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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1999
REGISTRATION NUMBER 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
KELLEY OIL & GAS CORPORATION
KELLEY OIL CORPORATION
KELLEY OPERATING COMPANY, LTD.
CONCORDE GAS MARKETING, INC.
(Exact name of registrants as specified in their charters)
<TABLE>
<S> <C> <C>
DELAWARE 1311 76-0447267
DELAWARE 1311 76-0082502
TEXAS 1311 76-0156485
DELAWARE 1311 76-0447267
(State or Other Jurisdiction of (I.R.S. Employer Identification
(Primary Standard Industrial No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
JOHN F. BOOKOUT
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 L. STRAUSS
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: As soon as practicable 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. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
14% Senior Secured Notes due 2003,
maturing at 105% of the stated
principal amount, Series B....... $100,000,000 101.5% $101,500,000 $28,217
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</TABLE>
(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 July 27, 1999, in the Private Offerings, Resales and Trading through
Automated Linkages (PORTAL) market, of the Registrant's 14% Senior Secured
Notes Due 2003, maturing at 105% of the stated principal amount, Series A,
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> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 30, 1999
KELLEY OIL & GAS CORPORATION
$100,000,000
OFFER TO EXCHANGE
$100,000,000 14% SENIOR SECURED NOTES DUE 2003
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT, SERIES A
FOR
$100,000,000 14% SENIOR SECURED NOTES DUE 2003
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT, SERIES B
-------------------
The new notes:
- will be freely tradeable,
- are substantially identical to the outstanding notes,
- will accrue interest at the same rate per annum as the outstanding
notes, payable semiannually in cash in arrears on each April 15 and
October 15, beginning October 15, 1999,
- will be guaranteed by three of our subsidiaries: Kelley Oil Corporation,
Kelley Operating Company, Ltd. and Concorde Gas Marketing, Inc., as well
as any of our future subsidiaries,
- will be secured by a first lien on substantially all existing and future
collateral, which includes substantially all of our proved oil and gas
properties,
- will rank equally with outstanding notes that are not exchanged and all
other senior indebtedness and will be senior to all subordinated
indebtedness, and
- will not be listed on any securities exchange or on any automated dealer
quotation system.
The exchange offer:
- expires at 5:00 p.m., New York City time, on , 1999, unless
extended, and
- is not conditioned on any minimum aggregate principal amount of
outstanding notes being tendered.
In addition, you should note that:
- all outstanding notes that are validly tendered and not validly
withdrawn will be exchanged for an equal principal amount of new notes
that are registered under the Securities Act of 1933,
- tenders of outstanding notes may be withdrawn any time before the
expiration of the exchange offer, and
- the exchange of outstanding notes for new notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 12 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance with the Exchange Act file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information we file at the SEC's public reference rooms at
450 Fifth Street, N.W., Washington, D.C. 20549, Seven World Trade Center, New
York, New York 10048 and 500 West Madison, 14th Floor, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0300 for further information on the public
reference rooms. Our SEC filings also are available to the public from
commercial document retrieval services and at the world wide web site maintained
by the SEC at http://www.sec.gov. Our stock is traded on the Nasdaq SmallCap
Market under the ticker symbol "KOGCC" through July 30, 1999, and thereafter
under our new ticker symbol "CONC". You may also inspect such reports, proxy
statements and other information concerning our company at the offices of the
Nasdaq National Market, 9801 Washingtonian Boulevard, Gaithersburg, Maryland
20898.
CAUTIONARY STATEMENT
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission:
- You should rely only on the information or representations provided in
this prospectus.
- We have not authorized any person to provide you with information other
than that provided in this prospectus.
- We have not authorized anyone to provide you with different information.
- We are not making an offer of these securities in any jurisdiction where
the offer is not permitted.
- You should not assume that the information in this prospectus is accurate
as of any date other than the date on the front of this document.
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SUMMARY
This summary highlights some information from this prospectus, but does not
contain all information that is important to you. This prospectus includes
specific terms of the exchange offer, information about our business and
detailed financial data. We encourage you to read the detailed information and
financial statements and the related notes appearing elsewhere in this
prospectus in their entirety. The "Glossary of Industry Terms" included in this
prospectus defines certain oil and gas business terms used in this prospectus.
Capitalized terms used in this summary are defined below under "Description of
the New Notes -- Definitions Used in This Description of New Notes". Capitalized
terms not otherwise defined below or in the Description of the New Notes have
the meanings given to them in the indenture. In this prospectus, the word
"Company" refers to Kelley Oil & Gas Corporation and not to any of its
subsidiaries, and references to "us" or "our" refer to the Company and the
Subsidiary Guarantors. References to "notes" are to the outstanding notes
together with the new notes.
OUR BUSINESS
We are engaged in the development, exploration, acquisition and production
of oil and natural gas properties, primarily in Louisiana and the shallow waters
of the Gulf of Mexico. Our activities have historically been concentrated on
lower-risk development drilling in north Louisiana and higher impact exploratory
drilling in south Louisiana. As of January 1, 1999, 74% of our estimated proved
reserves were located in north Louisiana.
We had proved reserves of 315 Bcfe at January 1, 1999 and produced 37.8
Bcfe in 1998. At January 1, 1999, we had a PV-10 Value of $234 million and
approximately 90% of our reserves were natural gas and 64% were proved
developed. As of January 1, 1999, we held an interest in:
- 174,556 gross (81,054 net) developed acres,
- 294,807 gross (90,703 net) undeveloped acres, and
- 584 gross (224.5 net) producing wells.
For 1998, our capital spending totaled $57 million, approximately 55% of which
was spent on development activities and acquisitions.
We continue to experience development and exploration success. In 1998, we
achieved a 98% success rate on development activities and an overall success
rate of 87% on the drilling of 62 total wells. We expect to spend approximately
$15 million on lower-risk drilling in 1999, substantially all of which is
discretionary.
In April 1999, we entered into an exploration and development agreement
with Phillips Petroleum Company relating to our interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana. As a result of this transaction,
we:
- sold 114.4 Bcfe of proved reserves, including 62.6 Bcfe of proved
undeveloped reserves,
- received an $83 million cash payment (subject to certain post-closing
adjustments),
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. Following the
closing of the Phillips transaction, approximately 85% of our reserves are
natural gas and 74% are proved developed.
In April 1999, we negotiated a private offering of $135 million principal
amount, 14% Senior Secured Notes due 2003, maturing at 105% of the principal
amount of the notes, Series A. As required pursuant to the terms of the
indenture governing these notes, we repurchased $35 million principal amount of
the
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notes at a repurchase price equal to 104% of their principal amount. We also
paid accrued and unpaid interest to the date of the repurchase. Such repurchase
closed on June 30, 1999.
Also in April 1999, we began an offer to repurchase the outstanding
principal amounts of our 7 7/8% Convertible Subordinated Notes due December 15,
1999 and our 8 1/2% Convertible Subordinated Debentures due April 1, 2000 at a
price equal to $590 per $1,000 principal amount. On May 17, 1999, we funded the
repurchase of $46.1 million aggregate principal amount of these securities.
We used the net proceeds from the combination of these transactions and
cash on hand to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest,
- fund cash collateral for a $1.5 million letter of credit which was
subsequently increased to $6.1 million and is expected to increase to
$7.5 million,
- fund the repurchase of $46.1 million aggregate principal amount of our
7 7/8% Convertible Subordinated Notes due December 15, 1999 and our
8 1/2% Convertible Subordinated Debentures due April 1, 2000 under the
offer to purchase at a total cost of approximately $28.3 million, and
- repurchase the $35 million principal amount of the 14% notes at 104% of
their principal amount.
We will use any remaining net proceeds and cash flow from operations for general
corporate purposes.
We will recognize an extraordinary gain of approximately $11.0 million in
the second quarter of 1999 related to repurchases and repayment of debt
described above.
On June 28, 1999, the Company began an offer to exchange 15 shares of its
common stock, or 1.5 shares after the reverse stock split described in the
following paragraph, for each outstanding share of its $2.625 Convertible
Exchangeable Preferred Stock. This offer expired at 12:01 a.m. New York City
Time on Tuesday, July 27, 1999. Approximately 368,000 shares, representing
approximately 21% of the shares of preferred stock outstanding prior to the
offer to exchange, were tendered in the offer.
The Company expects to effect a 1 for 10 reverse stock split of its common
stock on July 30, 1999. Following the reverse split, the total number of
outstanding shares of its common stock should be reduced from approximately 126
million to approximately 12.6 million, without giving effect to the share
exchange described above.
Finally, the Board of Directors has approved changing the Company's name to
Contour Energy Co. and its Nasdaq ticker symbol to CONC. The Company expects the
name change and the reverse stock split to become effective on July 30, 1999.
SUMMARY OF THE EXCHANGE OFFER
On May 17, 1999, we completed the private offering of the outstanding
notes. We entered into a registration rights agreement with the initial
purchasers in the private offering. We agreed to deliver this prospectus to you
and to use our best efforts to complete the exchange offer within 180 days after
the date we issued the outstanding notes. You are entitled to exchange your
outstanding notes for new notes with substantially identical terms.
You should read the discussion under the headings "-- Summary of Terms of
the New Notes" for further information regarding the new notes.
We summarize the terms of the exchange offer below. You should read the
discussion under the heading "The Exchange Offer" beginning on page 68 for
further information regarding the exchange offer and resale of the new notes.
The Exchange Offer......... We are offering to issue to you new 14% Senior
Secured Notes due 2003, maturing at 105% of the
stated principal amount, Series B, for
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your outstanding 14% Senior Secured Notes due 2003,
maturing at 105% of the stated principal amount,
Series A.
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City, on , 1999, or at a
later date and time to which we extend it.
Withdrawal of Tenders...... You may withdraw your tender of outstanding notes
at any time before the expiration date of the
exchange offer.
Conditions to the Exchange
Offer...................... We will not be required to accept outstanding notes
for exchange if the exchange offer would violate
applicable law or if any legal action has been
instituted or threatened that would impair our
ability to proceed with the exchange offer. Please
read the section "The Exchange Offer -- Conditions
to the Exchange Offer" beginning on page 70 for
more information regarding the conditions to the
exchange offer.
Procedures for Tendering
Outstanding Notes........ If you wish to participate in the exchange offer,
you must complete, sign and date the letter of
transmittal or a facsimile of the letter of
transmittal and mail or deliver the letter of
transmittal, together with the outstanding notes,
to the exchange agent. If your outstanding notes
are held through The Depository Trust Company you
may effect delivery of the outstanding notes by
book-entry transfer.
In the alternative, if your outstanding notes are
held through The Depository Trust Company and you
wish to participate in the exchange offer, you may
do so instead through the automated tender offer
program of The Depository Trust Company. If you
tender under this program, you will agree to bound
by the letter of transmittal that we are providing
with this prospectus as though you had signed the
letter of transmittal.
By signing or agreeing to be bound by the letter of
transmittal, you will represent to us, among other
things, that:
- any new notes you receive will be acquired in the
ordinary course of your business,
- you have no arrangement or understanding with any
person or entity to participate in the
distribution of the new notes,
- if you are not a broker-dealer, you are not
engaged in and do not intend to engage in the
distribution of the new notes,
- if you are a broker-dealer that will receive new
notes for your own account in exchange for
outstanding notes that were acquired as a result
of market-making activities, you will deliver a
prospectus, as required by law, in connection
with any resale of those new notes, and
- you are not our "affiliate", as defined in Rule
405 of the Securities Act of 1933, or, if you are
our affiliate, you will comply with any
applicable registration and prospectus delivery
requirements of the Securities Act of 1933.
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Guaranteed Delivery
Procedures................. If you wish to tender your outstanding notes and
cannot comply with the requirement to deliver the
letter of transmittal and notes or use the
applicable procedures under the automated tender
offer program of The Depository Trust Company,
before the expiration date, you must tender your
outstanding notes according to the guaranteed
delivery procedures described in "The Exchange
Offer -- Guaranteed Delivery Procedures" on page
74.
Federal Income Tax
Considerations........... The exchange of outstanding notes for new notes in
the exchange offer will not be a taxable event for
U.S. federal income tax purposes. Please read
"Federal Income Tax Considerations" on page 122.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of the new notes.
Plan of Distribution....... All broker-dealers who receive new notes in the
exchange offer have a prospectus delivery
obligation.
Broker-dealers who acquired the outstanding notes
as a result of market-making or other trading
activities may use this exchange offer prospectus,
as supplemented or amended, in connection with the
resales of the new notes.
Broker-dealers who acquired the outstanding notes
from Kelley must comply with the registration and
prospectus delivery requirements of the Securities
Act -- including being named as selling
noteholders -- in order to resell the outstanding
notes or the new notes.
Exchange Agent............. Norwest Bank Minnesota, National Association is the
exchange agent for the exchange offer. The
addresses and telephone number of the exchange
agent can be found under the caption "The Exchange
Offer -- The Exchange Agent" on page 77.
SUMMARY OF TERMS OF THE NEW NOTES
Unlike the outstanding notes, the new notes will be freely tradeable and
will not have registration rights or provisions for additional interest.
Otherwise, the new notes are substantially identical to the outstanding notes.
The new notes will evidence the same debt as the outstanding notes, and the
outstanding notes and the new notes will be governed by the same indenture.
Securities Offered......... $100,000,000 aggregate stated principal amount of
14% Senior Secured Notes due 2003, maturing at 105%
of the stated principal amount, Series B.
Issuer..................... Kelley Oil & Gas Corporation.
Maturity Date.............. April 15, 2003.
Interest Payment Dates..... Interest on the notes, will accrue from the Issue
Date and will be payable semi-annually in cash in
arrears on each April 15 and October 15, commencing
October 15, 1999.
Scheduled Quarterly
Redemption................. On the 15th day of each January, April, July and
October, commencing July 15, 2002, we will be
obligated to redeem $2.0 million of the stated
principal amount of the new notes
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(expressed as an integral multiple of $1,000) at a
redemption price equal to 103% of the stated
principal amount thereof plus accrued and unpaid
interest thereon to such date.
Repurchase following
Reserve Deficiency Event... We will be obligated to offer to repurchase a
portion of the new notes at a repurchase price
equal to 104% of the stated principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages (if any) to the date of
repurchase, following a Reserve Deficiency Event.
See "-- Certain Covenants -- Quarterly Reserve
Engineering Reports; Reserve Redemption Event".
Ranking; Collateral........ The new notes will be senior indebtedness secured
by a first lien on substantially all existing and
future Collateral the Company owns.
Guarantees; Collateral..... The new notes will be jointly and severally
guaranteed on a senior secured basis by each of the
Subsidiary guarantors, which initially will be
Kelley Oil, Kelley Operating and Concorde. The
guarantees will be senior obligations of the
guarantors secured by a first lien on substantially
all existing and future Collateral owned by the
guarantors, which initially includes substantially
all of the oil and natural gas properties of the
guarantors. See "Description of the New
Notes -- Subsidiary Guarantees" on page 79.
Optional Redemption........ The new notes will be redeemable, in whole or in
part, at our option on or after April 15, 2001, at
the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages
(if any) to the date of redemption. In addition, at
any time prior to April 15, 2001, we may, at our
option, redeem up to 35% of the original aggregate
stated principal amount of the new notes with the
net cash proceeds of one or more Equity Offerings
at a redemption price equal to 114% of the
aggregate stated principal amount of the new notes
to be redeemed, plus accrued and unpaid interest
and Liquidated Damages (if any) to the date of
redemption; provided, however, that after giving
effect to any such redemption at least 65% of the
original aggregate stated principal amount of the
new notes remains outstanding or such redemption
retires the new notes in their entirety and the
redemption occurs within 60 days after the
consummation of such Equity Offering.
Change of Control.......... Upon a Change of Control, we are obligated to offer
to repurchase each holder's new notes at a
repurchase price equal to 101% of the stated
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages (if any) to the
date of repurchase.
Asset Sales................ We will be obligated to offer to repurchase a
portion of the new notes at a repurchase price
equal to 105% of the stated principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages (if any) to the date of
repurchase, in the event of an Asset Sale.
Certain Covenants.......... The indenture governing the notes contains
covenants that limit our ability to, among other
things, incur additional indebtedness, pay
dividends or make certain other restricted
payments, consummate certain asset sales, enter
into transactions with affiliates, incur liens,
merge or consolidate with any other person or sell,
assign, transfer,
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lease, convey or otherwise dispose of all or
substantially all of our assets.
Rights Under Registration
Rights Agreement......... If we fail to complete the exchange offer as
required by the registration rights agreement, we
will be obligated to pay additional interest to
holders of the outstanding notes.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of the new notes. In consideration for
issuing the new notes, we will receive in exchange
a like principal amount of outstanding notes. The
outstanding notes surrendered in exchange for the
new notes will be retired and canceled and cannot
be reissued. Accordingly, issuance of the new notes
will not result in any change in our
capitalization.
Restricted Payments........ We will not pay cash dividends, redeem capital
stock for cash, repay subordinated indebtedness for
cash or make any investment other than Permitted
Investments. However, we will not be prohibited
from
- purchasing stock or subordinated obligations
using the proceeds from the sale of stock,
- purchasing subordinated obligations using the
proceeds of indebtedness the Company is otherwise
permitted to incur under the indenture, which
indebtedness will be effectively junior to the
notes,
- repurchasing subordinated obligations, provided
that we may not use the proceeds of the sale of
the outstanding notes, Excess Proceeds from Asset
Dispositions and cash flows from operations
accruing after the Issue Date for the repurchase
if the amount from those sources would exceed the
greater of (1) $36.0 million and (2) the excess
PV-10 Value of our Oil and Gas Assets, using 1998
year-end pricing assumptions, over two times the
aggregate stated principal amount of the notes
then outstanding,
- repurchasing subordinated obligations using
Excess Proceeds that have previously been offered
to holders of the new notes, not sooner than 360
days after the relevant Asset Disposition, or
- other payments in an aggregate amount not to
exceed $5 million.
For additional information regarding the notes, see "Description of the New
Notes" on page 78.
RISK FACTORS
Please read "Risk Factors" beginning on page 12 and carefully consider the
risk factors before participating in the exchange offer.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 601 Jefferson, Suite 1100,
Houston, Texas 77002 and our telephone number is (713) 652-5200.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FINANCIAL INFORMATION
The following tables present summary historical consolidated financial data
and the unaudited pro forma consolidated financial data for the Company to give
effect to the Pro Forma Transactions, as defined below. The historical financial
information for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1999 is derived from the financial statements. The
unaudited pro forma data are derived from the Unaudited Pro Forma Consolidated
Financial Information included elsewhere in this prospectus. The unaudited pro
forma income statement data and other financial data give effect to the Pro
Forma Transactions as if they occurred on January 1, 1998. The unaudited pro
forma balance sheet data as of March 31, 1999 gives effect to the Pro Forma
Transactions as if they occurred on March 31, 1999. The pro forma financial
information presented below is unaudited and is not necessarily indicative of
financial results that would have occurred had the Pro Forma Transactions
occurred on January 1, 1998 (for income statement data) or March 31, 1999 (for
balance sheet data) and should not be viewed as indicative of operations in
future periods. For purposes hereof, "Pro Forma Transactions" means the sale of
the outstanding notes, the consummation of the Phillips transaction, the
Subordinated Repurchase, as defined below, the repayment of all borrowings
outstanding under our revolving credit facility, our repurchase of $35 million
stated principal amount of the outstanding notes and the offer to exchange 15
shares of our common stock for our $2.625 convertible exchangeable preferred
stock. "Subordinated Repurchase" means our purchase of an aggregate of
approximately $46.1 million aggregate principal amount of our 7 7/8% Convertible
Subordinated Notes due 1999 and our 8 1/2% Convertible Subordinated Debentures
due 2000 at a purchase price of $590 per $1,000 principal amount thereof
pursuant to an Offer to Purchase dated April 19, 1999, as amended. This
information should be read in conjunction with "Capitalization" on page 22,
"Selected Consolidated Financial Data" on page 22, "Unaudited Pro Forma
Consolidated Financial Information" on page 24 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 31.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------------
PRO FORMA 1999
1996 1997 1998 1998 1998 1999 PRO FORMA
-------- --------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues.............. $ 60,854 $ 75,864 $ 79,150 $ 55,338 $ 23,047 $ 15,507 $ 11,058
Interest and other income......... 1,429 274 505 1,139 24 161 338
-------- --------- -------- -------- -------- -------- --------
Total revenues........... 62,283 76,138 79,655 56,477 23,071 15,668 11,396
-------- --------- -------- -------- -------- -------- --------
Production expenses............... 10,709 10,955 19,878 17,022 4,898 5,284 4,567
Exploration expenses.............. 5,438 5,433 12,034 12,034 2,051 1,370 1,370
General and administrative
expenses........................ 8,953 6,875 7,077 7,077 1,909 1,374 1,374
Interest and other debt
expenses........................ 24,401 25,071 33,333 40,638 8,092 8,666 9,703
Restructuring expenses............ 4,276 -- -- -- -- -- --
Depreciation, depletion and
amortization.................... 20,440 25,853 38,602 33,032 10,944 9,960 8,078
Impairment of oil and gas
properties(1)................... -- -- 25,738 25,738 -- -- --
-------- --------- -------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item.......... $(11,934) $ 1,951 $(57,007) $(79,064) $ (4,823) $(10,986) $(13,696)
======== ========= ======== ======== ======== ======== ========
Net income (loss)................. $(28,964) $ 1,951 $(57,007) $(79,064) $ (4,823) $(10,986) $(13,696)
======== ========= ======== ======== ======== ======== ========
Basic and diluted loss per common
share........................... $ (0.37) $ (0.03) $ (0.49) $ (0.64) $ (0.05) $ (0.10) $ (0.11)
======== ========= ======== ======== ======== ======== ========
Book value per share.............. $ (0.31) $ (0.04) $ (0.53) $ (0.25) $ (0.08) $ (0.62) $ (0.33)
======== ========= ======== ======== ======== ======== ========
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------------
PRO FORMA 1999
1996 1997 1998 1998 1998 1999 PRO FORMA
-------- --------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of Earnings to Fixed
Charges(2)...................... N/A 1.1x N/A N/A N/A N/A N/A
EBITDAX(3)........................ $ 42,621 $ 58,308 $ 52,700 $ 32,378 $ 16,264 $ 9,010 $ 5,455
CASH FLOW DATA:
Cash provided by operating
activities...................... 9,262 39,604 22,302 N/A 9,686 4,098 N/A
Cash used in investing
activities...................... (53,392) (164,275) (39,216) N/A (12,881) (5,823) N/A
Cash provided by financing
activities...................... 41,848 120,763 25,187 N/A 3,073 -- N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET AND RELATED DATA:
Cash and cash equivalents................................... $ 6,710 $ 40,254
Total assets................................................ 278,239 259,120
Long-term debt, including current maturities................ 320,810 265,439
Stockholders' deficit....................................... (77,925) (41,673)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------
HISTORICAL PRO FORMA
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
PV-10 Value(4).............................................. $234,284 $178,319
</TABLE>
- ---------------
(1) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties under SFAS 121. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 31 and Note 2 to the Financial Statements contained in
this prospectus.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations, excluding interest
income of $0.9 million, $0.2 million, $0.2 million, $0.0 million and $0.2
million for the years ended December 31, 1996, 1997 and 1998, and the three
months ended March 31, 1998 and 1999, respectively, plus fixed charges.
Fixed charges consist of interest expense and other debt expenses and
interest within rental expense of $0.4 million, $0.3 million, $0.2 million,
$0.0 million and $0.1 million for the years ended December 31, 1996, 1997
and 1998 and the three months ended March 31, 1998 and 1999, respectively.
For the years ended December 31, 1996 and 1998, and the three months ended
March 31, 1998 and 1999, earnings were insufficient to cover fixed charges
by $13.2 million, $57.4 million, $4.8 million and $11.3 million,
respectively, and $51.8 million and $14.1 million for the year ended
December 31, 1998, Pro Forma and the three months ended March 31, 1999, Pro
Forma, respectively.
(3) EBITDAX is calculated as income (loss) before extraordinary items, excluding
interest expense and other debt expenses, income taxes, exploration
expenses, restructuring expense, depletion, depreciation, amortization and
impairment of oil and gas properties. EBITDAX is not a measure of
performance or cash flow as determined by generally accepted accounting
principles ("GAAP"). Certain items excluded from EBITDAX are significant
components in understanding and assessing a company's financial performance,
such as a company's cost of capital and tax structure, as well as historic
costs of depreciable assets, none of which are components of EBITDAX. The
Company uses EBITDAX as a measure to gauge its operating performance, with
emphasis placed on revenue and cost trends, changes from period to period
and variances from management forecasts. The Company has excluded
restructuring expenses, which management believes are nonrecurring, and
excluded exploration expenses, which management believes provides more
consistency in measuring operating performance of comparable companies,
regardless of whether such companies use full cost accounting (and therefore
do not expense exploration costs) or successful efforts accounting. In
conjunction with EBITDAX, the Company uses GAAP and other operating measures
to evaluate its operating performance. The Company does not, and did not
during any of the periods presented above, use any single specific measure,
including EBITDAX, to evaluate or modify the conduct of its operations. In
addition, EBITDAX is a measure used by certain investors in evaluating the
operating performance of comparable oil and gas exploration and production
companies. EBITDAX should not be considered as an alternative to, or more
meaningful than, net income or cash flow as determined in accordance with
GAAP or as an indicator of the Company's operating performance or liquidity.
EBITDAX is not necessarily comparable to a similarly titled measure of
another company.
(4) "PV-10 Value" means with respect to any oil and gas assets the aggregate net
present value of such oil and gas assets calculated before income taxes and
discounted at 10 percent in accordance with SEC guidelines (including using
pricing provisions based on the most recent year-end prices), as reported in
the most recently prepared or audited report of our independent petroleum
engineers. The PV-10 Value as of December 31, 1998 was calculated using
prices of $10.81 per barrel of oil and $2.07 per Mcf of natural gas. PV-10
Value is not necessarily indicative of actual future cash flows. See "Risk
Factors -- There are uncertainties in estimating reserves and future net
cash flows".
10
<PAGE> 12
SUMMARY RESERVE AND OPERATING DATA
The following table sets forth certain summary reserve and operating data
for each of the three years in the period ended December 31, 1998. Our estimated
net proved reserves for each of the three years in the period ended December 31,
1998 are based on a reserve report prepared by H.J. Gruy & Associates, Inc.,
independent petroleum engineers. Detailed additional information concerning our
oil and natural gas production activities is contained in the Supplementary
Information in Note 12 to the financial statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
ESTIMATED PROVED RESERVES (PERIOD-END):
Oil and other liquid hydrocarbons (Mbbls)................... 1,466 2,953 5,294
Natural gas (Mmcf).......................................... 297,634 354,867 283,559
Natural gas equivalent (Mmcfe).............................. 306,430 372,585 315,323
% proved developed.......................................... 59% 73% 64%
PV-10 Value(1) (in thousands)............................... $518,184 $378,811 $234,284
PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................... 232 226 375
Natural gas (Mmcf).......................................... 23,466 30,202 35,557
Natural gas equivalent (Mmcfe).............................. 24,858 31,558 37,807
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per Bbl)................. $ 22.11 $ 19.34 $ 13.09
Natural gas (per Mcf)(2).................................... 2.30 2.27 2.09
Natural gas equivalent (per Mcfe)(2)........................ 2.37 2.31 2.10
AVERAGE PRODUCTION EXPENSES (PER MCFE)...................... $ 0.43 $ 0.35 $ 0.53
GENERAL AND ADMINISTRATIVE EXPENSES (PER MCFE).............. $ 0.36 $ 0.22 $ 0.19
INTEREST EXPENSE (PER MCFE)................................. $ 0.98 $ 0.79 $ 0.88
</TABLE>
- ---------------
(1) PV-10 Value is not necessarily indicative of actual future cash flows. See
"Risk Factors -- There are uncertainties in estimating reserves and future
net cash flows".
(2) Includes the effects of our hedging activities.
11
<PAGE> 13
RISK FACTORS
An investment in the new notes offered by this prospectus involves a high
degree of risk. Before you decide to invest in the new notes, you should
carefully consider the following risk factors which could affect our actual
financial condition and results of operations in the future.
WE HAVE A HIGH LEVEL OF DEBT.
We used part of the net cash proceeds from the issuance of the outstanding
notes to pay off the outstanding balance on our Amended and Restated Credit
Agreement dated as of December 1, 1997 among the Company, Kelley Oil and Kelley
Operating as borrowers, Concorde and certain other persons, as guarantors, each
of the lenders that is a signatory thereto, and Chase Bank of Texas, National
Association, as agent. As of March 31, 1999, we had $327.9 million principal
amount of debt outstanding, stockholders' deficit of approximately $78 million
and cash on hand of approximately $6.7 million. Including the outstanding notes,
we have scheduled principal and interest payments of approximately $21 million
due during the remainder of 1999 and an additional $25 million due during the
first four months of 2000. Giving pro forma effect to the Pro Forma Transactions
as of January 1, 1998, our interest expense for 1998 would have increased $7.3
million. We plan to fund these payments with the remaining cash proceeds from
the sale of the outstanding notes, from cash flow from operations and from cash
payments received from the Phillips transaction. However, we cannot give you any
assurance that we will have sufficient funds to make all of these payments.
WE MAY BE UNABLE TO REPAY OR REDEEM OUR SUBORDINATED DEBT OBLIGATIONS.
The indenture places substantial limitations on our ability to pay in full
our subordinated debt obligations coming due within the next nine months. Our
failure to repurchase, repay or otherwise refinance our subordinated debt
obligations at or before maturity will result in a default under the indentures
governing those subordinated debt obligations. A default under those indentures
would result in defaults under the indentures governing our other subordinated
debt obligations and under the indenture related to the notes. This could result
in all of our long-term debt being declared immediately due and payable. In that
circumstance, we would have no choice but to seek protection under bankruptcy
laws. This could substantially hinder, delay or prevent the holders of the new
notes from being repaid in full.
WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS.
We have limited cash flow for capital expenditures. Our ability to service
our debt levels and finance capital expenditures depends significantly on
various factors including a continuation of the recently improved oil and
natural gas commodity prices. After we repaid the credit facility and
repurchased $35 million principal amount of the outstanding notes and
repurchased approximately $46.1 million aggregate principal amount of our 7 7/8%
Convertible Subordinated Notes and our 8 1/2% Convertible Debentures at a total
cost of approximately $28.3 million, our cash proceeds from the Phillips
transaction and the sale of the outstanding notes were approximately $40.3
million. Now that we have repaid the credit facility, we are not likely to have
access to a revolving credit facility to supplement our cash needs. We will
continue to have significant debt outstanding and will continue to be subject to
various commodity and economic factors beyond our control that may have an
impact on our ability to exploit our exploration prospects and develop proved
undeveloped reserves.
We are dependent upon our ability to obtain financing beyond our internally
generated cash flow for acquiring, exploring and developing oil and natural gas
properties. Historically, we have financed these activities:
- through the issuance of debt and equity securities,
- through various credit facilities, and
- with internally generated funds.
12
<PAGE> 14
In addition, the Minerals Management Service recently increased the bonding
requirements for plugging and abandoning operations on some of our offshore
platforms and facilities by a total of $7.5 million. To comply with the higher
requirements, we will place a total of $7.5 million of cash in restricted
certificates of deposit as collateral for the bonds. As long as the bonding
requirements are in effect, this cash is restricted from being used for other
purposes.
We currently have plans for substantial capital expenditures to continue
our development and exploration activities. Our ability to expend the capital
necessary to undertake or complete future activities may be limited. We cannot
assure you that we will have adequate funds available to carry out our strategy.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" on page 36.
THE COLLATERAL MAY NOT BE SUFFICIENT TO SATISFY ALL AMOUNTS DUE ON THE NOTES.
The new notes and the guarantees will be secured by a first lien on
substantially all of our proved oil and natural gas properties. The reserve data
with respect to such interests, however, represent estimates only. You should
not consider the estimates to be exact. Also, the standardized measures of
discounted future cash flows should not be construed as the current market value
of our estimated proved reserves. See "-- There are uncertainties in estimating
reserves and future net cash flows". As a result, there can be no assurance
that, upon an acceleration of the notes offered by this prospectus, the proceeds
from the sale of the collateral would be sufficient to satisfy all amounts due
on the notes.
WE MAY NOT BE ABLE TO REPLACE OUR PROVED RESERVES OR ACQUIRE ADDITIONAL
RESERVES.
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Our future oil and natural gas reserves and production, and,
therefore, cash flow and income, are highly dependent upon our success in
efficiently developing our current reserves and acquiring additional reserves
that are economically recoverable.
With the completion of the Phillips transaction, we have more drilling
opportunities in south Louisiana and offshore than in the north Louisiana area.
These areas provide the opportunity for higher reserve potential but at a higher
risk than north Louisiana. The drilling of more higher risk wells could result
in a lower drilling success rate. We cannot assure you that we will be able to
replace the proved reserves that are the subject of the Phillips transaction or
that any proved reserves will be discovered through higher risk drilling.
WE MAY NOT BE ABLE TO RAISE EQUITY CAPITAL IN THE FORESEEABLE FUTURE.
The market price for our common stock has been substantially depressed for
an extended period of time, which has prevented us from seeking additional
capital through sales of equity. Given the current prices for oil and natural
gas, our substantial leverage and other relevant market factors, it is unlikely
that we will be able to raise equity capital in the foreseeable future.
OUR LENDERS IMPOSE RESTRICTIONS ON US.
We are subject to a number of significant covenants that, among other
things, restrict our ability to:
- dispose of assets,
- incur additional indebtedness,
- repay other indebtedness,
- incur liens,
- enter into some investments or acquisitions,
- repurchase or redeem capital stock,
13
<PAGE> 15
- engage in mergers or consolidations,
- engage in some transactions with subsidiaries and affiliates, and
- engage in some other corporate activities.
We cannot assure you that these restrictions will not adversely affect our
ability to finance our future operations or capital needs or engage in other
business activities that may be in our best interest.
THERE ARE UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS.
There are numerous uncertainties in:
- acquiring valuable oil and natural gas prospects,
- successfully exploring and developing oil and natural gas prospects,
- estimating quantities of proved reserves believed to have been
discovered,
- projecting future rates of production, and
- the timing of development expenditures.
Many of these factors are beyond our control. 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. There are uncertainties inherent in:
- the interpretation of that data,
- 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. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Accordingly,
different engineers or even the same engineers at different times may give very
different opinions regarding:
- 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 from those reserves.
We cannot give you any assurance that the reserves set forth in this
prospectus will ultimately be produced or that the proved undeveloped reserves
set forth in this prospectus will be developed within the periods anticipated.
It is likely that there will be material variances from the estimates given in
this prospectus. In addition, the estimates of future net cash flows from our
proved reserves and the present value of these cash flows are based upon certain
assumptions about future production levels, prices and costs that may not be
correct when judged against actual future experience. We emphasize that the
estimated future cash flows prepared by independent petroleum engineers should
not be construed as representative of the fair market value of our proved
reserves. These estimated 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 increased expenses and capital costs
after that 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 greatly, from the results estimated. Our
14
<PAGE> 16
operations in south Louisiana in recent years illustrate these uncertainties.
Accordingly, you are cautioned not to place undue reliance on the reserve data
included in this prospectus.
WE MAY BE UNABLE TO SATISFY THE NOTES IF WE HAVE TO FILE BANKRUPTCY.
An investment in the notes, as in any type of security, involves certain
insolvency and bankruptcy considerations that you should carefully consider. If
we or any of the subsidiary guarantors were to become a debtor subject to
insolvency proceedings under the United States Bankruptcy Code, you would likely
encounter delays in:
- payment of the notes, and
- enforcing remedies under the notes, any guarantee or the liens securing
the notes and the guarantees.
Provisions under the Bankruptcy Code or general principles of equity that
could result in the impairment of your rights include, but are not limited to:
- the automatic stay,
- avoidance of preferential transfers by a trustee or debtor-in-possession,
- substantive consolidation,
- limitations on collectability of unmatured interest,
- attorney fees, and
- forced restructuring of the notes.
Under the Bankruptcy Code, a trustee or debtor-in-possession may generally
recover payments or transfers of property of a debtor if such payment or
transfer was:
- to or for the benefit of a creditor,
- in payment of an antecedent debt owed before the transfer was made,
- made while the debtor was insolvent,
- within 90 days (or one year if the payment was to an "insider" of the
debtor) before the filing of the bankruptcy case that
- enabled the creditor to receive more than it would have received in a
liquidation under Chapter 7 of the Bankruptcy Code if the transfer had
not been made and the creditor received payment of the debt as provided
in the Bankruptcy Code.
By way of example, if payments were made on the notes prior to the filing
of a bankruptcy case and a court subsequently determined that the value of the
collateral pledged by the entity making the payment was less than the debt owed,
such payments could be set aside by the court as a preferential transfer. See
"-- The collateral may not be sufficient to satisfy all amounts due on the
notes".
A financial failure by us could also result in our inability to pay the
notes if a bankruptcy court were to "substantively consolidate" us and our
subsidiaries. If a bankruptcy court substantively consolidated us and our
subsidiaries, the assets of each entity would be subject to the claims of
creditors for all entities. Such a consolidation would expose the holders of the
notes not only to the usual impairments arising from bankruptcy, but could also
decrease the amount you ultimately recover because of the larger creditor base.
Forced restructuring of the notes could occur through the "cram-down"
provision of the Bankruptcy Code. Under this provision, the notes could be
restructured over the objections of holders of the notes as to their general
terms, primarily interest rate and maturity. Additionally, the notes could be
split into secured debt and unsecured debt if a bankruptcy court were to find
that the debt we owed exceeded the
15
<PAGE> 17
value of the collateral. If this were to occur, the unsecured portion of the
debt could be treated differently than the secured portion of the debt. For
example, the court could refuse to allow payment of the interest on the notes
that accrued after the filing of the bankruptcy petition.
A COURT COULD RULE THAT THE ISSUANCE OF THE NOTES VIOLATES FRAUDULENT TRANSFER
LAWS.
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 we either:
- issued the 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 incurring such indebtedness, and
at the time of the debt incurrence, we
- were insolvent,
- were rendered insolvent by reason of the debt incurrence,
- were engaged or about to engage in a business or transaction for which
our remaining assets constituted unreasonably small capital to carry on
our business, or
- intended to incur, or believed or reasonably should have believed that
we would incur, debts beyond our ability to pay as such debts matured,
then the court could:
- avoid our obligations to you as a holder of the notes,
- subordinate our obligations to you to all of our other indebtedness, or
- take other action detrimental to you as a holder of the notes.
In that event, we cannot assure you that you could ever recover any
repayment on the notes. Any guarantee also may be subject to challenge under
fraudulent transfer laws. In any case, the guarantees will be limited to amounts
that any guarantor can guarantee without violating those laws. See "Description
of the New Notes -- Certain Definitions -- Guarantee" on page 92.
The measure of insolvency for purposes of fraudulent transfer
considerations will vary depending upon the law applied in any insolvency
proceeding. Generally, however, we or one of our subsidiary guarantors may be
considered insolvent either:
(a) if the sum of our debts, including contingent liabilities, was greater than
the fair market value or fair saleable value of all of our assets at a fair
valuation or if the present fair market value or fair saleable value of our
assets was less than the amount that would be required to pay our total
outstanding debts and liabilities including our probable liabilities on our
existing debts, including contingent liabilities, as they become absolute
and mature, or
(b) if we are incurring debts beyond our ability to pay as those debts mature.
16
<PAGE> 18
Based upon financial and other information, we believe that:
- the guarantees are being incurred for proper purposes and in good faith,
and
- that we and each of our subsidiary guarantors:
- are solvent and will continue to be solvent after issuing the new notes
and guarantees,
- will have sufficient capital for carrying on our business after such
issuance, and
- will be able to pay our debts as they mature.
However, we cannot assure you that a court passing on those standards would
agree with us. See "Description of the New Notes -- Subsidiary Guarantees" on
page 79 and "-- Security; Ranking" on page 80.
OIL AND NATURAL GAS PRICES ARE VOLATILE.
Our financial results are affected significantly by the prices we receive
for our oil, natural gas and natural gas liquids production. Historically, the
markets for oil, natural gas and natural gas liquids have been volatile.
Throughout 1998 and into the first quarter of 1999, the prices of oil and
natural gas fell sharply and reflected the volatility of commodity prices and
the industry generally. We cannot predict future prices of oil and natural gas.
Although both oil and natural gas prices recently have risen, should prices
decline, our results of operations and liquidity could be adversely impacted.
The prices we receive for our oil, natural gas and natural gas liquids
production and the levels of that production are subject to government
regulation, legislation and policies. Our future financial condition and results
of operations will depend primarily upon the prices we receive for our oil and
natural gas production, as well as the costs of finding, acquiring, developing
and producing reserves.
WE HAVE OPERATING HAZARDS AND UNINSURED RISKS.
Oil and natural gas drilling activities are subject to numerous risks, many
of which are beyond our control. In addition, many of these risks are
uninsurable.
- It is possible that we will be unable to obtain commercially viable oil
or natural gas production.
- 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 these analyses and studies 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.
- Technical problems encountered in actual drilling, completion and
workover activities can delay those activities and add substantial costs
to a project.
- 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.
17
<PAGE> 19
The availability of a ready market for our 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 partially or totally shut in for
lack of a market or because of inadequacy or unavailability of natural gas
pipeline or gathering system capacity.
Our oil and natural gas business also is subject to all of the operating
risks associated with 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,
- pollution, and
- other risks.
Any of these operating risks could result in substantial losses to us.
Although we maintain insurance at levels that we believe are consistent with
industry practices, we are not fully insured against all risks. Losses and
liabilities arising from uninsured and underinsured events could have a material
adverse effect on our financial condition and operations.
WE FACE REGULATORY AND ENVIRONMENTAL RISKS.
Our 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,
- changes in those laws, and
- changes in administrative regulations.
We 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 any changes may have on our business or financial condition.
Our operations are subject to complex and constantly changing environmental
laws and regulations adopted by federal, state and local governmental
authorities. 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 our part to the government and third parties. We may also
be required to incur costs of remediation related to any discharges. We cannot
assure you that existing environmental laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations, will
not materially and adversely affect our operations and financial condition. We
also cannot assure you that material indemnity claims will not arise against us
with respect to properties we have acquired or sold. See "Description of Our
Business and Properties -- Regulation" on page 54.
18
<PAGE> 20
OUR USE OF HEDGING TRANSACTIONS INVOLVES RISKS.
We regularly enter into hedging transactions for our natural gas and crude
oil production and likely will continue to do so in the future. Such
transactions may limit our potential gains if oil and natural gas prices were to
rise substantially over the price established by the hedges. Additionally,
hedging transactions may expose us to the risk of financial loss in certain
circumstances, including possibly instances where our production is less than
expected or there is an unexpected event materially affecting prices. The
natural gas and crude oil swap agreements generally provide for us to receive or
make counterparty payments on the differential between a fixed price and a
variable indexed price for natural gas. We are exposed to the credit risk of
nonperformance by our 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 -- Market Risk Disclosure" on page 31 and Note 10 to the financial
statements included in this prospectus.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, WHICH INCLUDES COMPETITORS WITH
GREATER FINANCIAL RESOURCES.
We operate in a highly competitive environment with respect to:
- acquiring reserves,
- marketing oil and natural gas, and
- securing trained personnel.
Many of our larger competitors have greater financial and personnel
resources than we have available. These competitors 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 we can. Our ability to acquire
additional reserves in the future will depend on our ability to evaluate and
select suitable properties and to complete transactions in a highly competitive
environment. In addition, substantial competition exists for capital available
for investment in the oil and natural gas industry. We cannot assure you that we
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.
WE DEPEND ON KEY PERSONNEL.
We believe that our current operations and future prospects are largely
dependent upon the efforts of several members of our senior management team. The
loss of the services of these key individuals could have an adverse effect on
us. We do not currently maintain insurance against the loss of any of these
individuals.
CONTOUR PRODUCTION COMPANY L.L.C. OWNS APPROXIMATELY 57% OF OUR OUTSTANDING
VOTING POWER.
Contour's significant ownership position allows it to control:
- the election of our directors,
- our management, operations and affairs,
- the approval of any sale of all or substantially all of our assets,
including a merger or consolidation, and
19
<PAGE> 21
- the outcome of any corporate transaction or other matter submitted to our
stockholders for approval.
Circumstances may occur in which the interests of Contour, as our majority
stockholder, may conflict with your interests as a holder of the notes.
YOU MAY FIND IT DIFFICULT TO SELL YOUR NEW NOTES.
The new notes will constitute a new issue of securities with no established
trading market, and we cannot assure you as to:
- the development of any market for the new notes,
- the liquidity of any market for the new notes that may develop,
- your ability to sell your new notes, or
- the price at which you would be able to sell your new notes.
We do not intend to apply for listing of the new notes on any national
securities exchange or for quotation through the Nasdaq National Market.
If a market for the new notes were to exist, the new notes could trade at
prices that may be higher or lower than their principal amount or purchase
price, depending on many factors, including prevailing interest rates, the
market for similar debentures and our financial performance. Historically, the
market for non-investment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the new
notes. We cannot assure you that the market for the new notes, if any, will not
be subject to similar disruptions. Any disruption in the market for the new
notes may adversely affect you as a holder of the new notes.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE
CONSEQUENCES.
The outstanding notes were not registered under the Securities Act or under
the securities laws of any state and you may not resell them, offer them for
resale or otherwise transfer them unless they are subsequently registered or
resold under an exemption from the registration requirements of the Securities
Act and applicable state securities laws. If you do not exchange your
outstanding notes for new notes pursuant to this exchange offer, or if you do
not properly tender your outstanding notes in this exchange offer, you will not
be able to resell, offer to resell or otherwise transfer the outstanding notes
unless they are registered under the Securities Act or unless you resell them,
offer to resell or otherwise transfer them under an exemption from the
registration requirements of, or in a transaction not subject to, the Securities
Act. In addition, you will no longer be able to obligate us to register the
outstanding notes under the Securities Act.
CERTAIN PERSONS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER A PROSPECTUS
IN CONNECTION WITH RESALES OF THE NEW NOTES.
Based on certain no-action letters issued by the staff of the SEC, we
believe that you may offer for resale, resell or otherwise transfer the new
notes without compliance with the registration and prospectus delivery
requirements of the Securities Act. However, in some instances described in this
prospectus under "The Exchange Offer" beginning on page 68, you will remain
obligated to comply with the registration and prospectus delivery requirements
of the Securities Act to transfer your new notes. In these cases, if you
transfer any new note without delivering a prospectus meeting the requirements
of the Securities Act or without an exemption from registration of your new
notes under this Act, you may incur liability under the Securities Act. We do
not and will not assume or indemnify you against this liability.
20
<PAGE> 22
CAUTION AS TO FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus and other materials filed or to be
filed by us with the SEC (as well as information included in oral or other
written statements made or to be made by us or our representatives) that are
forward-looking in nature are intended to be "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, relating to
matters such as our anticipated operating and financial performance, business
prospects, developments and results.
Actual performance, prospects, developments and results may differ
materially from any or all anticipated performance, prospects, developments and
results due to economic conditions and other risks, uncertainties and
circumstances partly or totally outside of our control, including:
- rates of inflation,
- natural gas and crude oil prices,
- uncertainty of reserve estimates,
- rates and timing of future production of oil and natural gas,
- exploratory and development activities,
- acquisition risks and activities,
- changes in the level and timing of future costs and expenses related to
drilling and operating activities, and
- those risks described in the section entitled "Risk Factors" beginning on
page 12.
Words such as "anticipated", "expect", "estimate", "project" and similar
expressions are intended to identify forward-looking statements.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes.
In consideration for issuing the new notes, we will receive in exchange a like
principal amount of outstanding notes. The outstanding notes surrendered in
exchange for the new notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the new notes will not result in any change in our
capitalization.
We used the net proceeds from the sale of the outstanding notes to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest, and
- fund cash collateral for a $1.5 million letter of credit which was
subsequently increased to $6.1 million, and is expected to increase to
$7.5 million.
We intend to use the remainder of the net proceeds from the sale of the
outstanding notes for additional working capital for general corporate purposes,
including the payment of interest on outstanding subordinated indebtedness.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 1999 on a historical basis and pro forma to give effect to the Pro Forma
Transactions as if they had occurred on March 31, 1999. You should read this in
conjunction with "Unaudited Pro Forma Consolidated Financial Information",
"Selected Consolidated Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
included in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
HISTORICAL PRO FORMA
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 6,710 $ 40,254
======== ========
Long-term debt, including current maturities:
Credit Facility........................................... $111,500 --
14% Senior Secured Notes due 2003......................... -- $100,000
13 1/2% Senior Notes due 1999............................. 435 435
10 3/8% Senior Subordinated Notes due 2006................ 150,818 150,818
7 7/8% Convertible Subordinated Notes due 1999............ 32,416 4,930
8 1/2% Convertible Subordinated Debentures due 2000....... 25,641 9,256
-------- --------
Total long-term debt, including current
maturities...................................... 320,810 265,439
-------- --------
Stockholders' deficit....................................... (77,925) (41,673)
-------- --------
Total capitalization.............................. $242,885 $223,766
======== ========
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data for the
Company, which are derived from the Financial Statements. The historical
financial information for the year ended December 31, 1995 reflects the
Consolidation (as defined herein) in February 1995. The financial information
for periods prior to the Consolidation reflects Kelley Oil's historical results
of operations. The impact of the acquisition of the SPR properties (as defined
herein) is reflected in the selected financial data as of December 1, 1997. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues..................... $ 16,822 $ 36,998 $ 60,854 $ 75,864 $ 79,150 $ 23,047 $ 15,507
Interest and other income................ 1,416 1,763 1,429 274 505 24 161
-------- --------- -------- -------- -------- -------- --------
Total revenues....................... 18,238 38,761 62,283 76,138 79,655 23,071 15,668
-------- --------- -------- -------- -------- -------- --------
Production expenses...................... 3,760 10,835 10,709 10,955 19,878 4,898 5,284
Exploration expenses..................... 7,404 23,387 5,438 5,433 12,034 2,051 1,370
General and administrative expenses...... 5,172 7,030 8,953 6,875 7,077 1,909 1,374
Interest and other debt expenses......... 4,571 21,956 24,401 25,071 33,333 8,092 8,666
Restructuring expenses................... 1,814 1,115 4,276 -- -- -- --
Depreciation, depletion and
amortization........................... 20,474 35,591 20,440 25,853 38,602 10,944 9,960
Impairment of oil and gas
properties(1).......................... -- 150,138 -- -- 25,738 -- --
-------- --------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item..................... (24,957) (211,291) (11,934) 1,951 (57,007) (4,823) (10,986)
Provision for taxes...................... -- -- -- -- -- -- --
-------- --------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item................................... (24,957) (211,291) (11,934) 1,951 (57,007) (4,823) (10,986)
Extraordinary loss(2).................... -- -- (17,030) -- -- -- --
-------- --------- -------- -------- -------- -------- --------
Net income (loss)........................ $(24,957) $(211,291) $(28,964) $ 1,951 $(57,007) $ (4,823) (10,986)
======== ========= ======== ======== ======== ======== ========
Basic and diluted loss per common share
before extraordinary item(3)........... $ (1.58) $ (5.31) $ (.18) $ (.03) $ (.49) $ (.05) $ (.10)
Basic and diluted loss per common
share(3)............................... $ (1.58) $ (5.31) $ (.37) $ (.03) $ (.49) $ (.05) $ (.10)
Weighted average common shares
outstanding............................ 17,653 41,032 90,113 100,757 125,783 125,710 126,022
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDAX(4)............................... $ 9,306 $ 20,896 $ 42,621 $ 58,308 $ 52,700 $ 16,264 $ 9,010
Capital expenditures, including
acquisitions........................... 44,976 52,240 59,195 164,275 56,579 $ 12,881 $ 5,823
CASH FLOW DATA:
Net cash (used in) provided by operating
activities............................. $ (1,672) $ (1,806) $ 9,262 $ 39,604 $ 22,302 $ 9,686 $ 4,098
Net cash used in investing activities.... (44,976) (43,224) (53,392) (164,275) (39,216) (12,881) (5,823)
Net cash provided by financing
activities............................. 44,944 42,114 41,848 120,763 25,187 3,073 --
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 9,268 $ 6,352 $ 4,070 $ 162 $ 8,435 $ 40 $ 6,710
Total assets............................. 106,513 151,342 189,227 322,602 286,197 321,277 278,239
Long term debt, including current
maturities............................. 39,713 164,980 184,253 286,183 319,751 290,269 320,810
Stockholders' equity (deficit)........... 45,180 (45,568) (30,535) (5,621) (66,939) (10,443) (77,925)
Property and equipment, net.............. 74,912 128,642 158,468 293,613 256,455 293,499 250,964
</TABLE>
- ---------------
(1) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties under SFAS 121. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to the Financial Statements.
(2) Incurred in connection with the refinancing of the 13 1/2% Senior Notes and
represents the excess of the aggregate purchase price of the 13 1/2% Senior
Notes (including consent payments) over their carrying value as of the date
the refinancing was consummated.
(3) Dividends on the Company's cumulative preferred stock are deducted from
"Income (loss) before extraordinary item" and "Net income (loss)" in
calculating related per share amounts, whether or not declared, and amounted
to $2.9 million, $6.6 million, $4.6 million, $4.6 million and $4.6 million
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
respectively and $1.1 million and $1.1 million for the three months ended
March 31, 1998 and 1999, respectively.
(4) EBITDAX is calculated as income (loss) before extraordinary items, excluding
interest expense and other debt expenses, income taxes, exploration
expenses, restructuring expense, depletion, depreciation, amortization and
impairment of oil and gas properties. EBITDAX is not a measure of
performance or cash flow as determined by generally accepted accounting
principles ("GAAP"). Certain items excluded from EBITDAX are significant
components in understanding and assessing a company's financial performance,
such as a company's cost of capital and tax structure, as well as historic
costs of depreciable assets, none of which are components of EBITDAX. The
Company uses EBITDAX as a measure to gauge its operating performance, with
emphasis placed on revenue and cost trends, changes from period to period
and variances from management forecasts. The Company has excluded
restructuring expenses, which management believes are nonrecurring and
excluded exploration expenses, which management believes provides more
consistency in measuring operating performance of comparable companies,
regardless of whether such companies use full cost accounting (and therefore
do not expense exploration costs) or successful efforts accounting. In
conjunction with EBITDAX, the Company uses GAAP and other operating measures
to evaluate its operating performance. The Company does not, and did not
during any of the periods presented above, use any single specific measure,
including EBITDAX, to evaluate or modify the conduct of its operations. In
addition, EBITDAX is a measure used by certain investors in evaluating the
operating performance of comparable oil and gas exploration and production
companies. EBITDAX should not be considered as an alternative to, or more
meaningful than, net income or cash flow as determined in accordance with
GAAP or as an indicator of the Company's operating performance or liquidity.
EBITDAX is not necessarily comparable to a similarly titled measure of
another company.
23
<PAGE> 25
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statements of operations for
the year ended December 31, 1998 and for the three months ended March 31, 1999
give effect to the Pro Forma Transactions as if each had occurred on January 1,
1998. The following unaudited pro forma consolidated balance sheet as of March
31, 1999 gives effect to the Pro Forma Transactions as if each had occurred on
March 31, 1999. The unaudited pro forma consolidated balance sheet as of March
31, 1999 and statement of operations for the year ended December 31, 1998 and
for the three months ended March 31, 1999 are based upon the financial
statements included in this prospectus.
The pro forma adjustments are based upon available information and certain
assumptions that we believe are reasonable. The pro forma financial information
does not purport to represent what our results of operations would actually have
been had the Pro Forma Transactions in fact occurred on the assumed dates,
particularly in light of the nature of the Phillips transaction regarding
volumes that are contracted to be delivered in certain years. See footnote 3 to
the Pro Forma Statements of Operations. In addition, the unaudited pro forma
consolidated financial statements are not necessarily indicative of the results
of our future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 31.
24
<PAGE> 26
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
-------------------------------------------------------
OFFER TO
SALE OF THE EXCHANGE
OUTSTANDING PHILLIPS SUBORDINATED PREFERRED
HISTORICAL NOTES TRANSACTION REPURCHASE STOCK PRO FORMA
---------- ----------- ----------- ------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ 6,710 $ 15,250(1) $ 46,600(4) $(28,306)(8) $ 40,254
Accounts receivable................. 17,926 17,926
Accounts receivable -- drilling
programs.......................... 573 573
Prepaid expenses and other current
assets............................ 768 768
--------- --------- -------- -------- ------- ---------
Total current assets.............. 25,977 15,250 46,600 (28,306) 59,521
--------- --------- -------- -------- ------- ---------
Unproved properties................. 38,455 38,455
Properties subject to
amortization...................... 500,980 (57,505)(5) 443,475
Pipelines and other transportation
assets, at cost................... 1,582 1,582
Furniture, fixtures and equipment... 3,567 3,567
--------- --------- -------- -------- ------- ---------
Total property and equipment...... 544,584 (57,505) 487,079
Less: Accumulated depreciation,
depletion and amortization........ (293,620) (293,620)
--------- --------- -------- -------- ------- ---------
Total property and equipment,
net............................. 250,964 (57,505) 193,459
--------- --------- -------- -------- ------- ---------
Other non-current assets, net....... 1,298 6,981(2) (2,139)(6) 6,140
--------- --------- -------- -------- ------- ---------
Total assets................ $ 278,239 $ 22,231 $(13,044) $(28,306) $ 259,120
========= ========= ======== ======== ======= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued
expenses.......................... $ 35,078 $ 35,078
Accounts payable -- drilling
programs.......................... 276 276
Current portion of long-term debt... 32,851 (27,486)(8) 5,365
--------- --------- -------- -------- ------- ---------
Total current liabilities......... 68,205 (27,486) 40,719
--------- --------- -------- -------- ------- ---------
Credit Facility..................... 111,500 (111,500)(3) --
14% Senior Secured Notes............ -- 135,000(3) (35,000)(4) 100,000
10 3/8% Senior Subordinated Notes... 150,818 150,818
8 1/2% Convertible Subordinated
Debentures........................ 25,641 (16,385)(8) 9,256
--------- --------- -------- -------- ------- ---------
Total long-term debt.............. 287,959 23,500 (35,000) (16,385) 260,074
--------- --------- -------- -------- ------- ---------
Total liabilities........... 356,164 23,500 (35,000) (43,871) 300,793
--------- --------- -------- -------- ------- ---------
Preferred stock..................... 2,600 $ (552)(9) 2,048
Common stock........................ 1,260 55(9) 1,315
Additional paid-in capital.......... 300,653 497(9) 301,150
Retained earnings................... (382,438) (1,269)(2) 21,956(7) 15,565(10) (346,186)
--------- --------- -------- -------- ------- ---------
Total stockholders'
deficit................... (77,925) (1,269) 21,956 15,565 (41,673)
--------- --------- -------- -------- ------- ---------
Total liabilities and
stockholders' deficit..... $ 278,239 $ 22,231 $(13,044) $(28,306) $ 259,120
========= ========= ======== ======== ======= =========
</TABLE>
- ---------------
(1) To record the cash proceeds from the sale of the outstanding notes in
excess of the repayment of the credit facility.
(2) To record the debt issuance costs associated with the sale of the
outstanding notes and the extraordinary loss associated with writeoff of
the remaining capitalized issuance costs associated with the credit
facility.
(3) To record the aggregate stated principal amount of the outstanding notes
sold and the application of a portion of the net proceeds from the sale of
the outstanding notes to repay all outstanding borrowings under the credit
facility.
(4) To record cash proceeds from the conveyance of oil and gas properties
pursuant to the Phillips transaction in excess of the repurchase of $35
million stated principal amount of outstanding notes at 104% of their
stated principal.
(5) To record the adjustment to oil and gas properties pursuant to the Phillips
transaction. We have not completed our analysis of specific costs of oil
and gas properties and related accumulated depreciation, depletion and
amortization being sold and, accordingly, the reduction of properties
subject to amortization is presented net of estimated accumulated
depreciation, depletion and amortization.
(6) To record the writeoff of debt issuance costs associated with the
repurchase of the outstanding notes.
25
<PAGE> 27
(7) The pro forma adjustment to retained earnings resulting from the Phillips
transaction includes the following:
<TABLE>
<S> <C>
Gain on the conveyance of the oil and gas properties
pursuant to the Phillips transaction...................... $25,495
Writeoff of a proportionate amount of debt issuance costs
associated with the repurchase of the outstanding notes... (2,139)
Extraordinary loss on the repurchase of the outstanding
notes..................................................... (1,400)
-------
Net gain.................................................... $21,956
=======
</TABLE>
(8) To record the repurchase, net of deferred debt expenses, of the $46.1
million aggregate principal amount of subordinated debt repurchased
pursuant to the Subordinated Repurchase.
(9) Reflects the conversion of approximately 368,000 shares of preferred stock
at the conversion rate of 15:1, into 5,520,000 shares of the Company's
common stock.
(10) The pro forma adjustment to retained earnings resulting from the
Subordinated Repurchase includes the following:
<TABLE>
<S> <C>
Extraordinary gain resulting from the extinguishment of
subordinated debt......................................... $16,663
Commissions................................................. (1,098)
-------
Net gain.................................................... $15,565
=======
</TABLE>
26
<PAGE> 28
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------------------------------------
OFFER
TO EXCHANGE
SALE OF THE PHILLIPS SUBORDINATED PREFERRED
HISTORICAL OUTSTANDING NOTES TRANSACTION(5) REPURCHASE STOCK PRO FORMA
---------- ----------------- -------------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues.......... $ 79,150 $(23,812)(3) $ 55,338
Interest and other income..... 505 $ 370(1) 264(4) 1,139
-------- -------- -------- ------- ----- --------
Total revenues.............. 79,655 370 (23,548) 56,477
-------- -------- -------- ------- ----- --------
Production expenses........... 19,878 (2,856)(6) 17,022
Exploration expenses.......... 12,034 12,034
General and administrative
expenses.................... 7,077 7,077
Interest and other debt
expenses.................... 33,333 16,529(2) (5,484)(7) $(3,740)(9) 40,638
Depreciation, depletion and
amortization................ 38,602 (5,570)(8) 33,032
Impairment of oil and gas
properties.................. 25,738 25,738
-------- -------- -------- ------- ----- --------
Total expenses.............. 136,662 16,529 (13,910) (3,740) 135,541
-------- -------- -------- ------- ----- --------
Loss before income taxes...... (57,007) (16,159) (9,638) 3,740 (79,064)
Income taxes..................
-------- -------- -------- ------- ----- --------
Net loss(11).................. (57,007) (16,159) (9,638) 3,740 (79,064)
Preferred stock dividends..... (4,550) (625)(10) (5,175)
-------- -------- -------- ------- ----- --------
Net loss applicable to common
stock....................... $(61,557) $(16,159) $ (9,638) $ 3,740 (625) $(84,239)
======== ======== ======== ======= ===== ========
Basic and diluted loss per
common share................ $ (0.49) $ (0.64)
-------- --------
Weighted average common shares
outstanding................. 125,783 5,520(10) 131,303
======== ===== ========
</TABLE>
- ---------------
(1) To record interest income on the net cash proceeds from the sale of the
outstanding notes in excess of the repayment of the credit facility.
(2) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
Outstanding notes........................................... $21,172
Amortization of costs from the sale of the outstanding
notes..................................................... 2,063
Credit facility............................................. (8,170)
Writeoff of remaining debt issuance costs associated with
credit facility........................................... 1,464
-------
$16,529
=======
</TABLE>
(3) Pursuant to the Phillips transaction, we received an $83 million cash
payment, retained a 42 Bcfe volumetric overriding royalty interest (VORI)
and retained 25% of our interest in the Cotton Valley formation. Actual
revenues generated by the properties included in the Phillips transaction
totaling approximately $34.5 million on 16.1 Bcfe of production were
removed. Revenues generated by the VORI of approximately $10.7 million were
included based on the percentage of actual 1999 VORI production to
estimated 1999 production from the properties, multiplied by the actual
1998 production from the properties. This agreement also will allow us to
forego an estimated $40 million in capital expenditures and an estimated
$40 million in operating costs over the next ten years. The VORI is
projected to peak at an average net production level of 26.5 million cubic
feet of gas per day during 2001, building up from a level of 9.5 million
cubic feet per day in 1999, as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bcf........................................ 2.29 4.22 9.60 7.78 6.35 3.66 4.63 3.37
</TABLE>
In the aggregate, we expect the contracted volumes to approximate the actual
volumes we would have received from our proved producing reserves over the
contract period had the Phillips transaction not been consummated.
To record the reduction in 1998 gas revenues resulting from us receiving
only 2.29 Bcf from the retained overriding royalty interest between May 1,
1999 (the effective date of the Phillips transaction) and December 31, 1999.
Pro forma rules require that the specific terms of the transaction be
reflected. However, management believes that if the Phillips transaction had
27
<PAGE> 29
actually occurred on January 1, 1998, the transaction would have resulted in
us retaining significantly more volumes than are to be received in 1999 and,
consequently, than are reflected in the 1998 pro forma financial statements,
because of both the significant 1998 production from these properties and
the significant capital investment required to achieve such production.
(4) To record interest income on the net cash proceeds from the Phillips
transaction in excess of the repurchase of $35 million principal amount of
the outstanding notes at 104% of their stated principal amount.
(5) Excludes the estimated gain of $25.5 million on conveyance of oil and gas
properties pursuant to the Phillips transaction. We have not completed our
analysis of the specific costs of the oil and gas properties and related
accumulated depreciation, depletion and amortization being sold, and,
accordingly, the gain is subject to further adjustment.
(6) To record the reduction in lease operating expenses pursuant to the
Phillips transaction.
(7) To record the reduction in interest expense related to the repurchase of
the outstanding notes.
(8) To record the reduction in depreciation, depletion and amortization
pursuant to the Phillips transaction.
(9) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
7 7/8% Convertible Subordinated Notes....................... $(2,281)
8 1/2% Convertible Subordinated Debentures.................. (1,459)
-------
$(3,740)
=======
</TABLE>
(10) Reflects the conversion of approximately 368,000 shares of preferred stock
at the conversion rate of 15:1, into 5,520,000 shares of the Company's
common stock. Also reflects the excess of the fair value of the exchange
offer over the fair value of the original conversion terms. The entry may
be summarized as follows:
<TABLE>
<S> <C>
Reduction of dividends...................................... $ 966
Excess fair value........................................... (1,591)
-------
Additional reduction of earnings available to common
stockholders.............................................. $ (625)
=======
</TABLE>
(11) Net loss from continuing operations excludes the extraordinary loss of
$3,539, from the repurchase of $35 million principal amount of the
outstanding notes at 104% of the stated principal amount, the extraordinary
loss of $1,269 from repayment of the credit facility; and the extraordinary
gain of $15,565 from the repurchase of $46.1 million of the aggregate
outstanding principal amount of the 7 7/8% Convertible Subordinated Notes
and 8 1/2% Convertible Subordinated Debentures.
28
<PAGE> 30
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------------------------------
SALE OF THE OFFER TO
OUTSTANDING PHILLIPS SUBORDINATED EXCHANGE
HISTORICAL NOTES TRANSACTION REPURCHASE PREFERRED STOCK PRO FORMA
---------- ----------- ----------- ------------ --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues.............. $ 15,507 $(4,449)(3) $ 11,058
Interest and other income......... 161 $ 80(1) 97(4) 338
-------- ------ ------- ------------ ------ --------
Total revenues.................. 15,668 80 (4,352) 11,396
-------- ------ ------- ------------ ------ --------
Production expenses............... 5,284 (717)(5) 4,567
Exploration expenses.............. 1,370 1,370
General and administrative
expenses........................ 1,374 1,374
Interest and other debt
expenses........................ 8,666 3,338(2) (1,371)(6) $ (930)(8) 9,703
Depreciation, depletion and
amortization.................... 9,960 (1,882)(7) 8,078
-------- ------ ------- ------------ ------ --------
Total expenses.................. 26,654 3,338 (3,970) (930) 25,092
-------- ------ ------- ------------ ------ --------
Loss before income taxes.......... (10,986) (3,258) (382) 930 (13,696)
Income taxes
-------- ------ ------- ------------ ------ --------
Net loss.......................... (10,986) (3,258) (382) 930 (13,696)
Preferred stock dividends......... (1,137) $ 242(9) (895)
-------- ------ ------- ------------ ------ --------
Net loss applicable to common
stock........................... $(12,123) (3,258) $ (382) $ 930 $ 242 $(14,591)
======== ====== ======= ============ ====== ========
Basic and diluted loss per common
share........................... $ (0.10) $ (0.11)
======== ========
Weighted average common shares
outstanding..................... 126,022 5,520(9) 131,542
======== ====== ========
</TABLE>
- ---------------
(1) To record interest income on the net cash proceeds from the sale of the
outstanding notes in excess of the repayment of the credit facility.
(2) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
Outstanding notes........................................... $ 5,293
Amortization of costs from the sale of the outstanding
notes..................................................... 516
Credit facility, including amortization of debt issuance
costs..................................................... (2,471)
-------
$ 3,338
=======
</TABLE>
(3) Pursuant to the Phillips transaction, we received an $83 million cash
payment, retained a 42 Bcfe volumetric overriding royalty interest (VORI)
and retained 25% of our interest in the Cotton Valley formation. This
agreement also will allow us to forego an estimated $40 million in capital
expenditures and an estimated $40 million in operating costs over the next
ten years. The VORI is projected to peak at an average net production level
of 26.5 million cubic feet of gas per day during 2001, building up from a
level of 9.5 million cubic feet per day in 1999, as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bcf............................................ 2.29 4.22 9.60 7.78 6.35 3.66 4.63 3.37
</TABLE>
In the aggregate, we expect the contracted volumes to approximate the actual
volumes we would have received from our proved producing reserves over the
contract period had the Phillips transaction not been consummated.
To record the reduction in gas revenues for the first quarter of 1999
resulting from us receiving only 0.9 Bcf from the retained overriding
royalty interest from January 1, 1999 to March 31, 1999. The gas volumes
represent the first quarter's production retained through the VORI. Actual
revenues generated by the properties included in the Phillips transaction
totaling approximately $5.9 million on 3.4 Bcfe of production were removed.
Revenues generated by the VORI of approximately $1.5 million were included
based on the percentage of actual 2000 VORI production to estimated 2000
production from the properties, multiplied by the actual 1999 production
from the properties.
(4) To record interest income on the net cash proceeds from the Phillips
transaction in excess of the repurchase of $35 million principal amount of
the outstanding notes at 104% of their stated principal amount.
(5) To record the reduction in lease operating expenses pursuant to the Phillips
transaction.
(6) To record the reduction in interest expense related to the repurchase of the
outstanding notes.
29
<PAGE> 31
(7) To record the reduction in depreciation, depletion and amortization pursuant
to the Phillips transaction.
(8) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
7 7/8% Convertible Subordinated Notes....................... $(570)
8 1/2% Convertible Subordinated Debentures.................. (360)
-----
$(930)
=====
</TABLE>
(9) Reflects the conversion of approximately 368,000 shares of preferred stock,
at the conversion rate of 15:1, into 5,520,000 shares of the Company's
common stock.
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a description of our business affairs. You should read it
in conjunction with the historical financial statements and the notes to those
statements, which are included in this prospectus.
GENERAL
Introduction. We are engaged in oil and natural gas exploration,
development, production and acquisition. Our 1998 operational activities were
focused primarily on:
- exploiting our north Louisiana properties, and
- exploration activities on our south Louisiana acreage.
In 1998, we drilled or participated in drilling:
- 47 gross (21.2 net) development wells, of which 46 gross (20.7 net) were
completed as producing wells, and
- 15 gross (5.8 net) exploratory wells, of which 8 gross (2.5 net) were
completed as producing wells.
Our most significant event was the drilling of the Harry S. Bourg #1
discovery well in Terrebonne Parish, Louisiana which added 21.4 bcfe of proved
reserves to our reserve base at year-end. We have a 50% working interest in this
well. In the first three months of 1999, we participated in drilling 2 gross
(0.5 net) wells, both of which were completed in the first quarter of 1999.
General Conditions of the Oil and Natural Gas Industry and Commodity
Prices. Through the first quarter of 1999, the prices of oil and natural gas
have fallen sharply. The decline in prices reflects the volatility of commodity
prices and the industry generally. As a result, we cannot predict future prices
of oil and natural gas. Although both oil and natural gas prices have recovered,
should prices decline, our results of operations and liquidity could be
negatively impacted. Our success is partially dependent on factors outside of
our control, including capital market conditions and highly volatile oil and
natural gas prices. Still, these factors directly affect our financial
condition. Due to recent industry conditions, we and others in the industry have
been required to:
- reconsider our capital expenditures budgets, which could negatively
impact production levels, and
- evaluate various financing and strategic alternatives.
Hedging Activities. To reduce exposure to downward price fluctuations on
our natural gas and crude oil production, we periodically use:
- forward sales contracts,
- natural gas and crude oil price swap agreements,
- natural gas basis swap agreements, and
- options.
We do not engage in speculative transactions.
During 1998, we used price and basis swap agreements. Price swap agreements
generally provide for us to receive or make counterparty payments on the
difference between a fixed price and a variable indexed price for natural gas.
Basis swap agreements generally provide for us to receive or make counterparty
payments on the difference between a variable indexed price and the price we
receive from the sale of natural gas production. Basis swap agreements are used
to hedge against unfavorable price movements in the relationship between the
variable indexed price and the price received for such production. We include
the gains and losses we realize from hedging activities in oil and gas revenues
and
31
<PAGE> 33
average sales prices in the period that the related production is sold. Our
hedging activities also cover the oil and gas production attributable to the
interest in such production of the public unitholders in our subsidiary
partnerships.
Through natural gas price swap agreements, we hedged:
- approximately 49% of our natural gas production for 1998, at an average
NYMEX quoted price of $2.31 per Mmbtu, and
- approximately 66% our natural gas production for the three month period
ended March 31, 1999, at an average NYMEX quoted price of $2.27 per
Mmbtu.
As of December 31, 1998:
- 5,400,000 Mmbtus of natural gas production for 1999 has been hedged by
natural gas price swap agreements at an average NYMEX quoted price of
$2.36 per Mmbtu before transaction and transportation costs,
- 16,380,000 Mmbtus of natural gas production for 1999 has been hedged by
natural gas basis swap agreements, and
- the unrealized gain on our existing hedging instruments for future
production months in 1999 approximated $2.5 million.
As of March 31, 1999:
- 5,630,000 Mmbtus of natural gas production for April through October 1999
has been hedged by natural gas price swap agreements at an average NYMEX
quoted price of $2.03 per Mmbtu before transaction and transportation
costs,
- 10,980,000 Mmbtus of natural gas production for April through September
1999 has been hedged by natural gas basis swap agreements, and
- the unrealized loss on our existing hedging instruments for the future
production months in 1999 approximated $1.4 million.
All numbers included above are before transaction and transportation costs.
Hedging activities increased revenues by approximately $3.5 million in 1998 and
$2.5 million in the first quarter of 1999, as compared to estimated revenues had
we not engaged in hedging activities.
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. We have not experienced
counterparty nonperformance on these agreements and do not anticipate any in
future periods.
32
<PAGE> 34
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding net
production, average sales prices, production expenses and revenues associated
with our oil and natural gas operations for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................. 102 82.8
Natural gas (Mmcf)........................................ 10,165 7,247
Natural gas equivalent (Mmcfe)............................ 10,777 7,744
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (Mbbls)................. $14.26 $11.63
Natural gas (Mmcf)........................................ 2.12 1.97
Natural gas equivalent (per Mcfe)......................... 2.13 1.97
COST PER MCFE:
Lifting costs............................................. $ 0.34 $ 0.59
Severance and ad valorem taxes............................ 0.12 0.10
General and administrative expenses....................... 0.18 0.18
Depreciation, depletion and amortization (oil and gas
activities)............................................ 1.00 1.20
Interest expense, excluding accretion and amortization.... 0.62 0.96
</TABLE>
Our oil and gas revenues were $15.5 million for the first quarter of 1999.
This represents a decrease of 33% compared to $23.0 million in the same period
of 1998. This decrease is a result of:
- decreased natural gas production (29%),
- decreased oil production (19%),
- lower natural gas prices (7%), and
- lower oil prices (18%).
Interest and other income increased from $0.02 million in the first quarter
of 1998 to $0.2 million in the first quarter of 1999 due to higher average cash
balances in the current period.
Production expenses for the first quarter of 1999 increased 8% to $5.3
million from $4.9 million in the same period last year. This increase is
primarily due to higher workover expenses on Gulf of Mexico properties,
partially offset by lower current period severance, and ad valorem taxes.
Lifting costs (production expenses less severance and ad valorem taxes) per
Mmcfe for the first quarter of 1999 increased 74% compared to the first quarter
of 1998. The increase in lifting costs is primarily due to:
- the higher workover expenses, and
- a decrease in production volumes.
Exploration expenses totaled $1.4 million in the first quarter of 1999 and
$2.1 million in the first period of 1998. This 33% decrease was due to lower dry
hole expenses of $0.7 million and lower seismic expenses of $0.3 million, both
of which were partially offset by higher lease rental expenses.
General and administrative ("G&A") expenses of $1.4 million in the first
quarter of 1999 decreased 26% compared to $1.9 million in the first quarter of
last year. On a unit basis, G&A expenses of $0.18 per Mcfe were level with the
corresponding period in 1998 because the lower G&A expenses were offset by a
decline in production volumes.
33
<PAGE> 35
Interest and other debt expenses of $8.7 million in the first quarter of
1999 increased 7% from $8.1 million in the first quarter of 1998. The increase
in interest expense resulted primarily from higher average debt levels during
the current period. In addition to our 1999 interest expense of $7.4 million, we
recorded non-cash charges in the first quarter of 1999 of:
- $0.5 million for amortization of debt issuance costs,
- $0.3 million for accretion of note discount, and
- $0.5 million for accretion of debt valuation discount.
Depreciation, depletion and amortization ("DD&A") expense decreased 8% from
$10.9 million in the first quarter of 1998 to $10.0 million in the current
period. This decrease was primarily a result of lower first quarter 1999
production partially offset by an increase in the units-of-production DD&A rate
for oil and gas activities. This units-of-production DD&A rate increased from
$1.00 per Mcfe in the first quarter of 1998 to $1.20 per Mcfe in the current
period. This increase in rate was primarily a result of negative reserve
revisions at year end 1998.
We recognized a net loss of $11 million in the first quarter of 1999 and a
net loss of $4.8 million in the same period last year. The reasons for the
decline in earnings are described in the previous discussion.
The results of operations for the quarter ended March 31, 1999 are not
necessarily indicative of results to be expected for the full year.
Years Ended December 31, 1998 and 1997. Our oil and gas revenues of $79.2
million for 1998 increased 4% compared to $75.9 million in 1997 primarily as a
result of an increase in gas production 18%, which was partially offset by lower
oil prices (32%) and lower gas prices (8%). The increase in gas production was
primarily due to the acquisition of properties from SCANA Petroleum Resources,
Inc. ("SPR") in December 1997, and drilling activities in north Louisiana.
Interest and other income increased from $0.3 million in 1997 to $0.5
million in 1998 primarily due to business interruption insurance proceeds
related to hurricane disruptions on offshore properties.
Production expenses for 1998 increased 81% to $19.9 million from $11.0
million in the prior year, resulting primarily from the SPR properties acquired
during the fourth quarter of 1997 and higher current period workover expenses.
Higher-cost production from the Gulf of Mexico properties acquired in the SPR
acquisition contributed to a 78% increase in lifting costs (production expenses
less ad valorem and severance taxes) per Mcfe to $0.41 in 1998 as compared to
$0.23 in 1997.
Exploration expenses increased 122% from $5.4 million in 1997 to $12.0
million in 1998 due to increased dry hole, seismic and unproved property
abandonment expenses and higher overhead allocated to exploration activities.
General and administrative expenses of $7.1 million in 1998 increased 3%
compared to $6.9 million last year. On a unit of production basis, general and
administrative expenses were $0.19 per Mcfe in 1998 compared to $0.22 per Mcfe
in 1997.
Interest and other debt expenses of $33.3 million in 1998 increased 33%
from $25.1 million in 1997. The increase in interest expense resulted primarily
from higher average debt levels during the current period due to increased
borrowings under our credit facility and issuance of $30 million principal
amount of 10 3/8% Senior Subordinated Notes due 2006. In addition to our 1998
interest expense of $28.1 million, we recorded non-cash charges in 1998 of:
- $2.2 million for amortization of debt issuance costs,
- $1.0 million for accretion of note discount, and
- $2.0 million for accretion of debt valuation discount.
34
<PAGE> 36
Depreciation, depletion and amortization ("DD&A") expense increased 49%
from $25.9 million in 1997 to $38.6 million in 1998. This increase was a result
of higher 1998 production levels and an increase in the units-of-production DD&A
rate for oil and gas activities from $0.80 per Mcfe in 1997 to $1.01 in 1998.
In 1998, under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", we recognized noncash impairment charges of $25.7 million
against the carrying values of our proved and unproved oil and gas properties,
aggregating $21.6 million and $4.1 million, respectively, for the year ended
December 31, 1998 (see "Property Impairment under SFAS No. 121" in the "Notes to
Consolidated Financial Statements" included in this prospectus).
We recognized a net loss of $(57.0) million in 1998 and net income of $2.0
million in the prior year. The reasons for the earnings changes are described in
this discussion of the years ended December 31, 1998 and 1997.
Years Ended December 31, 1997 and 1996. Our oil and gas revenues of $75.9
million for 1997 increased 25% compared to $60.9 million in 1996. This increase
occurred primarily as a result of an increase in gas production (29%), which was
partially offset by lower oil prices (13%) and lower gas prices (1%). The
increase in gas production is primarily due to our 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 our 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 (production expenses less ad valorem and
severance taxes) decreased to $0.23 per Mcfe in 1997 compared to $0.31 per Mcfe
in 1996. This decrease reflects lower average costs on north Louisiana
production, which is increasing 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 the joint exploration agreement effective December 1996 in south
Louisiana with The Williams Companies, Inc.
General and administrative expenses of $6.9 million in 1997 decreased 23%
compared to $9.0 million in 1996, 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 the current period, and
- the payment of interest associated with the settlement of a lawsuit.
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
35
<PAGE> 37
- lower debt amortization expenses as a result of the refinancing of the
13 1/2% Senior Notes and the bank credit facility. See "-- Liquidity and
Capital Resources".
In addition to our 1997 interest expense of $20.9 million, we 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.
DD&A 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 DD&A rate for oil and gas activities was $0.80 per Mcfe in
both 1996 and 1997.
We 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 this discussion of the years ended
December 31, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. During 1998 and through the first quarter of 1999, the oil and gas
industry experienced a worldwide excess of supply over demand for oil and
natural gas resulting in sharply reduced prices. As a result, many companies in
the oil and gas industry, including us, experienced reduced profitability and
cash flows which, in turn, created significant liquidity problems. To address
these liquidity issues, we have taken the measures discussed in the following
paragraphs.
In April 1999, we entered into an Exploration and Development Agreement
with Phillips relating to certain of our interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana. Pursuant to the agreement, we:
- received an $83 million cash payment, subject to certain post-closing
adjustments,
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess of production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will, at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. We anticipate
recognition of a gain of approximately $25.5 million in the second quarter of
1999. We have not completed our analysis of the specific costs of the oil and
gas properties and related accumulated depreciation, depletion and amortization
being sold. Therefore, the gain is subject to further adjustment.
In April 1999, we negotiated a private offering of the outstanding notes.
The notes are:
- secured by a first lien on substantially all of our proved oil and
natural gas properties remaining after the sale to Phillips, and
- guaranteed by three of our wholly owned subsidiaries.
With the consummation of the Phillips transaction, we were obligated to
repurchase $35 million principal amount of the outstanding notes at a repurchase
price equal to 104% of their principal amount. We also paid accrued and unpaid
interest to the date of the repurchase. Such repurchase closed on June 30, 1999.
Also in April 1999, we began an offer to purchase the outstanding principal
amounts of our 7 7/8% Convertible Subordinated Notes due December 15, 1999 and
our 8 1/2% Convertible Subordinated
36
<PAGE> 38
Debentures due April 1, 2000 at a price equal to $590 per $1,000 principal
amount. On May 17, 1999, we funded the repurchase of $46.1 million aggregate
principal amount of these securities.
We used the net proceeds from the combination of these transactions and
cash on hand to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest,
- fund cash collateral for a $1.5 million letter of credit, which letter of
credit was subsequently increased to $6.1 million and is expected to
increase to $7.5 million,
- fund the repurchase of $46.1 million aggregate principal amount of 7 7/8%
Convertible Subordinated Notes due December 15, 1999 and our 8 1/2%
Convertible Subordinated Debentures due April 1, 2000 under the offer to
purchase at a total cost of approximately $28.3 million, and
- repurchase $35 million principal amount of the notes then outstanding at
104% of their principal amount.
We will use any remaining net proceeds and cash flow from operations for
general corporate purposes.
We will recognize an extraordinary gain of approximately $11.0 million in
the second quarter of 1999 related to these repurchases and refinancings.
On June 28, 1999, the Company began an offer to exchange 15 shares of its
common stock for each outstanding share of its $2.625 Convertible Exchangeable
Preferred Stock. This offer expired at 12:01 a.m. New York City Time on Tuesday,
July 27, 1999. Approximately 368,000 shares, representing approximately 21% of
the shares of preferred stock outstanding prior to the offer to exchange, were
tendered in the offer.
The Company expects to effect a 1 for 10 reverse stock split of its common
stock on July 30, 1999. Following the reverse split, the total number of
outstanding shares of its common stock should be reduced from approximately 126
million shares to approximately 12.6 million shares, without giving effect to
the share exchange described above.
While industry conditions cannot be predicted with certainty and are
dependent upon a number of commodity and economic factors which are beyond our
control, we believe that the cash on hand subsequent to the consummation of the
above transactions and the recent increase in oil and natural gas prices, if
continued, will sustain our operations over the short-term. However, we will
continue to have significant debt outstanding and limited ability to incur
further indebtedness, which, combined with industry conditions beyond our
control, may negatively affect our financial condition, results of operations
and cash flows.
Liquidity. Net cash provided by operating activities, before working
capital adjustments, during the first three months of 1999 aggregated $1.6
million. Funds used in investing activities were comprised of capital
expenditures of $5.8 million. As a result of these activities, cash and cash
equivalents decreased from $8.4 million at December 31, 1998 to $6.7 million as
of March 31, 1999. As of March 31, 1999, we had a working capital deficit of
$42.2 million, compared to a working capital deficit of $37.4 million at the end
of 1998.
Capital Resources. At March 31, 1999, $111.5 million of borrowings and $1.5
million of letters of credit were outstanding under our credit facility. In
April 1999, we borrowed an additional $4 million under this credit facility,
raising our total outstanding borrowings to $115.5 million as of April 30, 1999.
Our typical monthly cash flow cycle is such that we usually receive a
substantial portion of our 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.
After we paid all amounts outstanding under the credit facility, the credit
facility was terminated. We are not likely to have access to a revolving credit
facility to supplement our cash needs. The terms of the notes offered in this
prospectus and subordinated obligations significantly limit our ability to incur
37
<PAGE> 39
additional funded indebtedness. Accordingly, we anticipate that we will be
required to meet our obligations during the remainder of 1999 from:
- the net proceeds of the transactions described above,
- cash on hand, and
- cash flows from operations.
While we anticipate that we will be able to meet our obligations in 1999, we
cannot assure you that we will be able to do so.
We had $327.9 million principal amount of debt outstanding as of March 31,
1999 ($321 million recorded on the balance sheet), requiring $29.8 million in
annual cash interest payments. On a pro forma basis at March 31, 1999, we had
$270 million of debt outstanding ($265 million per balance sheet presentation),
which would require $32 million of annual cash interest payments. Our
outstanding $2.625 Convertible Exchangeable Preferred Stock is cumulative,
requiring dividends to accumulate, currently at the rate of $4.6 million
annually. The preferred stock carries liquidation preferences over the Company's
common stock totaling $49.8 million at March 31, 1999, including dividend
arrearages. We have not declared the quarterly dividend of $0.65625 per
preferred share for February 1, 1998, May 1, 1998, August 1, 1998, November 1,
1998, February 1, 1999 and May 1, 1999, aggregating approximately $6.8 million,
covering six quarters. Further dividends are restricted under the indentures
governing our 10 3/8% Senior Subordinated Notes and the new notes offered in
this prospectus. If we do not pay dividends on the preferred stock for a period
of six quarters, whether or not consecutive, the holders of the preferred stock,
as a group, have the right to elect two additional directors to our Board of
Directors. In June 1999, the Company began an offer to exchange 15 shares of its
common stock for each outstanding share of its $2.625 Convertible Exchangeable
Preferred Stock. This offer expired at 12:01 a.m. New York City Time on Tuesday,
July 27, 1999. Approximately 368,000 shares, representing approximately 21% of
the shares of preferred stock outstanding prior to the offer to exchange, were
tendered in the offer.
Capital Commitments. Our 1999 capital expenditure budget provides for:
- $10 million to be expended on development drilling primarily in north and
south Louisiana, and
- $5 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 three months of 1999, we participated in drilling 2 gross (.5 net)
wells, both of which wells were completed in the first quarter of 1999. As of
the end of the first quarter of 1999, we were participating in the drilling of 3
gross (.7 net) wells.
Year 2000. We have begun reviews and evaluations in response to Year 2000
issues. These issues involve the potential disruption to systems, processes, and
business practices that may occur if system hardware and software utilized by
us, our vendors, and our customers are unable to process year 2000 data.
We have worked closely with our information systems and technology vendors
to install updated software, where appropriate, that will be Year 2000
compliant. All of the critical Year 2000 internal systems issues have been
tested and corrected, where necessary.
We have identified those vendors and others that we believe provide
material services or are vital to our business. Discussions with these companies
to determine their Year 2000 readiness have begun and are expected to be
completed in the third quarter 1999.
The cost of reviewing and implementing corrective measures for Year 2000
issues to date has not been material to us and has been limited to our use and
the use of vendor personnel for review and implementation of corrective
measures. We do not expect the remainder of the Year 2000 review and corrective
measures to involve significant costs.
38
<PAGE> 40
Based on assessments to date and compliance plans in progress, nothing has
come to the attention of management to cause it to believe that Year 2000
issues, including the cost of implementing corrective measures, will have an
adverse material impact on our business or operations. Nevertheless, as
indicated above, achieving Year 2000 readiness is subject to risk and
uncertainties, especially regarding third parties, and there can be no assurance
we will not be negatively affected by Year 2000 issues.
The foregoing statements are intended to be and are hereby designated "Year
2000 Readiness Disclosures" within the meaning of the Year 2000 Information and
Readiness Act.
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 natural gas prices we received during
the periods indicated.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
OIL PRICE GAS PRICE
($/BBL) ($/MCF)(1)
--------- ----------
<S> <C> <C>
YEAR ENDED:
December 31, 1998....................................... $13.09 $2.09
December 31, 1997....................................... 19.34 2.27
December 31, 1996....................................... 22.11 2.30
</TABLE>
- ---------------
(1) Includes the effects of our hedging activities.
39
<PAGE> 41
MARKET RISK DISCLOSURE
We are exposed to market risk from changes in interest rates and commodity
prices. We have used our credit facility and use our senior and subordinated
debt instruments to finance a significant portion of our operations (see Note
1). Our exposure to market risk for interest rates was subject to change related
to our credit facility variable rate debt (see Note 1). In the normal course of
business we enter into hedging transactions, including natural gas and crude oil
price and basis swap agreements, to mitigate our exposure to commodity price
movements, but not for trading or speculative purposes. In the first three
months of 1999, we used price and basis swap agreements to reduce exposure to
downward price fluctuations for our natural gas production. For debt obligations
the table below presents principal cash flows and weighted average interest
rates by year of maturity. For natural gas and crude oil price and basis swap
agreements, the table presents notional amounts in Mmbtu's and weighted average
prices for contracts in place at March 31, 1999. The information presented below
should be read in conjunction with Note 4 and Note 10 to the Consolidated
Financial Statements included in this prospectus. Amounts below are in thousands
unless otherwise indicated.
<TABLE>
<CAPTION>
MATURITY DATE
------------------------------------------------------- FAIR VALUE
DEBT (DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 3/31/99
- --------------------------- ----------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable:
Credit Facility 7.03%(1)
(Maturity)............ $111,500 $111,500 $111,500
Fixed:
13.50% (Maturity)....... $ 435 435 435
7.88% (Maturity)........ 34,147 34,147 20,147
8.50% (Maturity)........ 26,856 26,856 15,845
10.38% (Maturity)....... $155,000 155,000 97,650
----------- -------- -------- -------- -------- -------- -------- --------
Total Maturity.... $ 34,582 $138,356 $155,000 $327,938 $245,577
=========== ======== ======== ======== ======== ======== ======== ========
Blended weighted average
interest rate........... 7.95% 8.5% 10.38%
COMMODITY PRICE DERIVATIVES
Price swaps:
Notional amounts
(Mmbtu's)............. 5,630,000
Weighted average price... $ 2.03
Fair value at
3/31/99(2)............ $ (1,050)
Basis swaps:
Notional amounts
(Mmbtu's)............. 10,980,000
Margin differential(3)... $ (0.03)
Fair value at
3/31/99(2)............ $ (335)
</TABLE>
- ---------------
(1) Reflects the weighted average interest rate on borrowings outstanding at
March 31, 1999.
(2) Represents estimated amounts to settle the contracts at March 31, 1999.
(3) Estimated weighted average margin differential at March 31, 1999.
40
<PAGE> 42
DESCRIPTION OF OUR BUSINESS AND PROPERTIES
THE COMPANY
We are engaged in the development, exploration, acquisition and production
of oil and natural gas properties, primarily in Louisiana and the shallow waters
of the Gulf of Mexico. Our activities have historically been concentrated on:
- lower-risk development drilling in north Louisiana, and
- higher impact exploratory drilling in south Louisiana.
As of January 1, 1999:
- 74% of our estimated proved reserves were located in north Louisiana (59%
after adjusting for the Phillips transaction),
- we had proved reserves of 315 Bcfe (201 bcfe after adjusting for the
Phillips transaction),
- we had a PV-10 Value of $234 million, ($178 million after adjusting for
the Phillips transaction),
- we held an interest in:
- 174,556 gross (81,054 net) developed acres
- 294,807 gross (90,703 net) undeveloped acres, and
- 584 gross (224.5 net) producing wells, and
- approximately 90% of our reserves were natural gas and 64% were proved
developed (85% and 74%, respectively, after adjusting for the Phillips
transaction).
For 1998, we produced 37.8 Bcfe, and spent $57 million in capital
expenditures, approximately 55% of which was spent on development activities and
acquisitions.
We continue to experience development and exploration success. In 1998, we
achieved a 98% success rate on development activities and an overall success
rate of 87% on the drilling of 62 total wells. We expect to spend approximately
$15 million on lower-risk drilling in 1999, substantially all of which is
discretionary.
In April 1999, we entered into an exploration and development agreement
with Phillips relating to our interests in the Bryceland, West Bryceland and
Sailes fields in north Louisiana. As a result of this transaction, we:
- sold 114.4 Bcfe of proved reserves, including 62.6 Bcfe of proved
undeveloped reserves,
- received an $83 million cash payment, subject to certain post-closing
adjustments,
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. Following the
closing of the Phillips transaction, approximately 85% of our reserves are
natural gas and 74% are proved developed.
In April 1999, we negotiated a private offering of $135 million principal
amount of the outstanding notes. As required pursuant to the terms of the
indenture governing these notes, we repurchased $35 million principal amount of
the notes at a repurchase price equal to 104% of their principal amount. We also
paid accrued and unpaid interest to the date of the repurchase. The repurchase
closed on June 30, 1999.
Also in April 1999, we began an offer to repurchase the outstanding
principal amounts of our 7 7/8% Convertible Subordinated Notes due December 15,
1999 and our 8 1/2% Convertible Subordinated
41
<PAGE> 43
Debentures due April 1, 2000 at a price equal to $590 per $1,000 principal
amount. On May 17, 1999, we funded the repurchase of $46.1 million aggregate
principal amount of these securities.
We used the net proceeds from the combination of these transactions and
cash on hand to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest,
- fund cash collateral for a $1.5 million letter of credit which was
subsequently increased to $6.1 million, and is expected to increase to
$7.5 million,
- fund the repurchase of $46.1 million aggregate principal amount of our
7 7/8% Convertible Subordinated Notes due December 15, 1999 and our
8 1/2% Convertible Subordinated Debentures due April 1, 2000 under the
offer to purchase at a total cost of approximately $28.3 million, and
- repurchase the $35 million principal amount of the outstanding notes at
104% of their principal amount.
We will use any remaining net proceeds and cash flow from operations for
general corporate purposes.
We will recognize an extraordinary gain of approximately $11.0 million in
the second quarter of 1999 related to these repurchases and refinancings.
On June 28, 1999, the Company began an offer to exchange 15 shares of its
common stock for each outstanding share of its $2.625 Convertible Exchangeable
Preferred Stock. This offer expired at 12:01 a.m. New York City Time on Tuesday,
July 27, 1999. Approximately 368,000 shares, representing approximately 21% of
the shares of preferred stock outstanding prior to the offer to exchange, were
tendered in the offer.
The Company expects to effect a 1 for 10 reverse stock split of its common
stock on July 30, 1999. Following the reverse split, the total number of
outstanding shares of its common stock should be reduced from approximately 126
million to approximately 12.6 million, without giving effect to the share
exchange described above.
Finally, the Board of Directors has approved changing the Company's name to
Contour Energy Co. and its Nasdaq ticker symbol to CONC. The Company expects the
name change and the reverse stock split to become effective on July 30, 1999.
COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths.
Balanced Portfolio of Drilling Opportunities. We hold a balanced portfolio
of lower-risk development properties and higher-impact exploratory prospects.
Our development properties and production attributable to the volumetric
overriding royalty interest ("VORI") retained in the Phillips transaction
provide us with cash flow to help support our operations and capital expenditure
budget. Our exploratory prospects offer the potential for larger reserves and
greater production.
Operational Efficiencies. Substantially all of our proved reserves and a
majority of our operating activities are concentrated in Louisiana and in the
shallow waters of the Gulf of Mexico. We believe that this geographic focus has
enabled our operating personnel to develop expertise by concentrating on areas
with similar operating and technical characteristics. Additionally, the
concentration of properties we operate enables us to achieve cost and
operational efficiencies.
Long-Lived Proved Reserves. Our proved reserves in north Louisiana (which
currently constitute 74% of our estimated proved reserves) are long-lived and
support cash flow through their low lease operating expenses and development
costs. We believe the relatively long lives and low costs of our north Louisiana
42
<PAGE> 44
wells plus the cash flows provided by the VORI provide a solid base from which
to pursue our acquisition and exploration strategy. As of January 1, 1999:
- our reserves to production ratio in north Louisiana was approximately
12.0:1 (11.7:1 as adjusted for the Phillips transaction), and
- our overall reserves to production ratio was approximately 10.2:1 (8.7:1
as adjusted for the Phillips transaction).
High Operating Margins. Our oil and natural gas reserves are located close
to pipeline transportation and key market locations. Therefore, we are generally
able to command more favorable wellhead prices. Production from our south
Louisiana properties generally is sold at a premium to NYMEX prices because it
has a higher BTU content. In addition, production generated by the VORI is not
burdened by development or lease operating costs. Our production and general and
administrative expenses for 1998 were $0.53 and $0.19 per Mcfe, respectively,
resulting in a cash operating margin of $1.38 per Mcfe.
Effective Use of Technology. We apply advanced technology to lower the
risks and costs of exploration and development activities. We constantly
re-evaluate and refine our 3-D seismic databases to improve drilling results.
These databases cover over 1,300 square miles, including all presently
identified exploration prospects. We have invested in computer-aided exploration
and development hardware and software. Additionally, we have an experienced
technical staff, including seven engineers, five geologists and three
geophysicists.
Experienced and Proven Management Team. Our senior management team has been
together since February 1996 and has extensive experience in the oil and natural
gas industry. In addition, we have adopted employee incentive programs designed
to align the interests of management and investors.
BUSINESS STRATEGY
Our strategy is to increase reserves, production and cash flow in a
cost-effective manner. We plan to implement this strategy through a program of
balanced development and exploration activities in our current areas of
operation.
Improve Liquidity. The sale of the outstanding notes and the Phillips
transaction have provided us with additional liquidity. We have historically
funded our operations primarily through cash flow from operations and
borrowings. As a result of sale of the outstanding notes, our ability to incur
additional indebtedness is substantially limited. Therefore, in the current
environment of depressed oil and natural gas prices, we will rely on the
following to fund oil and natural gas development and exploitation activities
and acquisitions:
- cash on hand,
- cash flow from operations, and
- asset sales.
Complete Strategic Transactions. We plan to complete sales of certain oil
and natural gas assets and similar transactions to provide additional liquidity
for redeployment in development and exploration projects. We expect these
transactions will increase cash flow, proved reserves and production. Consistent
with this strategy, we entered into the Phillips transaction.
Focus Capital Expenditures. Following this exchange offer and to the extent
capital is available, we intend to focus our capital expenditures on:
- the development of our existing south Louisiana properties,
- the continued development of our north Louisiana properties, and
- exploratory drilling.
43
<PAGE> 45
By focusing on development projects in our core areas of operation, we expect to
increase our current levels of production with reduced levels of capital
expenditures.
OUR HISTORY
The Consolidation. We were formed in 1994 to consolidate the equity
ownership (the "Consolidation") of Kelley Oil & Gas Partners, Ltd. ("Kelley
Partners") and Kelley Oil Corporation. Before the Consolidation in 1995, Kelley
Partners and Kelley Oil's developmental drilling partnership subsidiaries
("DDPs") jointly conducted drilling activities. Kelley Oil was the managing
general partner of Kelley Partners. Historically, Kelley Oil participated
proportionately in these operations. Kelley Partners retained one-third of its
working interest in each prospect and assigned drilling rights for the balance
of its interest to a DDP. In addition to serving as managing general partner of
each DDP, Kelley Oil purchased for its own investment account all units in DDPs
that were not already subscribed to by other investors in Kelley Partners. In
the Consolidation, we acquired Kelley Oil's interests in the remaining DDPs
sponsored during 1994 and 1992. These interests aggregated 92.2% and 84.3%,
respectively. The Consolidation was completed on February 7, 1995 following
approval by investors in Kelley Partners and Kelley Oil.
In the Consolidation, the outstanding capital stock of Kelley Oil and units
in Kelley Partners held by investors other than Kelley Oil and its subsidiaries
("Public Unitholders") were converted into:
- 43.7 million shares of the Company's common stock,
- 2.4 million shares of the Company's $2.625 convertible exchangeable
preferred stock, and
- 2.2 million shares of cumulative convertible preferred stock held by the
Company's Employee Stock Ownership Plan ("ESOP preferred stock").
As a result of the Consolidation, Kelley Oil became our wholly owned subsidiary,
and Kelley Partners became a 99.99%-owned subsidiary partnership. For financial
accounting purposes, we treated the Consolidation as a purchase of the Public
Unitholders' interests in Kelley Partners. In 1996, Kelley Partners was merged
into the Company and each of the then outstanding shares of ESOP preferred stock
was redeemed for one share of the Company's common stock.
Contour Transaction. In January 1996, we entered into financing and related
agreements with Contour Production Company L.L.C. Pursuant to these agreements,
on February 15, 1996, Contour purchased:
- 48.0 million newly issued shares of the Company's common stock for $48.0
million, and
- an option to purchase an additional 27.0 million shares of the Company's
common stock for $27.0 million.
Contour exercised its option on December 1, 1997. In February 1996, in
connection with the first stage of Contour's investment in the Company, John F.
Bookout 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.
In connection with the Contour transaction, the Company also:
- amended its Certificate of Incorporation to increase its authorized
common stock from 100 million shares to 200 million shares,
- entered into employment agreements with John F. Bookout and other new
executives elected by its Board of Directors,
- reduced the size of its Board to seven members,
- reconstituted the Board with three continuing directors and four
designees of Contour, and
- replaced its existing lines of credit.
44
<PAGE> 46
Acquisition of Oil and Gas Properties. Effective as of December 1, 1997,
the Company purchased substantially all of the assets of SCANA Petroleum
Resources, Inc. for approximately $110 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 leasehold acreage in those areas.
We financed this acquisition with $27 million of proceeds received upon the
exercise of the Contour option and borrowings under our credit facility. In July
1998, we sold, for $17.4 million, our interests in the Waskom field (located in
east Texas) acquired from SPR.
OPERATIONS AND PROPERTIES
Operation Activities. Our production is derived primarily from:
- two fields in the Vacherie Salt Dome region of north Louisiana,
- south Louisiana, and
- the shallow waters of the Gulf of Mexico.
Development Activities. During 1998, we continued development drilling
activities within our existing properties in the Vacherie Salt Dome region of
north Louisiana. At December 31, 1998, approximately 71% of our proved reserves
were located on 46,460 gross (21,514 net) acres in this region. In north
Louisiana, we drilled or participated in drilling 44 gross (21.1 net)
development wells. Of these 44 wells, 43 gross (20.7 net) were completed as
producing wells. At year-end 1998, 156 locations included in the Gruy reserve
report were defined as proved undeveloped locations totaling 114.6 Bcfe of
reserves.
As a part of the Phillips transaction, we sold 114.4 bcfe of proved
reserves (including 62.6 bcfe of proved undeveloped reserves). As a result, our
remaining reserves (201 bcfe) are 74% proved developed, including those
associated with the VORI.
Exploration Activities. We focus our exploration activities primarily on
our existing leaseholdings in Terrebonne and LaFourche Parishes, Louisiana. We
believe these leaseholdings have, with higher risk, the potential for larger
reserve and production increases than development activity in north Louisiana.
Additional exploration activities include our existing blocks located in the
shallow waters of the Gulf of Mexico and properties located in the Permian Basin
in west Texas. We have approximately 273,460 gross undeveloped acres of
exploratory properties principally in these regions on which we have identified
over 30 prospective exploratory well sites. 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 capital funds and drilling rigs,
- weather, and
- general economic factors.
See "Caution as to Forward-Looking Statements" on page 21 and "Risk Factors"
beginning on page 12.
We are utilizing sophisticated technologies to identify exploration
prospects. We are also utilizing advanced geophysical techniques to continue to
develop and refine interpretations of our 3-D seismic database, which covers:
- 600 square miles, a major portion of our existing leaseholdings in
Terrebonne and LaFourche Parishes, in south Louisiana,
45
<PAGE> 47
- 50 square miles offshore Texas, and
- 600 square miles of our Permian Basin exploratory prospects.
In 1998, we drilled 15 gross (5.8 net) exploratory wells, of which 8 gross
(2.5 net) were completed as producing wells. Included in these amounts are 3
gross (0.8 net) exploratory wells that were drilled and completed as producing
wells on acreage acquired in the SPR acquisition.
Description of Properties. Our properties are located in:
- Louisiana,
- the Gulf of Mexico,
- Texas,
- New Mexico, and
- Arkansas.
As of January 1, 1999, we owned interests in a total of 584 gross (224.5
net) producing wells, accounting for 74% of our current production. We operated
298 of these wells. We also had leaseholdings covering 174,556 gross (81,054
net) developed acres and 294,807 gross (90,703 net) undeveloped acres. In May,
we conveyed interests in 284 wells (127 net) to Phillips.
As of March 31, 1999, after adjusting for the Phillips transaction:
- approximately 85% of our proved oil and natural gas reserves was natural
gas on an energy content basis, and
- the reserves to production ratio for these properties, based on first
quarter 1999 production was estimated to be 8.7.
Significant Properties. Our natural gas properties in north Louisiana are
located primarily in the Sibley and Ada fields located in the Webster and
Bienville Parishes.
Our properties in south Louisiana are concentrated in these fields in Terrebonne
Parish:
- Orange Grove/Humphreys,
- Lirette,
- Lake Pagie,
- Ouiski Bayou, and
- Bayou Sauveur (Bourg prospect).
Production is primarily from the Hosston (north Louisiana) and Miocene
(south Louisiana) formations. Our other properties are located primarily in the
shallow waters of the Gulf of Mexico, south Louisiana and Texas. Substantially
all of our oil and natural gas properties are pledged to secure the outstanding
notes. The following table sets forth information as of the dates indicated
regarding our
46
<PAGE> 48
interests by major geographic region. See "-- Estimated Proved
Reserves -- Uncertainties in Estimating Reserves and Future Net Cash Flows" on
page 49.
<TABLE>
<CAPTION>
PROVED RESERVES AT JANUARY 1, 1999
----------------------------------------------- PRODUCTION
PRESENT VALUE FOR THE
OF ESTIMATED YEAR ENDED DECEMBER 31, 1998
FUTURE NET -----------------------------
GAS CASH GAS
OIL GAS EQUIVALENT FLOWS(1)(2) OIL GAS EQUIVALENT
(MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) (MBBLS) (MMCF) (MMCFE)
------- ------- ---------- -------------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
North Louisiana................... 604 229,565 233,189 $169,938 93 24,293 24,851
South Louisiana................... 3,735 26,555 48,965 40,369 113 4,798 5,476
Offshore.......................... 475 23,976 26,826 18,955 52 5,584 5,896
Other............................. 480 3,463 6,343 5,022 117 882 1,584
----- ------- ------- -------- --- ------ ------
Totals.................... 5,294 283,559 315,323 $234,284 375 35,557 37,807
===== ======= ======= ======== === ====== ======
</TABLE>
- ---------------
(1) 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 12 to the Financial
Statements included in this prospectus.
(2) Before the effects of income taxes. See "Glossary of Industry Terms".
In April 1999, we entered into an exploration and development agreement
with Phillips relating to certain of our proved behind pipe and undeveloped
interests in the Bryceland, West Bryceland and Sailes fields in north Louisiana.
Pursuant to the agreement, we:
- received an $83 million cash payment, subject to certain post-closing
adjustments,
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. Following the
closing of the Phillips transaction, approximately 85% of our reserves are
natural gas and 74% are proved developed.
Additional information regarding these regions is set forth below. Unless
otherwise noted, acreage and well information is provided as of December 31,
1998 and reserve information is provided as of January 1, 1999.
North Louisiana. Our reserves in this region are 64% proved developed, and
our wells are typically drilled to a maximum depth of approximately 10,500 feet.
Our reserves to production ratio in north Louisiana is approximately 9.4:1. Our
lifting costs in this region are generally low (approximately $0.17 per Mcfe in
1998) as a result of relatively low formation pressures and minimal liquid
hydrocarbon and salt water production. In the past three years, completed wells
in north Louisiana had an average development cost of $0.69 per Mcfe and added
gross average reserves per well of 2.4 Bcfe. At December 31, 1998, we were
operating an aggregate of 222 gross (122.0 net) wells in this region and were
drilling or completing 1 gross (0.34 net) well in the region, which was
completed in the first quarter of 1999. Our weighted average working interest in
these properties based on estimated proved reserves is approximately 51%.
As a part of the Phillips transaction we sold 114.4 bcfe, retaining 42 bcf
associated with the VORI, reducing our proved reserves in north Louisiana to 119
bcfe.
South Louisiana. Our operations in this region primarily are focused on
five fields in the Houma Embayment and Terrebonne Trough areas. These areas
contain high-quality reservoir rock, which contribute to high production rates.
Wells are typically drilled to a depth of approximately 11,000 to
47
<PAGE> 49
19,000 feet. Production from our south Louisiana properties generally receives
premium wellhead prices because of:
- the proximity of the properties to transportation and market locations,
and
- the rich condensate content.
We believe 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, 1998, we were operating an
aggregate of 23 gross (13.4 net) wells and were drilling 1 gross (0.50 net) well
in this region, which was completed in the first quarter of 1999. Our weighted
average working interest in these properties based on estimated proved reserves
is approximately 56%.
In 1998, the Harry S. Bourg #1 deep exploratory test was drilled to total
depth. The well has been designated as a new completion in the Bayou Sauveur
field. Development of the field began in the second quarter of 1999 with the
drilling of the first appraisal well, which will test most of the sands
encountered in the discovery well but at a structurally higher position.
Offshore. Our operations in this region are primarily focused in the
shallow waters of the Gulf of Mexico, offshore Texas, Louisiana and Alabama. At
December 31, 1998, we operated an aggregate of 34 gross (30.6 net) wells in this
region and had an interest in 67 gross (37.7 net) wells with a weighted average
working interest based on estimated proved reserves of approximately 74%.
JOINT VENTURE PARTNERSHIPS
We participate in joint ventures with industry partners to accelerate the
exploration and evaluation of our properties and to mitigate the risks
associated with exploratory drilling projects.
In December 1996, we entered into a joint venture with Williams Production,
Gulf Coast Company, a unit of The Williams Companies, Inc., relating to our
south Louisiana properties. Under the terms and conditions of this joint
venture, effective December 1, 1996, Williams purchased a 50% interest in our
27,000 net acreage position in the Houma Embayment, including 50% of our
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
this purchase price was committed under the joint venture to drill up to eight
exploration wells in those areas. Together with Williams, we drilled 3 gross
(1.5 net) wells in south Louisiana in 1998, of which 2 gross (1.0 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 expected to continue
exploratory drilling on these south Louisiana properties. However, our
participation in drilling these wells is in our discretion.
We are involved in other joint ventures with third-party interest holders,
including:
- Fina Oil and Chemical Company, a subsidiary of FINA, Inc., and
- Cobra Oil and Gas Corporation.
The Fina joint venture represents a joint exploration and development agreement
covering an area of mutual interest 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 area of mutual
interest. To date, the Company and Fina have acquired 3-D seismic data covering
approximately 450 square miles within the area of mutual interest. The Cobra
program involves exploitation of approximately 68,000 acres in Texas, New
Mexico, Arkansas, Louisiana and Alabama and includes 3-D seismic data covering
approximately 975 square miles.
48
<PAGE> 50
ESTIMATED PROVED RESERVES
The following table sets forth the estimated quantities of proved and
proved developed reserves of oil (including condensate and natural gas liquids)
and natural gas owned by us for each of the three years in the period ended
December 31, 1998. This table is based on reserve estimates prepared by Gruy.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Beginning balance.................................. 1,387 196,273 1,466 297,634 2,953 354,867
Revisions of previous estimates.................... (89) (30,519) 106 21,831 (79) (31,674)
Purchases of reserves in place..................... 57 30,844 1,351 51,712 -- --
Extensions and discoveries......................... 477 128,692 256 13,892 3,082 9,512
Sale of reserves in place.......................... (134) (4,190) -- -- (287) (13,589)
Production....................................... (232) (23,466) (226) (30,202) (375) (35,557)
----- ------- ----- ------- ----- -------
Ending balance................................... 1,466 297,634 2,953 354,867 5,294 283,559
===== ======= ===== ======= ===== =======
PROVED DEVELOPED RESERVES:
Producing.......................................... 608 113,831 1,856 180,307 1,062 129,787
Non-producing...................................... 369 59,634 576 77,493 919 59,037
----- ------- ----- ------- ----- -------
Total proved developed....................... 977 173,465 2,432 257,800 1,981 188,824
===== ======= ===== ======= ===== =======
</TABLE>
These estimates of proved reserves 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.
Estimated 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
- 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. Many of these factors are beyond our control. 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. There are uncertainties
inherent in:
- the interpretation of this engineering data,
- 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. The
accuracy of any reserve estimate depends on the quality of available data and of
engineering and geological interpretation and judgment. Accordingly, different
engineers or even the same engineers at different times may give very different
opinions regarding:
- 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 from those reserves.
49
<PAGE> 51
We cannot assure you that the reserves described in this prospectus will
ultimately be produced or that the proved undeveloped reserves set forth in this
prospectus will be developed within the periods anticipated. It is likely that
there will be material variances from the estimates given in this prospectus. In
addition, the estimates of future net cash flows from our proved reserves and
the present value of these cash flows are based upon certain assumptions about
future production levels, prices and costs that may not be correct when judged
against actual future experience. We emphasize that the estimated future net
cash flows prepared by independent petroleum engineers should not be construed
as representative of the fair market value of our proved reserves. These
estimated 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 increased expenses and capital costs after that 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 greatly differ, from the results estimated. Accordingly, you are
cautioned not to place undue reliance on the reserve data included in this
prospectus.
We have 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 includes production data, average sales prices, average
production expenses and general and administrative expenses attributable to our
properties for 1996, 1997 and 1998. Detailed additional information concerning
our oil and natural gas production activities is contained in the Supplementary
Information in Note 12 to the Financial Statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................. 232 226 375
Natural gas (Mmcf)........................................ 23,466 30,202 35,557
Natural gas equivalent (Mmcfe)............................ 24,858 31,558 37,807
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per Bbl)............... $ 22.11 $ 19.34 $ 13.09
Natural gas (per Mcf)(1).................................. 2.30 2.27 2.09
Natural gas equivalent (per Mcfe)(1)...................... 2.37 2.31 2.10
AVERAGE PRODUCTION EXPENSES (PER MCFE)...................... $ 0.43 $ 0.35 $ 0.53
GENERAL AND ADMINISTRATIVE EXPENSES (PER MCFE).............. $ 0.36 $ 0.22 $ 0.19
</TABLE>
- ---------------
(1) Includes the effects of our hedging activities.
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1998, we had leaseholdings comprising 174,556 gross
(81,054 net) developed acres and 294,807 gross (90,703 net) undeveloped acres,
all located within the continental United States. The oil and natural gas leases
in which we have 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 our leasehold interests are
held by production. This means that as long as oil or natural gas is produced
from the properties covered by these leases, 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.
50
<PAGE> 52
The following table details our ownership interests in our leaseholds as of
December 31, 1998.
<TABLE>
<CAPTION>
DEVELOPED(1) UNDEVELOPED(2)
----------------------- -----------------------
GROSS ACRES NET ACRES GROSS ACRES NET ACRES
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Louisiana.................................. 78,683 33,085 234,427 70,112
Texas...................................... 24,055 4,366 19,429 3,162
Offshore................................... 58,840 38,772 2,830 1,054
Other states............................... 12,978 4,831 38,121 16,375
------- ------ ------- ------
Total............................ 174,556 81,054 294,807 90,703
======= ====== ======= ======
</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 natural gas,
regardless of whether that acreage contains proved reserves.
As of December 31, 1998, we had working interests in 514 gross (213.0 net)
productive natural gas wells and 70 gross (11.5 net) productive oil wells,
including producing wells and wells capable of production. In May 1999, we
conveyed interests in 284 gross wells (127 net) to Phillips and reduced our net
developed acreage by 11,930 acres.
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<PAGE> 53
EXPLORATION AND DEVELOPMENT
The following table illustrates the number of gross and net productive and
dry exploratory and development wells we have drilled.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
NORTH LOUISIANA:
Exploratory wells:
Oil.................................. -- -- -- -- -- --
Natural gas.......................... -- -- -- -- 2 0.72
Dry.................................. -- -- -- -- -- --
-- ----- -- ----- -- -----
Total........................... -- -- -- -- 2 0.72
== ===== == ===== == =====
Development wells:
Oil.................................. 1 0.03 -- -- -- --
Natural gas.......................... 65 31.63 82 34.96 43 20.68
Dry.................................. 3 1.74 -- -- 1 0.46
-- ----- -- ----- -- -----
Total........................... 69 33.40 82 34.96 44 21.14
== ===== == ===== == =====
Total north Louisiana:
Producing............................ 66 31.66 82 34.96 45 21.40
Dry.................................. 3 1.74 -- -- 1 0.46
-- ----- -- ----- -- -----
Total........................... 69 33.40 82 34.96 46 21.86
== ===== == ===== == =====
SOUTH LOUISIANA AND OTHER:
Exploratory wells:
Oil.................................. -- -- -- -- -- --
Natural gas.......................... -- -- 9 3.50 6 1.81
Dry.................................. -- -- 1 0.50 7 3.22
-- ----- -- ----- -- -----
Total........................... -- -- 10 4.00 13 5.03
== ===== == ===== == =====
Development wells:
Oil.................................. -- -- -- -- 3 0.04
Natural gas.......................... -- -- -- -- -- --
Dry.................................. -- -- -- -- -- --
-- ----- -- ----- -- -----
Total........................... -- -- -- -- 3 0.04
== ===== == ===== == =====
Total south Louisiana and other:
Producing............................ -- -- 9 3.50 9 1.85
Dry.................................. -- -- 1 0.50 7 3.22
-- ----- -- ----- -- -----
Total........................... -- -- 10 4.00 16 5.07
== ===== == ===== == =====
</TABLE>
As of December 31, 1998, we had 1 gross (0.34 net) development well in
progress in north Louisiana and 1 gross (0.50 net) exploratory well in progress
in south Louisiana. Subsequent to year-end 1998, the south Louisiana exploratory
well (Bourg discovery) was completed as a well.
MARKETING OF OIL AND NATURAL GAS
We do not refine or process any of the oil and natural gas we produce.
Substantially all of our natural gas is sold under:
- term contracts,
- contracts providing for periodic price adjustments, or
- in the spot market.
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<PAGE> 54
Our revenue streams are therefore sensitive to changes in current market
prices. Our sales of oil, condensate and natural gas liquids generally are made
at prices related to posted field prices.
In addition to marketing our natural gas production, we:
- secure gas transportation arrangements,
- provide nomination and gas control services,
- supervise gas aggregation operations, and
- perform revenue receipt and disbursement services, as well as regulatory
filing, recordkeeping, inspection, testing, monitoring and marketing
functions.
We believe that our activities are not currently restrained by a lack of
adequate transportation systems or system capacity. We do not anticipate any
significant disruption in available transportation for our production. However,
we cannot give you any assurance that we will not encounter these difficulties
in the future. In that event, we would be forced to seek alternate sources of
transportation and may face increased costs.
HEDGING OF NATURAL GAS
To reduce exposure to downward price fluctuations on our natural gas
production, we periodically use:
- forward sales contracts,
- natural gas and crude oil price swap agreements,
- natural gas basis swap agreements, and
- options.
We do not engage in speculative transactions. During 1998, we used price
and basis swap agreements to hedge our exposure to possible declines in natural
gas prices. Additional information concerning our hedging activities during 1998
is set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 31 and in Note 10 to the financial
statements included in this prospectus.
COMPETITION
We operate in a highly competitive environment with respect to:
- acquiring reserves,
- marketing oil and natural gas, and
- securing trained personnel.
Many of our larger competitors have greater financial and personnel
resources than we have available. These competitors 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 we can. Our ability to acquire
additional reserves in the future will depend on our ability to evaluate and
select suitable properties and to complete transactions in a highly competitive
environment. In addition, substantial competition exists for capital available
for investment in the oil and natural gas industry. We cannot assure you that we
will be able to compete successfully in the future in:
- acquiring reserves,
- developing reserves,
- marketing hydrocarbons,
53
<PAGE> 55
- attracting and retaining quality personnel, or
- raising additional capital.
TITLE TO PROPERTIES
Our properties are mortgaged to secure the outstanding notes and, following
this exchange offer, will be mortgaged to secure the new notes. In addition, our
properties are subject to:
- royalty interests,
- liens incident to operating agreements,
- liens for current taxes, and
- other customary burdens, including other mineral encumbrances and
restrictions.
We do not believe that any mortgage, lien or other burden materially
interferes with the use of our properties in the operation of our business.
We believe that we have satisfactory title to or rights in all of our
producing properties. As is customary in the oil and natural gas industry,
minimal investigation of title is made at the time we acquire undeveloped
properties. Title investigation is made, and title opinions of local counsel are
generally obtained, before (i) we begin drilling operations or (ii) when we
prepare division orders when production is obtained and the revenues are
allocated.
EMPLOYEES
As of June 30, 1999, we had 54 permanent employees. Our staff includes
employees experienced in:
- acquisitions,
- geology,
- geophysics,
- petroleum engineering,
- land acquisition, and
- management, finance and accounting.
None of our employees is represented by a union. We have not experienced an
interruption in our operations due to any labor dispute. We believe that our
working relationships with our employees are satisfactory.
REGULATION
Our operations are subject to extensive and continually changing regulation
because 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 large penalties. The regulatory burden on this industry increases our cost of
doing business and, therefore, affects our profitability. However, we do not
believe that we are affected in a significantly different way by these
regulations than our competitors are. Because of the many complex federal and
state statutes and regulations that may affect us, you should not rely upon the
following discussion of these statutes and regulations as a complete review of
all matters affecting our operations.
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<PAGE> 56
Transportation and Production
Transportation and Sale of Oil and Natural Gas. We can make sales of oil,
natural gas and condensate at market prices which are not subject to price
controls at this time. The price that we receive from the sale of these products
is affected by our ability to transport and the cost of transporting these
products to market. Under applicable laws, the Federal Energy Regulatory
Commission ("FERC") regulates:
- the construction of natural gas pipeline facilities, and
- the rates for transportation of these products in interstate commerce.
Our sales of natural gas are affected by the availability, terms and cost
of pipeline transportation. The price and terms for access to pipeline
transportation remain subject to extensive federal and state regulation. Several
major regulatory changes have been implemented by Congress and the FERC from
1985 to the present. These changes affect the economics of natural gas
production, transportation and sales. In addition, the FERC is continually
proposing and implementing new rules and regulations affecting these segments of
the natural gas industry that remain subject to the FERC's jurisdiction. The
most notable of these are natural gas transmission companies.
The FERC's more recent proposals may affect the availability of
interruptible transportation service on interstate pipelines. These initiatives
may also affect the intrastate transportation of gas in some cases. The stated
purpose of many of these regulatory changes is to promote competition among the
various sectors of the natural gas industry. These initiatives generally reflect
more light-handed regulation of the natural gas industry. The ultimate impact of
the complex rules and regulations issued by the FERC since 1985 cannot be
predicted. In addition, some aspects of these regulatory developments have not
become final but are still pending judicial and FERC final decisions. We cannot
predict what further action the FERC will take on these matters. However, we do
not believe that any action taken will affect us much differently than it will
affect other natural gas producers, gatherers and marketers with which we
compete.
The Outercontinental Shelf Lands Act requires that all pipelines operating
on or across the Outer Continental Shelf provide open-access, non-discriminatory
service. The FERC has chosen not to impose regulations on gatherers and other
non-jurisdictional entities under Order No. 509, in which the FERC implemented
the Outercontinental Shelf Lands Act. However, the FERC has retained the
authority to exercise jurisdiction over those entities if necessary to permit
non-discriminatory access to service on the Outer Continental Shelf.
Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil. These
regulations could increase the cost of transporting oil to the purchaser. We do
not believe that these regulations will affect us any differently than other oil
producers and marketers with which we compete.
Regulation of Drilling and Production. Our drilling and production
operations are subject to regulation under a wide range of state and federal
statutes, rules, orders and regulations. Among other matters, these statutes and
regulations govern:
- 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
- the remediation of contaminated sites,
and require:
- permits for drilling operations,
55
<PAGE> 57
- drilling bonds, and
- reports concerning operations.
The federal leases are administered by the Bureau of Land Management and
the Minerals Management Service. The Bureau of Land Management, the Minerals
Management Service and the Bureau of Indian Affairs are administered by the
federal Department of the Interior. These leases contain relatively standard
terms and require compliance with detailed Minerals Management Service and
Bureau of Land Management regulations and orders, which are subject to change.
In addition to permits required by other federal agencies (such as the Coast
Guard, the Army Corps of Engineers and the Environmental Protection Agency),
lessees must also obtain a permit from the Minerals Management Service or the
Bureau of Land Management prior to beginning offshore or onshore drilling.
The Minerals Management Service has put in place regulations which require
offshore production facilities located on the Outer Continental Shelf to meet
stringent engineering and construction specifications. The Minerals Management
Service also has regulations restricting the flaring or venting of natural gas,
and has proposed to amend such regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization. Similarly, the Minerals
Management Service has promulgated other regulations governing plugging and
abandonment of wells located offshore and the removal of all production
facilities.
To cover the various obligations of lessees on the Outer Continental Shelf,
the Minerals Management Service generally requires that lessees have a
substantial net worth or post bonds or other acceptable assurances that such
obligations will be met. Under certain circumstances, the Minerals Management
Service may require any of our operations on federal leases to be suspended or
terminated. Any such suspension or termination could significantly and
negatively affect our financial condition, cash flows and operations.
States in which we own and operate properties have varying laws and
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 we can produce from our wells and to limit the number of wells or
the locations at which we can drill. In addition, each state generally imposes
an ad valorem, production or severance tax with respect to the production and
sale of oil, natural gas and gas liquids within its jurisdiction.
Environmental Regulations
General. Our operations are affected by the various state, local and
federal environmental laws and regulations, including the:
- National Environmental Policy Act,
- Clean Air Act,
- Oil Pollution Act of 1990,
- Federal Water Pollution Control Act,
- Resource Conservation and Recovery Act ("RCRA"),
- Toxic Substances Control Act, and
- Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA").
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<PAGE> 58
These laws and regulations govern the discharge of materials into the
environment or the disposal of waste materials, or otherwise relate to the
protection of the environment. In particular, the following activities are
subject to stringent environmental regulations:
- drilling,
- development and production operations,
- activities in connection with storage and transportation of oil and other
liquid hydrocarbons, and
- use of facilities for treating, processing or otherwise handling
hydrocarbons and wastes.
Violations are subject to reporting requirements, civil penalties and criminal
sanctions. As with the industry generally, compliance with existing regulations
increases our overall cost of business. The increased costs cannot be easily
determined. 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 remediate, plug and abandon inactive well sites and pits.
Environmental regulations historically have been subject to frequent change
by regulatory authorities. Therefore, we are unable to predict the ongoing cost
of compliance with these laws and regulations or the future impact of such
regulations on our operations. However, we do not believe that changes to these
regulations will have a significant negative affect on our competitive position
because our competitors will be similarly affected.
A discharge of hydrocarbons or hazardous substances into the environment
could subject us to substantial expense, including both the cost to comply with
applicable regulations pertaining to the clean up of releases of hazardous
substances into the environment and claims by neighboring landowners and other
third parties for personal injury and property damage. We maintain insurance,
which may provide some protection against certain types of environmental
liabilities. However, we cannot predict the coverage of such insurance and the
amount of protection afforded by it with respect to any particular possible
environmental liability. This insurance may not be adequate to protect us from
substantial expense.
The Oil Pollution Act and regulations thereunder impose a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. A
"responsible party" includes the owner or operator of an onshore facility,
vessel or pipeline, or the lessee or permittee of the area in which an offshore
facility is located. The Oil Pollution Act assigns liability to each responsible
party for oil removal costs and a variety of public and private damages. The Oil
Pollution Act also requires certain categories of responsible parties to
maintain evidence of financial responsibility to cover liabilities related to a
crude oil spill. The Federal Water Pollution Control Act imposes restrictions
and strict controls regarding the discharge of produced waters and other oil and
natural gas wastes into navigable waters. 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 U.S.
Environmental Protection Agency ("EPA") has promulgated regulations that require
many oil and natural gas production operations to obtain permits to discharge
storm water runoff.
The Clean Air Act 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, we believe Clean Air Act requirements will
not have a material adverse effect on our financial condition or results of
operations.
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<PAGE> 59
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. As a
result, we are not subject to many of RCRA's requirements because our operations
generate minimal quantities of hazardous wastes.
CERCLA, also known as "Superfund", imposes 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 where hazardous substances have
been released, 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 our ordinary operations, we may generate waste that may fall within
CERCLA's definition of a "hazardous substance". As a result, we may be 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.
We currently own or lease, and have 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 we have utilized operating and disposal
practices that were standard 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 us 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 our control. These properties and
wastes disposed thereon may be subject to the corrective action or remediation
requirements imposed by CERCLA, RCRA and analogous state laws. Under such laws,
we could be required to:
- remove or remediate previously disposed wastes, including wastes disposed
of or released by prior owners or operators,
- clean up contaminated property, including contaminated groundwater, or
- perform remedial plugging operations to prevent future contamination.
We could also be subject to other damage claims by governmental authorities or
third parties related to such contamination.
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<PAGE> 60
MANAGEMENT
Set forth below are the names, ages and positions of the Company's
executive officers and directors. 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 or their earlier resignation or removal.
<TABLE>
<S> <C>
John F. Bookout................ President, Chief Executive Officer and Chairman of the
Board
Dallas D. Laumbach............. Senior Vice President -- Exploration and Production
(retired effective June 15, 1999)
Rick G. Lester................. Senior Vice President and Chief Financial Officer
John J. Conklin, Jr. .......... Director
Ralph P. Davidson.............. Director
Adam P. Godfrey................ Director
William J. Murray.............. Director
Ogden M. Phipps................ Director
Ward W. Woods.................. Director
</TABLE>
John F. Bookout, age 76, has served as Chairman of the Board, President and
Chief Executive Officer since February 1996. He was appointed to these positions
in connection with the Contour transaction. He had served as Chairman of the
Board and President of Contour Production Company since its formation in 1993.
Before joining Contour Production Company 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.
Dallas D. Laumbach, age 62, has served as Senior Vice
President -- Exploration and Production 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. Mr. Laumbach retired effective June 15,
1999.
Rick G. Lester, age 47, was elected Senior Vice President and Chief
Financial Officer by our Board in October 1998. Previously, he was Vice
President and Chief Financial Officer of Domain Energy Corporation from 1996
until 1998 and was with Tenneco Inc. from 1981 to 1996.
John J. Conklin, Jr., age 68, has served as a director of the Company or
its predecessor 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.
Ralph P. Davidson, age 71, served as our Chairman of the Board from October
1995 through February 1996 and has served as a director of the Company or its
predecessor 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, age 36, has served as a director of the Company since
March 19, 1998. 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. and other
affiliated investment partnerships including the investment partnerships that
comprise the BH Group. The
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<PAGE> 61
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., an affiliate of Bessemer Holdings, L.P. From
July 1993 to December 1997, Mr. Godfrey was a principal with Bessemer Partners &
Co., and a member of the general partner of Bessemer Holdings, L.P. Mr. Godfrey
is a director of several private companies.
William J. Murray, age 84, has served as a director of the Company or its
predecessor 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, age 58, has served as a director of the Company since his
election in February 1996. He was Chairman of the Board of Bessemer Securities
Corporation from 1982 through 1994 and of The Bessemer Group, Incorporated from
1991 through 1994. Mr. Phipps continues to serve as a director of Bessemer
Securities Corporation and The Bessemer Group, Incorporated and is also a
manager of Bessemer Securities, LLC. Bessemer Securities Corporation is the
principal limited partner of Bessemer Holdings, L.P. Bessemer Securities
Corporation and Bessemer Securities, LLC 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 nonprofit
organizations.
Ward W. Woods, age 56, has served as a director of the Company since his
election in February 1996. Since 1989, he has been the sole stockholder and
president of corporations that serve as the managing general partner or
principal manager of the general partner of Bessemer Holdings, L.P. and other
affiliated investment partnerships including those comprising the BH Group. He
is also the sole stockholder and president of a corporation that is a managing
general partner of Bessemer Partners & Co. Mr. Woods is the President and Chief
Executive Officer of Bessemer Securities, LLC and Bessemer Securities
Corporation, which he joined in 1989. He is a director of Boise Cascade
Corporation and several private companies.
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<PAGE> 62
EXECUTIVE COMPENSATION
Summary Compensation Table. The following summary compensation table sets
forth compensation paid during the last three fiscal years to the Company's
Chief Executive Officer and the Company's other executive officers whose
compensation exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
----------------------- ------------ ALL OTHER
SALARY OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS($)(5) AWARDS(#) ($)(2)
- --------------------------- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David C. Baggett(4)(6)................. 1998 126,666 77,344 -- 8,284
Former Senior Vice President and 1997 148,000 -- 575,000 9,500
Chief Financial Officer 1996 -- -- -- --
Thomas E. Baker(7)..................... 1998 91,538 76,834 98,000 3,991
Former General Counsel and 1997 175,000 -- -- 9,500
Corporate Secretary 1996 80,681 -- -- 3,500
John F. Bookout(3)..................... 1998 800,000 -- -- 10,000
Chairman, President and CEO 1997 800,000 -- -- 8,000
1996 700,000 -- -- 2,667
Dallas D. Laumbach(3).................. 1998 190,000 -- -- 10,000
Senior Vice President -- 1997 190,000 -- -- 9,500
Exploration and Production 1996 166,250 -- 862,500 3,800
Rick G. Lester(6)...................... 1998 43,750 50,000 381,000 2,625
Senior Vice President and
Chief Financial Officer
William C. Rankin(3)(4)................ 1997 37,500 -- -- 167,063
Former Senior Vice President and 1996 144,375 -- 862,500 3,300
Chief Financial Officer
</TABLE>
- ---------------
(1) Perquisites and other benefits did not exceed 10% of any named officer's
total annual salary and bonus and therefore are excluded.
(2) Amounts include matching contributions by the Company to the named executive
officer's 401(k) account.
(3) In February 1996, Mr. Bookout was appointed Chairman, President and CEO of
the Company. Mr. Laumbach was appointed Senior Vice President -- Exploration
and Production, and Mr. Rankin was appointed Senior Vice President and Chief
Financial Officer.
(4) 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.
(5) Amounts include annual performance awards granted in respect of 1997 and
paid in 1998 under the 1997 Annual Long-Term Incentive-Performance Plan.
(6) In October 1998, Mr. Lester was appointed Senior Vice President and Chief
Financial Officer after Mr. Baggett left the employment of the Company.
(7) Mr. Baker resigned as an employee on July 31, 1998 and his option
terminated, and as General Counsel and Corporate Secretary on March 3, 1999.
STOCK OPTION PLANS
The Company maintains stock option plans providing for the authority to
grant options intended to be:
- not qualified under section 422 of the Internal Revenue Code of 1986, as
amended,
- qualified under section 422 of the Internal Revenue Code, or
- either not qualified or qualified.
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<PAGE> 63
Stock option plans covering the grant of qualified stock options only were
adopted in:
- 1987 (the "1987 Plan"), covering the grant of options for 500,000 shares
of the Company's common stock,
- 1991 (the "1991 Plan"), covering the grant of options for 500,000 shares
of the Company's common stock,
- 1995 (the "1995 Plan"), covering the grant of options for 1.5 million
shares of the Company's common stock, and
- 1996 (the "1996 Plan"), covering the grant of options for 1 million
shares of the Company's common stock.
In February 1996, a stock option plan covering the grant of non-qualified
stock options 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 the Company's common stock to senior
executives designated by Mr. Bookout.
In March 1997, our Board of Directors adopted, subject to stockholder
approval, our 1997 Annual and Long-Term Incentive-Performance Plan (the "1997
Plan"). Our stockholders 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 grant of options. Awards granted under the 1997
Plan may be:
- annual performance awards,
- stock options designated as either non-qualified stock options or
qualified stock options, or
- other forms of stock-based performance awards.
The total number of shares authorized for issuance under the 1997 Plan is
4,200,000 shares.
The exercise price for non-qualified stock options granted under the 1997
Plan and qualified stock options are fixed either by the Compensation Committee
of the Board or the Board at the fair market value of our 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
(generally, 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 qualified stock option 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 Corporation (the Company's predecessor) 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 of Kelley Oil's common stock at $7.00 per share during
1993,
- 266,000 shares of the Company's common stock at $2 3/8 per share during
1995, and
- 14,000 shares of the Company's common stock at $2 3/16per 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.
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<PAGE> 64
Under the 1995 Plan, options to purchase a total of 1,500,000 shares of the
Company's 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 the Company's 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 the Company's common stock at the exercise price of
$1.00 per share in 1996,
- 575,000 shares of the Company's common stock at $1.00 per share in 1997,
and
- 381,000 shares of the Company's common stock at $1.00 per share in 1998.
Under the 1997 Plan, non-qualified stock options were granted in 1997 to
purchase a total of 442,500 shares of the Company's common stock at prices
ranging from $2 9/16 to $3 1/4 per share. In 1998, non-qualified stock options
under the 1997 Plan were granted to purchase a total of 727,000 shares of the
Company's common stock at prices ranging from $0.6875 to $2.21875 per share.
Options were exercised for a total of:
- 272,167 shares in 1998,
- 415,400 shares in 1997, and
- 35,600 shares in 1996,
at prices from $1.00 to $2 3/8 per share during 1997.
At December 31, 1998, the following options were issued and outstanding to
purchase shares of our common stock:
- 111,000 shares under the 1987 Plan,
- 448,205 shares under the 1991 Plan,
- 1,393,795 shares under the 1995 Plan,
- 10,000 shares under the 1996 Plan,
- 1,680,167 shares under the 1996 NQSO Plan, and
- 853,500 shares under the 1997 Plan,
for a total of 4,496,667 shares of our common stock subject to options under all
of the plans.
Mr. Bookout has not participated in any of the stock option plans or in the
1997 Plan.
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<PAGE> 65
The following table provides information about non-qualified stock options
granted during 1998 under the 1996 NQSO Plan and the 1997 Plan to the following
Named Executive Officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE ----------------------
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
- ---- ------------ ------------ ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rick G. Lester......... 381,000(2) 34.39% 1.00 10/19/2008 239,609 607,216
Thomas E. Baker........ 98,000(3) 8.84% 2.2188 07/31/1998(3) 136,748(3) 346,547(3)
</TABLE>
- ---------------
(1) Potential realizable value is based on an assumption that the stock price of
the Company's common stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the 10-year option term.
These numbers are calculated based on the requirements promulgated by the
SEC and do not reflect the Company's future stock price growth, which is
dependent on future performance and stock market conditions.
(2) This was granted on October 19, 1998 by the Board in accordance with the
1996 NQSO Plan.
(3) This was granted on March 19, 1998 in accordance with the 1997 Plan; Mr.
Baker resigned as an employee on July 31, 1998, and the option terminated on
that date.
The following table sets forth information on stock options exercised in
1998, unexercised stock options held, and option values held by the Named
Executive Officers as of December 31, 1998.
AGGREGATE OPTION EXERCISES IN 1998 AND 1998 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT YEAR END(#) AT YEAR END($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ----------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
David C. Baggett......... 191,667 75,239 None/None(2) --/--
Thomas E. Baker.......... None -- 29,500/None(2) --(3)/--
John F. Bookout.......... None -- None/None --/--
Dallas D. Laumbach....... None -- 575,000/287,500 --(3)/--(3)
Rick G. Lester........... None -- None/381,000 --/--(3)
</TABLE>
- ---------------
(1) Calculated utilizing the closing price of the Company's common stock listed
on the NASDAQ National Market System on December 31, 1998.
(2) Mr. William C. Rankin left the employment of the Company in March 1997 and
at such time, forfeited 575,000 options in accordance with the terms and
conditions of the 1996 NQSO Plan. Those 575,000 options were granted to
David C. Baggett on March 20, 1997. Mr. Baggett resigned from the Company on
August 31, 1998. At such time, 191,667 options had vested. The remaining
383,333 options were forfeited in accordance with the terms and conditions
of the NQSO Plan, and 381,000 options were granted to Mr. Lester. Mr. Baker
resigned as an employee on July 31, 1998.
(3) The exercise price exceeded the closing price of the Company's common stock
at year end.
EMPLOYEE SECTION 401(K) AND 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. All employees are eligible to
participate in the 401(k) Plan. We 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 service. Prior to converting the ESOP into a Section 401(k) Plan,
the ESOP held preferred stock which the Board redeemed in exchange for the same
number of shares of the Company's common stock. Effective with the
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<PAGE> 66
conversion of the ESOP into a Section 401(k) Plan, participants have the
opportunity to invest their accounts in various mutual funds and in the
Company's common stock. We match 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 Internal Revenue Code.
EMPLOYMENT AGREEMENTS
In connection with the Contour transactions, we 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 October 1998, we entered
into a one-year evergreen employment agreement with Rick G. Lester at a base
salary of $175,000 and an initial bonus of $50,000. Each of the agreements
provides for a lump sum severance payment if we terminate the covered executive
without cause or as otherwise permitted, as defined in the agreements. The
severance payment would be equal to one year's compensation as defined in the
respective agreements, except that:
- Mr. Bookout would be entitled to a payment covering the balance of the
three-year term, and
- In the case of a change of control, Mr. Lester's severance payment would
be equal to eighteen months' salary plus annual performance awards as
defined in the agreement.
Each of the agreements provides for various other benefits and for
indemnification of the covered executive under certain conditions. In 1999, the
Board extended the agreement with Mr. Bookout for an additional three-year term
on the same compensation terms.
CHANGE OF CONTROL AGREEMENTS AND SEVERANCE PAYMENTS
In November 1995, we entered into change of control agreements with 16
management and professional personnel, entitling them to severance benefits in
the event their employment with us was terminated prior to February 15, 1998.
For this purpose, the Contour transactions constituted a change of control. The
severance benefits amount to salary continuation for twelve months, based on the
employee's highest compensation rate during the two years prior to termination,
for all covered employees other than three specified persons, who were entitled
upon termination of employment to salary continuation for periods of 36, 24 and
18 months, respectively. Pursuant to the employment agreement with Mr. Rankin,
we became obligated upon his departure in 1997 to make payments to him of
$165,000 in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors serving on the Board's Compensation Committee has
ever served as an officer or employee of the Company or any of its subsidiaries,
and are not eligible to participate in the 1997 Plan.
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<PAGE> 67
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
As of July 15, 1999, approximately 126,022,235 million shares of the
Company's common stock were outstanding, and approximately 1,733,628 million
shares of convertible preferred stock were outstanding. Each share of the
Company's common stock and each share of convertible preferred stock is entitled
to one vote, voting as a single class, on all matters submitted to a vote by
stockholders. The following table sets forth information as of June 18, 1999,
with respect to the Company's common stock and convertible preferred stock
beneficially owned, directly or indirectly, by persons known by us to own
beneficially more than five percent of any class of the Company's capital stock,
each of the Company's directors, the Company's five most highly compensated
executive officers during 1998 and by all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
COMMON PERCENT OF PREFERRED PERCENT OF
NAME OF BENEFICIAL OWNER STOCK CLASS(%) STOCK CLASS(%)
- ------------------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Contour Production Company L.L.C.(1)............... 72,144,048 57.2 -- --
David C. Baggett(2)................................ -- -- -- --
Thomas E. Baker(3)................................. -- -- -- --
John F. Bookout(4)................................. 2,980,952 2.4 -- --
John J. Conklin, Jr. .............................. 91,037 * -- --
Ralph P. Davidson(5)............................... 154,862 * -- --
Adam P. Godfrey(6)................................. -- -- -- --
Dallas D. Laumbach(7).............................. 987,500 * -- --
Rick G. Lester..................................... 125,000 * -- --
William J. Murray(8)............................... 81,805 * 2,000 *
Ogden M. Phipps.................................... -- -- -- --
Ward W. Woods(6)................................... -- -- -- --
All current directors and executive officers as a
group (8 persons)(9)............................. 3,433,656 2.7 2,000 *
</TABLE>
- ---------------
* Less than 1%
(1) Contour's address is 630 Fifth Avenue, 39th Floor, New York, New York 10111.
Bessemer Holdings, L.P. owns a majority of the membership interests in
Contour. 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. 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) Mr. Baggett left the Company in August 1998.
(3) Mr. Baker resigned as an employee of the Company in July 1998.
(4) Represents shares held directly as well as shares held by JFB Squared, Ltd.
and Bevairohn, Ltd., partnerships controlled by Mr. Bookout.
(5) Includes 122,253 shares of the Company's common stock held by Mr. Davidson's
wife and 609 shares of the Company's common stock held by his daughter.
(6) Excludes 72,144,048 shares of the Company's common stock held by Contour, in
which Messrs. Godfrey and Woods have an indirect interest and as to which
each of Messrs. Godfrey and Woods have disclaimed beneficial ownership.
(7) Includes unexercised options to purchase 862,500 shares. Mr. Laumbach left
the Company effective June 15, 1999.
(8) Includes 2,000 shares of convertible preferred stock held in Mr. Murray's
defined benefit pension plan.
(9) See notes 4, 5, 6 and 8.
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<PAGE> 68
CERTAIN TRANSACTIONS
Pursuant to the Contour transaction, Contour purchased 48.0 million newly
issued shares of the Company's common stock on February 15, 1996, for $48.0
million, and an option to purchase an additional 27.0 million shares of the
Company's common stock for $27.0 million. The 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 the Company's common stock held
or acquired by Contour.
In connection with the Contour transaction, the Company entered into an
Advisory Agreement with Bessemer Partners & Co., an affiliate of Bessemer
Holdings, L.P. The Advisory Agreement provided for the engagement of Bessemer
Partners & Co. to provide us with financial advisory services. Under the
Advisory Agreement, Bessemer Partners & Co. has assisted us in arranging credit
facilities and negotiating the related agreements and is assisting us in
restructuring our capital structure. For its services under the Advisory
Agreement, Bessemer Partners & Co. received or will receive:
- an advisory fee of $2.0 million at the closing of the Contour
transaction,
- $500,000 in each of December 1996, 1997 and 1998, and
- $500,000 in each December of 1999, 2000 and 2001.
In addition, Bessemer Partners & Co. is entitled to reimbursement of expenses
incurred in connection with rendering advisory services. We also have agreed to
indemnify Bessemer Partners & Co. and its affiliates against certain liabilities
under the Advisory Agreement.
It is our policy that we will only enter into a transaction between us and
our officers, directors, principal stockholders or other affiliates, if such
transaction:
- is on terms no less favorable to us than terms that could be obtained on
an arms-length basis from unrelated parties, and
- has been approved by a majority of our independent and disinterested
directors.
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<PAGE> 69
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We entered into a registration rights agreement with the initial purchasers
of the outstanding notes in which we agreed to file a registration statement
relating to our offer to exchange the outstanding notes for new notes. We also
agreed to use our best efforts to complete the offer within 180 days after May
17, 1999. We are offering the new notes under this prospectus to satisfy those
obligations under the registration rights agreement.
However, the SEC has recently proposed the repeal of its interpretations
permitting the use of a registration statement in connection with an exchange
offer such as ours. We cannot predict whether the SEC will act on this proposal
before completion of the exchange offer. If those interpretations are repealed
before the exchange offer is completed, holders of outstanding notes will not be
able to receive new notes under the exchange offer. Rather, we will be required
to register the outstanding notes under a shelf registration statement, in
connection with resales by the holders. Holders will be required to deliver a
prospectus to the purchasers and will be subject to civil liability provisions
under the Securities Act in connection with their resales.
We will file with the SEC a shelf registration statement to cover resales
of outstanding notes if any of the following occur:
- any changes in law or applicable interpretations by the staff of the SEC
do not permit us to effect the exchange offer as contemplated by the
registration rights agreement,
- any holder of outstanding notes so requests because it may not resell its
new notes to the public without delivering a prospectus, and this
prospectus is not available for resales by that holder, or
- any applicable law or interpretations do not permit any holder of
outstanding notes to participate in the exchange offer.
If we are required to file a shelf registration statement, we will use our
best efforts to cause the SEC to declare effective the shelf registration
statement. We will also use our best efforts to keep the shelf registration
statement effective for up to two years.
If we fail to comply with deadlines for completion of the exchange offer,
we will be required to pay additional interest to holders of the outstanding
notes. Please read the section captioned "Description of the New
Notes -- Registration Rights; Liquidated Damages" on page 81 for more details
regarding the registration rights agreement.
To exchange an outstanding note for transferable new notes in the exchange
offer, the holder of that outstanding note will be required to make all of the
following representations:
- any new note the holder receives will be acquired in the ordinary course
of business,
- the holder has no arrangements or understandings with any person to
participate in the distribution of the outstanding notes or the new notes
within the meaning of the Securities Act,
- if the holder is not a broker-dealer, that holder is not engaged in and
does not intend to engage in the distribution of the new notes,
- if the holder is a broker-dealer that will receive new notes in exchange
for outstanding notes acquired for its own account as a result of
market-making activities or other trading activities, that holder will
deliver a prospectus, as required by law, in connection with any resale
of the new notes, and
- the holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
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<PAGE> 70
RESALE OF NEW NOTES
Based on interpretations of the SEC staff in "no action letters" issued to
third parties, we believe that each new note issued under the exchange offer may
be offered for resale and be resold and otherwise transferred by the holder of
that new note without compliance with the registration and prospectus delivery
provisions of the Securities Act if all of the following apply:
- the holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act,
- the new note is acquired in the ordinary course of the holder's business,
and
- the holder does not intend to participate in the distribution of new
notes.
If a holder of outstanding notes tenders in the exchange offer with the
intention of participating in any manner in a distribution of the new notes,
that holder both:
- cannot rely on these interpretations by the SEC staff, and
- must comply with the registration and prospectus delivery requirements of
the Securities Act including being named as selling noteholders in
connection with a secondary resale transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This prospectus may be used for an offer to resell, a resale or other
retransfer of new notes only as specifically described in this prospectus. Only
broker-dealers that acquired the outstanding notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Please read the section captioned "Plan of Distribution" beginning on page 122
for more details regarding the transfer of new notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn before the expiration date. We will
issue $1,000 principal amount of new notes in exchange for each $1,000 principal
amount of outstanding notes surrendered under the exchange offer. Outstanding
notes may be tendered only in integral multiples of $1,000. The exchange offer
is not conditioned upon any minimum aggregate principal amount of outstanding
notes being tendered for exchange.
As of the date of this prospectus, $100 million aggregate principal amount
of the notes are outstanding. This prospectus and the letter of transmittal are
being sent to all registered holders of outstanding notes. There will be no
fixed record date for determining registered holders of outstanding notes
entitled to participate in the exchange offer.
We intend to conduct the exchange offer according to the provisions of the
registration rights agreement, the applicable requirements of the Securities Act
and the Securities Exchange Act of 1934 and the rules and regulations of the
SEC. Outstanding notes that are not tendered for exchange in the exchange offer
will remain outstanding and continue to accrue interest and will be entitled to
the rights and benefits the holders have under the indenture relating to the
notes and the registration rights agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent and complied with the applicable provisions of the
registration rights agreement. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the new notes.
Holders tendering 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
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<PAGE> 71
the exchange of outstanding notes. We will pay all charges and expenses, other
than some applicable taxes as described below, in connection with the exchange
offer. It is important for holders to read the section labeled "-- Fees and
Expenses" for more details regarding fees and expenses incurred in the exchange
offer.
We will return any outstanding notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time, on
, 1999, unless, in our sole discretion, we extend the
exchange offer.
EXTENSIONS, DELAY IN ACCEPTANCE, TERMINATION OR AMENDMENT
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. During any
extensions, all outstanding notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange.
To extend an exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
If any of the conditions described below under "-- Conditions to the
Exchange Offer" have not been satisfied, we reserve the right, in our sole
discretion to either:
- delay accepting for exchange any outstanding notes,
- extend the exchange offer, or
- terminate the exchange offer
by giving oral or written notice of a delay, extension or termination to the
exchange agent. Subject to the terms of the registration rights agreement, we
also reserve the right to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed, as promptly as practicable, by oral or written notice to the
registered holders of the outstanding notes. If we amend the exchange offer in a
manner we determine to constitute a material change, we will promptly disclose
the amendment by means of a prospectus supplement and, if required, a
post-effective amendment to the registration statement. The supplement will be
distributed to the registered holders of the outstanding notes. Depending upon
the significance of the amendment and the manner of disclosure to the registered
holders, we will extend the exchange offer if the exchange offer would otherwise
expire during that period.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we will have no obligation to publish, advertise or
otherwise communicate any public announcement, other than by making a timely
press release to the Dow Jones News Service.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, if in our reasonable judgment
the exchange offer, or the making of any exchange by a holder of outstanding
notes, would violate applicable law or any applicable interpretation of the
staff of the SEC:
- we will not be required to accept for exchange, or exchange any new notes
for, any outstanding notes, and
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<PAGE> 72
- we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made:
- the representations described under "-- Purpose and Effect of the
Exchange Offer," "-- Procedures for Tendering" and "Plan of
Distribution", and
- other representations as may be reasonably necessary under applicable SEC
rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions to the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, nonacceptance or termination to the holders of the outstanding notes
as promptly as practicable. These conditions are for our sole benefit, and we
may assert them or waive them in whole or in part at any time or at various
times in our sole discretion. If we fail at any time to exercise any of these
rights, this failure will not mean that we have waived our rights. Each right
will be deemed an ongoing right that we may assert at any time or at various
times. In addition, we will not accept for exchange any outstanding notes
tendered and will not issue new notes in exchange for any outstanding notes if,
at that time, any stop order has been threatened or is in effect with respect to
(1) the registration statement of which this prospectus is a part or (2) the
qualification of the indenture relating to the notes under the Trust Indenture
Act of 1939.
PROCEDURES FOR TENDERING
How to Tender Generally. Only a holder of outstanding notes may tender
their outstanding notes in the exchange offer. To tender in the exchange offer,
a holder must comply with all of the following:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal, have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires, and mail or deliver
the letter of transmittal or a facsimile of the letter of transmittal to
the exchange agent before the expiration date, or
- comply with the automated tender offer program procedures of DTC
described below.
In addition, one of the following must occur:
- the exchange agent must receive outstanding notes along with the letter
of transmittal,
- the exchange agent must receive, before the expiration date, a timely
confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message, and
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided above under "-- The Exchange Agent" before the expiration date.
The tender by a holder that is not withdrawn before the expiration date will
constitute an agreement between the holder and us according to the terms and
subject to the conditions described in this prospectus and in the letter of
transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send
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the letter of transmittal or outstanding notes to us. Holders may request their
broker-dealers, commercial banks, trust companies or other nominees to effect
the above transactions on their behalf.
Tendering Through DTC's Automated Tender Offer Program. The exchange agent
and DTC have confirmed that any financial institution that is a participant in
DTC's system may use DTC's automated tender offer program to tender.
Participants in the program may, instead of physically completing and signing
the letter of transmittal and delivering it to the exchange agent, transmit
their acceptance of the exchange offer electronically. They may do so by causing
DTC to transfer the outstanding notes to the exchange agent according to its
procedures for transfer. DTC will then send an agent's message to the exchange
agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that:
- DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering outstanding notes that
are the subject of book-entry confirmation,
- the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery, and
- the agreement may be enforced against the participant.
How to Tender if You Are a Beneficial Owner. If you beneficially own
outstanding notes that are registered in the name of a broker-dealer, commercial
bank, trust company or other nominee and you wish to tender those notes, you
should contact the registered holder promptly and instruct it to tender on your
behalf. If you are a beneficial owner and wish to tender on your own behalf, you
must, before completing and executing the letter of transmittal and delivering
your outstanding notes, either:
- make appropriate arrangements to register ownership of the outstanding
notes in your name, or
- obtain a properly completed bond power from the registered holder of
outstanding notes.
The transfer of registered ownership may take considerable time and may not be
completed before the expiration date.
Signatures and Signature Guarantees. You must have signatures on a letter
of transmittal or a notice of withdrawal described below guaranteed by:
- a member firm of a registered national securities exchange,
- a member of the National Association of Securities Dealers, Inc.,
- a commercial bank or trust company having an office or correspondent in
the United States, or
- an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934.
The above must be a member of one of the recognized signature guarantee programs
identified in the letter of transmittal, unless the outstanding notes are
tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal, and the new notes are being issued directly to the
registered holder of the outstanding notes tendered in the exchange for
those new notes, or
- for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution.
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When Endorsements or Bond Powers are Needed. If the letter of transmittal
is signed by a person other than the registered holder of any outstanding notes,
the outstanding notes must be endorsed or accompanied by a properly completed
bond power. The bond power must be signed by the registered holder as the
registered holder's name appears on the outstanding notes and a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an eligible guarantor institution must
guarantee the signature on the bond power.
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. They should also submit
evidence of their authority to deliver the letter of transmittal satisfactory to
us unless we waive this requirement.
Determinations Under the Exchange Offer. We will determine in our sole
discretion all questions as to the validity, form, eligibility, time of receipt,
acceptance of tendered outstanding notes and withdrawal of tendered outstanding
notes. Our determination will be final and binding. We reserve the absolute
right to reject any outstanding notes not properly tendered or any outstanding
notes our acceptance of which would, in the opinion of our counsel, be unlawful.
We also reserve the right to waive any defects, irregularities or conditions of
tender as to particular outstanding notes. Our 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 the time we shall determine. Neither we, the exchange agent nor
any other person will be under any duty to give notification of defects or
irregularities with respect to tenders of outstanding notes, and none of the
aforementioned will incur liability for failure to give notification. Tenders of
outstanding notes will not be deemed made until any defects or irregularities
have been cured or waived. Any outstanding notes received by the exchange agent
that are not properly tendered and the defects or irregularities of which have
not been cured or waived will be returned to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
When We Will Issue New Notes. In all cases, we will issue new notes for
outstanding notes that we have accepted for exchange under the exchange offer
only after the exchange agent timely receives both:
- outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC, and
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
Return of Outstanding Notes Not Accepted or Exchanged. If we do not accept
any tendered outstanding notes for exchange for any reason described in the
terms and conditions of the exchange offer or if outstanding notes are submitted
for a greater principal amount than the holder desires to exchange, the
unaccepted or nonexchanged outstanding notes will be returned without expense to
their tendering holder. In the case of outstanding notes tendered by book-entry
transfer into the exchange agent's account at DTC according to the procedures
described below, the nonexchanged outstanding notes will be credited to an
account maintained with DTC. These actions will occur as promptly as practicable
after the expiration or termination of the exchange offer.
Your Representations to Us. By signing or agreeing to be bound by the
letter of transmittal, you will represent that, among other things:
- any new notes that the holder receives will be acquired in the ordinary
course of its business,
- the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the new notes,
- if the holder is not a broker-dealer, the holder is not engaged in and
does not intend to engage in the distribution of the new notes,
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- if the holder is a broker-dealer that will receive new notes for its own
account in exchange for outstanding notes that were acquired as a result
of market-making activities, the holder will deliver a prospectus, as
required by law, in connection with any resale of the new notes, and
- that holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if the holder is an affiliate, that holder will
comply with any applicable registration and prospectus delivery
requirements of the Securities Act.
Book-Entry Transfer. The exchange agent will make a request to establish an
account with respect to the outstanding notes at DTC for purposes of the
exchange offer promptly after the date of this prospectus. Any financial
institution participating in DTC's system may make book-entry delivery of
outstanding notes by causing DTC to transfer the outstanding notes into the
exchange agent's account at DTC according to DTC's procedures for transfer.
Holders of outstanding notes who are unable to deliver confirmation of the
book-entry tender of their outstanding notes into the exchange agent's account
at DTC or all other documents required by the letter of transmittal to the
exchange agent on or before the expiration date must tender their outstanding
notes according to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Any holder wishing to tender its outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver its outstanding notes,
the letter of transmittal or any other required documents to the exchange agent
or comply with the applicable procedures under DTC's automated tender offer
program before the expiration date may tender if:
- the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution,
- before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust company
having an office or correspondent in the United States, or eligible
guarantor institution either a properly completed and duly executed
notice of guaranteed delivery by facsimile transmission, mail or hand
delivery or a properly transmitted agent's message and notice of
guaranteed delivery:
- stating the holder's name and address, the registered number(s) of the
holder's outstanding notes and the principal amount of outstanding notes
tendered,
- stating that the tender is being made, and
- guaranteeing that, within five business days after the expiration date,
the letter of transmittal or a facsimile of the letter of transmittal,
together with the outstanding notes or a book-entry confirmation, and
any other documents required by the letter of transmittal will be
deposited by the eligible guarantor institution with the exchange agent,
and
- the exchange agent receives the properly completed and executed letter of
transmittal or a facsimile of the letter of transmittal, as well as all
tendered outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within five business days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to a holder if it wishes to tender its outstanding notes according to the
guaranteed delivery procedures described above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, any holder may withdraw
its tender at any time before 5:00 p.m., New York City time, on the expiration
date unless previously accepted for exchange. For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at one of
the addresses listed under "-- The Exchange Agent", and
- the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system.
Any notice of withdrawal must comply with all of these requirements:
- specify the name of the person who tendered the outstanding notes to be
withdrawn (the "Depositor"),
- identify the outstanding notes to be withdrawn, including the
registration number or numbers and the principal amount of the
outstanding notes,
- be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those outstanding notes or
be accompanied by documents of transfer sufficient to permit the trustee
for the outstanding notes to register the transfer into the name of the
Depositor withdrawing the tender, and
- specify the name in which the outstanding notes are to be registered, if
different from that of the Depositor.
If outstanding notes have been tendered under the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding notes
and otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any outstanding notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
Any outstanding notes that have been tendered for exchange but are not
exchanged for any reason will be returned to their holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, the outstanding notes will be credited to an account maintained with DTC
for the outstanding notes. This return or crediting will take place as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Holders may retender properly withdrawn outstanding notes by following
one of the procedures described under the caption "-- Procedures for Tendering"
above at any time on or before the expiration date.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by telecopy,
telephone or in person by our officers and regular employees and the officers
and regular employees of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letter of transmittal
and related documents to the beneficial owners of the outstanding notes and in
handling or forwarding tenders for exchange.
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We will pay the cash expenses to be incurred in connection with the exchange
offer, including:
- SEC registration fees,
- fees and expenses of the exchange agent and trustee,
- accounting and legal fees and printing costs, and
- related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
- certificates representing outstanding notes for 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 registered holder of
outstanding notes tendered,
- tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal, or
- a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.
TRANSFER TAXES
If a holder tenders its outstanding notes for exchange, it will not be
required to pay any transfer taxes. However, if a holder instructs us to
register new notes in the name of, or requests that outstanding notes not
tendered or not accepted in the exchange offer be returned to, a person other
than that holder, in that holder's capacity as the registered tendering holder,
that holder will be required to pay any applicable transfer tax.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders who do not exchange their outstanding notes for new notes under the
exchange offer will remain subject to the existing restrictions on transfer of
the outstanding notes. In general, a holder may not offer or sell the
outstanding notes unless they are registered under the Securities Act or if the
offer or sale is exempt from registration under the Securities Act and
applicable state securities laws. Except as required by the registration rights
agreement, we do not intend to register resales of the outstanding notes under
the Securities Act. Based on interpretations of the SEC staff, holders may offer
for resale, or may resell or otherwise transfer new notes issued in the exchange
offer without compliance with the registration and prospectus delivery
provisions of the Securities Act, if they:
- are not our "affiliate" within the meaning of Rule 405 under the
Securities Act,
- acquired the new notes in the ordinary course of their business, and
- have no arrangement or understanding with respect to the distribution of
the new notes to be acquired in the exchange offer.
If a holder tenders in the exchange offer for the purpose of participating
in a distribution of the new notes, it both:
- cannot rely on the applicable interpretations of the SEC, and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
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ACCOUNTING TREATMENT
We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize expenses of the exchange
offer over the term of the new notes under generally accepted accounting
principles.
THE EXCHANGE AGENT
We have appointed Norwest Bank Minnesota, National Association as exchange
agent for this exchange offer. You should direct all questions and requests for
assistance on the procedures for tendering and all requests for additional
copies of this prospectus or the letter of transmittal to the exchange agent as
follows:
By regular mail or overnight courier:
Norwest Bank Minnesota, National Association
N9303-120
Corporate Trust
Sixth and Marquette
Minneapolis, MN 55479
By hand delivery only:
Norwest Bank Minnesota, National Association
Northstar East Building - 12th Floor
Corporate Trust
608 Second Avenue South
Minneapolis, MN 55402
By Registered or Certified Mail:
Norwest Bank Minnesota, National Association
N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480
Facsimile: 612/667-9825 (Administration) or 612/667-4927 (Operations)
Phone: 612/667-9165 (Administration) or 612/667-9764 (Customer Service)
OTHER
Participation in the exchange offer is voluntary, and holders of
outstanding notes should carefully consider whether to accept. Those holders are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
We may, in the future, seek to acquire untendered outstanding notes in
open-market or privately negotiated transactions, through subsequent exchange
offers or otherwise. We have 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.
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DESCRIPTION OF THE NEW NOTES
GENERAL
We will issue the new notes, and we issued the outstanding notes, under an
indenture dated as of April 15, 1999, that the Company along with Kelley Oil
Corporation, Kelley Operating Company, Ltd. and Concorde Gas Marketing, Inc., as
the initial subsidiary guarantors, entered into with Norwest Bank Minnesota,
National Association, as trustee. The terms of the new notes include those
stated in the indenture and those made part of the indenture by the Trust
Indenture Act of 1939, as amended. We urge you to read the indenture, the
subsidiary guarantees, the Security Documents and the registration rights
agreement because they, not this description, define your rights as a holder of
the notes.
We have summarized below material selected provisions of the notes and the
indenture. For a complete description, you should refer to the indenture, the
notes and the subsidiary guarantees filed as exhibits to this registration
statement which includes this prospectus. See "Available Information".
Most of the capitalized terms used in this summary are defined below under
"-- Definitions Used in This Description of New Notes". Capitalized terms not
otherwise defined below or elsewhere in this Description of the New Notes have
the meanings given to them in the indenture. In this description, the word
"Company" refers to Kelley Oil & Gas Corporation and not to any of its
subsidiaries, and references to "we", "us" or "our" refer to the Company and the
subsidiary guarantors. References to "notes" are to the outstanding notes
together with the new notes.
Like the outstanding notes, the new notes:
- will be senior secured obligations of the Company,
- will be secured by a first Lien, subject only to Permitted Liens, on
substantially all of the proved oil and natural gas reserves of the
Company,
- will rank equally in contractual right of payment with all of the
Company's current and future senior Indebtedness,
- will rank senior to all of the Company's current and future Subordinated
Obligations, and
- will be unconditionally guaranteed by the subsidiary guarantors, which
guarantees will be secured by a first Lien, subject only to Permitted
Liens, on substantially all of the proved oil and natural gas reserves of
each subsidiary guarantor.
The aggregate stated principal amount of notes we may issue is limited to
an amount equal to the Borrowing Base. The notes mature on April 15, 2003 at a
price of 105% of the stated principal amount thereof, with a partial quarterly
mandatory redemption. See "-- Mandatory Redemption." We will pay interest on the
notes at the rate of 14% per year on 105% of the stated principal amount from
the Issue Date, payable semiannually to the persons registered as the owners of
the notes 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 October 15, 1999. We will also pay interest on overdue principal
and (to the extent permitted by law) on overdue installments of interest at the
rate of 1% per annum in excess of the stated rate of 14% per year on 105% of the
stated principal amount on the notes. We will compute interest based on a
360-day year of twelve 30-day months. Interest shall accrue and be payable
before and after the filing of a bankruptcy petition at the rate and on the
dates set forth above.
We will issue the new notes only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple of $1,000. You will pay no
service charge for any registration of transfer or exchange of the notes, but we
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith.
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The form and term of the new notes are the same as the form and term of the
outstanding notes they will replace, except that:
- we will register the new notes under the Securities Act,
- the new notes, once registered, will not bear legends restricting
transfer, and
- holders of the new notes will not be entitled to some rights under the
registration rights agreement, including our payment of additional
interest for failure to meet specified deadlines, which terminate when
the exchange offer is consummated.
We will issue the new notes solely in exchange for an equal principal
amount of outstanding notes. As of the date of this prospectus, $100 million
aggregate principal amount of notes are outstanding. See "The Exchange Offer".
SCHEDULED QUARTERLY REDEMPTION
On the 15th day of each January, April, July and October, commencing July
15, 2002, we will be obligated to redeem $2.0 million of the stated principal
amount of the notes, expressed as an integral multiple of $1,000, at a
redemption price equal to 103% of the stated principal amount, plus accrued and
unpaid interest thereon to the date of redemption.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Company may not redeem
the notes prior to April 15, 2001. After that date, the Company may redeem the
notes, at its 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 to you by
first-class mail, at 105% of stated principal amount, plus accrued interest to
the redemption date (subject to your right, if you are a holder of record on the
relevant record date, to receive interest due on the relevant interest payment
date), if redeemed on or after April 15, 2001.
In addition, at any time and from time to time prior to April 15, 2001, the
Company may redeem in the aggregate up to 35% of the original stated principal
amount of the notes with the proceeds of one or more Equity Offerings at a
redemption price of 114% of stated principal amount, plus accrued interest to
the redemption date, subject to your right, if you are registered as a holder on
the relevant record date, to receive interest due on the relevant interest
payment date; provided, however, that either at least 65% of the original stated
principal amount of the notes must remain outstanding after each such redemption
or such redemption must retire the notes in their entirety and the redemption
occurs within 60 days after the consummation of such Equity Offering.
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 another
method that 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. We will issue another note in your name
in principal amount equal to the unredeemed portion thereof upon cancellation of
your original note.
SUBSIDIARY GUARANTEES
The Company's Restricted Subsidiaries (other than the Programs), which are
initially Kelley Oil Corporation, Kelley Operating Company, Ltd. and Concorde
Gas Marketing, Inc. (all such Restricted Subsidiaries being the subsidiary
guarantors) will guarantee the Company's obligations under the notes. Each
subsidiary guarantor will pledge substantially all of its Oil and Gas Assets to
secure its obligations under its subsidiary guarantee. Each subsidiary
guarantor's subsidiary guarantee will rank equally in contractual right of
payment with all of its current and future senior Indebtedness, and senior to
all of its current and future Subordinated Obligations.
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Each subsidiary guarantor, as primary obligor and not merely as surety,
will irrevocably and unconditionally guarantee, on a joint and several 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. Each subsidiary guarantee will be
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 guarantee voidable under applicable law relating to
fraudulent transfer or fraudulent conveyance or similar laws affecting the
rights of creditors generally. Each subsidiary guarantor will agree to pay, in
addition to the amount stated above, any and all expenses, including reasonable
counsel fees and expenses, incurred by the holders of the notes and the trustee
in enforcing any rights under the subsidiary guarantee with respect to that
subsidiary guarantor.
Each subsidiary guarantee is a continuing guarantee and shall:
- remain in full force and effect until payment in full of all the
guaranteed obligations,
- be binding upon the relevant subsidiary guarantor, and
- inure to the benefit of and be enforceable by the trustee, the holders of
the notes and their successors, transferees and assigns as provided in
the indenture. See "-- Defaults".
Under 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 the other Person is not the Company or a subsidiary guarantor,
that subsidiary guarantor's obligations under the indenture and its subsidiary
guarantee must be expressly assumed by the other Person. However, upon the sale
or disposition (by merger or otherwise) of any subsidiary guarantor to a Person
(other than to the Company or a subsidiary guarantor) permitted by the
indenture, that subsidiary guarantor will be released and relieved from all its
obligations under the indenture and its subsidiary guarantee. See "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock".
SECURITY; RANKING
All of the Company's obligations and the subsidiary guarantors' guaranteed
obligations will be secured by a first Lien, subject only to Permitted Liens, on
substantially all of the Oil and Gas Assets of the Company and its Restricted
Subsidiaries owned on the Issue Date, and by a first Lien, subject only to
Permitted Liens, on substantially all of the Oil and Gas Assets acquired or
developed thereafter; provided however that, with respect to any property
securing Acquired Indebtedness, the Company's and each subsidiary guarantor's
obligation to provide Liens to the trustee on that property will be limited to
the extent that granting a Lien on that property is not prohibited by the terms
of the instruments creating that Acquired Indebtedness (including any
refinancing thereof); and provided further that such Lien, if not otherwise
prohibited, may be inferior to the Lien securing the Acquired Indebtedness. See
"-- Certain Covenants -- Lien on Additional Collateral." In addition, the
obligations will be secured by a first priority Lien on the general partnership
interests of the Company and the subsidiary guarantors in the Programs.
The Oil and Gas Assets that will initially secure the obligations and the
guaranteed obligations represent approximately 95% of the PV-10 Value of the Oil
and Gas Properties of the Company and subsidiary guarantors as of December 31,
1998. The general partnership interests of the Company and the subsidiary
guarantors in the Programs represent approximately 10% of that value.
If the notes become due and payable prior to the Stated Maturity or we do
not pay the notes in full at the Stated Maturity, the trustee may take all
actions it deems necessary or appropriate, including, but not limited to,
foreclosing upon the Collateral in accordance with the indenture, the Security
Documents and applicable law. The trustee will apply the proceeds received from
the sale of any Collateral that is the subject of a foreclosure or collection
suit first to pay the expenses of such foreclosure or suit and amounts then
payable to the trustee and thereafter to pay the principal of and interest on
the notes. The trustee has
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the power to institute and maintain any suits and proceedings as it may deem
expedient to prevent impairment of, or to preserve or protect its and your
interest in, the Collateral.
We cannot assure you that the trustee will be able to sell the Collateral
without substantial delays or that the proceeds obtained will be sufficient to
pay all amounts owing to you. See "Risk Factors -- Adequacy of Collateral."
The collateral release provisions of the indenture will permit the release
of Collateral without substitution of collateral of equal value in some
circumstances. See "-- Possession, Use and Release of Collateral."
As secured obligations of the Company and the relevant subsidiary
guarantors, the obligations and the guaranteed obligations, respectively, will
be senior to all of our Subordinated Obligations and rank equally in contractual
right of payment to all of our other current and future senior Indebtedness. The
notes and any subsidiary guarantee will effectively, however, be senior as to
other senior Indebtedness on the basis of the Liens granted under the indenture
and the Security Documents to the extent of the value of the Collateral.
Substantially all the Company's operations are currently conducted through
its subsidiaries. Claims of creditors of any subsidiaries that have not executed
a subsidiary guarantee, including trade creditors, secured creditors and
creditors holding guarantees issued by those subsidiaries, and claims of
preferred stockholders (if any) of those subsidiaries generally will have
priority with respect to the assets and earnings of those subsidiaries over the
claims of our creditors, including you as a holder of notes. The notes and each
subsidiary guarantee, 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. The Company's
subsidiaries (other than the subsidiary guarantors) currently have no
liabilities to any Person other than the Company and its subsidiaries. Although
the indenture limits the incurrence of Indebtedness and the issuance of
preferred stock of certain of the Company's subsidiaries, that limitation is
subject to a number of significant qualifications; moreover, the indenture does
not impose any limitation on the incurrence by those subsidiaries of liabilities
that are not considered Indebtedness under the indenture. See "-- Certain
Covenants -- Limitation on Indebtedness."
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the issuance of the outstanding notes, we entered into a
registration rights agreement. Under the registration rights agreement, we
agreed to
- file a registration statement with the SEC on or within 75 days after May
17, 1999,
- use our best efforts to cause the registration statement to be declared
effective under the Securities Act within 135 days after May 17, 1999,
- use our best efforts to cause the exchange offer to be consummated within
180 days after May 17, 1999,
- keep the exchange offer open for acceptance for a period of not less than
20 business days after the date notice of the exchange offer is mailed to
holders of the outstanding notes, and
- accept for exchange all outstanding notes duly tendered and not validly
withdrawn under the exchange offer according to the terms of the
registration statement and letter of transmittal.
As soon as practicable after the exchange offer registration statement
becomes effective, we will offer the holders of outstanding notes who are not
prohibited by any law or policy of the SEC from participating in the exchange
offer the opportunity to exchange their outstanding notes for new notes
registered under the Securities Act that are substantially identical to the
outstanding notes, except that the new notes will not contain terms with respect
to transfer restrictions, registration rights and additional interest.
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The registration rights agreement also provides that we
- shall make available for a period of 180 days after the consummation of
the exchange offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale
of any new notes, and
- shall pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the notes, and will indemnify
some holders of the notes, including any broker-dealer, against
liabilities including liabilities under the Securities Act.
A broker-dealer that delivers a prospectus to purchasers in connection with
resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the registration rights
agreement, including some of the indemnification rights and obligations.
We will use our best efforts to file with the SEC a shelf registration
statement to cover resales of the outstanding notes by those holders who provide
required information in connection with that shelf registration statement under
each of the following circumstances:
- if any changes in law, SEC rules or regulations or applicable
interpretations of these laws, rules or regulations by the staff of the
SEC do not permit us to effect the exchange offers as contemplated by the
registration rights agreement,
- if SEC rules or regulations or applicable interpretations prohibit any
initial purchaser of the outstanding notes from participating in the
exchange offer, or
- if any holder of the outstanding notes notifies us that it may not resell
the new notes without delivering a prospectus and the prospectus included
in this registration statement is not available for those resales.
We will use our best efforts to keep the shelf registration statement, if
filed, effective for a period of two years after it is filed.
If a registration default occurs, we will be obligated to pay additional
interest to each holder of outstanding notes at a rate equal to 0.5% per annum.
If a registration default is not cured within six months, the interest rate
increases by an additional 0.5% per annum, but the additional interest may not
exceed an aggregate of 1% per year at any one time. A registration defaults
occurs if
- the registration statement is not filed with the SEC within 75 days after
May 17, 1999,
- we receive notice of a requirement to file a shelf registration statement
but do not do so within 60 days after receipt of that notice,
- the registration statement or shelf registration statement is not
declared effective within 60 days after filing,
- the exchange offer is not consummated within 180 days after May 17, 1999,
or
- the shelf registration statement is filed and declared effective, but
subsequently ceases to be effective.
Following the cure of a registration default, additional interest will cease to
accrue.
If you desire to tender your outstanding notes, you will be required to
make to us the representations described under "The Exchange Offers -- Purpose
and Effect of the Exchange Offers" and "The Exchange Offers -- Procedures for
Tendering" to participate in the exchange offers. In addition, we may require
you to deliver information to be used in connection with the shelf registration
statement to have your notes included in the shelf registration statement and to
benefit from the provisions regarding additional interest described in the
preceding paragraphs. A holder who sells outstanding notes under the shelf
registration statement generally will be required to be named as a selling
security holder in the related prospectus and
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to deliver a prospectus to purchasers. A holder will also be subject to the
civil liability provisions under the Securities Act in connection with the sales
and will be bound by the provisions of the registration rights agreement that
are applicable to a holder, including indemnification obligations.
The description of the registration rights agreement contained in this
section is a summary of the terms we believe are material at this time and is
qualified in its entirety by reference to all provisions of the registration
rights agreement. The registration rights agreement is filed as an exhibit to
the registration statement of which this prospectus is a part.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of the Company or any of its
Restricted Subsidiaries of the types described under clauses (b)(5), (b)(7),
(b)(11) and (b)(12) of the covenant "Limitation on Indebtedness."
"Additional Assets" means
(i) any property or assets (other than Indebtedness and Capital Stock)
used or useful 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 Net Tangible Assets" 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
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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, 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 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 preceding. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments," "-- Certain Covenants -- Limitation 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
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(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 Partners & Co. ("Bessemer"), Bessemer
Holdings, L.P. ("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 preceding, 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) 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, (3) the abandonment, farm-out, lease or
sublease of developed or undeveloped oil and gas properties in the ordinary
course of business, (4) 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, provided that if any property so traded or
exchanged contains proved reserves, then the property received therefor
contains a reasonably equivalent value of proved reserves, (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
Investment in equity interests of a Person engaged in the Oil and Gas
Business, provided that if any property so traded or exchanged contains
proved reserves, then (A) the Company's or such Restricted Subsidiary's pro
rata Investment in such Person shall represent a reasonably equivalent
value of proved reserves and (B) such Person is or becomes by virtue of
such Investment a Restricted Subsidiary or a Permitted Joint Venture, or
(6) the sale or transfer of hydrocarbons or other mineral products or
surplus or obsolete equipment all 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).
"Available Borrowing Base" means, as of any date, the Borrowing Base minus
the outstanding principal amount of the notes as of such date.
"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
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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.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means $135.0 million.
"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 and any
warrants or options granted to directors, officers or employees of the Company
in the ordinary course of business.
"Cash Balance Amount" means, as of any date, the amount equal to the
aggregate amount of cash and Temporary Cash Investments held by the Company and
its Restricted Subsidiaries as of the close of business on the immediately
preceding Business Day divided by 1.04, minus $5,000.000.
"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
Closing 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
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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.
"Closing Date" means the date on which the indenture is executed.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means, collectively, all of the property and assets
(including, without limitation, Trust Moneys) that are from time to time subject
to, or purported to be subject to, the Lien of the indenture or any of the
Security Documents.
"Collateral Account" has the meaning given to it in the section described
herein under the heading "Possession, Use and Release of Collateral -- Deposit,
Use and Release of Trust Moneys."
"Collateral Maintenance Tender Offer Amount" means, with respect to any
Asset Disposition other than the Designated Transaction, an amount equal to the
excess of (i) the outstanding principal balance of the notes over (ii) quotient
obtained by dividing (a) the PV-10 Value of all of the Oil and Gas Assets of the
Company and its Restricted Subsidiaries immediately after giving effect to such
Asset Disposition by (b) 1.75.
"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
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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 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
or disposition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred or repaid 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
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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, and (y)
noncash interest expense Incurred in connection 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 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.
"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;
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(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 Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans, term
loans, production payments, receivables financings (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.
"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
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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 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 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 preceding, 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.
"Excess Proceeds" has the meaning given such term in the covenant
"-- Limitation on Sales of Assets and Subsidiary Stock."
"Excess Proceeds Offer" has the meaning given such term in the covenant
"-- Limitation on Sales of Assets and Subsidiary Stock."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the 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 other 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 other 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.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness, Capital Stock or Lien 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
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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" or "principal amount" of Indebtedness at any time of
determination as used herein represented by:
(1) any Capital Lease Obligation shall be the amount determined in
accordance with the definition thereof,
(2) any Interest Rate Agreements included in the definition of
Permitted Indebtedness shall be zero,
(3) all other unconditional obligations shall be the amount of the
liability thereof determined in accordance with GAAP, and
(4) all other contingent obligations shall be the maximum liability at
such date of such Person.
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,
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(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.
"Initial Purchaser" means the initial purchaser from the Company of the
outstanding notes.
"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 17, 1999.
"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).
"Liquidated Damages" has the meaning given such term in the section
"Registration Rights; Liquidated Damages".
"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
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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".
"Minimum Reserve Amount" means, as of any date, an amount of Oil and Gas
Assets expressed as a volumetric equivalent equal to 180 Bcfe less the aggregate
of all revisions to reserves resulting from sales of reserves in place as
reflected in all Reserve Reports delivered pursuant to the indenture.
"Mortgage" means mortgage (or deed of trust), assignment of production,
security agreement, fixture filing and financing statement granted by the
Company or any Subsidiary Guarantor for the benefit of the trustee and the
holders of the notes and pursuant to which one or more Liens on Oil and Gas
Assets or interests therein are created, as the same may be amended,
supplemented or modified from time to time in accordance with the terms thereof
and of the indenture.
"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 Closing 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.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the indenture and other documentation governing the notes.
"Oil and Gas Assets" means all proved oil and gas reserves and natural gas
processing facilities of the Company and/or any Restricted Subsidiary.
"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.
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"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.
"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 Closing 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
Closing Date and
(v) officers or employees of the Company or any of its Subsidiaries as
of the Closing 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;
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(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.
"Permitted Joint Venture" means any Person engaged in the Oil and Gas
Business in which the Company or a Restricted Subsidiary makes a Permitted
Business Investment and which cannot, by the terms of such Person's constituent
documents, Incur or Guarantee Indebtedness.
"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;
(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 under clauses (b)(7) and
(b)(11) of the covenant "Limitation on Indebtedness"; 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 365 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 Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been incurred in accordance with the
provisions of the indenture; provided, that: (1) such Liens are expressly
junior to the Liens securing the Obligations and the Subsidiary Guarantees,
(2) such Refinancing results in an improvement on a pro forma basis in the
Company's Consolidated Coverage Ratio, and (3) the instruments creating
such Liens expressly subject the foreclosure rights of the holders of the
Indebtedness being Refinanced to a stand-still of not less than 179 days;
(h) Liens existing on the Closing Date;
(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;
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(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 preceding clauses (f), (g), (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
(g), (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
payments and for compliance with the terms of such leases;
(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;
(s) 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; and
(t) Liens arising pursuant to the Indenture or any Security Document
or otherwise securing the Obligations and/or the Subsidiary Guarantees.
Notwithstanding the preceding, (1) "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 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; (2) "Permitted Liens" as such term relates to
encumbrances on property constituting Collateral shall not include Liens of the
type described in clauses (a), (d), (h), (l) and (n) (in so far as it relates to
clause (h)); and (3) Liens Incurred pursuant to clauses (f), (i) and (j) shall
not secure Indebtedness in a principal amount at any one time outstanding
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in excess of the greater of (A) $5.0 million or (B) an amount equal to 33.33% of
the fair market value of the property acquired (which shall be deemed to be the
PV-10 Value of any Oil and Gas Assets) subject of such Lien as of the date such
Lien is created or assumed.
"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.
"Pledge Agreement" means that certain Pledge Agreement dated as of the
Issue Date pursuant to which the Capital Stock of the Programs owned by the
Company and its Restricted Subsidiaries is pledged to the trustee for the
benefit of the holders of the notes, as the same may be amended, modified or
supplemented from time to time.
"Preferred Stock," as applied to the Capital Stock of any Person, 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 Person, over shares
of Capital Stock of any other class of such Person.
"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.
"PV-10 Value" means with respect to any Oil and Gas Assets the aggregate
net present value of such Oil and Gas Assets calculated before income taxes and
discounted at 10 percent in accordance with SEC guidelines (including using
pricing provisions based on the most recent year-end prices), as reported in the
most recently prepared or audited report of the Company's independent petroleum
engineers.
"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.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Closing
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
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include (x) Indebtedness of a Subsidiary (other than a Subsidiary
Guarantor) that Refinances Indebtedness of the Company or another
Subsidiary or (y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.
"Reserve Report" shall mean a reserve engineering report, setting forth, as
of the most recent January 1, April 1, July 1 and October 1, the oil and gas
reserves attributable to the Company's and its Restricted Subsidiaries' Oil and
Gas Assets included in the Collateral together with a projection of the rate of
production and future net income, severance and production taxes, operating
expenses and capital expenditures with respect thereto as of such date, based
upon the pricing assumptions consistent with SEC reporting requirements at the
time.
"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,
(iv) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of the Company's 7 7/8% Convertible
Subordinated Notes due 1999 and the Company's 8 1/2% Convertible
Subordinated Notes due 2000, or
(v) 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.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Documents" means, collectively, the Mortgages, the Pledge
Agreement and all security agreements, mortgages, deeds of trust, collateral
assignments or other instruments evidencing or creating any security interests
in favor of the trustee or any predecessor trustee in all or any portion of the
Collateral, in each case as amended, supplemented or modified from time to time
in accordance with their terms and the terms of the indenture.
"Shelf Registration Statement" has the meaning given such term in the
section "Registration Rights; Liquidated Damages".
"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.
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"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 Obligations" means any Indebtedness or Preferred Stock of the
Company or any Subsidiary Guarantor, whether outstanding on the Closing Date or
thereafter Incurred, which is subordinate or junior in right of payment to the
notes or any subsidiary guarantee, as the case may be, 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. Unless otherwise indicated, references to
Subsidiaries in this Description of the New Notes refers to Subsidiaries 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 used in
the Securities Act and the Exchange Act and the rules promulgated
thereunder) 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 Services, 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 or "A" by Moody's Investors Service,
Inc.
"Trust Moneys" means all cash or Temporary Cash Investments received by the
trustee:
(1) upon the release of Collateral from the Lien of the indenture and
the Security Documents, including investment earnings thereon;
(2) pursuant to the provisions of any Mortgage;
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(3) as proceeds of any Asset Disposition or other sale or other
disposition of all or any part of the Collateral by or on behalf of the
trustee or any collection, recovery, receipt, appropriation or other
realization of or from all or any part of the Collateral pursuant to the
indenture or any of the Security Documents or otherwise; or
(4) for application under the indenture as provided for in the
indenture or the Security Documents, or whose disposition is not elsewhere
specifically provided for in the indenture or in the Security Documents;
provided, however, that Trust Moneys shall not include any property
deposited with the trustee pursuant to any Change of Control offer, Excess
Proceeds Offer or redemption or defeasance of any notes.
"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 is a Subsidiary Guarantor, 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 the
Subsidiary to be so designated has total assets of $1,000 or less. 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
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 preceding 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 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.
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CERTAIN COVENANTS
The indenture limits our ability to do the following:
Limitation on Indebtedness
(a) The Company may not, and may not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that we 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) These limitations in the indenture do not, however, prohibit
(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
then Available Borrowing Base,
(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 guarantees,
(4) Indebtedness outstanding on the Closing Date (other than
Indebtedness described in clause (1), (2) or (3) above)
(5) Indebtedness 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 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 under
paragraph (a) above or under clause (3), (4) or (5) above, clause (7) or
(12) 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 its 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,
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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 consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and its
Restricted Subsidiaries pursuant to the indenture,
(9) 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,
(10) 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 under this clause (10) and then outstanding, does not
exceed $15.0 million,
(11) 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 (11) and then
outstanding, does not exceed $10.0 million,
(12) 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 of 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
(13) 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 (12) above or paragraph
(a) above) 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 preceding, the Company shall not Incur any
Indebtedness pursuant to the preceding 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 any of its Subordinated
Obligations outstanding on the Closing Date.
(d) For purposes of determining compliance with the provisions of
"Limitation on Indebtedness", (i) if 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) we may divide an item of Indebtedness and classify it in more
than one of the types of Indebtedness described above.
Limitation on Restricted Payments
(a) The Company shall not make, and shall not permit any Restricted
Subsidiary to make, directly or indirectly, a Restricted Payment.
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(b) Paragraph (a) does not prohibit:
(i) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value 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,
(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 which the Company is permitted to Incur under the
provisions described under "-- Limitation on Indebtedness"; provided that
such Indebtedness is effectively junior to the notes, matures no less than
180 days after the Stated Maturity of the notes and does not result in an
increase in the total amount of the Company's Indebtedness,
(iii) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations; provided
that the Company may not use the proceeds from the sale of the notes, any
Excess Proceeds or the cash flows from operations accumulated after the
Issue Date to purchase, repurchase, redeem, defease, acquire or retire for
value any of the Subordinated Obligations if the aggregate amount so
purchased, repurchased, redeemed, defeased, acquired or retired using any
or all of the proceeds from the sale of the notes, any Excess Proceeds or
the cash flows from operations accumulated after the Issue Date would
exceed the greater of (1) $36.0 million and (2) the excess of the PV-10
Value of the Company's and its Restricted Subsidiaries' Oil and Gas Assets,
using 1998 year-end pricing assumptions, over two times the aggregate
stated principal amount of the notes then outstanding,
(iv) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made with
any Excess Proceeds remaining after an Excess Proceeds Offer in which the
Company purchased all notes duly tendered thereunder; provided, such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value occurs no sooner than 360 days after the last Asset
Disposition giving rise to an obligation to offer to purchase such
Subordinated Obligations, or
(v) further Restricted Payments in an aggregate amount not to exceed
$5.0 million.
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,
(c) to transfer any of its property or assets to the Company or a
Restricted Subsidiary, or
(d) grant to the trustee a Lien on any of its Property, except
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Closing Date,
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary under 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
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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 under an agreement
referred to in clause (i) or (ii) above or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or
(ii) above 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 holders of the notes 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,
(vi) any restriction with respect to a Restricted Subsidiary
imposed under 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, and
(vii) in the case of clause (d) above, restrictions contained in
instruments related to or creating Permitted Liens under clauses (f),
(i), (j) and (n) of the definition of "Permitted Liens," provided such
restrictions relate only to the property subject to such Permitted
Liens.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company shall not, and shall not cause or permit any of the
Restricted Subsidiaries to, consummate an Asset Disposition unless
(1) the Company or the applicable Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Disposition at
least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Company's Board of
Directors or senior management of the Company), and
(2) (A) at least 75% of the consideration received by the Company or
such Restricted Subsidiary, as the case may be, from such Asset Disposition
shall be in the form of cash or Temporary Cash Investments and is received
at the time of such disposition, and
(B) at least 15% of such consideration received if in a form
other than cash or Temporary Cash Investments is converted into or
exchanged for cash or Temporary Cash Investments within 90 days of such
disposition.
If 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 Closing Date in any period of 12 consecutive months exceeds $5.0
million, then the Company shall
(i) within 180 days after the date such Net Available Cash so received
exceeds such $5.0 million invest an amount equal to such excess in
Additional Assets or in one or more Permitted Joint Ventures or Permitted
Business Investments, or
(ii) apply an amount equal to such excess (to the extent not applied
pursuant to the clause above) as provided in the following paragraphs
describing this covenant. The amount of such excess Net Available Cash
required to be applied during the applicable period and not applied (or
designated by the Company as not to be so applied) as so required by the
end of such period shall constitute "Excess Proceeds".
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Notwithstanding the foregoing paragraph, if the Company consummates any
Asset Disposition, then the Company
(i) shall, on a date which is not less than 15 nor more than 30 days
after the date on which such Asset Disposition is consummated, offer to
purchase from all holders of notes an amount not less than the Collateral
Maintenance Tender Offer Amount (expressed as an integral multiple of
$1,000) of the notes at a purchase price equal to 105% of the stated
principal amount thereof plus accrued and unpaid interest thereon to the
date of purchase (subject to the right of holders of notes on the relevant
record date to receive interest on the relevant interest payment date) and
purchase any notes tendered in response to such offer (up to an amount
equal to the Collateral Maintenance Tender Offer Amount), and
(ii) may use the Net Available Cash received from such Asset
Disposition less an amount equal to the amount required to repurchase notes
tendered in response to the offer made under the immediately preceding
clause in a manner contemplated by clause (b)(iii) of the covenant
described under "-- Limitation on Restricted Payments."
Any remaining Net Available Cash received from such Asset Disposition and
not used pursuant to the two immediately preceding clauses shall be applied in
accordance with the immediately preceding paragraph.
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 $5.0 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 of notes on a pro rata basis an aggregate stated
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 105% of
the stated principal amount of such notes, plus, in each case, accrued interest
(if any) to the date of purchase (the "Excess Proceeds Payment"). We 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 we receive such Excess Proceeds under this provision and we are
required to repurchase notes as described above. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this covenant, we shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached our obligations under this
covenant by virtue thereof.
(b) If the Company transfers substantially all (but not all) of its
property and assets 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 this covenant, and shall comply
with the provisions of this covenant 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.
(c) All Net Available Cash shall constitute Trust Moneys and shall be
delivered by the Company to the trustee and shall be deposited in the Collateral
Account in accordance with the indenture. Net Available Cash so deposited may be
withdrawn from the Collateral Account for application by the Company in
accordance with this covenant or otherwise under the indenture as summarized in
"-- Possession, Use and Release of Collateral -- Deposit, Use and Release of
Trust Moneys".
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
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compensation arrangements or the rendering of any service) with any Affiliate of
the Company (an "Affiliate Transaction") unless the terms thereof
(i) 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,
(ii) if such Affiliate Transaction involves an amount in excess of
$1.0 million, are set forth in writing and have been approved by a majority
of the members of the Board of Directors having no personal stake in such
Affiliate Transaction, or
(iii) if such Affiliate Transaction involves an amount in excess of
$10.0 million, have 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 preceding 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, entered into 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 that we enter into 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 this prospectus under the caption
"Certain Transactions", and
(vii) loans or advances to our 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, you will have the right to
require that the Company repurchase your notes at a purchase price in cash equal
to 101% of the stated principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase, subject to the right of holders on the relevant
record date to receive interest on the relevant interest payment date, in
accordance with the terms contemplated in paragraph (b) below.
(b) Within 30 days following any Change of Control, we will mail a notice
to you with a copy to the trustee stating
(1) that a Change of Control has occurred and that you have the right
to require the Company to purchase your notes at a purchase price in cash
equal to 101% of the stated principal amount
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thereof plus accrued and unpaid interest, if any, to the date of purchase,
subject to the right of holders 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 this
covenant, that you must follow in order to have your notes purchased.
(c) We will 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. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this covenant, we will comply with the applicable securities
laws and regulations and we will not be deemed to have breached our obligations
under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. We have no present intention to engage in
a transaction involving a Change of Control, although it is possible that we
would decide to do so in the future. Subject to the limitations discussed below,
we 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 our capital structure
or credit ratings. Restrictions on our ability to incur additional Indebtedness
are contained in the covenants described under "-- Limitation on Indebtedness,"
"-- Limitation on Liens" and "-- Limitation on Sale/ Leaseback Transactions".
Except for the limitations contained in such covenants, however, the indenture
does not contain any covenants or provisions that may afford you protection in
the event of a highly leveraged transaction.
The provisions under the indenture relating to our 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.
We will not be required to make an offer to purchase the notes as a result
of a Change of Control if a third party
- makes an offer in the manner, at the times and otherwise in compliance
with the requirements set forth in the indenture relating to our
obligations to make the offer, and
- purchases all notes validly tendered and not withdrawn under the offer.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
The Company will not sell or otherwise dispose of any shares of Capital
Stock of a Restricted Subsidiary, and will 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, we 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, we would own greater than 80% of the Voting Stock of
such Restricted Subsidiary and have no lesser economic interest in such
Restricted Subsidiary, or
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(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;
provided that in the case of clauses (ii) and (iii), the Company complies with
the provisions of the covenant described under the caption "-- Limitation on
Sales of Assets and Subsidiary Stock". If we dispose of all of the Capital Stock
of any subsidiary guarantor, such subsidiary guarantor shall be released from
the obligations under its subsidiary guarantee.
Limitation on Liens
The Company will not, and will not cause or permit any its our Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist or remain in effect any Liens other than Permitted Liens.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale/ Leaseback Transaction with respect to any property unless
(i) the Company or that Restricted Subsidiary would be entitled to (A)
Incur Indebtedness in an amount equal to the Attributable Debt with respect
to that Sale/Leaseback Transaction under the covenant described under
"-- Limitation on Indebtedness" and (B) create a Lien on the property
securing that Attributable Debt under the covenant described under
"-- Limitation on Liens,"
(ii) the net proceeds received by the Company or any Restricted
Subsidiary in connection with the Sale/Leaseback Transaction are at least
equal to the fair value, as determined by the Board of Directors) of the
property, and
(iii) we apply the proceeds of that transaction in compliance with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock".
Future Subsidiary Guarantors
From and after the Issue Date, the Company will cause each of its
Subsidiaries that is or becomes a Restricted Subsidiary, other than the
Programs, to issue a subsidiary guarantee for the benefit of the holders of the
notes.
Merger and Consolidation
The Company will 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") is 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 under the indenture
and the notes,
(ii) immediately after giving effect to that transaction, and treating
any Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary as a result of that transaction as having been Incurred by the
Successor Company or the Subsidiary at the time of the transaction, no
Default shall have occurred and be continuing,
(iii) immediately after giving effect to the transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) or, if applicable, paragraph (b)(5), of
the covenant described under "-- Limitation on Indebtedness",
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(iv) immediately after giving effect to the 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 the transaction, and
(v) the Company has delivered to the trustee an officers' certificate
and an opinion of counsel, each stating that the consolidation, merger or
transfer and the supplemental indenture, if any, comply with the indenture;
provided, however, that clauses (iii) and (iv) shall not be applicable to any
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 supplemental indenture, in a form acceptable to the trustee,
all the obligations of that subsidiary guarantor, if any, under its
subsidiary guarantee,
(ii) immediately after giving effect to that 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 the transaction as having been issued by that Person at the time
of that 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 consolidation, merger or transfer
and the guaranty agreement, if any, complies with the indenture.
Notwithstanding the preceding, upon any consolidation, merger, conveyance,
transfer or lease of all or substantially all its assets, a subsidiary guarantor
and its successor or transferee shall be released from all of that subsidiary
guarantor's obligations under the indenture and its subsidiary guarantee 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 holders of the notes 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 those Sections,
the information, documents and other reports to be so filed and provided at the
times specified for the filing of that information, documents and reports under
those Sections.
Limitation on Impairment of Lien
Neither the Company nor any of its Subsidiaries will take or omit to take
any action which action or omission would have the result of adversely affecting
or impairing the Lien in favor of the trustee or any predecessor, on behalf of
itself and the holders or the priority thereof, with respect to the Collateral,
and neither the Company nor any of its Subsidiaries will grant to any Person, or
suffer any Person, other than the Company and its Restricted Subsidiaries, to
have, other than to the trustee on behalf of the trustee and the holders of
notes, any interest whatsoever in the Collateral other than Permitted Liens.
Neither the Company nor any of its Subsidiaries will enter into any agreement or
instrument that by its terms requires
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the proceeds received from any sale of Collateral to be applied to repay,
redeem, defease or otherwise acquire or retire any Indebtedness, other than
pursuant to the indenture and the Security Documents.
Limitation on Conduct of Business
The Company will not, and will not permit any of our Restricted
Subsidiaries to, engage in the conduct of any business other than the Oil and
Gas Business.
Limitation on Capital Expenditures
During the period of eight fiscal quarters, commencing with the fiscal
quarter during which the Issue Date occurs, the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any expenditures for fixed or
capital assets if, after giving effect thereto, the aggregate of all such
expenditures during any such fiscal quarter would exceed $5.0 million plus the
excess of EBITDA for such fiscal quarter over $12.5 million; provided that this
covenant will not limit expenditures for fixed or capital assets to the extent
those expenditures are made with the Net Cash Proceeds of any sale or issuance
of Capital Stock, other than Disqualified Capital Stock, of the Company, other
than sales or issuances to any of its Subsidiaries. Notwithstanding the
foregoing, (i) if any amount which the Company would have been permitted to
spend during a given fiscal quarter on fixed or capital assets under this
covenant is not spent during such fiscal quarter, the Company may spend such
amounts during the next succeeding fiscal quarter, and (ii) if the Company
spends an amount in a given fiscal quarter on fixed or capital assets which
exceeds 120% of the maximum amount permitted under this covenant for that fiscal
quarter, that action shall not be considered a breach of this covenant if the
aggregate amount spent on fixed and capital assets during that fiscal quarter
and the next succeeding fiscal quarter does not exceed the sum of the maximum
permitted expenditures for both those fiscal quarters.
Lien on Additional Collateral
(a) If, after the Issue Date, the Company or any of its Restricted
Subsidiaries (i) acquire any Oil and Gas Assets or other assets as non-cash
consideration for any Asset Disposition or (ii) engage in successful drilling
and exploration activities resulting in the creation of material new proved oil
and gas reserves, then the Company will, and will cause each of its Restricted
Subsidiaries to, execute and file in the appropriate filing offices additional
Security Documents granting to the trustee for the benefit of the holders of the
notes a first Lien, subject only to Permitted Liens, or in the case of property
securing Acquired Indebtedness, to the extent not prohibited by the terms of the
instruments creating the Acquired Indebtedness, a junior Lien, as is necessary
or appropriate to ensure that the Lien of the indenture and the Security
Documents covers substantially all of the PV-10 Value of the new assets.
(b) Without limiting clause (a), on the date any Oil and Gas Assets or
interests in a Permitted Joint Venture shall be acquired in exchange for or
replacement of any Collateral, the Company will, and will cause each of its
Restricted Subsidiaries to, execute and file in the appropriate filing offices
additional Security Documents granting to the trustee, for the benefit of the
holders of the notes, a first Lien, subject only to Permitted Liens (or in the
case of property securing Acquired Indebtedness, to the extent not prohibited by
the terms of the instruments creating such Acquired Indebtedness, a junior
Lien), on that portion of the assets as is necessary to ensure that the Lien of
the indenture and the Security Documents covers substantially all of the PV-10
Value of the assets received in exchange or trade or on the interests in the
Permitted Joint Venture.
(c) In connection with any Security Documents executed and filed under
clause (a) or (b), we will also comply with the terms of the Trust Indenture Act
to the extent applicable.
(d) On March 15th in each year, beginning with March 15, 2000, the Company
will review its and its Restricted Subsidiaries' Oil and Gas Assets as of the
preceding January 1st to ascertain whether substantially all of the PV-10 Value
of the Company's and its Restricted Subsidiaries' Oil and Gas Assets as of that
January 1st are then subject to the Lien of the indenture and the Security
Documents, provided that to the extent Oil and Gas Assets secure Acquired
Indebtedness, the discounted future net revenues
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attributable to such Oil and Gas Assets may be excluded from this calculation to
the extent the instruments securing the Acquired Indebtedness prohibit the
Incurrence of a Lien on those assets. If substantially all of the PV-10 Value of
the assets are not then subject to the Lien of the indenture and the Security
Documents, then the Company will, and will cause its Restricted Subsidiaries to,
execute and file in the appropriate filing offices additional Security Documents
granting to the trustee for the benefit of the holders of the notes a first
Lien, subject only to Permitted Liens, or in the case of property securing
Acquired Indebtedness, to the extent not prohibited by the terms of instruments
creating that Acquired Indebtedness, a junior Lien, as is necessary or
appropriate to encumber substantially all those assets.
Quarterly Reserve Engineering Reports; Reserve Redemption Event
Not later than the first day of each March, June, September and December of
each year commencing June 1, 1999, we will furnish to the trustee and we will
make available to any holder of notes upon request a Reserve Report dated as of
the January 1, April 1, July 1 or October 1 immediately preceding such date.
Each such Reserve Report of each year shall be prepared (i) by certified
independent petroleum engineers or consultants or (ii) under the supervision of
the chief engineer of the Company and audited by that certified independent
petroleum engineers or consultant(s) of national standing in accordance with the
Company's reserve engineering practices as of the Issue Date.
If as of the date any Reserve Report under this covenant is delivered, we
report that the volumetric equivalent of our Oil and Gas Assets is less than the
Minimum Reserve Amount (a "Reserve Deficiency Event") then we will, not later
than the fifth Business Day following that event, make an offer (a "Reserve
Deficiency Offer") to purchase from the holders of notes on a pro rata basis an
aggregate stated principal amount of notes equal to the Cash Balance Amount,
rounded down to the nearest multiple of $1,000, on the date of such Reserve
Deficiency Offer, at a purchase price equal to 104% of the stated principal
amount of those notes, plus, in each case, accrued interest (if any) to the date
of purchase (the "Reserve Deficiency Payment").
If (i) within 90 days following such Reserve Deficiency Event, we have not
entered into one or more definitive agreements for one or more Asset
Dispositions, such that, after giving effect to any of those Asset
Disposition(s) and the assumed redemption of the notes following an Excess
Proceeds Offer under the covenant "-- Certain Covenants -- Limitation of Sale of
Assets and Subsidiary Stock," the PV-10 Value of the Oil and Gas Assets of the
Company and its Restricted Subsidiaries is greater than or equal to 1.75 times
the aggregate stated principal amount of the notes then outstanding or (ii) if
within that period that ratio is not otherwise met without the need for any such
Asset Disposition, then we will be obligated on the 91st day following such
Reserve Deficiency Event to offer to redeem (a "Reserve Deficiency Redemption
Offer") all of the notes then outstanding at a purchase price equal to 104% of
the stated principal amount of those notes, plus, in each case, accrued interest
(if any) to the date of purchase.
We will commence a Reserve Deficiency Offer or Reserve Deficiency
Redemption Offer with respect to the notes by mailing a notice to the trustee
and each holder of notes stating: (i) that the offer is being made under this
covenant and that all notes validly tendered will be accepted for payment on a
pro rata basis; (ii) 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 the
notice is mailed) (the "Reserve Deficiency Payment Date"); (iii) that any note
not tendered will continue to accrue interest pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the Reserve Deficiency Payment,
any notes accepted for payment under the Reserve Deficiency Offer shall cease to
accrue interest on and after the Reserve Deficiency Payment Date; (v) that
holders electing to have a note purchased pursuant to the offer will be required
to surrender the note, together with the form entitled "Option of Holder to
Elect Purchase" on the reverse side of the note 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 Reserve Deficiency Payment Date; (vi)
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 Reserve Deficiency Payment Date, a telegram, facsimile
transmission or letter setting forth the name of that holder, the principal
amount of
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notes delivered for purchase and a statement that the holder is withdrawing his
election to have those notes purchased; and (vii) that holders whose notes are
being purchased only in part will be issued new notes equal in principal amount
to the unpurchased portion of the notes surrendered; provided however, that each
note purchased and each new note issued shall be in a principal amount of $1,000
or integral multiples thereof.
On the Reserve Deficiency Payment Date, the Company shall
(A) accept for payment on a pro rata basis notes or portions thereof
tendered pursuant to the Reserve Deficiency Offer or Reserve Deficiency
Redemption Offer,
(B) deposit with the Paying Agent money sufficient to pay the purchase
price of all notes or portions thereof so accepted, and
(C) deliver, or cause to be delivered, to the trustee all notes or
portions thereof so accepted together with an Officers' Certificate
specifying the notes or portions thereof so accepted for payment by the
Company.
The Paying Agent shall promptly mail to the holders of notes so accepted payment
in an amount equal to the purchase price, and the trustee shall promptly
authenticate and mail to those holders a new note equal in principal amount to
any unpurchased portion of the note surrendered; provided, however; that each
note purchased and each new note issued shall be in a principal amount of $1,000
or integral multiples thereof. The Company will publicly announce the results of
the Reserve Deficiency Offer or Reserve Deficiency Redemption Offer as soon as
practicable after the Reserve Deficiency Payment Date. For purposes of this
covenant, the trustee shall act as the Paying Agent.
We will comply, to the extent applicable, with the requirements of this
covenant, of the Exchange Act and any other securities laws or regulations
thereunder in the event that a Reserve Deficiency Event occurs under this
covenant 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 this covenant, we will comply with the applicable
securities laws and regulations and shall not be deemed to have breached our
obligations under this covenant by virtue thereof.
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 20 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 Company's failure to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above,
(iv) the Company's failure to comply for 20 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," "-- Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries," "-- Change of Control" (other than a failure to
purchase notes), "-- Limitation on Liens," "-- Limitation on Sale/Leaseback
Transactions," "-- Future Subsidiary Guarantors," "-- SEC Reports,"
"-- Limitation on Impairment of Lien," "-- Limitation on Capital
Expenditures," or "-- Quarterly Reserve Engineering Reports; Reserve
Redemption Event," (other than a failure to purchase notes),
(v) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in the
indenture or any Security Document,
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(vi) principal of, or interest on, any Indebtedness of the Company or
any Significant Subsidiary, other than Limited Recourse Indebtedness, in
excess of $10.0 million is not paid when due, after giving effect to any
applicable grace period, or any default shall occur and be continuing under
any Indebtedness of the Company or any Significant Subsidiary, other than
Limited Recourse Indebtedness, in excess of $10.0 million and the maturity
thereof is accelerated by the holders thereof (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 guarantee or any Security Document ceases to be in
full force and effect, other than in accordance with the terms of such
subsidiary guarantee or such Security Document, or the Company or a
subsidiary guarantor denies or disaffirms its obligations under any
Security Document to which it is a party or its subsidiary guarantee, as
applicable, if that 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 stated principal
amount of the notes notifies the Company of the default and the Company does not
cure that default within the time specified after receipt of the notice.
If an Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the notes then outstanding may declare
the principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, that 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 or any Significant
Subsidiary occurs and is continuing, the principal of and interest on all the
notes will become and be immediately due and payable without any declaration or
other act on the part of the trustee or any holders of notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
notes may rescind an acceleration with respect to the notes and its
consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, if 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 notes unless those 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 or interest when due, no holder of notes may pursue any remedy with
respect to the indenture, the notes, any subsidiary guarantee or Security
Document unless
(i) that 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 notes then
outstanding have requested the trustee to pursue the remedy,
(iii) the holders have offered the trustee reasonable security or
indemnity against any loss, liability or expense,
(iv) the trustee has not complied with that 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 notes then
outstanding have not given the trustee a direction inconsistent with that
request within that 60-day period.
Subject to some restrictions, the holders of a majority in principal amount of
the notes then outstanding are given the right to direct the time, method and
place of conducting any proceeding for any remedy
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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 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 you 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 notes. In addition, the Company is
required to deliver to the trustee, within 120 days after the end of each fiscal
year, an officers' certificate indicating whether the signers thereof know of
any Default that occurred during that 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 some exceptions, the indenture, the subsidiary guarantees and
any Security Document 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 any currency other than that stated in
the note,
(vi) impair the right of any holder to receive payment of principal of
and interest and any Liquidated Damages on that 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 that 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 in any subsidiary guarantee or any Security
Document that could adversely affect that holder, or
(ix) release any Collateral from the Liens created under the indenture
and the Security Documents or release any subsidiary guarantor from any of
its obligations under its subsidiary guarantee, in any case otherwise than
in accordance with the terms of the indenture.
Without notice to or the consent of any holder of notes, the Company and
trustee may amend the indenture, any subsidiary guarantee or Security Document
- to cure any ambiguity, omission, defect or inconsistency,
- to provide for the assumption by a Successor Company of the
obligations of the Company under the indenture or of a subsidiary
guarantor under a subsidiary guarantee,
- 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
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Code, or in a manner such that the uncertificated notes are described
in Section 163(f)(2)(B) of the Code),
- to add guarantees with respect to the notes,
- to further secure the notes,
- to add to the covenants of the Company for the benefit of the
holders of notes or
- to surrender any right or power conferred upon the Company or any
Subsidiary Guarantor,
- to make any change that does not adversely affect the rights of any
holder of notes or
- to comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
The consent of the holders of 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.
After an amendment under the indenture, any subsidiary guarantee or
Security Document becomes effective, the Company is required to mail to you a
notice briefly describing that amendment. However, the failure to give that
notice to all holders of notes, or any defect therein, will not impair or affect
the validity of the amendment.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Company and the Restricted Subsidiaries will have the right to remain in
possession and retain exclusive control of the Collateral securing the notes
(other than any cash, securities, obligations and Temporary Cash Investments
constituting part of the Collateral and deposited with the trustee in the
Collateral Account and other than as set forth in the Security Documents), to
freely operate the Collateral and to collect, invest and dispose of any income
thereon or therefrom.
Release of Collateral
Upon compliance by the Company with the conditions set forth below in
respect of any sale, lease, transfer or other disposition to any Person
involving Collateral, including the disposition of all of the Capital Stock of a
subsidiary guarantor, the trustee will release the Released Interests (as
defined below) from the Lien of the indenture and the Security Documents and
reconvey the Released Interests to the Company or any other Person as the
Company may direct in writing. The Company will have the right to obtain a
release of items of Collateral subject to any sale, lease, transfer or other
disposition or owned by a subsidiary guarantor all of the Capital Stock of which
is subject of a disposition (the "Released Interests") upon compliance with the
condition that the Company deliver to the trustee the following:
(1) a notice from the Company requesting the release of Released
Interests:
(A) describing the proposed Released Interests,
(B) specifying the value of those Released Interests on a date
within 60 days of the Company notice (the "Valuation Date"),
(C) stating that the purchase price or other property to be
received in consideration for those Released Interests is at least equal
to the fair market value of the Released Interests,
(D) stating that the release of those Released Interests will not
interfere with the trustee's ability to materially realize the value of
the remaining Collateral and will not materially impair the maintenance
and operation of the remaining Collateral,
(E) confirming the sale, lease, transfer or other disposition of,
or an agreement to sell, lease, transfer or dispose of, those Released
Interests in a bona fide transaction to a Person that is not
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an Affiliate of the Company or, in the event that such disposition is to
a Person that is an Affiliate, confirming that such disposition is made
in compliance with the provisions set forth in "-- Certain
Covenants -- Limitation on Affiliate Transactions", and
(F) in the event there is to be a substitution of property for the
Collateral subject to the sale, lease, transfer or other disposition,
specifying the property intended to be substituted for the Collateral to
be disposed of;
(2) an officers' certificate of the Company stating that:
(A) such sale, lease, transfer or other disposition complies with
the terms and conditions of the indenture with respect to Asset
Dispositions and Restricted Payments to the extent applicable,
(B) all Net Available Cash from the sale, lease, transfer or other
disposition will be applied pursuant to the provisions of the indenture
to the extent applicable,
(C) there is no Event of Default in effect or continuing on the
date thereof or the date of the sale, lease, transfer or other
disposition,
(D) the release of the Collateral will not result in an Event of
Default under the indenture, and
(E) upon the delivery of the officers' certificate, all conditions
precedent in the indenture relating to the release in question will have
been complied with, and
(3) all other documentation required by the Trust Indenture Act, if
any, prior to the release of Collateral by the trustee and, in the event
there is to be a contemporaneous substitution of property for the
Collateral subject to the sale, lease, transfer or other disposition, all
documentation necessary to effect the substitution of those new Collateral.
Notwithstanding the provisions of "-- Release of Collateral" above, so long
as no Event of Default shall have occurred and be continuing, the Company may
engage in any number of ordinary course activities in respect of the Collateral,
in limited dollar amounts specified by the Trust Indenture Act, upon
satisfaction of certain conditions. For example, among other things, subject to
such dollar limitations and conditions, the Company would be permitted to:
(1) sell or otherwise dispose of any property subject to the Lien of
the indenture and the Security Documents, which may have become worn out or
obsolete,
(2) abandon, terminate, cancel, release or make alterations in or
substitutions of any leases or contracts subject to the Lien of the
indenture or any of the Security Documents,
(3) surrender or modify any franchise, license or permit subject to
the Lien of the indenture or any of the Security Documents which it may own
or under which it may be operating,
(4) alter, repair, replace, change the location or position of and add
to its structures, machinery, systems, equipment, fixtures and
appurtenances,
(5) demolish, dismantle, tear down or scrap any Collateral or abandon
any thereof, and
(6) grant farm-outs, leases or sub-leases in respect of real property
to the extent any of the preceding does not constitute an Asset
Disposition.
Deposit, Use and Release of Trust Moneys
The Net Available Cash from any Asset Disposition involving Collateral
shall be deposited into a securities account maintained by the trustee at its
corporate trust offices or at any securities intermediary selected by the
trustee having a combined capital and surplus of at least $250.0 million and
having a long-term debt rating of at least "A3" by Moody's Investor Service,
Inc. and at least "A -- " by Standard &
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Poor's Ratings Services styled the "Kelley Oil Collateral Account" (such account
being the "Collateral Account") which shall be under the exclusive dominion and
control of the trustee. All amounts on deposit in the Collateral Account shall
be treated as financial assets and cash funds on deposit in the Collateral
Account may be invested by the trustee, at the direction of the Company, in
Temporary Cash Investments; provided, however, in no event shall the Company
have the right to withdraw funds or assets from the Collateral Account except in
compliance with the terms of the indenture and all assets credited to the
Collateral Account shall be subject to a Lien in favor of the trustee and the
holders of notes.
Any of those funds will be released to the Company by its delivering to the
Trustee an officers' certificate stating that:
(1) no Event of Default has occurred and is continuing as of the date
of the proposed release,
(2) (A) if those Trust Moneys represent Net Available Cash in respect
of an Asset Disposition, that those funds will be applied in accordance
with the covenant "Limitation on Sales of Assets and Subsidiary Stock"
above, or (B) if those Trust Moneys do not represent Net Available Cash,
that those amounts will be utilized in connection with the business of the
Company and its Restricted Subsidiaries in compliance with the terms of the
indenture,
(3) all other conditions precedent in the indenture relating to the
release in question have been complied with, and
(4) all documentation required by the Trust Indenture Act, if any,
prior to the release of those Trust Moneys by the trustee has been
delivered to the trustee.
Notwithstanding the preceding, (A) if the maturity of the notes has been
accelerated, which acceleration has not been rescinded as permitted by the
indenture, the trustee shall apply the Trust Moneys credited to the Collateral
Account to pay the principal of, premium, if any, and accrued and unpaid
interest on the notes to the extent of such Trust Moneys, (B) if the Company so
elects, by giving written notice to the trustee, the trustee shall apply Trust
Moneys credited to the Collateral Account to the payment of interest due on any
interest payment date, and (C) if the Company so elects, by giving written
notice to the trustee, the trustee shall apply Trust Moneys credited to the
Collateral Account to the payment of the principal of, and premium, if any, and
accrued and unpaid interest on any notes on the Stated Maturity or upon
redemption or to the purchase of notes upon tender or in the open market or at
private sale or upon any exchange or in any one or more of such ways, in each
case in compliance with the indenture and at the direction of the Company.
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.
We 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
We at any time may terminate all our obligations under the notes and the
indenture and all of the obligations of the subsidiary guarantors under the
subsidiary guarantees 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").
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We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our 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 we exercise our
legal defeasance option or our covenant defeasance option each subsidiary
guarantor, if any, will be released from all its obligations with respect to its
subsidiary guarantee.
In order to exercise either defeasance option, we 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 notes will not recognize income, gain or loss for Federal income tax
purposes as a result of the 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 the deposit and defeasance had not occurred
(and, in the case of legal defeasance only, the 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
Norwest Bank Minnesota, National Association is to be the trustee under the
indenture and has been appointed by the Company as the initial Registrar and
initial Paying Agent with regard to the notes.
The holders of a majority in principal amount of the notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that 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 person in the conduct of that person's 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 that 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.
BOOK-ENTRY; DELIVERY AND FORM
The notes initially will be represented by one or more permanent global
notes in definitive, fully registered form without interest coupons
(collectively, 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 the nominee, as the case may be, will be considered the sole
owner or holder of the notes represented by the 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 we, 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
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beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
We expect 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. We also expect that payments by participants to owners of beneficial
interests in the Global Note held through those 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 those customers. Those payments will be the responsibility of those
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.
We expect that DTC will take any action permitted to be taken by a Holder,
including the presentation of Notes for exchange as described below, only at the
direction of one or more participants to whose account the DTC interests in the
Global Note is credited and only in respect of that portion of the aggregate
principal amount of any Note as to which that participant or participants has or
have given that direction. However, if there is an Event of Default under the
Notes, DTC may exchange the applicable Global Note for Certificated Notes, which
it will distribute to its participants.
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 preceding 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 those procedures,
and those 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.
CERTIFICATED NOTES
The indenture requires that payments in respect of notes (including
principal and interest) be made by wire transfer of immediately available funds
to the account specified by the holders thereof or, if no account is specified,
by mailing a check to each 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, the Company will issue Certificated Notes in exchange for the
Global Note.
GOVERNING LAW
The indenture provides that it, the subsidiary guarantees and the notes
will be governed by, and construed in accordance with, the laws of the State of
New York. The Security Documents will be governed by, and construed in
accordance with, the laws of the State of New York, except to the extent the law
of another jurisdiction otherwise mandatorily applies to certain issues.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary fairly describes the material United States federal
income tax consequences expected to apply to the exchange of outstanding notes
for new notes. This summary is based upon the provisions of the Internal Revenue
Code of 1986, as amended, the final, temporary and proposed regulations
promulgated under the Internal Revenue Code, and administrative rulings and
judicial decisions now in effect. All of the above are subject to change or to
different interpretations, possibly with retroactive effect. This discussion is
for general information only and does not purport to address all of the possible
federal income tax consequences or any other federal, or any state, local or
foreign, tax consequences of the acquisition, ownership and disposition of the
outstanding notes or new notes. It is limited to investors who hold the
outstanding notes and the new notes as capital assets and does not address the
federal income tax consequences that may be relevant to particular investors in
light of their unique circumstances or to particular investors, such as dealers
in securities, insurance companies, financial institutions, foreign
corporations, partnerships or trusts, nonresident alien individuals, and
tax-exempt entities, who may be subject to special treatment under the federal
income tax law.
An exchange of the outstanding notes for the new notes under the exchange
offer will not constitute a taxable event for federal income tax purposes. As a
result, holders who exchange their outstanding notes for new notes will not
recognize in income any accrued and unpaid interest on the new notes by reason
of the exchange. An exchanging holder will have the same adjusted basis and
holding period in the new notes as it had in the outstanding notes immediately
before the exchange.
Holders of notes should consult their own tax advisor as to the particular
tax consequences for them of exchanging outstanding notes for new notes in the
exchange offer, including the applicability and effect of any state, local, or
foreign tax laws and or recent or possible future changes in the tax laws.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC in "no action letters"
issued to third parties, we believe that you may transfer new notes issued under
the exchange offer in exchange for the outstanding notes if you both:
- acquire the new notes in the ordinary course of your business, and
- are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes.
Broker-dealers receiving new notes in the exchange offer will be subject to
a prospectus delivery requirement with respect to resales of the new notes. The
letter of transmittal states that by acknowledging and 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 new 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.
We believe that you may not transfer new notes issued under the exchange
offer in exchange for the outstanding notes if you are either:
- our "affiliate" within the meaning of Rule 405 under the Securities Act,
- a broker-dealer that acquired outstanding notes directly from us, or
- a broker-dealer that acquired outstanding notes as a result of
market-making or other trading activities without compliance with the
registration and prospectus delivery provisions of the Securities Act.
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To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange offer,
other than a resale of an unsold allotment from the original sale of the
outstanding notes, with the prospectus contained in the exchange offer
registration statement. Broker-dealers who acquired the outstanding notes from
us may not rely on SEC staff interpretations. They must comply with the
registration and prospectus delivery requirements of the Securities
Act -- including being named as selling noteholders -- in order to resell the
outstanding notes or the new notes. In the registration rights agreement, we
have agreed to permit participating broker-dealers use of this prospectus in
connection with the resale of new notes. We have agreed that, for a period up to
180 days after the expiration of the exchange offer, we will make this
prospectus, and any amendment or supplement to this prospectus, available to any
broker-dealer that requests these documents in the letter of transmittal. In
addition, until, , 1999, all dealers effecting transactions in the new
notes may be required to deliver a prospectus.
If you wish to exchange your outstanding notes for new notes in the
exchange offer, you will be required to make representations to us as described
in "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and "The
Exchange Offer -- Procedures for Tendering -- Your Representations to Us" of
this prospectus and in the letter of transmittal. In addition, if you are a
broker-dealer who receives new notes for your own account in exchange for
outstanding notes that were acquired by you as a result of market-making
activities or other trading activities, you will be required to acknowledge that
you will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale by you of new notes.
We will not receive any proceeds from any sale of new notes by
broker-dealers. Broker-dealers who receive new notes for their own account in
the exchange offer may sell them from time to time in one or more transactions
either:
- in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the new notes or a combination of
methods of resale,
- at market prices prevailing at the time of resale, or
- at prices related to prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offer and
any broker or dealer that participates in a distribution of new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act. Any
profit on any resale of new notes and any commissions or concessions received by
any 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.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers. We will indemnify
holders of the outstanding notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
registration rights agreement.
LEGAL MATTERS
Certain legal matters related to the new notes offered hereby will be
passed upon for the Company by Fulbright & Jaworski L.L.P.
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EXPERTS
The consolidated financial statements of the Company included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report thereon appearing herein, and are included in reliance
upon the report of that firm given their authority as experts in accounting and
auditing.
ENGINEERS
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 that firm as an expert in petroleum engineering.
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GLOSSARY OF INDUSTRY TERMS
3-D seismic. (Three-Dimensional Seismic) Seismic reflections from the
subsurface used to map strata in three dimensions.
Bbl. One stock tank barrel, or 42 U.S. Gallons liquid volume, used herein
in reference to 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).
Condensate. A hydrocarbon mixture that becomes liquid and separates from
natural gas when the natural gas is produced.
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
natural 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.
EBITDAX. Income before extraordinary items, interest expense and other debt
expenses, income taxes, exploration costs, restructuring expense, depletion,
depreciation, amortization, and impairment of oil and natural gas properties
expenses.
Estimated future net cash flows. The estimated net cash flows expected to
be derived upon production and sale from proved oil and natural 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 natural 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 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).
MMBtu. One million British Thermal Units, a standard measure of energy
content.
Mmcf. One million cubic feet of natural gas.
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 our fractional working
interests therein.
Net wells. The sum of the fractional working interests we own in gross
wells.
125
<PAGE> 127
NYMEX. New York Mercantile Exchange.
PV-10 Value or present value of estimated future net cash flows. An
estimate of the present value of the estimated future net cash flows is
calculated by discounting estimated future net cash flows before income taxes 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 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 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 natural gas property (normally
a leasehold interest) that gives the owner the right to drill, produce and
conduct oil and natural 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.
126
<PAGE> 128
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, 1997, 1998 and
March 31, 1999............................................ F-3
Consolidated Statements of Income (Loss) -- For the years
ended December 31, 1996, 1997 and 1998, the three months
ended March 31, 1998 (unaudited) and 1999................. F-4
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1996, 1997 and 1998, the three months ended
March 31, 1998 (unaudited) and 1999....................... F-5
Consolidated Statements of Changes in Stockholders'
Deficit -- For the years ended December 31, 1996, 1997 and
1998, and for the three months ended March 31, 1999....... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 129
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 (the "Company") as of December 31, 1997 and
1998 and March 31, 1999, and the related consolidated statements of income
(loss), cash flows, and changes in stockholders' deficit for each of the three
years in the period ended December 31, 1998 and the three months ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kelley Oil & Gas Corporation
and subsidiaries as of December 31, 1997 and 1998 and March 31, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 and the three months ended March 31, 1999, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 17, 1999
F-2
<PAGE> 130
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................... $ 162 $ 8,435 $ 6,710
Accounts receivable..................................... 24,566 18,071 17,926
Accounts receivable -- drilling programs................ 718 624 573
Prepaid expenses and other current assets............... 1,412 1,121 768
--------- --------- ---------
Total current assets................................. 26,858 28,251 25,977
--------- --------- ---------
Oil and gas properties, successful efforts method:
Unproved properties, net............................. 49,854 38,293 38,455
Properties subject to amortization................... 463,263 496,686 500,980
Pipelines and other transportation assets, at cost...... 4,690 1,582 1,582
Furniture, fixtures and equipment....................... 2,969 3,554 3,567
--------- --------- ---------
520,776 540,115 544,584
Less: Accumulated depreciation, depletion and
amortization......................................... (227,163) (283,660) (293,620)
--------- --------- ---------
Total property and equipment, net.................... 293,613 256,455 250,964
Other non-current assets, net........................... 2,131 1,491 1,298
--------- --------- ---------
Total assets......................................... $ 322,602 $ 286,197 $ 278,239
========= ========= =========
LIABILITIES:
Accounts payable and accrued expenses................... $ 41,474 $ 33,113 $ 35,078
Accounts payable -- drilling programs................... 566 272 276
Current portion of long-term debt....................... -- 32,251 32,851
--------- --------- ---------
Total current liabilities............................ 42,040 65,636 68,205
--------- --------- ---------
Long-term debt.......................................... 286,183 287,500 287,959
--------- --------- ---------
Total liabilities.................................... 328,223 353,136 356,164
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 20,000,000 shares
authorized at December 31, 1997, 1998 and March 31,
1999; 1,745,443, 1,733,628 and 1,733,628 shares
issued and outstanding at December 31, 1997, 1998 and
March 31, 1999, respectively (liquidation value
$48,977, $48,633 and $49,771, respectively).......... 2,618 2,600 2,600
Common stock, $.01 par value, 200,000,000 shares
authorized at December 31, 1997, 1998 and March 31,
1999; 125,709,093, 126,022,235 and 126,022,235 shares
issued and outstanding at December 31, 1997, 1998 and
March 31, 1999, respectively......................... 1,257 1,260 1,260
Additional paid-in capital.............................. 300,367 300,653 300,653
Accumulated deficit..................................... (309,863) (371,452) (382,438)
--------- --------- ---------
Total stockholders' deficit.......................... (5,621) (66,939) (77,925)
--------- --------- ---------
Total liabilities and stockholders' deficit.......... $ 322,602 $ 286,197 $ 278,239
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 131
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ----------------------
1996 1997 1998 1998 1999
-------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues.................. $ 60,854 $75,864 $ 79,150 $23,047 $ 15,507
Interest and other income............. 1,429 274 505 24 161
-------- ------- -------- ------- --------
Total revenues........................ 62,283 76,138 79,655 23,071 15,668
-------- ------- -------- ------- --------
COSTS AND EXPENSES:
Production expenses................... 10,709 10,955 19,878 4,898 5,284
Exploration expenses.................. 5,438 5,433 12,034 2,051 1,370
General and administrative expenses... 8,953 6,875 7,077 1,909 1,374
Interest and other debt expenses...... 24,401 25,071 33,333 8,092 8,666
Restructuring expenses................ 4,276 -- -- -- --
Depreciation, depletion and
amortization....................... 20,440 25,853 38,602 10,944 9,960
Impairment of oil and gas
properties......................... -- -- 25,738 -- --
-------- ------- -------- ------- --------
Total expenses........................ 74,217 74,187 136,662 27,894 26,654
-------- ------- -------- ------- --------
Income (loss) before income taxes and
extraordinary item.................... (11,934) 1,951 (57,007) (4,823) (10,986)
Income taxes.......................... -- -- -- -- --
-------- ------- -------- ------- --------
Net income (loss) before extraordinary
item.................................. (11,934) 1,951 (57,007) (4,823) (10,986)
Extraordinary item.................... (17,030) -- -- -- --
-------- ------- -------- ------- --------
Net income (loss)....................... (28,964) 1,951 (57,007) (4,823) (10,986)
Less: cumulative preferred stock
dividends.......................... (4,582) (4,582) (4,550) (1,145) (1,137)
-------- ------- -------- ------- --------
Net loss applicable to common stock..... $(33,546) $(2,631) $(61,557) $(5,968) $(12,123)
======== ======= ======== ======= ========
Basic and diluted loss per common share
before extraordinary item............. $ (.18) $ (.03) $ (0.49) $ (0.05) $ (0.10)
======== ======= ======== ======= ========
Basic and diluted loss per common
share................................. $ (.37) $ (.03) $ (0.49) $ (0.05) $ (0.10)
======== ======= ======== ======= ========
Weighted average common shares
outstanding........................... 90,113 100,757 125,783 125,710 126,022
======== ======= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 132
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................... $ (28,964) $ 1,951 $ (57,007) $ (4,823) $(10,986)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization..................... 20,440 25,853 38,602 10,944 9,960
Impairment of oil and gas
properties....................... -- -- 25,738 -- --
Gain on sale of properties.......... (176) -- -- -- --
Exploration expenses................ 5,438 5,433 12,034 2,051 1,370
Accretion and amortization of other
debt expenses.................... 5,170 4,297 5,236 1,394 1,233
Restructuring expenses.............. 4,276 -- -- -- --
Extraordinary loss.................. 17,030 -- -- -- --
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable and other current
assets........................... (9,054) (1,297) 6,880 676 549
(Increase) decrease in other
non-current assets............... (1,945) (1,203) (526) 33 3
Increase (decrease) in accounts
payable and accrued expenses..... (2,953) 4,570 (8,655) (589) 1,969
--------- --------- --------- -------- --------
Net cash provided by operating
activities.......................... 9,262 39,604 22,302 9,686 4,098
--------- --------- --------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures.................. (47,601) (53,140) (56,579) (12,881) (5,823)
Acquisition of oil and gas
properties.......................... (11,594) (111,135) -- -- --
Proceeds from sale of properties...... 5,803 -- 17,363 -- --
--------- --------- --------- -------- --------
Net cash used in investing
activities.......................... (53,392) (164,275) (39,216) (12,881) (5,823)
--------- --------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings.... 50,000 180,500 119,100 34,100 --
Principal payments on long-term
borrowings.......................... (58,500) (82,700) (118,900) (30,800) --
Proceeds from sale of notes, net...... 120,938 -- 29,526 -- --
Debenture conversion costs............ (1,100) -- -- -- --
Proceeds from sale of common stock,
net................................. 43,998 27,545 273 1 --
Proceeds from conversion of preferred
stock............................... -- -- (2) -- --
Retirement of notes................... (113,488) -- (228) (228) --
Dividends on preferred stock.......... -- (4,582) (4,582) -- --
--------- --------- --------- -------- --------
Net cash provided by financing
activities.......................... 41,848 120,763 25,187 3,073 --
--------- --------- --------- -------- --------
(Decrease) increase in cash and cash
equivalents........................... (2,282) (3,908) 8,273 (122) (1,725)
Cash and cash equivalents, beginning of
period................................ 6,352 4,070 162 162 8,435
--------- --------- --------- -------- --------
Cash and cash equivalents, end of
period................................ $ 4,070 $ 162 $ 8,435 $ 40 $ 6,710
========= ========= ========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 133
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' 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' deficit at January 1, 1996............ $ 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)
------- ------ -------- ---------
Conversion of 11,815 shares of preferred stock into
40,976 share of common stock...................... (18) 1 17 --
Issuance of 272,166 shares of common stock pursuant
to employee incentive stock options............... -- 2 269 --
Preferred stock dividends........................... -- -- -- (4,582)
Net loss............................................ -- -- -- (57,007)
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1998...................... 2,600 1,260 300,653 (371,452)
------- ------ -------- ---------
Net loss............................................ -- -- -- (10,986)
------- ------ -------- ---------
BALANCE AT MARCH 31, 1999......................... $ 2,600 $1,260 $300,653 $(382,438)
======= ====== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 134
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- INDUSTRY CONDITIONS AND LIQUIDITY
During 1998 and through the first quarter of 1999, the oil and gas industry
experienced a worldwide excess of supply over demand for oil and natural gas
resulting in sharply reduced prices. As a result, many companies in the oil and
gas industry, including Kelley Oil & Gas Corporation ("the Company"),
experienced reduced profitability and cash flows which, in turn, created
significant liquidity problems. To address these liquidity issues, the Company
has taken the measures discussed in the following paragraphs.
In April 1999, the Company entered into an Exploration and Development
Agreement with Phillips Petroleum Company ("Phillips") relating to certain of
the Company's interests in the Bryceland, West Bryceland and Sailes fields in
north Louisiana. Pursuant to the agreement, the Company (1) received an $83
million cash payment (subject to certain post-closing adjustments), (2) retained
a 42 Bcf, 8-year volumetric overriding royalty interest and a 1% override on the
excess of production above such royalty interest and (3) retained 25% of its
working interest in the Cotton Valley formation. In addition, Phillips, will at
its risk and expense, operate, develop, exploit and explore the properties
thereby relieving the Company of significant operating, exploration and
development costs in the future. The effective date of the transaction was May
1, 1999 and it closed on May 17, 1999. The Company anticipates recognition of a
gain ranging from approximately $24 million to $28 million in the second quarter
of 1999. The Company has not completed its analysis of the specific costs of the
oil and gas properties and related accumulated depreciation, depletion and
amortization being sold, and accordingly, the gain is subject to further
adjustment.
In April 1999, the Company negotiated a private offering of $135 million
principal amount, 14% Senior Secured Notes (the "Notes"). The Notes are secured
by a first lien on substantially all of the Company's proved oil and natural gas
properties remaining after the sale to Phillips and guaranteed by three entities
wholly-owned by the Company. With the consummation of the Phillips transaction,
the Company is obligated to offer to repurchase $35 million principal amount of
the Notes at a repurchase price equal to 104% of the principal amount, plus
accrued and unpaid interest to the date of the repurchase within 30 days of such
closing.
In April 1999, the Company began an offer to purchase ("Offer to Purchase")
the outstanding principal amounts of its 7 7/8% Convertible Subordinated Notes
due December 15, 1999 and its 8 1/2% Convertible Subordinated Debentures due
April 1, 2000 (collectively, the "Securities") at a price equal to $590 per
$1,000 principal amount. On May 17, 1999, the Company funded the repurchase of
$46.1 million of the Securities through the Offer to Purchase, at a total cost
of approximately $28.3 million, and will recognize an extraordinary gain of
approximately $15.6 million in the second quarter of 1999.
The net proceeds from the combination of these transactions and cash on
hand were used by the Company to repay all borrowings outstanding under its
Credit Facility of $115.5 million plus accrued interest, to fund cash collateral
for a $1.5 million letter of credit, and to fund the repurchase of $46.1 million
of Securities under the Offer to Purchase, at a total cost of approximately
$28.3 million, all at May 17, 1999. The remaining net proceeds and cash flow
from operations will be used to repurchase up to $35 million of Notes at 104% of
their principal amount and for general corporate purposes.
While industry conditions cannot be predicted with certainty and are
dependent upon a number of commodity and economic factors which are beyond the
company's control, the Company believes that the cash on hand subsequent to the
consummation of the above transactions and the recent increase in oil and
natural gas prices, if continued, will sustain its operations over the
short-term. However, the Company will continue to have significant debt
outstanding and limited ability to incur further indebtedness, which, combined
with industry conditions beyond its control, may adversely affect its financial
condition, results of operations and cash flows.
F-7
<PAGE> 135
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations. Kelley Oil & Gas Corporation (a Delaware
Corporation), its corporate subsidiaries and proportionate partnership interests
are referred to herein as the "Company". The Company is an independent oil & gas
company engaged in the exploration, development and acquisition of domestic oil
and gas properties, principally in the Gulf Coast region and northern Louisiana.
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 $19.2 million, $19.6 million and $26.5 million for the years ended
December 31, 1996, 1997 and 1998, respectively, and $2.3 million and $2.0
million for the periods ended March 31, 1998 (unaudited) and March 31, 1999,
respectively.
Financial Instruments. The Company's financial instruments consist of cash
and cash equivalents, receivables, payables and long term debt. As of December
31, 1998 and March 31, 1999, the estimated fair value of the Company's long-term
debt was $251 million and $246 million, respectively. The fair value of such
long-term debt has been estimated based on quoted market prices. 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. 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. 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"), 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 a decline in its proved reserves at January 1, 1999
from year-earlier levels, the Company performed an assessment of the fair 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 $21.6 million and $4.1 million, respectively, at December 31, 1998.
Prices of oil and natural gas have increased since December 31, 1998 so that no
additional impairment was required at March 31, 1999.
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.
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 $1.8 million, $2.8 million
and $1.3 million for the years
F-8
<PAGE> 136
ended December 31, 1996, 1997 and 1998, respectively, and $0.5 million and $0.6
million, for the periods ended March 31, 1998 (unaudited) and March 31, 1999,
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 basic loss per
common share before extraordinary item and basic 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, 1996, 1997 and 1998,
and for the periods ended March 31, 1998 (unaudited) and 1999, all potentially
dilutive securities are anti-dilutive and therefore are not included in the EPS
calculations. As of March 31, 1999, potentially dilutive securities which could
impact EPS in the future include stock options granted to employees to purchase
4.0 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 which can be converted into 6.0 million shares. See
Note 1 regarding the Company's purchase of a portion of the outstanding 7 7/8%
Convertible Subordinated Notes and 8 1/2% Convertible Subordinated Debentures.
Stock Based Compensation. The Company applies Accounting Principles Board
Opinion No. 25 ("APB 25") and related Interpretations in accounting for stock
option and purchase plans. Under APB 25, compensation expense, if any, is based
on the intrinsic value of the equity instrument at the measurement date. The
Company has not recognized any compensation expense because the exercise price
of employee stock options equals the market price of the underlying stock on the
date of the grant.
Derivatives and Hedging Activities. See Note 10 for a discussion of the
Company's accounting policies related to hedging activities. 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 derivatives, 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 after issuance of the
Statement. Retroactive application to periods prior to adoption is not allowed.
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. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
For all applicable periods through March 31, 1999, 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
F-9
<PAGE> 137
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Presentation. The accompanying consolidated interim financial
statements and disclosures for 1998 (unaudited) and 1999, have been prepared by
the Company in accordance with generally accepted accounting principles and, in
the opinion of management, 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 interim financial
statements for the three months ended March 31, 1998 (unaudited) and 1999 should
be read in conjunction with the Company's annual consolidated financial
statements contained in its Annual Report on Form 10-K for the year ended
December 31, 1998. The results of operations for the three months ended March
31, 1999 are not necessarily indicative of results to be expected for the full
year.
Changes in Presentation. Certain financial statement items in 1996, 1997
and 1998 have been reclassified to conform to the 1999 presentation.
NOTE 3 -- 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, 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 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 Kelley's
Consolidated Statements of Income (Loss) since December 1, 1997. The pro forma
information shown below assumes that the acquisition occurred at the beginning
of each year 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 January 1, 1997, and should not be
viewed as indicative of operations in future periods.
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues.................................................... $112,936 $112,142
Income (loss) before extraordinary item..................... (12,484) 1,315
Net income (loss)........................................... (29,514) 1,315
Loss per common share....................................... (0.29) (0.03)
</TABLE>
F-10
<PAGE> 138
NOTE 4 -- LONG-TERM DEBT
Long-Term Debt. The Company's long-term debt at December 31, 1997 and 1998
and March 31, 1999 is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank credit facilities............................... $111,300 $111,500 $111,500
13 1/2% Senior Notes................................. 435 435 435
10 3/8% Senior Subordinated Notes.................... 120,615 150,662 150,818
7 7/8% Convertible Subordinated Notes................ 29,710 31,816 32,416
8 1/2% Convertible Subordinated Debentures........... 24,123 25,338 25,641
-------- -------- --------
286,183 319,751 320,810
Less current maturities............................ -- (32,251) (32,851)
-------- -------- --------
$286,183 $287,500 $287,959
======== ======== ========
</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 Corporation ("Kelley Oil") and Kelley Operating
Company, Ltd., with Concorde Gas Marketing, Inc. (a wholly-owned subsidiary of
the Company) and the Company's subsidiary partnerships as guarantors.
The Credit Facility provides for a maximum $140 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 limited to a
borrowing base determined by, among other things, the proved oil and natural gas
reserves and other assets of the borrowers and the value of those reserves based
on the underlying prices for oil and natural gas. The Borrowing Base is
redetermined at least semiannually by the Agent under the Credit Facility, with
the consent of 100% of the 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 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 million. Following the
Company's sale of its interest in the Waskom field in July 1998, the Borrowing
Base and Threshold Amount were reduced to $130 million and $117 million,
respectively. As provided in the Credit Facility, on November 1, 1998 the
Borrowing Base was reduced to equal the Threshold Amount of $117 million.
On December 29, 1998 the Borrowing Base under the Credit Facility was
maintained at $117 million and certain terms were amended, including: (i) an
increase in the margin borrowing rate to 250 basis points over LIBOR, (ii) a
reduction in the grace periods available under certain default provisions, (iii)
a change in the definition of majority banks for purposes of setting the
semi-annual Borrowing Base and implementing other provisions from 75% to 100%,
and (iv) a reduction in the time allowed to cure a Borrowing Base deficiency to
30 days.
At December 31, 1998 and March 31, 1999, $111.5 million of borrowings and
$1.5 million of letters of credit were outstanding under the Credit Facility. In
April 1999 the Company borrowed an additional $4 million under the Credit
Facility, raising its total outstanding borrowings to $115.5 million as of April
30, 1999. 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.
The weighted average interest rates on borrowings outstanding at December 31,
1998 and March 31, 1999 under the Credit Facility were 7.03% and 6.78%,
respectively.
As of March 31, 1999, the Company was in default on certain covenants under
the Credit Facility. In addition, a review of the Borrowing Base was scheduled
for May 1, 1999, at which time the Company
F-11
<PAGE> 139
expected the current $117 million Borrowing Base to be lowered. The excess of
the amounts outstanding over the new Borrowing Base would have been due and
payable within 30 days. The Company received waivers of these defaults through
May 17, 1999, at which time all amounts due under the Credit Facility were
repaid and the Credit Facility was terminated (see Note 1). Following the sale
of the Notes, the Company's ability to negotiate a new revolving credit facility
will be severely limited.
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 $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 holder 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 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 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 Company's bank
credit facility ("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 a
Change of Control, as defined. Kelley Oil Corporation, a wholly
F-12
<PAGE> 140
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. In issuing the Series C Notes, the Company agreed to use its best efforts
to register under the Securities Act notes identical in terms to the Series C
Notes ("Series D Notes"). The Company completed the exchange of the Series C
Notes for the Series D Notes on November 12, 1998.
7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible Subordinated
Debentures. The Company has outstanding 7 7/8% Convertible Subordinated Notes
due December 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.
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.
See Note 1 regarding the Company's purchase of a portion of the outstanding
7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible Subordinated
Debentures.
14% Senior Secured Notes Due 2003. On April 16, 1999, the Company issued
$135,000,000 of Senior Secured Notes due 2003, maturing at 105% of the stated
principal amount. Interest will accrue from the issue date and will be payable
semi-annually in cash in arrears on each April 15 and October 15, commencing
October 15, 1999. As a result of the consummation of the Phillips transaction,
by June 16, 1999, the Company must offer to redeem $35 million of the Notes at
104% of par. The remaining Notes are redeemable by the Company on or after April
15, 2001. Scheduled mandatory redemptions of $2,000,000 per quarter begin July
15, 2002. In addition, the indenture contains covenants that restrict the
Company's ability to incur additional indebtedness, pay dividends, incur capital
expenditures, sell assets, merge or consolidate and redeem subordinated
indebtedness.
Debt Maturities. At December 31, 1998 and March 31, 1999, the Company has
aggregate debt maturities of $34.6 million in 1999, $138.4 million in 2000 and
$155.0 million in 2006.
NOTE 5 -- STOCKHOLDERS' 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.
F-13
<PAGE> 141
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 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. On April 14, 1998, the Company declared 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 per
preferred share for February 1, 1998, May 1, 1998, August 1, 1998, November 1,
1998, February 1, 1999 and May 1, 1999 aggregating approximately $6.8 million,
covering 6 quarters. Further dividends are restricted under the Company's
indentures governing its 10 3/8% Senior Subordinated Notes and its 14% Senior
Secured Notes. 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.
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 6 -- 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 and 1998 which are subject to a four year
vesting period.
F-14
<PAGE> 142
Stock option activity for the Company during 1996, 1997, 1998 and the three
month period ended March 31, 1999, was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
1996 1997 1998 MARCH 31, 1999
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS IN THOUSANDS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -------------------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options outstanding,
beginning of year............. 2,105 $2.38 4,589 $1.63 4,601 $1.75 4,497 $1.87
Granted....................... 2,520 1.01 482 2.61 727 2.20 -- --
Exercised..................... (36) 2.38 (415) 1.31 (272) 1.00 -- --
Surrendered or expired........ -- -- (55) 2.62 (559) 1.73 (482) 1.15
----- ----- ----- -----
Stock options outstanding, end
of year/period................ 4,589 $1.63 4,601 $1.75 4,497 $1.87 4,015 $1.96
===== ===== ===== ===== ===== ===== ===== =====
</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, 1998 and March 31, 1999, approximately 3.6 million and 4.1
million shares, respectively, were available for future option grants.
The following table summarizes information about the options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICE (THOUSANDS) (YEARS) PRICE (THOUSANDS) PRICE
- -------------- ----------- ---------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.69-1.00 1,688 7.8 $1.00 793 $1.00
$1.75-2.56 2,531 7.2 2.25 1,808 2.23
$2.72-4.13 278 4.0 3.78 226 3.98
</TABLE>
The following table summarizes information about the options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICE (THOUSANDS) (YEARS) PRICE (THOUSANDS) PRICE
- -------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.69-1.00 1,252 7.2 $1.00 863 $1.00
$1.75-2.56 2,493 7.0 2.24 1,933 2.22
$2.72-4.13 270 3.6 3.81 224 3.99
</TABLE>
The weighted average fair value of options granted during 1996, 1997 and
1998 was $0.59, $1.51 and $1.46, respectively. There were no options granted in
the first quarter of 1999. The fair value of the options granted was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: weighted average risk-free interest rate of 6.8% for
1996, 6.4% for 1997 and 5.2% for 1998; an expected volatility of 60% for 1996
and 1997 and 78% for 1998; expected life of five years and no dividend yield for
all three years.
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
F-15
<PAGE> 143
grant dates for awards under those plans consistent with the method of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
compensation", the Company's net loss and earnings per share for the years ended
December 31, 1996, 1997, 1998 and the three month period ended March 31, 1999,
would have been as reflected in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1996 1997 1998 1999
-------- ------ -------- ------------
<S> <C> <C> <C> <C>
Net income (loss) before extraordinary item (in
thousands)...................................... $(14,512) $1,319 $(57,708) $(11,079)
Loss per common share before extraordinary item... (.21) (.03) (.49) (.10)
Net income (loss) (in thousands).................. (31,542) $1,319 $(57,708) $(11,079)
Loss per common share............................. (.40) (.03) (.49) (.10)
</TABLE>
ESOP/401K. 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 the years ended 1996, 1997, 1998 and the
periods ended March 31, 1998 (unaudited) and 1999, the Company made matching
contributions totaling $0.1 million, $0.2 million, $0.3 million, $58,000 and
$67,000, respectively.
NOTE 7 -- INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax for the years ended December 31, 1996, 1997 and 1998 and for the
three month period ended March 31, 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1996 1997 1998 1999
-------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) before income taxes................ $(28,965) $ 1,951 $(57,007) $(10,986)
-------- ------- -------- --------
Income tax expense (benefit) computed at
statutory rates................................ (9,848) 663 (19,382) (3,735)
Increase in valuation allowance................ 16,322 301 16,272 5,297
Adjustment to net operating loss carryforward
and other................................... (7,209) (1,459) 2,463 (1,778)
Permanent differences:
Nondeductible expenses......................... 735 708 700 216
Other-net...................................... -- (213) (53) --
-------- ------- -------- --------
Tax expense (benefit)....................... $ -- $ -- $ -- $ --
======== ======= ======== ========
</TABLE>
No federal income taxes were paid for the years ended December 31, 1996,
1997 and 1998 or for the three months ended March 31, 1998 (unaudited) and 1999.
F-16
<PAGE> 144
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:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1996 1997 1998 1999
--------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <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 method on oil and gas
properties.............................. 42,696 32,210 43,730 44,096
Net operating loss carryforwards........... 62,179 72,992 77,741 82,672
Charitable contribution carryforwards...... 78 52 54 54
Alternative minimum tax credit
carryforwards........................... 21 21 21 21
Valuation allowance........................ (104,974) (105,275) (121,546) (126,843)
--------- --------- --------- ---------
Total deferred tax assets.................. -- -- -- --
--------- --------- --------- ---------
Net deferred tax liability................. $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
Net Operating Loss Carryforwards and Alternative Minimum Tax Credits. As of
December 31, 1998, the Company had cumulative net operating loss carryforwards
("NOL") for federal income tax purposes of approximately $228 million, which
expire in 2000 through 2018, and net operating loss carryforwards for
alternative minimum tax purposes of approximately $218 million, which expire in
2008 through 2018. Due to previous ownership changes, future utilization of the
net operating loss carry forwards will be limited by Internal Revenue Code
section 382.
NOTE 8 -- 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 March 31, 1999, 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 March 31, 1999, Kelley Oil owned 13.4 million units (83.7%) in
the 1992 DDP, together with its 3.94% general partner interest. As of March 31,
1999, the 1992 DDP was indebted to Kelley Oil for loans aggregating $2.3 million
($0.4 million, net of intercompany eliminations). The Company recorded interest
income on this indebtedness of $10,000 in the first three months of 1999, 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 $0.2 million, $0.1 million, $21,000,
$24,000 and $18,000 in 1996, 1997, 1998, and the three months ended March 31,
1998 (unaudited) and 1999, respectively.
F-17
<PAGE> 145
Interest on DDP Commitments. During 1996, 1997, 1998, the first three
months of 1998 (unaudited) and 1999, the Company paid or accrued interest at a
market rate in the amounts, net of intercompany elimination, of $91,000,
$11,000, zero, zero and zero, respectively, on deferred subscription commitments
to DDPs.
Advisory Fees. 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. 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, 1997 and 1998, and will
receive an additional $500,000 in each December of 1999, 2000 and 2001. 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.
NOTE 9 -- 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 1998 and the three month period ended March 31, 1999, natural
gas sales to three purchasers accounted for 48%, 22% and 18% and 50%, 25% and
17%, respectively, 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-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 1996, the Company incurred restructuring
expenses of $4.3 million associated primarily with staff reductions, related
severance settlements and reorganization costs. Accrued expenses on the balance
sheet include $0.9 million, $0.2 million and $0.1 million at December 31, 1997
and 1998 and March 31, 1999, 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, 1996, 1997 and 1998 and for the three month periods
ended March 31, 1998 (unaudited) and 1999 were $1.3 million, $0.8 million,
F-18
<PAGE> 146
$0.6 million, $0.1 million and $0.2 million, respectively. For the balance of
the lease terms, minimum rentals are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999.................................................. $ 667
2000.................................................. 636
2001.................................................. 341
2002.................................................. 39
2003.................................................. 7
------
Total....................................... $1,690
======
</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 10 -- 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. During 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.
Through natural gas price swap agreements, the Company hedged approximately
49% and 66% of its natural gas production for 1998 and the three month period
ended March 31, 1999, respectively, at average NYMEX quoted prices of $2.31 per
Mmbtu and $2.27 per Mmbtu, respectively, before transaction and transportation
costs. As of December 31, 1998, 5,400,000 Mmbtus of natural gas production for
1999 has been hedged by natural gas price swap agreements at an average NYMEX
quoted price of $2.36 per Mmbtu before transaction and transportation costs. As
of March 31, 1999, 5,630,000 Mmbtus of natural gas production for April through
October 1999 has been hedged by natural gas price swap agreements at an average
NYMEX quoted price of $2.03 per Mmbtu before transaction and transportation
costs. As of December 31, 1998, 16,380,000 Mmbtu's of natural gas production for
1999 has been hedged by natural gas basis swap agreements. As of March 31, 1999,
10,980,000 Mmbtus of natural gas production for April through September 1999 has
been hedged by natural gas basis swap agreements. Hedging activities increased
revenues by approximately $3.5 million in 1998 and $2.5 million in the first
quarter of 1999, as compared to estimated revenues had no hedging activities
been conducted. At December 31, 1998, the unrealized gain on the Company's
existing hedging instruments for future production months in 1999 approximated
$2.5 million. As of March 31, 1999, the unrealized loss on the Company's
existing hedging instruments for the future production months in 1999
approximated $1.4 million.
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.
F-19
<PAGE> 147
NOTE 11 -- 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 D 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, 1997 and
1998 and March 31, 1999, consolidating condensed statements of income
(loss) for each of the years ended December 31, 1996, 1997 and 1998 and for
the three month periods ended March 31, 1998 (unaudited) and 1999 and
consolidating condensed statements of cash flows for each of the years
ended December 31, 1996, 1997 and 1998 and for the three month periods
ended March 31, 1998 (unaudited) and 1999.
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.
F-20
<PAGE> 148
CONSOLIDATING CONDENSED BALANCE SHEET
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 SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets................. $ 424,609 $ 212,946 $10,859 $(620,163) $ 28,251
Property and equipment, net.... -- 243,927 14,008 (1,480) 256,455
Other non-current assets,
net......................... (165,642) 18,611 -- 148,522 1,491
--------- --------- ------- --------- --------
Total assets........... $ 258,967 $ 475,484 $24,867 $(473,121) $286,197
========= ========= ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities............ $ 38,406 $ 641,113 $ 6,281 $(620,164) $ 65,636
Long-term debt................. 287,500 -- -- -- 287,500
Stockholders' deficit.......... (66,939) (165,629) 18,586 147,043 (66,939)
--------- --------- ------- --------- --------
Total liabilities and
stockholders'
deficit.............. $ 258,967 $ 475,484 $24,867 $(473,121) $286,197
========= ========= ======= ========= ========
</TABLE>
F-21
<PAGE> 149
CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets................. $ 422,192 $ 206,289 $ 8,166 $(610,670) $ 25,977
Property and equipment, net.... -- 239,052 13,589 (1,677) 250,964
Other non-current assets,
net......................... (168,126) 18,476 -- 150,948 1,298
--------- --------- ------- --------- --------
Total assets........... $ 254,066 $ 463,817 $21,755 $(461,399) $278,239
========= ========= ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities............ $ 44,032 $ 631,533 $ 3,310 $(610,670) $ 68,205
Long-term debt................. 287,959 -- -- -- 287,959
Stockholders' deficit.......... (77,925) (167,716) 18,445 149,271 (77,925)
--------- --------- ------- --------- --------
Total liabilities and
stockholders'
deficit.............. $ 254,066 $ 463,817 $21,755 $(461,399) $278,239
========= ========= ======= ========= ========
</TABLE>
F-22
<PAGE> 150
CONSOLIDATING CONDENSED STATEMENT 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 STATEMENT OF INCOME (LOSS)
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 (loss)................. $ 1,951 $ 29,268 $ 9,179 $(38,447) $ 1,951
======== ======== ======== ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $ (18) $ 69,958 $ 9,715 $ -- $ 79,655
Costs and expenses............... (33,893) (94,457) (7,742) (570) (136,662)
Equity in earnings (loss) of
subsidiaries................... (23,096) 1,973 -- 21,123 --
-------- -------- ------- ------- ---------
Net income (loss)................ $(57,007) $(22,526) $ 1,973 $20,553 $ (57,007)
======== ======== ======= ======= =========
</TABLE>
F-23
<PAGE> 151
CONSOLIDATING CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $ (18) $ 19,962 $ 3,194 $ (67) $ 23,071
Expenses........................... (8,260) (17,940) (1,940) 246 (27,894)
Equity in earnings of
subsidiaries..................... 3,455 1,254 -- (4,709) --
------- -------- ------- ------------ ------------
Net income (loss).................. $(4,823) $ 3,276 $ 1,254 $ (4,530) $ (4,823)
======= ======== ======= ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ -- $ 13,732 $ 1,990 $ (54) $ 15,668
Expenses.......................... (8,701) (16,684) (1,125) (144) (26,654)
Equity in earnings (loss) of
subsidiaries.................... (2,285) 865 -- 1,420 --
-------- -------- ------- ------------ ------------
Net income (loss)................. $(10,986) $ (2,087) $ 865 $ 1,222 $ (10,986)
======== ======== ======= ============ ============
</TABLE>
F-24
<PAGE> 152
CONSOLIDATING CONDENSED STATEMENT 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> 153
CONSOLIDATING CONDENSED STATEMENT 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.......................... $ 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 on 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> 154
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(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)................... $ (57,007) $(22,526) $ 1,973 $ 20,553 $ (57,007)
Non-cash income (loss)
adjustments...................... 28,109 70,144 3,687 (20,553) 81,387
Changes in operating assets and
liabilities...................... 3,869 (7,976) 2,029 -- (2,078)
--------- -------- ------- -------- ---------
Net cash provided by (used in)
operating activities................ (25,029) 39,642 7,689 -- 22,302
--------- -------- ------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures................ -- (56,579) -- -- (56,579)
Proceeds from sale of property...... -- 17,363 -- -- 17,363
Distributions from partnerships..... -- 7,730 -- (7,730) --
--------- -------- ------- -------- ---------
Net cash used in investing
activities.......................... -- (31,486) -- (7,730) (39,216)
--------- -------- ------- -------- ---------
FINANCING ACTIVITIES:
Payments on long term borrowings.... (118,900) -- -- -- (118,900)
Net proceeds on long term
borrowings....................... 119,100 -- -- -- 119,100
Redemption on subordinated notes.... (228) -- -- -- (228)
Proceeds from sale of common
stock............................ 273 -- -- -- 273
Proceeds from conversion of
preferred........................ (2) -- -- -- (2)
Proceeds from sale of common stock,
net.............................. 29,526 -- -- -- 29,526
Distributions to partners........... -- -- (7,730) 7,730 --
Dividends on preferred stock........ (4,582) -- -- -- (4,582)
--------- -------- ------- -------- ---------
Net cash provided by (used in)
financing activities................ 25,187 -- (7,730) 7,730 25,187
--------- -------- ------- -------- ---------
Increase (decrease) in cash and cash
equivalents......................... 158 8,156 (41) -- 8,273
Cash and cash equivalents, beginning
of period........................... 117 4 41 -- 162
--------- -------- ------- -------- ---------
Cash and cash equivalents, end of
period.............................. $ 275 $ 8,160 $ -- $ -- $ 8,435
========= ======== ======= ======== =========
</TABLE>
F-27
<PAGE> 155
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................... $ (4,823) $ 3,276 $ 1,254 $(4,530) $ (4,823)
Non-cash income adjustments.......... (2,061) 11,041 879 4,530 14,389
Changes in operating assets and
liabilities....................... 3,721 (3,848) 247 -- 120
-------- -------- ------- ------- --------
Net cash provided by (used in)
operating activities................. (3,163) 10,469 2,380 -- 9,686
-------- -------- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures................. -- (12,675) (206) -- (12,881)
Capital contributed to
partnerships...................... -- -- -- -- --
Distributions from partnerships...... -- 2,202 -- (2,202) --
-------- -------- ------- ------- --------
Net cash used in investing
activities........................... -- (10,473) (206) (2,202) (12,881)
-------- -------- ------- ------- --------
FINANCING ACTIVITIES:
Net proceeds on long term
borrowings........................ 34,100 -- -- -- 34,100
Net payments on long term
borrowings........................ (30,800) -- -- -- (30,800)
Redemption of notes.................. (228) -- -- -- (228)
Proceeds from sale of common stock,
net............................... 1 -- -- -- 1
Distributions to partners............ -- -- (2,202) 2,202 --
Capital contributed by partners...... -- -- -- -- --
Dividends on preferred stock......... -- -- -- -- --
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities................. 3,073 -- (2,202) 2,202 3,073
-------- -------- ------- ------- --------
Decrease in cash and cash
equivalents.......................... (90) (4) (28) -- (122)
Cash and cash equivalents, beginning of
period............................... 117 4 41 -- 162
-------- -------- ------- ------- --------
Cash and cash equivalents, end of
period............................... $ 27 $ -- $ 13 $ -- $ 40
======== ======== ======= ======= ========
</TABLE>
F-28
<PAGE> 156
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(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)............... $(10,986) $(2,087) $ 865 $ 1,222 $(10,986)
Non-cash income (loss)
adjustments.................. 3,517 9,835 433 (1,222) 12,563
Changes in operating assets and
liabilities.................. 7,188 (4,370) (297) -- 2,521
-------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities............ (281) 3,378 1,001 -- 4,098
-------- ------- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures............ -- (5,823) -- -- (5,823)
Proceeds from sale of
property..................... -- -- -- -- --
Distributions from
partnerships................. -- 1,001 -- (1,001) --
-------- ------- ------- ------- --------
Net cash used in investing
activities...................... -- (4,822) -- (1,001) (5,823)
-------- ------- ------- ------- --------
FINANCING ACTIVITIES:
Net payments on long term
borrowings................... -- -- -- -- --
Proceeds from sale of notes,
net.......................... -- -- -- -- --
Redemption of subordinated
notes........................ -- -- -- -- --
Proceeds from sale of common
stock, net................... -- -- -- -- --
Proceeds from conversion of
preferred stock.............. -- -- -- -- --
Distributions to partners....... -- -- (1,001) 1,001 --
Dividends on preferred stock.... -- -- -- -- --
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities............ -- -- (1,001) 1,001 --
-------- ------- ------- ------- --------
Increase (Decrease) in cash and
cash equivalents................ (281) (1,444) -- -- (1,725)
Cash and cash equivalents,
beginning of period............. 275 8,160 -- -- 8,435
-------- ------- ------- ------- --------
Cash and cash equivalents, end of
period.......................... $ (6) $ 6,716 $ -- $ -- $ 6,710
======== ======= ======= ======= ========
</TABLE>
F-29
<PAGE> 157
NOTE 12 -- 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Unevaluated properties............................ $ 12,521 $ 49,854 $ 38,293
Properties subject to amortization................ 338,794 463,263 496,686
--------- --------- ---------
Capitalized costs................................. 351,315 513,117 534,979
Accumulated depreciation, depletion and
amortization.................................... (194,367) (221,729) (280,640)
--------- --------- ---------
Net capitalized costs............................. $ 156,948 $ 291,388 $ 254,339
========= ========= =========
</TABLE>
Costs Incurred. Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition costs:
Proved............................................... $11,594 $ 73,190 $ 2,338
Unproved(1).......................................... 2,160 40,997 1,405
Exploration costs...................................... 5,438 9,525 25,414
Development costs...................................... 41,790 40,713 27,875
------- -------- -------
Total costs incurred......................... $60,982 $164,425 $57,032
======= ======== =======
</TABLE>
- ---------------
(1) Includes $40 million in unproved assets acquired from SPR on December 1,
1997.
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, 1996, 1997 and 1998. This table is based on
reserves estimates prepared by H.J. Gruy & Associates, Inc. ("Gruy"),
independent petroleum engineers.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS LIQUIDS NATURAL GAS
(MBBLS) (MMCF)
------------------------ ---------------------------
1996 1997 1998 1996 1997 1998
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year....................... 1,387 1,466 2,953 196,273 297,634 354,867
Revisions of previous estimates......... (89) 106 (79) (30,519) 21,831 (31,674)
Purchases of reserves in place.......... 57 1,351 -- 30,844 51,712 --
Extensions and discoveries.............. 477 256 3,082 128,692 13,892 9,512
Sale of reserves in place............... (134) -- (287) (4,190) -- (13,589)
Production.............................. (232) (226) (375) (23,466) (30,202) (35,557)
----- ----- ----- ------- ------- -------
End of year............................. 1,466 2,953 5,294 297,634 354,867 283,559
===== ===== ===== ======= ======= =======
Proved developed reserves at end of
year.................................... 977 2,432 1,981 173,465 257,800 188,824
===== ===== ===== ======= ======= =======
</TABLE>
F-30
<PAGE> 158
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 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 revenues
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................... $1,099,089 $ 930,357 $ 643,473
Future production costs........................... (113,178) (196,048) (159,378)
Future development costs.......................... (81,932) (106,123) (93,321)
Future income tax expenses........................ (162,887) (37,050) (1,627)
---------- --------- ---------
Future net cash flows........................... 741,092 591,136 389,147
10% annual discount for estimating timing of cash
flows........................................... (307,321) (227,249) (155,677)
---------- --------- ---------
Standardized measure of discounted future net
cash flows................................... $ 433,771 $ 363,887 $ 233,470
========== ========= =========
</TABLE>
The standardized measure of discounted future net cash flows as of December
31, 1996, 1997 and 1998 was calculated using prices in effect as of those dates,
which averaged $25.18, $16.93 and $10.81, respectively, per barrel of oil and
$3.66, $2.49 and $2.07, respectively, per Mcf of natural gas.
F-31
<PAGE> 159
Change in Standardized Measure. Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and gas, net of production costs.... $(48,307) $ (62,080) $ (57,940)
Sale of reserves in place........................ (6,836) -- (15,424)
Extensions and discoveries....................... 192,174 21,945 20,097
Purchases of reserves in place................... 11,594 91,034 --
Future development costs incurred................ 24,500 21,806 9,218
Changes due to revisions in standardized variables:
Prices and production costs...................... 159,292 (243,851) (94,569)
Revisions of previous quantity estimates......... (50,594) 25,345 (29,853)
Estimated future development costs............... 3,254 (17,413) (29,240)
Income taxes..................................... (82,831) 69,489 (14,110)
Accretion of discount............................ 17,575 51,818 24,903
Production rates (timing) and other.............. 42,898 (27,977) 56,501
-------- --------- ---------
Net increase (decrease)....................... 262,719 (69,884) (130,417)
Beginning of year................................ 171,052 433,771 363,887
-------- --------- ---------
End of year................................... $433,771 $ 363,887 $ 233,470
======== ========= =========
</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.
NOTE 13 -- QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -------------------------------------
1ST 2ND 3RD 4TH(1) 1ST 2ND 3RD 4TH(2)
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $18,947 16,178 17,105 23,634 $23,047 21,162 18,630 16,311
Operating profit........................... 7,368 4,892 6,121 8,367 3,245 (1,251) (85) (26,087)
Net income (loss).......................... 1,703 (1,248) 59 1,437 (4,823) (9,433) (8,411) (34,340)
Basic and diluted income (loss) per
common share............................. $ 0.01 (0.02) (0.01) -- $ (0.05) (0.08) (0.08) (0.28)
</TABLE>
- ---------------
(1) Reflects the acquisition of SPR on December 1, 1997.
(2) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties under SFAS 121 (see Note 2).
NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, the Company was obligated to offer to repurchase
$35 million principal amount of the Notes at a repurchase price equal to 104% of
the principal amount. On June 30, 1999, the Company completed such repurchase
and will recognize an extraordinary loss of approximately $3.5 million in the
second quarter of 1999.
On June 28, 1999, the Company began an offer (the "Tender Offer") to
exchange 15 shares of its Common Stock for each outstanding share of its $2.625
Convertible Exchangeable Preferred Stock. On July 27, 1999, the Company closed
the Tender Offer and exchanged approximately 368,000 shares of preferred stock
for 5,520,000 shares of common stock. With the exchange, the Company eliminated
dividend arrearages on the preferred stock of approximately $1.4 million.
On July 30, 1999, the Company expects to effect a 1 for 10 reverse stock
split of its common stock. Following the reverse split, the total number of
outstanding shares of its common stock should be reduced from approximately
131.5 million to approximately 13.2 million after giving effect to the Tender
Offer described above.
F-32
<PAGE> 160
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING TO EXCHANGE NOTES IN ANY JURISDICTION WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS AS OF
ANY DATE OTHER THAN THE DATE STATED ON THE COVER.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information.... 2
Cautionary Statement................... 2
Summary................................ 3
Risk Factors........................... 12
Caution as to Forward-Looking
Statements........................... 21
Use of Proceeds........................ 21
Capitalization......................... 22
Selected Consolidated Financial Data... 22
Unaudited Pro Forma Consolidated
Financial Information................ 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 31
Description of Our Business and
Properties........................... 41
Management............................. 59
Executive Compensation................. 61
Voting Securities and Principal
Stockholders......................... 66
Certain Transactions................... 67
The Exchange Offer..................... 68
Description of the New Notes........... 78
U.S. Federal Income Tax
Considerations....................... 122
Plan of Distribution................... 122
Legal Matters.......................... 123
Independent Accountants................ 124
Engineers.............................. 124
Glossary of Industry Terms............. 125
Financial Statements................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
KELLEY OIL & GAS CORPORATION
$100,000,000
OFFER TO EXCHANGE
14% SENIOR SECURED NOTES
DUE 2003
MATURING AT 105% OF
THE STATED PRINCIPAL AMOUNT,
SERIES A
FOR
14% SENIOR SECURED NOTES
DUE 2003
MATURING AT 105% OF
THE STATED PRINCIPAL AMOUNT,
SERIES B
------------------------
PROSPECTUS
------------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 161
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> 162
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1 -- Agreement and Plan of Consolidation among the Company,
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
Company'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 Company (incorporated
by reference to Exhibit 3.1 to the Consolidation
Registration Statement).
3.2 -- Certificate of Amendment to Certificate of Incorporation
of the Company 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 Company dated February 12, 1996 (incorporated by
reference to Exhibit 3.1 to the Company'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 Company (incorporated
by reference to Exhibit 3.1 to the Company'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 Company (incorporated by reference
to Exhibit 3.2 to the Company'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
Company'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 Company dated April 26, 1996 (incorporated by
reference to Exhibit 3.7 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1997).
3.8+ -- Certificate of Amendment of Certificate of Incorporation
of the Company dated July 12, 1999.
3.9 -- Bylaws of the Company (incorporated by reference to
Exhibit 3.5 to the Consolidation Registration Statement).
4.1 -- Certificate representing Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the
Consolidation Registration Statement).
4.2 -- Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Company (incorporated by reference
to Exhibit 4.2 to the Consolidation Registration
Statement).
4.3 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 8 1/2%
Convertible Subordinated Debentures (the "8 1/2%
Debentures") due 2000 (incorporated by reference to
exhibit 4.1 to the Company's Current Report on Form 8-K
(File No. 0-25214) dated February 10, 1995).
</TABLE>
II-2
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.4 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 8 1/2% Debentures (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1995).
4.5 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 7 7/8%
Convertible Subordinated Notes (the "7 7/8% Notes") due
1999 (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 10, 1995).
4.6 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 7 7/8% Notes (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31,
1995).
4.7 -- Indenture dated as of June 15, 1995 among the Company, as
issuer, Kelley Partners, Kelley Operating Company, Ltd.
and Kelley Oil Corporation, as guarantors, and Chemical
Bank, as trustee, relating to the Company's 13 1/2%
Senior Notes due 1999 (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-3 (Reg. No. 33-92214) dated June 9, 1995.
4.8 -- Supplemental Indenture dated as of October 28, 1996,
among the Company, as issuer, Kelley Operating Company,
Ltd. and Kelley Oil Corporation, as guarantors, and The
Chase Manhattan Bank (formerly Chemical Bank), as
trustee, relating to the Company's 13 1/2% Senior Notes
due 1999 (incorporated by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q (File No.
0-25214) for the quarterly period ended September 20,
1996).
4.9 -- Indenture dated as of October 15, 1996, among the
Company, as issuer, Kelley Oil Corporation and Kelley
Operating Company, Ltd., as guarantors, and United States
Trust Company of New York, relating to the Company's
10 3/8% Senior Subordinated Notes due 2006 (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.10 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series B (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-4
(Reg. No. 333-18481) filed December 20, 1996, as
amended).
4.11 -- Indenture dated as of May 29, 1998, among the Company, as
issuer, Kelley Oil Corporation and Kelley Operating
Company, Ltd., as guarantors, and United States Trust
Company of New York, relating to the Company's 10 3/8%
Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-61681) filed August
17, 1998).
4.12 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series D (incorporated by reference to Exhibit
4.8 to the Company's Registration Statement on Form S-4
(Reg. No. 333-61681) filed August 17, 1998).
4.13+ -- Indenture dated as of April 15, 1999, among Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd.
and Concorde Gas Marketing, Inc., as guarantors, and
Norwest Bank Minnesota, National Association, relating to
the Company's 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount.
4.14* -- Form of the Company's 14% Senior Secured Notes Due 2003,
maturing at 105% of the stated principal amount.
</TABLE>
II-3
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.15+ -- Registration Rights Agreement dated as of April 16, 1999,
by and among the Company, Kelley Oil Corporation, Kelley
Operating Company, Ltd., Concorde Gas Marketing, Inc. and
Jefferies & Company, Inc.
5.1+ -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Amended and Restated Employee Stock Ownership Plan of
Kelley Oil Corporation effective as of January 1, 1989
(incorporated by reference to Exhibit 10.15 to Kelley Oil
Corporation'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 Corporation (incorporated by reference to
Kelley Oil Corporation'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 Corporation (incorporated by reference to
Exhibit 10.3 to Kelley Oil Corporation'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 Company (the
"1995 Plan") (incorporated by reference to Exhibit 10.4
to the Company'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
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.4 to the
Company'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 Company and John F. Bookout, Jr.
(incorporated by reference to Exhibit 10.2 to the
Company'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 Company and each of Dallas Laumbach and
William Albrecht (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
10.9 -- Employment Agreement dated as of October 1, 1998 with
Rick G. Lester (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1998).
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
Company's Current Report on Form 8-K (File No. 0-25214)
dated December 1, 1997).
10.11 -- 1996 Incentive Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1996).
10.12 -- 1997 Annual and Long-Term Incentive-Performance Plan of
the Company (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1997).
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K
(File No. 0-25214) for the year ended December 31, 1996).
23.1+ -- Consent of Deloitte & Touche LLP.
</TABLE>
II-4
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
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 (contained on pages II-6 through II-9
of this registration statement).
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* -- 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.
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> 166
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 July 29, 1999.
KELLEY OIL & GAS CORPORATION
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints John F. Bookout or Rick G. Lester, or any
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this 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 attorney-in-fact and agent, and any 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 attorney-in-fact and agent, or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 29th, day of July, 1999 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, July 29, 1999
- ----------------------------------------------------- President and Chief
John F. Bookout Executive Officer
(Principal Executive
Officer), Director
/s/ RICK G. LESTER Senior Vice President and July 29, 1999
- ----------------------------------------------------- Chief Financial Officer
Rick G. Lester (Principal Financial and
Accounting Officer)
/s/ JOHN J. CONKLIN, JR. Director July 29, 1999
- -----------------------------------------------------
John J. Conklin, Jr.
Director July 29, 1999
- -----------------------------------------------------
Ralph P. Davidson
/s/ ADAM P. GODFREY Director July 29, 1999
- -----------------------------------------------------
Adam P. Godfrey
July 29, 1999
- -----------------------------------------------------
William J. Murray
/s/ OGDEN M. PHIPPS July 29, 1999
- -----------------------------------------------------
Ogden M. Phipps
/s/ WARD W. WOODS July 29, 1999
- -----------------------------------------------------
Ward W. Woods
</TABLE>
II-6
<PAGE> 167
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 July 29, 1999.
KELLEY OIL CORPORATION
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints John F. Bookout or Rick G. Lester, or any
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this 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 attorney-in-fact and agent, and any 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 attorney-in-fact and agent, or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 29th day of July, 1999 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, President July 29, 1999
- ----------------------------------------------------- and Chief Executive Officer
John F. Bookout (Principal Executive Officer),
Director
/s/ RICK G. LESTER Senior Vice President and Chief July 29, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial and Accounting
Officer)
</TABLE>
II-7
<PAGE> 168
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 July 29, 1999.
KELLEY OPERATING COMPANY, LTD.
By: KELLY OIL CORPORATION,
its General Partner
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints John F. Bookout or Rick G. Lester, or any
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this 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 attorney-in-fact and agent, and any 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 attorney-in-fact and agent, or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 29th day of July, 1999 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, President July 29, 1999
- ----------------------------------------------------- and Chief Executive Officer
John F. Bookout (Principal Executive Officer),
Director
/s/ RICK G. LESTER Senior Vice President and Chief July 29, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial and Accounting
Officer)
</TABLE>
II-8
<PAGE> 169
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 July 29, 1999.
CONCORDE GAS MARKETING, INC.
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints John F. Bookout or Rick G. Lester, or any
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this 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 attorney-in-fact and agent, and any 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 attorney-in-fact and agent, or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 29th day of July, 1999 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, President July 29, 1999
- ----------------------------------------------------- and Chief Executive Officer
John F. Bookout (Principal Executive Officer),
Director
/s/ RICK G. LESTER Senior Vice President and Chief July 29, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial Officer)
/s/ ROBERT J. PANACCIONE Controller (Principal Accounting July 29, 1999
- ----------------------------------------------------- Officer)
Robert J. Panaccione
</TABLE>
II-9
<PAGE> 170
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1 -- Agreement and Plan of Consolidation among the Company,
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
Company'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 Company (incorporated
by reference to Exhibit 3.1 to the Consolidation
Registration Statement).
3.2 -- Certificate of Amendment to Certificate of Incorporation
of the Company 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 Company dated February 12, 1996 (incorporated by
reference to Exhibit 3.1 to the Company'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 Company (incorporated
by reference to Exhibit 3.1 to the Company'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 Company (incorporated by reference
to Exhibit 3.2 to the Company'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
Company'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 Company dated April 26, 1996 (incorporated by
reference to Exhibit 3.7 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1997).
3.8+ -- Certificate of Amendment of Certificate of Incorporation
of the Company dated July 12, 1999.
3.9 -- Bylaws of the Company (incorporated by reference to
Exhibit 3.5 to the Consolidation Registration Statement).
4.1 -- Certificate representing Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the
Consolidation Registration Statement).
4.2 -- Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Company (incorporated by reference
to Exhibit 4.2 to the Consolidation Registration
Statement).
4.3 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 8 1/2%
Convertible Subordinated Debentures (the "8 1/2%
Debentures") due 2000 (incorporated by reference to
exhibit 4.1 to the Company'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
Company and the United States Trust Company of New York,
relating to the 8 1/2% Debentures (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1995).
</TABLE>
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.5 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 7 7/8%
Convertible Subordinated Notes (the "7 7/8% Notes") due
1999 (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 10, 1995).
4.6 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 7 7/8% Notes (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31,
1995).
4.7 -- Indenture dated as of June 15, 1995 among the Company, as
issuer, Kelley Partners, Kelley Operating Company, Ltd.
and Kelley Oil Corporation, as guarantors, and Chemical
Bank, as trustee, relating to the Company's 13 1/2%
Senior Notes due 1999 (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-3 (Reg. No. 33-92214) dated June 9, 1995.
4.8 -- Supplemental Indenture dated as of October 28, 1996,
among the Company, as issuer, Kelley Operating Company,
Ltd. and Kelley Oil Corporation, as guarantors, and The
Chase Manhattan Bank (formerly Chemical Bank), as
trustee, relating to the Company's 13 1/2% Senior Notes
due 1999 (incorporated by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q (File No.
0-25214) for the quarterly period ended September 20,
1996).
4.9 -- Indenture dated as of October 15, 1996, among the
Company, as issuer, Kelley Oil Corporation and Kelley
Operating Company, Ltd., as guarantors, and United States
Trust Company of New York, relating to the Company's
10 3/8% Senior Subordinated Notes due 2006 (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.10 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series B (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-4
(Reg. No. 333-18481) filed December 20, 1996, as
amended).
4.11 -- Indenture dated as of May 29, 1998, among the Company, as
issuer, Kelley Oil Corporation and Kelley Operating
Company, Ltd., as guarantors, and United States Trust
Company of New York, relating to the Company's 10 3/8%
Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-61681) filed August
17, 1998).
4.12 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series D (incorporated by reference to Exhibit
4.8 to the Company's Registration Statement on Form S-4
(Reg. No. 333-61681) filed August 17, 1998).
4.13+ -- Indenture dated as of April 15, 1999, among Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd.
and Concorde Gas Marketing, Inc., as guarantors, and
Norwest Bank Minnesota, National Association, relating to
the Company's 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount.
4.14 -- Form of the Company's 14% Senior Secured Notes Due 2003,
maturing at 105% of the stated principal amount (included
as Exhibit B to Exhibit 4.13).
4.15+ -- Registration Rights Agreement dated as of April 16, 1999,
by and among the Company, Kelley Oil Corporation, Kelley
Operating Company, Ltd., Concorde Gas Marketing, Inc. and
Jefferies & Company, Inc.
5.1+ -- Opinion of Fulbright & Jaworski L.L.P.
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.1 -- Amended and Restated Employee Stock Ownership Plan of
Kelley Oil Corporation effective as of January 1, 1989
(incorporated by reference to Exhibit 10.15 to Kelley Oil
Corporation'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 Corporation (incorporated by reference to
Kelley Oil Corporation'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 Corporation (incorporated by reference to
Exhibit 10.3 to Kelley Oil Corporation'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 Company (the
"1995 Plan") (incorporated by reference to Exhibit 10.4
to the Company'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
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.4 to the
Company'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 Company and John F. Bookout, Jr.
(incorporated by reference to Exhibit 10.2 to the
Company'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 Company and each of Dallas Laumbach and
William Albrecht (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
10.9 -- Employment Agreement dated as of October 1, 1998 with
Rick G. Lester (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1998).
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
Company's Current Report on Form 8-K (File No. 0-25214)
dated December 1, 1997).
10.11 -- 1996 Incentive Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1996).
10.12 -- 1997 Annual and Long-Term Incentive-Performance Plan of
the Company (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1997).
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K
(File No. 0-25214) for the year ended December 31, 1996).
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 (contained on pages II-6 through II-9
of this registration statement).
25.1+ -- Statement of Eligibility Under Trust Indenture Act of
1939 of a Corporation Designated to Act as Trustee on
Form T-1.
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
99.1* -- Letter of Transmittal, Notice of Guaranteed Delivery, and
Substitute W-9 Instructions.
</TABLE>
- ---------------
+ Filed herewith.
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.8
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KELLEY OIL & GAS CORPORATION
Kelley Oil & Gas Corporation (the "Corporation"), a corporation duly
organized and existing under the General Corporation Law of the State of
Delaware (the"GCLD"), does hereby certify that:
I. The amendment to the Corporation's Certificate of
Incorporation set forth below was duly adopted in accordance with the
provisions of Section 242 of the GCLD and has been consented to in writing by
the stockholders of the Corporation, and written notice has been given to
stockholders who have not consented in writing, in accordance with Section 228
of the GCLD.
II. The Certificate of Incorporation of the Corporation is hereby
amended as follows:
A. Article 1 is hereby amended in its entirety to read
as follows:
"1. Name. The name of the corporation is Contour Energy Co. (the
"Corporation")."
B. The first paragraph of Article 4 is hereby amended in
its entirety to read as follows:
"4. Number an Designation of Shares. The total number of shares
of capital stock that the Corporation shall have authority to issue is
22,000,000 shares, which shall be divided into two classes as follows:
20,000,000 shares of Common Stock, $.10 par value ("Common Stock"),
and 2,000,000 shares of Preferred Stock, $1.50 par value ("Preferred
Stock"). The powers, designations, preferences, rights and
qualifications, limitations or restrictions on the Common Stock and
the Preferred Stock are set forth below."
C. A new paragraph "(d)" shall be added to the end of
Article 4, which shall read in its entirety as
follows:
"(d) Effective as of the close of business on July 30,
1999 (the "Effective Time"), each ten shares of Common Stock issued
and outstanding immediately prior to the Effective Time shall
automatically be changed and converted, without any action on the part
of the holder thereof, into one share of Common Stock, and, in lieu of
interests in a fraction of a share of Common Stock, each holder whose
aggregate holdings of Common Stock immediately prior to the Effective
Time amounted to a number of shares not evenly divisible by ten shall
be entitled to receive for each such one-tenth fractional interest of
a share of Common Stock, and at the Effective Time each such one-tenth
fractional interest of a share of Common Stock shall automatically be
changed and converted, without any action on the
<PAGE> 2
part of the holder thereof, into the right to receive, upon surrender
of the stock certificate or certificates formerly representing shares
of Common Stock, an amount in cash equal to $ * for each such
one-tenth fractional interest of a share of Common Stock.
, where the figure identified by the asterisk ("*") shall be the closing price
per share of the Common Stock on July 30, 1999, as reported by The Nasdaq Stock
Market.
III. Pursuant to Section 103(d) of the GCLD, this Amendment shall
become effective as of the Effective Time.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by its authorized officer, on this 12th day of July, 1999.
KELLEY OIL & GAS CORPORATION
by /s/ John F. Bookout
--------------------------------------
name John F. Bookout
------------------------------------
title President
-----------------------------------
<PAGE> 1
EXHIBIT 4.13
================================================================================
KELLEY OIL & GAS CORPORATION,
AS ISSUER,
THE SUBSIDIARY GUARANTORS PARTY HERETO
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
AS TRUSTEE
------------------------
INDENTURE
------------------------
DATED AS OF APRIL 15, 1999
$135,000,000
14% SENIOR SECURED NOTES DUE 2003 AND
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT
================================================================================
<PAGE> 2
This INDENTURE dated as of April 15, 1999, is among Kelley Oil & Gas
Corporation, a Delaware corporation (the "Company"), Kelley Oil Corporation, a
Delaware corporation ("Kelley Oil"), Kelley Operating Company, Ltd., a Texas
limited partnership ("Kelley Operating"), Concorde Gas Marketing, Inc., a
Delaware corporation ("Concorde"), and Norwest Bank Minnesota, National
Association, as Trustee (the "Trustee").
The Company has duly authorized the creation of the 14% Senior Secured
Notes due 2003 and Maturing at 105% of the Stated Principal Amount, Series A
(the "Initial Securities") and, if and when issued pursuant to a registered
exchange for the Initial Securities, the Company's 14% Senior Secured Notes due
2003 and Maturing at 105% of the Stated Principal Amount, Series B (the
"Exchange Securities", together with the Initial Securities, the "Securities")
and, to provide therefor, the Company has duly authorized the execution and
delivery of this Indenture:
ARTICLE 1
Definitions and Incorporation by Reference
Section 1.01. Definitions.
"Acquired Indebtedness" means Indebtedness of the Company or any of its
Restricted Subsidiaries of the types described under clauses (b)(5), (b)(7),
(b)(11) and (b)(12) of Section 4.03.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) used or useful 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 Net Tangible Assets" 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, 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
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<PAGE> 3
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 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 preceding. 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 Partners & Co. ("Bessemer"), Bessemer Holdings, L.P.
("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 preceding, 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)
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, (3) the abandonment, farm-out, lease
or sublease of developed or undeveloped oil and gas properties in the ordinary
course of business, (4) the trade or exchange by the Company or any Restricted
Subsidiary of any oil and gas property
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<PAGE> 4
owned or held by the Company or such Restricted Subsidiary for any oil and gas
property owned or held by another Person, provided that if any property so
traded or exchanged contains proved reserves, then the property received
therefor contains a reasonably equivalent value of proved reserves, (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
Investment in equity interests of a Person engaged in the Oil and Gas Business,
provided that if any property so traded or exchanged contains proved reserves,
then (A) the Company's or such Restricted Subsidiary's pro rata Investment in
such Person shall represent a reasonably equivalent value of proved reserves and
(B) such Person is or becomes by virtue of such Investment a Restricted
Subsidiary or a Permitted Joint Venture, or (6) the sale or transfer of
hydrocarbons or other mineral products or surplus or obsolete equipment all 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).
"Available Borrowing Base" means, as of any date, the Borrowing Base
minus the outstanding stated principal amount of the Securities as of such date.
"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.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means $135.0 million.
"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 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 and any
warrants or options granted to directors, officers or employees of the Company
in the ordinary course of business.
"Cash Balance Amount" means, as of any date, the amount equal to the
aggregate amount of cash and Temporary Cash Investments held by the Company and
its Restricted Subsidiaries as of the close of business on the immediately
preceding Business Day divided by 1.04, minus $5,000,000.
"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
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<PAGE> 5
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
Closing 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.
"Closing Date" means the date on which this Indenture is executed.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means, collectively, all of the property and assets
(including, without limitation, Trust Moneys) that are from time to time subject
to, or purported to be subject to, the Lien of this Indenture or any of the
Security Documents.
"Collateral Maintenance Tender Offer Amount" means, with respect to any
Asset Disposition other than the Designated Transaction, an amount equal to the
excess of (i) the outstanding principal balance of the Securities over (ii)
quotient obtained by dividing (a) the PV-10 Value of all of the Oil and Gas
Assets of the Company and its Restricted Subsidiaries immediately after giving
effect to such Asset Disposition by (b) 1.75.
"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.
"Concorde" means the party named as such in the preamble to this
Indenture until a successor replaces it and, thereafter, means the successor.
"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
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<PAGE> 6
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 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 or disposition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred or repaid 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
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<PAGE> 7
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 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 and (y) 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 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.
"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 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
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<PAGE> 8
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.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Indenture is located
at Sixth and Marquette, Minneapolis, Minnesota 55479-0069.
"Credit Agreement" means that certain Amended and Restated Credit
Agreement dated as of December 1, 1997 among the Company, Kelley Oil and Kelley
Operating, as borrowers, Concorde and certain other Persons, as guarantors, each
of the lenders that is a signatory thereto, and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National Association), as
agent, and any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended or
modified prior to the Issue Date.
"Credit Facilities" means, with respect to the Company or any
Restricted Subsidiary, one or more debt facilities (other than the Credit
Agreement) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, production payments,
receivables financings (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 Transaction" means the transaction(s) contemplated by that
certain Exploration and Development Agreement dated as of April 12, 1999 between
the Company and Phillips Petroleum Company, as the same may be amended, but in
any event providing for cash proceeds to the Company equal to at least $80.0
million minus any non-material, usual and customary price adjustments for
similar transactions in the Oil and Gas Business.
"Designated Transaction Tender Offer Amount" means, with respect to any
Designated Transaction, an amount equal to the sum of (i) $15,000,000 and (ii)
the product obtained by multiplying (a) 0.77
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times (b) the excess, if any, of the PV-10 Value of the Oil and Gas Assets
disposed of in such Designated Transaction over $60,000,000.
"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 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 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
preceding, 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.
"Escrow Agent" means Norwest Bank Minnesota, National Association, in
its capacity as escrow agent under the Escrow Agreement.
"Escrow Agreement" means that certain Escrow Agreement dated as of the
Closing Date among the Company, the Subsidiary Guarantors, the Trustee, the
Escrow Agent and Norwest Bank Minnesota, National Association, as securities
intermediary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect on the 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
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<PAGE> 10
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 other 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 other 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 "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, Capital Stock or Lien 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 obligation is assumed by such
first-
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<PAGE> 11
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" or "principal amount" of
Indebtedness at any time of determination as used herein represented by: (1) any
Capital Lease Obligation shall be the amount determined in accordance with the
definition thereof, (2) any Interest Rate Agreements included in the definition
of Permitted Indebtedness shall be zero, (3) all other unconditional obligations
shall be the amount of the liability thereof determined in accordance with GAAP,
and (4) all other contingent obligations shall be the maximum liability at such
date of such Person.
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 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.
"Initial Purchaser" means Jefferies & Company, Inc.
"interest" when used with respect to any Security means the amount of
all interest accruing on such Security, including any applicable defaulted
interest pursuant to Section 2.10 and any Liquidated Damages pursuant to the
Registration Rights Agreement.
"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
"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
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<PAGE> 12
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 on which the proceeds of the Securities are
released from escrow as contemplated by and pursuant to the Escrow Agreement.
"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).
"Liquidated Damages" has the meaning given such term in the
Registration Rights Agreement.
"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 Section 4.06.
"Maturity Date" means April 15, 2003.
"Minimum Reserve Amount" means, as of any date, an amount of Oil and
Gas Assets expressed as a volumetric equivalent equal to 180 Bcfe less the
aggregate of all revisions to reserves resulting from sales of reserves in place
as reflected in all Reserve Reports delivered pursuant to this Indenture.
"Mortgage" means mortgage, deed of trust, assignment of production,
security agreement, fixture filing and financing statement granted by the
Company or any Subsidiary Guarantor for the benefit of the Trustee and the
Holders and pursuant to which one or more Liens on Oil and Gas Assets or
interests therein are created, as the same may be amended, supplemented or
modified from time to time in accordance with the terms thereof and of this
Indenture.
"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
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<PAGE> 13
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 Closing 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.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under this Indenture and other documentation governing the Securities.
"Offering Memorandum" means the confidential Offering Memorandum dated
April 15, 1999 of the Issuer relating to the offering of the 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 of
the Company issuing such certificate.
"Oil and Gas Assets" means all proved oil and gas reserves and natural
gas processing facilities of the Company and/or any Restricted Subsidiary.
"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.
"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.
"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
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<PAGE> 14
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 Closing 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 Closing Date and (v)
officers or employees of the Company or any of its Subsidiaries as of the
Closing 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.
"Permitted Joint Venture" means any Person engaged in the Oil and Gas
Business in which the Company or a Restricted Subsidiary makes a Permitted
Business Investment and which cannot, by the terms of such Person's constituent
documents, Incur or Guarantee Indebtedness.
"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; (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 under clauses
(b)(7) and (b)(11) of Section 4.03; 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 365 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 Refinancing Indebtedness
which is incurred to Refinance any Indebtedness
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<PAGE> 15
which has been incurred in accordance with the provisions of this Indenture;
provided, that: (1) such Liens are expressly junior to the Liens securing the
Obligations and the Subsidiary Guarantees, (2) such Refinancing results in an
improvement on a pro forma basis in the Company's Consolidated Coverage Ratio,
and (3) the instruments creating such Liens expressly subject the foreclosure
rights of the holders of the Indebtedness being Refinanced to a stand-still of
not less than 179 days; (h) Liens existing on the Closing Date; (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
preceding clauses (f), (g), (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), (g), (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 payments and for compliance with the terms of such
leases; (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; (s) 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; and (t) Liens arising pursuant to this Indenture or any
Security Document or otherwise securing the Obligations and/or the Subsidiary
Guarantees. Notwithstanding the preceding, (1) "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
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; (2) "Permitted Liens" as
such term relates to encumbrances on property constituting Collateral shall not
include Liens of the type described in clauses (a), (d), (h), (l) and (n) (in so
far as it relates to clause (h)); and (3) Liens Incurred pursuant to clauses
(f), (i) and (j) shall not secure Indebtedness in a principal amount at any one
time outstanding in excess of the greater of (A) $5.0 million or (B) an amount
equal to 33.33% of the fair market value of the property acquired (which shall
be deemed to be the PV-10 Value of any Oil and Gas Assets) subject of such Lien
as of the date such Lien is created or assumed.
"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.
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<PAGE> 16
"Pledge Agreement" means that certain Pledge Agreement dated as of the
Issue Date, pursuant to which the Capital Stock of the Programs owned by the
Company and its Restricted Subsidiaries is pledged to the Trustee for the
benefit of the Holders, as the same may be amended, modified or supplemented
from time to time.
"Preferred Stock", as applied to the Capital Stock of any Person, 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 Person, over shares
of Capital Stock of any other class of such Person.
"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 general partnership, and each
of their respective successors.
"PV-10 Value" means with respect to any Oil and Gas Assets the
aggregate net present value of such Oil and Gas Assets calculated before income
taxes and discounted at 10 percent in accordance with SEC guidelines (including
using pricing provisions based upon the most recent year end), as reported in
the most recently prepared or audited report of the Company's independent
petroleum engineers.
"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 Closing
Date 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 another Subsidiary or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Closing Date but effective as of the Issue Date among the Issuer, the
Subsidiary Guarantors and the Initial Purchaser.
"Reserve Report" shall mean a reserve engineering report, setting
forth, as of the most recent January 1, April 1, July 1 and October 1, the oil
and gas reserves attributable to the Company's and its Restricted Subsidiaries'
Oil and Gas Assets included in the Collateral together with a projection of the
rate of production and future net income, severance and production taxes,
operating expenses and capital expenditures with respect thereto as of such
date, based upon the pricing assumptions consistent with SEC reporting
requirements at the time.
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"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, (iv) the purchase, repurchase, redemption, defeasance
or other acquisition or retirement for value of the Company's 7 7/8% Convertible
Subordinated Notes due 1999 and the Company's 8 1/2% Convertible Subordinated
Notes due 2000, or (v) 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.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities" means the Securities issued under this Indenture.
"Security Documents" means, collectively, the Mortgages, the Pledge
Agreement and all security agreements, mortgages, deeds of trust, collateral
assignments or other instruments evidencing or creating any security interests
in favor of the Trustee or any predecessor Trustee in all or any portion of the
Collateral, in each case as amended, supplemented or modified from time to time
in accordance with their terms and the terms of this Indenture.
"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 Obligations" means any Indebtedness or Preferred Stock of
the Company or any Subsidiary Guarantor (whether outstanding on the Closing Date
or thereafter Incurred) which is subordinate or junior in right of payment to
the Securities or any Subsidiary Guarantee, as the case may be, 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
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<PAGE> 18
such Person. Unless otherwise indicated, references to Subsidiaries in this
Indenture refers to Subsidiaries of the Company.
"Subsidiary Guarantor" means Kelley Oil, Kelley Operating, Concorde and
each other Restricted Subsidiary of the Company (other than the Programs) that
in the future executes a supplemental indenture in which such Restricted
Subsidiary agrees to be bound by the terms of this Indenture as a Subsidiary
Guarantor; provided, however, that any Person constituting a Subsidiary
Guarantor as described above shall cease to constitute a Subsidiary Guarantor
when its Subsidiary Guarantee is released in accordance with the terms of this
Indenture.
"Subsidiary Guarantee" means a Guarantee, pursuant to Article 11 of
this Indenture, by a Subsidiary Guarantor of the Company's obligations with
respect to the Securities.
"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 used in the Securities Act and
the Exchange Act and the rules promulgated thereunder) 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 Services, 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 or "A" by Moody's Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939, as amended (15 U.S.C.
Sections 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.
"Trustee" means the party named as such in the preamble to this
Indenture until a successor replaces it and, thereafter, means the successor.
"Trust Moneys" means all cash or Temporary Cash Investments received by
the Trustee:
(1) upon the release of Collateral from the Lien of this Indenture and
the Security Documents, including investment earnings thereon;
(2) pursuant to the provisions of any Mortgage;
(3) as proceeds of any Asset Disposition or other sale or other
disposition of all or any part of the Collateral by or on behalf of the
Trustee or any collection, recovery, receipt, appropriation or other
realization of or from all or any part of the Collateral pursuant to this
Indenture or any of the Security Documents or otherwise; or
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<PAGE> 19
(4) for application under this Indenture as provided for in this
Indenture or the Security Documents, or whose disposition is not elsewhere
specifically provided for in this Indenture or in the Security Documents;
provided, however, that Trust Moneys shall not include any property
deposited with the Trustee pursuant to any Change of Control offer, Excess
Proceeds Offer or redemption or defeasance of any Securities.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer within the Corporate Trust Office of the
Trustee (or any successor group of the Trustee) assigned by the Trustee or any
successor Trustee to administer this Indenture and the Security Documents.
"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 is a Subsidiary Guarantor ,
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 the Subsidiary to be so designated has total
assets of $1,000 or less. 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 preceding
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 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
"covenant defeasance option"................................... 8.01(b)
"Collateral Account" .......................................... 10.08
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C>
"Custodian" .................................................... 6.01
"Event of Default".............................................. 6.01
"Excess Proceeds"............................................... 4.06(a)
"Excess Proceeds Offer"......................................... 4.06(a)
"Excess Proceeds Payment"....................................... 4.06(a)
"Excess Proceeds Payment Date".................................. 4.06(a)
"Guaranteed Obligations"........................................ 11.01
"legal defeasance option"....................................... 8.01(b)
"Legal Holiday"................................................. 12.08
"Paying Agent".................................................. 2.03
"Registrar"..................................................... 2.03
"Released Interests"............................................ 10.04(b)
"Reserve Deficiency Event" ..................................... 4.19(b)
"Reserve Deficiency Offer" ..................................... 4.19(b)
"Reserve Deficiency Redemption Offer" .......................... 4.19(c)
"Reserve Deficiency Payment Date" .............................. 4.19(c)
"Successor Company"............................................. 5.01
"Valuation Date"................................................ 10.04(b)
</TABLE>
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.
"indenture securities" means the Securities and, to the extent
Subsidiary Guarantees are given, such Subsidiary Guarantees.
"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;
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<PAGE> 21
(6) 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;
(7) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater; and
(8) 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. Form and Dating. Provisions relating to the Initial
Securities and the Exchange Securities are set forth in Appendix A, which is
hereby incorporated in and expressly made part of this Indenture. The Initial
Securities and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit 1 to Appendix A which is hereby
incorporated in and expressly made a part of this Indenture. The Exchange
Securities and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit 2 to Appendix A 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 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 terms of the
Securities set forth in Exhibit 1 and Exhibit 2 to Appendix A are part of the
terms of this Indenture.
Section 2.02. Execution and Authentication. Two Officers shall sign the
Securities for the Company by manual or facsimile signature. The Company's seal
shall be impressed, affixed, imprinted or reproduced on the Securities and may
be in facsimile form.
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 may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Securities. 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 and has the same protections under Article 7 hereof.
Section 2.03. Registrar and Paying Agent. The Company shall maintain an
office or agency where (a) Securities may be presented for registration of
transfer or for exchange (the "Registrar") which shall be the Corporate Trust
Office and (b) an office or agency where Securities may be presented for payment
(the "Paying Agent") which shall initially be the Norwest Corporate Trust c/o
The Depository Trust Company, First Floor, TADS Department, 55 Water Street, New
York, New York 10041. 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; provided that any such co-registrar or
Paying Agent shall deliver a certificate to the Trustee certifying that it
agrees to perform its duties in accordance with the procedures established by
the Trustee and with the terms of this Indenture. The term "Paying Agent"
includes any additional paying agent.
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The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar 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 in writing 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 incorporated Wholly Owned Subsidiaries
may act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Securities.
Section 2.04. 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 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 held by the Paying Agent for
the payment of principal of or interest on the Securities and shall notify the
Trustee in writing of any default by the Company in making any such payment. If
the Company or a Subsidiary 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 2.05. 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 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 2.06. 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, upon receipt of a written order of the Company signed by
two Officers, authenticate and deliver a replacement Security if the
requirements of Section 8-405 of the Uniform Commercial Code are met and the
Holder 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 Company and the Trustee to protect the
Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from
any loss which 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.
Every replacement Security is an additional obligation of the Company.
Section 2.07. 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 cancellation 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 2.06, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a bona fide 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.
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Section 2.08. Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall authenticate
and deliver 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, upon receipt of a written order of
the Company signed by two Officers, authenticate definitive Securities and
deliver them in exchange for temporary Securities.
Section 2.09. Cancellation. The Company at any time may deliver
Securities to the Trustee for cancellation. 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 and
destroy (subject to the record retention requirements of the Exchange Act) all
Securities surrendered for registration of transfer, exchange, payment or
cancellation and deliver a certificate of such destruction to the Company. The
Company may not issue new Securities to replace Securities it has redeemed, paid
or delivered to the Trustee for cancellation.
Section 2.10. Defaulted Interest. If the Company defaults in a payment
of interest on the Securities, the Company shall pay defaulted interest (plus
interest on such defaulted interest to the extent lawful) at the rate specified
therefor in the Securities. 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 mail promptly to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
Section 2.11. 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. The Company shall
promptly notify the Trustee in writing of any change in the CUSIP number(s).
Section 2.12. Liquidated Damages Under Registration Rights Agreement.
Under certain circumstances, the Company shall be obligated to pay certain
liquidated damages to the Holders, all as set forth in Section 4 of the
Registration Rights Agreement. The terms thereof are hereby incorporated by
reference.
Section 2.13. Refinancing of Credit Agreement; Status of Securities as
Senior and Designated Senior Indebtedness.
(a) The proceeds of the Securities escrowed under the Escrow Agreement
will be used to replace and refinance the Indebtedness outstanding under the
Credit Agreement; and upon release, this Indenture, the Subsidiary Guarantees
and the Securities shall represent a modification, refunding, replacement and
refinancing of the Indebtedness outstanding under the Credit Agreement. This
Indenture is and shall be a credit agreement and term loan credit facility.
(b) The Securities issued hereunder and the Subsidiary Guarantees are
hereby designated by the Company and each Subsidiary Guarantor as (i) "Senior
Indebtedness" and "Designated Senior Indebtedness" under the Indentures dated as
of October 15, 1996 and May 29, 1998 among the Company, as issuer, Kelley Oil
and Kelley Operating, as subsidiary guarantors, and United States Trust Company
of New York, as Trustee, pursuant to which the Company's 10-3/8% Senior
Subordinated Notes due 2006 have been issued as the same has been amended,
supplemented or modified, and (ii) as "Senior Indebtedness", "Designated Senior
Indebtedness", " Guarantor Senior Indebtedness" and "Designated Guarantor Senior
Indebtedness" or any other like or similar categories of senior indebtedness
under any other indenture or instrument pursuant to which any Subordinated
Obligations of the Company or any Subsidiary Guarantor is issued. Further, this
Indenture is a "Credit Facility" within the meaning of the indentures noted in
clause (i).
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<PAGE> 24
(c) The Securities issued hereunder and the Subsidiary Guarantees are
hereby designated by the Company and each Subsidiary Guarantor as "Senior
Indebtedness" under the Indenture dated as of December 15, 1992 among the
Company (as successor to Kelley Oil & Gas Partners, Ltd.), as issuer, and United
States Trust Company of New York, as Trustee, pursuant to which the Company's 7
7/8% Convertible Subordinated Notes due 1999 have been issued as the same has
been amended, supplemented or modified.
(d) The Securities issued hereunder and the Subsidiary Guarantees are
hereby designated by the Company and each Subsidiary Guarantor as "Senior
Indebtedness" under the Indenture dated as of April 1, 1990 among the Company
(as successor to Kelley Oil & Gas Partners, Ltd.), as issuer, and United States
Trust Company of New York, as Trustee, pursuant to which the Company's 8 1/2%
Convertible Subordinated Notes due 2000 have been issued as the same has been
amended, supplemented or modified.
(e) To the extent required pursuant to the indentures described in
Section 2.13(b), (c) or (d), the Company will give the relevant trustee notice
of the classification of the Securities under such indentures.
ARTICLE 3
Redemption
Section 3.01. Notices to Trustee. If the Company elects, or is
obligated, 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.
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 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;
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(5) if fewer than all the outstanding Securities are to be redeemed,
the identification and principal amounts of the particular Securities to be
redeemed;
(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.
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.
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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.
(b) Notwithstanding the preceding 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 exceed the then Available
Borrowing Base;
(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 Guarantees;
(4) Indebtedness outstanding on the Closing Date (other than
Indebtedness described in Section 4.03(b)(1), (2) or (3));
(5) Indebtedness 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 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)
above or Section 4.03(b)(7) or (12) below; 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 its 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 consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and its
Restricted Subsidiaries pursuant to this Indenture;
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<PAGE> 27
(9) 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;
(10) 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)(10) and then
outstanding, does not exceed $15.0 million;
(11) 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)(11) and
then outstanding, does not exceed $10.0 million;
(12) 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 of 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
(13) 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 Section 4.03(b)(1) through (12) 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 preceding, the Company shall not Incur any
Indebtedness pursuant to the preceding 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 any of its
Subordinated Obligations outstanding on the Closing Date.
(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.
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.
(b) The provisions of Section 4.04(a) shall not prohibit: (i) any
purchase, repurchase, defeasance or other acquisition or retirement for value 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); (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 which the Company is permitted to Incur pursuant to Section 4.03,
provided that such Indebtedness is
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effectively junior to the Securities, matures no earlier than 180 days following
the Stated Maturity of the Securities and does not result in an overall increase
in the amount the Company's and its Restricted Subsidiaries' total Indebtedness;
(iii) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations; provided that the Company may
not use the proceeds from the sale of the Securities, any Excess Proceeds or the
cash flows from operations accumulated after the Issue Date to purchase,
repurchase, redeem, defease, acquire or retire for value any of the Subordinated
Obligations under this clause (iii) if the aggregate amount so purchased,
repurchased, redeemed, defeased, acquired or retired using any or all of the
proceeds from the sale of the Securities, any Excess Proceeds or the cash flows
from operations accumulated after the Issue Date would exceed the greater of (1)
$36.0 million and (2) the excess of the PV-10 Value of the Company's and its
Restricted Subsidiaries' Oil and Gas Assets, using 1998 year-end pricing
assumptions, over two times the aggregate stated principal amount of the
Securities then outstanding; (iv) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value of Subordinated
Obligations made with any Excess Proceeds remaining after an Excess Proceeds
Offer in which the Company purchased all Securities duly tendered thereunder;
provided that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value occurs no sooner than 360 days after the
last Asset Disposition giving rise to an obligation to offer to purchase such
Subordinated Obligations; or (v) further Restricted Payments in an aggregate
amount not to exceed $5.0 million.
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 (c) to transfer any of its property or assets to the Company or a
Restricted Subsidiary or (d) grant to the Trustee a Lien on any of its Property,
except: (i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Closing 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 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; (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; and (vii) in the case of clause (d) above,
restrictions contained in instruments related to or creating Permitted Liens
under clauses (f), (i), (j) and (n) of the definition of "Permitted Liens",
provided such restrictions relate only to the property subject to such Permitted
Liens.
Section 4.06. Limitation on Sales of Assets and Subsidiary Stock. (a)
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, consummate an Asset Disposition unless (1) the Company or the
applicable Restricted Subsidiary, as the case may be, receives consideration at
the time of such Asset Disposition at least equal to the fair market value of
the assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors or senior management of the Company), and (2)(A) at
least 75% of the consideration received by the Company or such Restricted
Subsidiary, as the case may be, from such Asset Disposition shall be in the form
of cash or Temporary Cash Investments and is received at the time of such
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disposition and (B) at least 15% of such consideration received if in a form
other than cash or Temporary Cash Investments is converted into or exchanged for
cash or Temporary Cash Investments within 90 days of such disposition.
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 Closing Date in any period of 12 consecutive months
exceeds $5.0 million, then the Company shall (i) within 180 days after the date
such Net Available Cash so received exceeds such $5.0 million invest an amount
equal to such excess in Additional Assets or in one or more Permitted Joint
Ventures or Permitted Business Investments or (ii) apply an amount equal to such
excess (to the extent not applied pursuant to clause (i)) 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 (or designated by the Company as not to be so applied) as so required by
the end of such period shall constitute "Excess Proceeds."
Notwithstanding the foregoing paragraph, if the Company consummates the
Designated Transaction, then the Company (i) shall, on a date which is not less
than 15 nor more than 30 days after the date on which the Designated Transaction
is consummated, offer to purchase from all Holders an amount not less than
$35,000,000 (expressed as an integral multiple of $1,000) of the Securities at a
purchase price equal to 104% of the stated principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase (subject to the right of
Holders on the relevant record date to receive interest on the relevant interest
payment date) and purchase any Securities tendered in response to such offer (up
to an amount equal to $35,000,000), and (ii) may use the Net Available Cash
received from the Designated Transaction less an amount equal to the amount
required to repurchase Securities tendered in response to the offer made under
the immediately preceding clause (i) in a manner contemplated by clause (b)(iii)
of Section 4.04. Any remaining Net Available Cash received from the Designated
Transaction and not used pursuant to the immediately preceding clauses (i) and
(ii) shall be applied in accordance with the immediately preceding paragraph of
this Section 4.06.
Notwithstanding the foregoing two paragraphs, if the Company
consummates any Asset Disposition other than the Designated Transaction, then
the Company (i) shall, on a date which is not less than 15 nor more than 30 days
after the date on which such Asset Disposition is consummated, offer to purchase
from all Holders an amount not less than the Collateral Maintenance Tender Offer
Amount (expressed as an integral multiple of $1,000) of the Securities at a
purchase price equal to 105% of the stated principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase (subject to the right of
Holders on the relevant record date to receive interest on the relevant interest
payment date) and purchase any Securities tendered in response to such offer (up
to an amount equal to the Collateral Maintenance Tender Offer Amount); and (ii)
may use the Net Available Cash received from such Asset Disposition less an
amount equal to the amount required to repurchase Securities tendered in
response to the offer made under the immediately preceding clause (i) in a
manner contemplated by clause (b)(iii) of Section 4.04. Any remaining Net
Available Cash received from such Asset Disposition and not used pursuant to the
immediately preceding clauses (i) and (ii) shall be applied in accordance with
the immediately second preceding paragraph of this Section 4.06.
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 $5.0 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 stated 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 105% of the
stated principal amount of such Securities, plus, in each case, accrued interest
(if any) to the date of purchase (the "Excess Proceeds Payment").
The Company shall commence any Excess Proceeds Offer with respect to
the Securities by mailing a written 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
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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 stated 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 stated 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
stated principal amount of $1,000 or integral multiples thereof.
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 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 stated 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
stated 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.
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.
(b) In the event of the transfer of substantially all (but not all) of
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 this Section 4.06, and shall comply with the
provisions of this Section 4.06 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.
(c) All Net Available Cash shall constitute Trust Moneys and shall be
delivered by the Company to the Trustee and shall be deposited in the Collateral
Account in accordance with this Indenture. Net Available Cash so deposited may
be withdrawn from the Collateral Account for application by the Company in
accordance with this Section 4.06 or otherwise pursuant to this Indenture.
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, are set
forth in writing and has been approved by a majority of the members of the Board
of
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Directors having no personal stake in such Affiliate Transaction or (3) if such
Affiliate Transaction involves an amount in excess of $10.0 million, have 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,
entered into 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 Section 4.04, and (vi) the transactions
described in the Offering Memorandum under the caption "Certain Transactions"
and loans or advances to employees of the Company or any Subsidiary 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 stated
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders 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).
(b) Within 30 days following any Change of Control, the Company shall
mail a written 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 stated 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 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 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 stated 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
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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, 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; provided that in the case of
clauses (ii) and (iii), the Company complies with the provisions of Section
4.06. If the Company or a Restricted Subsidiary shall dispose of all of the
Capital Stock of any Subsidiary Guarantor, such Subsidiary Guarantor shall be
released from the obligations under its Subsidiary Guarantee.
Section 4.10. Limitation on Liens. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly
create, incur, assume or permit to suffer to exist or remain in effect any Liens
other than Permitted Liens.
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 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 Subsidiary Guarantors. From and after the Issue
Date, the Company shall cause each of its Subsidiaries which is or becomes a
Restricted Subsidiary (other than the Programs) to (a) execute and deliver to
the Trustee a supplemental indenture in substantially the form of Appendix B,
pursuant to which such Restricted Subsidiary shall unconditionally guarantee all
of the Company's obligations under the Securities and this Indenture on the
terms set forth in this Indenture, (b) grant to the Trustee a Lien on
substantially all its Oil and Gas Assets, and (c) deliver to the Trustee an
Opinion of Counsel and an Officers' Certificate, stating that no Event of
Default shall occur as a result of such supplemental indenture, that it complies
with the terms of this Indenture and that such supplemental indenture has been
duly authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Subsidiary Guarantor for all purposes of this Indenture.
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 Section 314(a)(4).
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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.
Section 4.15. Limitation on Impairment of Lien. Neither the Company nor
any of its Subsidiaries will take or omit to take any action which action or
omission would have the result of adversely affecting or impairing the Lien in
favor of the Trustee or any predecessor, on behalf of itself and the Holders or
the priority thereof, with respect to the Collateral, and neither the Company
nor any of its Subsidiaries shall grant to any Person, or suffer any Person
(other than the Company and its Restricted Subsidiaries) to have (other than to
the Trustee on behalf of the Trustee and the Holders) any interest whatsoever in
the Collateral other than Permitted Liens. Neither the Company nor any of its
Subsidiaries will enter into any agreement or instrument that by its terms
requires the proceeds received from any sale of Collateral to be applied to
repay, redeem, defease or otherwise acquire or retire any Indebtedness, other
than pursuant to the Indenture and the Security Documents.
Section 4.16. Limitation on Conduct of Business. The Company will not,
and will not permit any of its Restricted Subsidiaries to, engage in the conduct
of any business other than the Oil and Gas Business.
Section 4.17. Limitation on Capital Expenditures. During the period of
eight fiscal quarters, commencing with the fiscal quarter during which the Issue
Date occurs, the Company will not, and will not permit any of its Restricted
Subsidiaries to, make any expenditures for fixed or capital assets if, after
giving effect thereto, the aggregate of all such expenditures during any such
fiscal quarter would exceed $5.0 million plus the excess of EBITDA for the such
fiscal quarter over $12.5 million; provided that this Section 4.17 will not
limit expenditures for fixed or capital assets to the extent such expenditures
are made with the Net Cash Proceeds of any sale or issuance of Capital Stock
(other than Disqualified Capital Stock) of the Company (other than sales or
issuances to any of its Subsidiaries). Notwithstanding the foregoing, (i) if any
amount which the Company would have been permitted to spend during a given
fiscal quarter on fixed or capital assets under this Section 4.17 is not spent
during such fiscal quarter, the Company may spend such amounts during the next
succeeding fiscal quarter, and (ii) if the Company spends an amount in a given
fiscal quarter on fixed or capital assets which exceeds 120% of the maximum
amount permitted under this Section 4.17 for such fiscal quarter, such action
shall not be considered a breach of this Section 4.17 if the aggregate amount
spent on fixed and capital assets during such fiscal quarter and the next
succeeding fiscal quarter does not exceed the sum of the maximum permitted
expenditures for both such fiscal quarters.
Section 4.18. Lien on Additional Collateral. (a) If, after the Issue
Date, the Company or any of its Restricted Subsidiaries shall (i) acquire any
Oil and Gas Assets or other assets as non-cash consideration for any Asset
Disposition or (ii) engage in successful drilling and exploration activities
resulting in the creation of material new proved oil and gas reserves, then the
Company shall, and shall cause each of its Restricted Subsidiaries to, execute
and file in the appropriate filing offices additional Security Documents
granting to the Trustee for the benefit of the Holders a first Lien, subject
only to Permitted Liens (or in the case of property securing Acquired
Indebtedness, to the extent not prohibited by the terms of the instruments
creating such Acquired Indebtedness, a junior Lien), as is necessary or
appropriate to ensure that the Lien of this Indenture and the Security Documents
covers substantially all of the PV-10 Value of such new assets.
(b) Without limitation of clause (a), on the date any Oil and Gas
Assets or interests in a Permitted Joint Venture shall be acquired in exchange
for or replacement of any Collateral, the Company shall, and shall cause each of
its Restricted Subsidiaries to, execute and file in the appropriate filing
offices additional Security Documents granting to the Trustee, for the benefit
of the Holders, a first Lien, subject only to Permitted Liens (or in the case of
property securing Acquired Indebtedness, to the extent not prohibited by the
terms of the instruments creating such Acquired Indebtedness, a junior Lien), on
such portion of such assets as is necessary to ensure that the Lien of this
Indenture and the Security Documents covers substantially all of the PV-10 Value
of such assets received in exchange or trade or on such interests in such
Permitted Joint Venture.
(c) In connection with any Security Documents executed and filed under
clause (a) or (b), the Company shall also comply with the terms of the TIA to
the extent applicable.
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(d) On March 15th in each year, beginning with March 15, 2000, the
Company shall review its and its Restricted Subsidiaries' Oil and Gas Assets as
of the preceding January 1st to ascertain whether substantially all of the PV-10
Value of its and its Restricted Subsidiaries' Oil and Gas Assets as of such
January 1st are then subject to the Lien of this Indenture and the Security
Documents, provided that to the extent Oil and Gas Assets secure Acquired
Indebtedness, the discounted future net revenues attributable to such Oil and
Gas Assets may be excluded from this calculation to the extent the instruments
securing such Acquired Indebtedness prohibit the Incurrence of a Lien on such
assets. If substantially all of the PV-10 Value of such assets are not then
subject to the Lien of this Indenture and the Security Documents, then the
Company shall, and shall cause its Restricted Subsidiaries, to execute and file
in the appropriate filing offices additional Security Documents granting to the
Trustee for the benefit of the Holders a first Lien, subject only to Permitted
Liens (or in the case of property securing Acquired Indebtedness, to the extent
not prohibited by the terms of instruments creating such Acquired Indebtedness,
a junior Lien), as is necessary or appropriate to encumber substantially all
such assets.
Section 4.19. Quarterly Reserve Engineering Reports; Reserve Deficiency
Event. (a) Not later than the first day of each March, June, September and
December of each year commencing June 1, 1999, the Company shall furnish to the
Trustee and shall make available to any Holder upon request a Reserve Report
dated as of the January 1, April 1, July 1 or October 1 immediately preceding
such date. Each such Reserve Report of each year shall be prepared (i) by
certified independent petroleum engineers or consultants or (ii) under the
supervision of the chief engineer of the Company and audited by such certified
independent petroleum engineers or consultant(s) of national standing in
accordance with the Company's reserve engineering practices as of the Issue
Date.
(b) If as of the date any Reserve Report under Section 4.19 is
delivered, the Company reports that the volumetric equivalent of its and its
Restricted Subsidiaries' Oil and Gas Assets is less than the Minimum Reserve
Amount (a "Reserve Deficiency Event"), then the Company shall, not later than
the fifth Business Day following such event, make an offer (a "Reserve
Deficiency Offer") to purchase from the Holders on a pro rata basis an aggregate
stated principal amount of Securities equal to the Cash Balance Amount (rounded
down to the nearest multiple of $1,000) on the date of such Reserve Deficiency
Offer, at a purchase price equal to 104% of the stated principal amount of such
Securities, plus, in each case, accrued interest (if any) to the date of
purchase.
(c) If (i) within the 90 day period following such Reserve Deficiency
Event, the Company has not entered into one or more definitive agreements for
one or more Asset Dispositions such that, after giving effect to any such Asset
Disposition(s) and the assumed redemption of the Securities following an Excess
Proceeds Offer under Section 4.06, the PV-10 Value of the Oil and Gas Assets of
the Company and its Restricted Subsidiaries is greater than or equal to 1.75
times the aggregate stated principal amount of the Securities then outstanding
or (ii) within such period such ratio is not otherwise met without the need for
any such Asset Disposition, then the Company shall be obligated on the 91st day
following such Reserve Deficiency Event to offer to redeem (a "Reserve
Deficiency Redemption Offer") all of the Securities then outstanding at a
purchase price equal to 104% of the stated principal amount of such Securities,
plus, in each case, accrued interest (if any) to the date of purchase.
(d) The Company shall commence any Reserve Deficiency Offer or Reserve
Deficiency Redemption Offer with respect to the Securities by mailing a notice
to the Trustee and each Holder stating: (i) that such offer is being made
pursuant to this Section 4.19 and that, in the case of a Reserve Deficiency
Offer, all Securities validly tendered will be accepted for payment on a pro
rata basis; (ii) 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 "Reserve Deficiency Payment Date"); (iii) that any
Security not tendered will continue to accrue interest pursuant to its terms;
(iv) that, unless the Company defaults in the payment of the Reserve Deficiency
Payment, any Security accepted for payment pursuant to the Reserve Deficiency
Offer shall cease to accrue interest on and after the Reserve Deficiency Payment
Date; (v) that Holders electing to have a Security purchased pursuant to such
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
Reserve Deficiency Payment Date; (vi) 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 Reserve Deficiency
Payment Date, a telegram,
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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.
On the Reserve Deficiency Payment Date, the Company shall (A) accept
for payment on a pro rata basis Securities or portions thereof tendered pursuant
to the Reserve Deficiency Offer or Reserve Deficiency Redemption Offer, (B)
deposit with the Paying Agent 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 Reserve
Deficiency Offer or the Reserve Deficiency Redemption Offer as soon as
practicable after the Reserve Deficiency Payment Date. For purposes of this
Section 4.19, the Trustee shall act as the Paying Agent.
The Company will comply, to the extent applicable, with the
requirements of this Section 4.19, of the Exchange Act and any other securities
laws or regulations thereunder in the event that a Reserve Deficiency Event
occurs under this Section 4.19 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
4.19, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under
Section 4.19 by virtue thereof.
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;
(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;
(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)(5);
(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
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(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
supplemental indenture, in a form acceptable to the Trustee, all the obligations
of such Subsidiary Guarantor, if any, under its Subsidiary Guarantee; (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 Subsidiary Guarantee 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 this
Indenture and its Subsidiary Guarantee.
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, and such default continues for a
period of 20 days;
(2) the Company (i) defaults in the payment of the principal of any
Security when the same becomes due and payable, upon optional redemption,
upon required repurchase, upon declaration or otherwise or (ii) fails to
redeem or purchase Securities when required pursuant to this Indenture or
the Securities;
(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, 4.12, 4.15, 4.16, 4.17,
4.18 or 4.19 (other than a failure to purchase Securities when required
under Section 4.19) and such failure continues for 20 days after the notice
specified below;
(5) the Company or any Subsidiary Guarantor fails to comply with any of
its agreements contained in the Securities, this Indenture or any Security
Document (other than those referred to in (1), (2), (3) or (4) above) and
such failure continues for 60 days after the notice specified below;
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(6) principal of, or interest on, any Indebtedness of the Company or
any Significant Subsidiary (other than Limited Recourse Indebtedness) in
excess of $10.0 million or its foreign currency equivalent at the time is
not paid when due, after giving effect to any applicable grace period, or
any default shall occur and be continuing under any Indebtedness of the
Company or any Significant Subsidiary (other than Limited Recourse
Indebtedness) in excess of $10.0 million or its foreign currency equivalent
at the time and the maturity thereof is accelerated by the holders thereof;
(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;
(10) any Subsidiary Guarantee or any Security Document ceases to be in
full force and effect (other than in accordance with the terms of such
Subsidiary Guarantee or Security Document) or the Company or a Subsidiary
Guarantor denies or disaffirms its obligations under any Security Document
to which it is a party or its Subsidiary Guarantee, as applicable, if such
default continues for a period of 10 days after the notice specified below;
or
(11) the Company shall ultimately realize Net Available Cash from the
Designated Transaction of less than $80.0 million minus any non-material,
usual and customary price adjustments for transactions similar to the
Designated Transaction in the Oil and Gas Business.
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.
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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 (11) is not an Event of Default
until the Trustee or the Holders of at least 25% in stated 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. 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) or (11) 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 stated 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 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 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 security and
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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, the Securities, any Subsidiary Guarantee
or Security Document 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 stated 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 and
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 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, fees, expenses, disbursements and advances of the
Trustee, its agents and its counsel, and any other amounts due the Trustee under
Section 7.07. To the extent the payment of any such compensation, fees,
expenses, disbursements, and advances of the Trustee, its agent and counsel, and
any other amounts due the Trustee under or in connection with this Indenture out
of the estate in any such proceeding, shall be denied for any reason, payment of
the same shall be secured by a first Lien on, and shall be paid out of, any and
all distributions, dividends, money, securities and other properties that the
Holders may be entitled to receive in such proceeding whether in liquidation or
under any plan of reorganization or arrangement or otherwise, and such Lien in
favor of a predecessor Trustee shall be senior to the Lien in favor of the
current Trustee.
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, including any predecessor Trustee, for amounts
due under Section 7.07;
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SECOND: 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
THIRD: 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 written
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 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 stated 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 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;
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(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 security and 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.
(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, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and if the
Trustee shall determine to make such further inquiry or investigation, it shall
be entitled to examine the books, records and premises of the Company,
personally or by agent or attorney.
(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 the rights or
powers conferred upon it by this Indenture; 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.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders pursuant to the provisions of this Indenture,
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unless such Holders shall have offered, and if requested, provided to the
Trustee security and indemnity reasonably satisfactory to the Trustee against
the costs, expenses and liabilities which may be incurred by it in compliance
with such request, order, direction or exercise.
(g) No permissive right of the Trustee to act hereunder shall be
construed as a duty.
(h) Except with respect to Section 4.01 hereof, the Trustee shall have
no duty to inquire as to the performance of the Company's covenants in Article 4
hereof. In addition, the Trustee shall not be deemed to have knowledge of any
Default or Event of Default except (i) any Event of Default occurring pursuant
to Sections 6.01(1) and 6.01(2) hereof or (ii) any Default or Event of Default
of which the Trustee shall have received written notification or obtained actual
knowledge.
(i) The Trustee shall not be deemed to have notice or knowledge of any
matter unless a Trust Officer has actual knowledge thereof or unless written
notice thereof is received by the Trustee at the Corporate Trust Office of the
Trustee and such notice references the Notes generally, the Company or this
Indenture.
(j) The Trustee shall be authorized to exercise its rights and remedies
under this Indenture and the Security Documents through one or more agents.
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
the Offering Memorandum, this Indenture, the Securities, the Subsidiary
Guarantees or any of the Security Documents, 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 this 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 the Trustee receives written notice thereof or the Trustee otherwise has
actual knowledge thereof, 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 April 15 of each year, beginning with April 15, 2000, the Trustee shall
mail to each Securityholder a brief report dated as of April 15 of such year,
that complies with TIA Section 313(a). The Trustee also shall comply with TIA
Section 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, fees, 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
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connection with (i) 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, but not limited to, under Section 7.07), and
(ii) the validity, invalidity, adequacy or inadequacy of the Offering
Memorandum, this Indenture, the Securities the Subsidiary Guarantees or any of
the Security Documents. The Trustee shall notify the Company promptly of any
claim (whether asserted by any Securityholder or the Company) for which it
intends to seek indemnity. Failure by the Trustee to so notify the Company shall
not relieve the Company of its obligations hereunder. The Company shall defend
the claim and the Trustee may have separate counsel and the Company shall pay
the fees and expenses of such Trustee's 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 or any predecessor Trustee shall have a first 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 by resolution
of its Board of Directors 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 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 6.09 and 7.07.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in stated 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.
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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 Section 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 Section
310(b); provided, however, that there shall be excluded from the operation of
TIA Section 310(b)(1) any indenture 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 Section
310(b)(1) are met.
Section 7.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated.
Section 7.12. Other Capacities. All references in this Indenture to the
Trustee shall be deemed to refer to the Trustee in its capacity as Trustee and
in its capacity as any agent, to the extent acting in such capacities, and every
provision of this Indenture relating to the conduct or affecting the liability
or offering protection, immunity or indemnity to the Trustee shall be deemed to
apply with the same force and effect to the Trustee acting in its capacity as
any agent.
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 2.06) 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 2.06), 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 and
all of the obligations of the Subsidiary Guarantors under the Subsidiary
Guarantees 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, 4.12, 4.17, 4.18 and 4.19 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.
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If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated 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 Guarantee.
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 2.03, 2.04, 2.05, 2.06, 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;
(4) the deposit does not constitute a default under any other agreement
binding on the Company;
(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
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(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 principal of and interest on the Securities.
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 and the
Subsidiary Guarantors jointly and severally 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, then 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.
ARTICLE 9
Amendments
Section 9.01. Without Consent of Holders. The Company and the Trustee
may amend this Indenture, the Securities, the Subsidiary Guarantees and any
Security Document 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;
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(4) to add guarantees with respect to the Securities, including adding
any Subsidiary of the Company as a Subsidiary Guarantor under Article 11,
or to further secure the Securities;
(5) 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 or any Subsidiary Guarantor;
(6) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA;
(7) to make any change that does not adversely affect the rights of any
Securityholder; or
(8) to provide for the assumption by a successor company of the
obligations of the Company under this Indenture or of a Subsidiary
Guarantor under a Subsidiary Guarantee.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a written 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, the Securities, the Subsidiary Guarantees and any Security
Document without notice to any Securityholder but with the written consent of
the Holders of at least a majority in stated principal amount of the Securities
then outstanding. 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,
including defaulted interest, on any Securities or reduce the amount of
Liquidated Damages payable under the Registration Rights Agreement;
(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 this 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 any currency other than that stated in
the Security;
(6) make any change in Section 6.04 or 6.07 or the second sentence of
this Section;
(7) make any change in any Subsidiary Guarantee or Security Document
that would adversely affect the Securityholders; or
(8) release any Collateral from the Liens created pursuant to the
Indenture and the Security Documents or release any Subsidiary Guarantor
from any of its obligations under its Subsidiary Guarantee, in any case
otherwise than in accordance with the terms of this Indenture.
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.
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.
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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 at least 30 days prior to the first solicitation of
such consent. 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 exchange for the Security shall issue and the Trustee, upon receipt of a
written order of the Company signed by two Officers, 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 approved by the Board of Directors of the Company and 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 security and 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
Security
Section 10.01. Grant of Security Interest; Remedies.
(a) In order to secure the obligations of the Company hereunder, the
Company hereby covenants to and to cause each Subsidiary Guarantor owning Oil
and Gas Assets to execute and deliver on or before the Issue Date one or more
Mortgages and other Security Documents, as reasonably determined by the Trustee
to obtain a Lien on substantially all of the Oil and Gas Assets of the Company
and the Subsidiary Guarantors as of the Issue Date. Each such Security Document,
when executed and delivered, shall be deemed hereby incorporated by
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reference herein to the same extent and as fully as if set forth in their
entirety at this place, and reference is made hereby to each such Security
Document for a more complete description of the terms and provisions thereof.
Each Holder, by accepting a Security, agrees to all of the terms and provisions
of each Security Document and the Trustee agrees to all of the terms and
provisions of each Security Document.
(b) If (i) the Securities become due and payable prior to the Maturity Date
or are not paid in full at the Maturity Date or (ii) an Event of Default has
occurred and is continuing, the Trustee may take all actions it deems necessary
or appropriate, including, but not limited to, foreclosing upon the Collateral
in accordance with the Security Documents and applicable law. The proceeds
received from the sale of any Collateral that is the subject of a foreclosure or
collection suit shall be applied in accordance with the priorities set forth in
Section 6.10. The Trustee has the power to institute and maintain such suits and
proceedings as it may deem expedient to prevent impairment of, or to preserve or
protect its and the Holders' interest in, the Collateral in the manner set forth
in Article 7.
(c) Unless an Event of Default shall have occurred and be continuing, the
Company and the Subsidiary Guarantors will have the right to remain in
possession and retain exclusive control of the Collateral securing the
Securities (other than any cash, securities, obligations and Cash Equivalents
constituting part of the Collateral and deposited with the Trustee in the
Collateral Account and other than as set forth in the Security Documents), to
freely operate the Collateral and to collect, invest and dispose of any income
thereon or therefrom.
Section 10.02. Recording and Opinions.
(a) The Company shall take or cause to be taken all action required to
perfect, maintain, preserve and protect the Lien in the Collateral granted by
the Security Documents, including, without limitation, the filing of financing
statements, continuation statements and any instruments of further assurance, in
such manner and in such places as may be required by law fully to preserve and
protect the rights of the Holders and the Trustee under this Indenture and the
Security Documents to all property comprising the Collateral. The Company shall
from time to time promptly pay all financing and continuation statement
recording and/or filing fees, charges and taxes relating to this Indenture, the
Security Documents, any amendments thereto and any other instruments of further
assurance required pursuant to the Security Documents.
(b) The Company shall, to the extent required by the TIA, furnish to the
Trustee, at closing and at such other time as required by Section 314(b) of the
TIA, Opinion(s) of Counsel either (i) substantially to the effect that, in the
opinion of such counsel, this Indenture and the grant of a Lien in the
Collateral intended to be made by the Security Documents and all other
instruments of further assurance, including, without limitation, financing
statements, have been properly recorded and filed to the extent necessary to
perfect the Lien in the Collateral created by the Security Documents (other than
as stated in such opinion) and reciting the details of such action, and stating
that as to the Lien created pursuant to the Security Documents, such recordings
and filings are the only recordings and filings necessary to give notice thereof
and that no re-recordings or refilings are necessary to maintain such notice
(other than as stated in such opinion), or (ii) to the effect that, in the
opinion of such counsel, no such action is necessary to perfect such Lien. In
rendering such opinions, legal counsel may rely on certificates of Officers of
the Company and/or the Restricted Subsidiaries with respect to factual matters.
(c) To the extent required by the TIA, the Company shall furnish to the
Trustee on April 15th in each year, beginning with April 15, 2000, an Opinion of
Counsel, dated as of such date, either (i)(A) stating that, in the opinion of
such counsel, all required action has been taken with respect to the recording,
filing, re-recording and refiling of all supplemental indentures, financing
statements, continuation statements and other documents as is necessary to
maintain the Lien of the Security Documents (other than as stated in such
opinion) and reciting with respect to the Lien in the Collateral the details of
such action or referring to prior Opinions of Counsel in which such details are
given, and (B) stating that, based on relevant laws as in effect on the date of
such Opinion of Counsel, all financing statements, continuation statements and
other documents have been executed and filed that are necessary as of such date
and during the succeeding 24 months fully to maintain the Lien of the Holders
and the Trustee hereunder and under the Security Documents with respect to the
Collateral (other than as stated in such opinion), or (ii) stating that, in the
opinion of such counsel, no such action is necessary to maintain such Lien. In
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rendering such opinions, legal counsel may rely on certificates of Officers of
the Company and/or the Restricted Subsidiaries with respect to factual matters.
Section 10.03. Release of Collateral.
(a) The Trustee, in its capacity as secured party under the
Security Documents, shall not at any time release Collateral from the Lien
created by this Indenture and the Security Documents unless such release is in
accordance with the provisions of this Indenture and the Security Documents.
(b) At any time when an Event of Default shall have occurred
and be continuing, the Trustee shall not release any Liens granted for the
benefit of the Holders and no release of Collateral given at such time pursuant
to the provisions of this Indenture and the Security Documents shall be
effective as against the Holders of the Securities.
(c) The release of any Collateral from the terms of the
Security Documents shall not be deemed to impair the security under this
Indenture in contravention of the provisions hereof if and to the extent the
Collateral is released pursuant to this Indenture and the Security Documents. To
the extent applicable, the Company shall cause TIA Section 314(d) relating to
the release of property from the Lien of the Security Documents and relating to
the substitution therefor of any property to be subjected to the Lien of the
Security Documents to be complied with. Any certificate or opinion required by
TIA Section 314(d) may be made by an Officer of the Company, except in cases
where TIA Section 314(d) requires that such certificate or opinion be made by an
independent Person, which Person shall be an independent engineer, appraiser or
other expert selected or approved by the Trustee. A Person is "independent" if
such Person (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company, any of its
Subsidiaries or in any Affiliate of the Company and (c) is not an officer,
employee, promoter, underwriter, trustee, partner or director or Person
performing similar functions to any of the foregoing for either the Company or
any of its Subsidiaries. The Trustee shall be entitled to receive and rely upon
a certificate provided by any such Person confirming that such Person is
independent within the foregoing definition.
Section 10.04. Specified Releases of Collateral.
(a) The Company and the Subsidiary Guarantors shall be
entitled to obtain a full release of all of the Collateral from the Lien of this
Indenture and of the Security Documents upon compliance with the conditions
precedent set forth in Section 8.01 for satisfaction and discharge of this
Indenture or for Legal Defeasance pursuant to Section 8.02. Upon delivery by the
Company to the Trustee of an Officers' Certificate and an Opinion of Counsel,
each to the effect that such conditions precedent have been complied with (and
which may be the same Officers' Certificate and Opinion of Counsel required by
Article 8), the Trustee shall forthwith take all necessary action (at the
request of and the expense of the Company) to release and reconvey to the
relevant Person all of the Collateral, and shall deliver such Collateral in its
possession to the Company, including, without limitation, the execution and
delivery of releases and satisfactions wherever required.
(b) Upon compliance by the Company with the conditions set
forth below in respect of any sale, lease transfer or other disposition to any
Person involving Collateral (including the disposition of all of the Capital
Stock of a Subsidiary Guarantor), the Trustee will release the Released
Interests (as defined below) from the Lien of this Indenture and the Security
Documents and reconvey the Released Interests to the Company or such other
Person as the Company may direct in writing. The Company will have the right to
obtain a release of items of Collateral subject to any sale, lease, transfer or
other disposition, or owned by a Subsidiary Guarantor all of the Capital Stock
of which is the subject of a disposition (the "Released Interests") upon
compliance with the condition that the Company deliver to the Trustee the
following:
(i) a written notice from the Company signed by two Officers requesting
the release of Released Interests:
(A) describing the proposed Released Interests,
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(B) specifying the value of such Released Interests on a date
within 60 days of the Company notice (the "Valuation Date"),
(C) stating that the purchase price or other property to be
received in consideration for such Released Interests is at least equal to the
fair market value of the Released Interests,
(D) stating that the release of such Released Interests will
not interfere with the Trustee's ability to materially realize the value of the
remaining Collateral and will not materially impair the maintenance and
operation of the remaining Collateral,
(E) confirming the sale, lease, transfer or other disposition
of, or an agreement to sell, lease, transfer or dispose of, such Released
Interests in a bona fide transaction to a Person that is not an Affiliate of the
Company or, in the event that such disposition is to a Person that is an
Affiliate, confirming that such disposition is made in compliance with the
provisions set forth in Section 4.07,
(F) in the event there is to be a substitution of property for
the Collateral subject to the sale, lease, transfer or other disposition,
specifying the property intended to be substituted for the Collateral to be
disposed of;
(ii) an Officers' Certificate of the Company stating that:
(A) such sale, transfer or other disposition or such
redesignation, as the case may be, complies with the terms and conditions of
this Indenture with respect to Asset Dispositions and Restricted Payments to the
extent applicable,
(B) all Net Available Cash from such sale, lease, transfer or
other disposition will be applied pursuant to the provisions of this Indenture
to the extent applicable,
(C) there is no Event of Default in effect or continuing on
the date thereof or the date of such sale, lease, transfer or other disposition,
(D) the release of the Collateral will not result in an Event
of Default under this Indenture, and
(E) upon the delivery of such Officers' Certificate, all
conditions precedent in this Indenture relating to the release in question will
have been complied with; and
(iii) all other documentation required by the TIA, if any, prior to the
release of Collateral by the Trustee and, in the event there is
to be a contemporaneous substitution of property for the
Collateral subject to such sale, lease, transfer or other
disposition, all documentation necessary to effect the
substitution of such new Collateral.
(c) Notwithstanding the provisions of Section 10.04(b), so long as no
Event of Default shall have occurred and be continuing, the Company may, without
satisfaction of the conditions set forth in Section 10.04(b) above: (i) sell or
otherwise dispose of any property subject to the Lien of this Indenture and the
Security Documents, which may have become worn out or obsolete, (ii) abandon,
terminate, cancel, release or make alterations in or substitutions of any leases
or contracts subject to the Lien of this Indenture or any of the Security
Documents, (iii) surrender or modify any franchise, license or permit subject to
the Lien of this Indenture or any of the Security Documents which it may own or
under which it may be operating, (iv) alter, repair, replace, change the
location or position of and add to its structures, machinery, systems,
equipment, fixtures and appurtenances, (v) demolish, dismantle, tear down or
scrap any obsolete Collateral or abandon any portion thereof and (vi) grant
farm-outs, leases or sub-leases in respect of real property to the extent any of
the preceding does not constitute an Asset Disposition.
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Section 10.05. Rights of Purchasers; Form and Sufficiency of Release.
No purchaser or grantee of any property or rights purporting to be
released herefrom shall be bound to ascertain the authority of the Trustee to
execute the release or to inquire as to the existence of any conditions herein
prescribed for the exercise of such authority; nor shall any purchaser or
grantee of any property or rights permitted by this Indenture to be sold or
otherwise disposed of by the Company or any Restricted Subsidiary be under any
obligation to ascertain or inquire into the authority of the Company or
Restricted Subsidiary to make such sale or other disposition. In the event that
any Person has sold, exchanged, or otherwise disposed of or proposes to sell,
exchange or otherwise dispose of any portion of the Collateral that may be sold,
exchanged or otherwise disposed of, and the Company or Restricted Subsidiary
makes written request to the Trustee to furnish a written disclaimer, release or
quit-claim of any interest in such property under this Indenture and the
Security Documents, the Trustee, in its capacity as secured party under the
Security Documents, shall execute, acknowledge and deliver to the Company or
Restricted Subsidiary (in proper form) such an instrument promptly after
satisfaction of the conditions set forth herein for delivery of any such
release. Notwithstanding the preceding sentence, all purchasers and grantees of
any property or rights purporting to be released herefrom shall be entitled to
rely upon any release executed by the Trustee hereunder as sufficient for the
purpose of this Indenture and the Security Documents and as constituting a good
and valid release of the property therein described from the Lien of this
Indenture or of the Security Documents.
Section 10.06. Authorization of Actions to Be Taken by the Trustee
Under the Security Documents.
Subject to the provisions of the applicable Security Document, (a) the
Trustee may, in accordance with the terms hereof and without the consent of the
Holders, take all actions it deems necessary or appropriate in order to (i)
enforce any of the terms of the Security Documents and (ii) collect and receive
any and all amounts payable in respect of the Obligations of the Company
hereunder and (b) the Trustee shall have power to institute and to maintain such
suits and proceedings as it may deem expedient to prevent any impairment of the
Collateral by any act that may be unlawful or in violation of the Security
Documents or this Indenture, and such suits and proceedings as the Trustee may
deem expedient to preserve or protect its interests and the interests of the
Holders in the Collateral (including the power to institute and maintain suits
or proceedings to restrain the enforcement of or compliance with any legislative
or other governmental enactment, rule or order that may be unconstitutional or
otherwise invalid if the enforcement of, or compliance with, such enactment,
rule or order would impair the security interest thereunder or be prejudicial to
the interests of the Holders or of the Trustee).
Section 10.07. Authorization of Receipt of Funds by the Trustee Under
the Security Documents.
The Trustee is authorized to receive any funds for the benefit of the
Holders distributed under the Security Documents, and to make further
distributions of such funds to the Holders in accordance with the provisions of
Section 6.10 and the other provisions of this Indenture.
Section 10.08. Use of Trust Moneys.
The Net Available Cash from any Asset Disposition involving
Collateral shall be deposited into a securities account maintained by the
Trustee at its Corporate Trust Office or at any securities intermediary selected
by the Trustee having a combined capital and surplus of at least $250,000,000
and having a long-term debt rating of at least "A3" by Moody's Investor Service,
Inc. and at least "A--" by Standard & Poor's Rating Services styled the "Kelley
Oil Collateral Account" (such account being the "Collateral Account") which
shall be under the exclusive dominion and control of the Trustee. All amounts on
deposit in the Collateral Account shall be treated as financial assets and cash
funds on deposit in the Collateral Account may be invested by the Trustee, at
the written direction of the Company signed by two Officers, in Temporary Cash
Investments; provided, however, in no event shall the Company have the right to
withdraw funds or assets from the Collateral Account except in compliance with
the terms of this Indenture, and all assets credited to the Collateral Account
shall be subject to a Lien in favor of the Trustee and the Holders.
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Any such funds may be released to the Company by its
delivering to the Trustee an Officers' Certificate stating:
(1) no Event of Default has occurred and is continuing as of the date
of the proposed release;
(2) (A) if such Trust Moneys represent Net Available Cash in respect of
an Asset Disposition, that such funds will be applied in accordance
with Section 4.06, or (B) if such Trust Moneys do not represent Net
Available Cash, that such amounts will be utilized in connection with
the business of the Company and its Restricted Subsidiaries in
compliance with the terms of this Indenture;
(3) all other conditions precedent in this Indenture relating to the
release in question have been complied with; and
(4) all documentation required by the TIA, if any, prior to the release
of such Trust Moneys by the Trustee has been delivered to the Trustee.
Notwithstanding the preceding, (A) if the maturity of the
Securities has been accelerated, which acceleration has not been rescinded as
permitted by this Indenture, the Trustee shall apply the Trust Moneys credited
to the Collateral Account to pay the principal of and accrued and unpaid
interest on the Securities to the extent of such Trust Moneys, (B) if the
Company so elects, by giving written notice to the Trustee, the Trustee shall
apply Trust Moneys credited to the Collateral Account to the payment of interest
due on any interest payment date, and (C) if the Company so elects, by giving
written notice to the Trustee, the Trustee shall apply Trust Moneys credited to
the Collateral Account to the payment of the principal of and accrued and unpaid
interest on any Securities on the Stated Maturity or upon redemption or to the
purchase of Securities upon tender or in the open market or at private sale or
upon any exchange or in any one or more of such ways, in each case in compliance
with this Indenture and at the direction of the Company.
ARTICLE 11
Subsidiary Guarantee
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 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 (and any Liquidated Damages payable
thereon) 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 Guaranteed Obligations or (f) any change in the ownership of such
Subsidiary Guarantor.
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Each Subsidiary Guarantor further agrees that its Subsidiary Guarantee
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.
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
unenforceability 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 Guarantee
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 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
Guarantee, 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.
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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. If no Default exists or
would exist under this Indenture, upon the sale of disposition of all of the
Capital Stock of a Subsidiary Guarantor by the Company or a Restricted
Subsidiary of the Company, or upon the sale or disposition (by merger or
otherwise) of any Subsidiary Guarantor to a Person in compliance with Article 5
(in each case, other than to the Company or a Subsidiary Guarantor), 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 and all Collateral owned by such Person shall be released to the extent
set forth in Section 10.04; provided, however, that each such Subsidiary
Guarantor is sold or disposed of in accordance with this Indenture. At the
request of the Company, the Trustee shall execute and deliver an appropriate
instrument evidencing such release.
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
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if to the Trustee:
Norwest Bank Minnesota, National Association
Sixth and Marquette
Minneapolis, Minnesota 55479-0069
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, except for
notices or communications to the Trustee which shall be effective only upon
actual receipt thereof.
Section 12.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA Section 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
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<PAGE> 57
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, for the purpose of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Securities of which the Trustee has written knowledge of such
ownership 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, the Subsidiary Guarantees
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 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.
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IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
KELLEY OIL & GAS CORPORATION, as the Company
By /s/ JOHN F. BOOKOUT
-----------------------------------------
Name: John F. Bookout
Title: President
KELLEY OIL CORPORATION, as a Subsidiary Guarantor
By /s/ JOHN F. BOOKOUT
-----------------------------------------
Name: John F. Bookout
Title: President
KELLEY OPERATING COMPANY, LTD., as a
Subsidiary Guarantor
By: Kelley Oil Corporation, its General Partner
By /s/ JOHN F. BOOKOUT
-----------------------------------------
Name: John F. Bookout
Title: President
CONCORDE GAS MARKETING, INC., as a
Subsidiary Guarantor
By /s/ JOHN F. BOOKOUT
-----------------------------------------
Name: John F. Bookout
Title: President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee,
By /s/ JANE Y. SCHWEIGER
-----------------------------------------
Name: Jane Y. Schweiger
Title: Corporate Trust Officer
<PAGE> 59
APPENDIX A
PROVISIONS RELATING TO INITIAL 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 Purchaser" means Jefferies & Company, Inc.
"Private Exchange" means an offer by the Company, pursuant to the
Registration Rights 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.
"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 Rights
Agreement.
"Purchase Agreement" means the Purchase Agreement dated April 13, 1999
among the Company, the Subsidiary Guarantors and the Initial Purchaser.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registered Exchange Offer" means the offer by the Company, pursuant
to the Registration Rights 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 Rights Agreement" means the Registration Rights
Agreement dated the Closing Date, but effective as of the Issue Date among the
Company, the Subsidiary Guarantors and the Initial Purchaser.
"Regulation S" means Regulation S under the Securities Act.
Appendix A - Page 1
<PAGE> 60
"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.
"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 Rights 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 Initial 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
Initial 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.
(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 (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
Appendix A - Page 2
<PAGE> 61
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 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. Upon receipt of a written order signed by two
Officers of the Company, the Trustee shall authenticate and make available for
delivery upon a written order of the Company signed by two Officers (1) Initial
Securities for original issue on the date hereof in an aggregate stated
principal amount of $135,000,000 and (2) 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 Rights 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
stated principal amount of Securities outstanding at any time may not exceed
$135,000,000 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
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:
Appendix A - Page 3
<PAGE> 62
(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 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 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
Appendix A - Page 4
<PAGE> 63
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.
(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 stated 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 stated 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.
Appendix A - Page 5
<PAGE> 64
(e) Legend.
(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 STATED 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."
Appendix A - Page 6
<PAGE> 65
(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 Initial or Private Exchange
Securities during the period of the effectiveness of a Shelf
Registration Statement with respect to such Initial or Private
Exchange Securities, as the case may be, all requirements pertaining
to the Restricted Securities Legend on such Initial or Private
Exchange Securities will cease to apply and the requirements that any
such Initial or 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 Initial Securities pursuant to which Holders of
such Initial Securities are offered Exchange Securities in exchange
for their Initial Securities, all requirements pertaining to Initial
Securities that Initial 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 that
exchange such Initial Securities in such Registered Exchange Offer.
(v) Upon the consummation of a Private Exchange with respect
to the Initial Securities pursuant to which Holders of such Initial
Securities are offered Private Exchange Securities in exchange for
their Initial Securities, all requirements pertaining to such Initial
Securities that Initial 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 Initial 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.
(f) Cancellation 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
cancellation or retained and canceled by the Trustee. At any time prior to
such cancellation, 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 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.
Appendix A - Page 7
<PAGE> 66
(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 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) not less than five Business Days prior to the date of the
proposed issuance of certificated Securities under the Indenture, the Company,
in its sole discretion, notifies the Trustee in a writing signed by two
Officers of the Company 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 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.
Appendix A - Page 8
<PAGE> 67
(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.
Appendix A - Page 9
<PAGE> 68
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 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
STATED 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
Exhibit A - Page 1
<PAGE> 69
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."
Exhibit A - Page 2
<PAGE> 70
CUSIP No.: [_______________________]
ISIN: [_______________________]
KELLEY OIL & GAS CORPORATION
14% SENIOR SECURED NOTE DUE 2003
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT
NO.[_____________________] $[_______________________]
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay
to ____________________________________________________________, or registered
assigns, the principal sum of _________________________ DOLLARS ($__________)
on April 15, 2003, plus a redemption premium equal to five percent (5%) of the
outstanding stated principal amount hereof as of such date.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
Additional provisions of this Security are set forth on the other side
of this Security.
KELLEY OIL & GAS CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
Dated:____________________________________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 14% Senior Secured Notes Due 2003 maturing at 105%
of the Stated Principal Amount referred to in the within-mentioned Indenture.
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By:_____________________________________
Authorized Signatory
Date of Authentication:_________________
Exhibit A - Page 3
<PAGE> 71
[FORM OF REVERSE SIDE OF INITIAL SECURITY]
14% Senior Secured Note Due 2003
Maturing at 105% of the Stated Principal Amount
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 final principal amount of this Security payable at
maturity at the rate per annum shown above and, if applicable, Liquidated
Damages pursuant to the Registration Rights Agreement. 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 the date the Securities are issued
and authenticated. 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. In
addition, the Company will pay a commitment fee of 14% per annum on 105% of the
Initial Deposit (as defined in the Escrow Agreement) for the period from the
Closing Date to the Issue Date calculated on the basis of a 360-day year of
twelve 30-day months. Such commitment fee will be payable on the first
interest payment date following the Issue Date.
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 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, Norwest Bank
Minnesota, National Association ("Trustee"), will act as Paying Agent and
Registrar. The Company may appoint and change any Paying Agent, Registrar or
co-registrar as set forth in Section 2.03 of the Indenture. 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 April 15, 1999 ("Indenture"), between the Company, the
Subsidiary Guarantors 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 senior secured obligations of the Company limited
to $135,000,000 aggregate stated 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 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.
Exhibit A - Page 4
<PAGE> 72
The Indenture also provides that the Company shall cause each
Restricted Subsidiary of the Company (other than the Programs) to Guarantee the
Securities pursuant to a Subsidiary Guarantee. Any such Subsidiary Guarantee
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 Guarantee
will unconditionally guarantee the Obligations on a senior secured basis
pursuant to the terms of the Indenture.
5. Redemption. (a) Optional Redemption. Except as set forth in
the next paragraph, the Securities shall not be redeemable at the option of the
Company prior to April 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 105% (expressed as a percentage of stated 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 on or after April 15, 2001.
In addition, at any time and from time to time prior to April 15,
2001, the Company may redeem in the aggregate up to 35% of the original stated
principal amount of Securities with the proceeds of one or more Equity
Offerings following at a redemption price (expressed as a percentage of stated
principal amount) of 114% 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 65% of the original stated principal amount of Securities must
remain outstanding after each such redemption or such redemption must retire
the Securities in their entirety and the redemption occurs within 60 days after
the consummation of such Equity Offering.
(b) Scheduled Mandatory Redemption. On the 15th day of each
January, April, July and October, commencing July 15, 2002, the Company will
redeem $2.0 million of the stated principal amount of the Securities (expressed
as an integral multiple of $1,000) at a redemption price equal to 103% of the
stated principal amount thereof plus accrued and unpaid interest thereon to
such date.
(c) Reserve Deficiency Redemption. All of the Securities will
also be subject to mandatory redemption as provided for in Section 4.19(c) of
the Indenture.
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 stated 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. Security. The Securities are secured by a first Lien, subject
only to Permitted Liens, on the Collateral.
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 before a selection of
Securities to be redeemed or 15 days before an interest payment date.
Exhibit A - Page 5
<PAGE> 73
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, the Subsidiary Guarantees, any Security
Document 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, the
Subsidiary Guarantees, any Security Document 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 provide for the assumption by a Successor
Company of the obligations of the Company under the Indenture or of a
Subsidiary Guarantor under a Subsidiary Guarantee or to add guarantees with
respect to the Securities, or to further 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 any Subsidiary Guarantor, 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.
14. Defaults and Remedies. Under the Indenture, Events of Default
include (i) default for 20 days in payment of interest on the Securities when
due; (ii) default in payment of principal on the Securities when due at their
stated 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, the Securities or any Security
Document, 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, (viii) a Subsidiary
Guarantee or Security Document ceases to be in full force and effect (other
than in accordance with the terms of such Subsidiary Guarantee or such Security
Document) or a Subsidiary Guarantor or the Company denies or disaffirms its
obligations under any Security Document to which it is a party or its
Subsidiary Guarantee, as applicable, if such default continues for a period of
10 days after notice thereof to the Company, or (ix) the Company shall
ultimately realize Net Available Cash from the Designated Transaction of less
than $80.0 million minus any non-material, usual and customary price
adjustments for transactions similar to the Designated Transaction in the Oil
and Gas Business. 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 (ix) 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.
Exhibit A - Page 6
<PAGE> 74
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 and 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.
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 Rights Agreement. Each
Holder of a Security, by acceptance hereof, acknowledges and agrees to the
provisions of the Registration Rights 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.
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.
Exhibit A - Page 7
<PAGE> 75
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint___________________________, agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
Date:___________________ Signed:_______________________________________________
(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.)
Exhibit A - Page 8
<PAGE> 76
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 stated 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
[ ] (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.
Dated:________________ 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.)
Exhibit A - Page 9
<PAGE> 77
[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
Exhibit A - Page 10
<PAGE> 78
[OPTION OF HOLDER TO ELECT PURCHASE]
If you elect to have this Security purchased by the Company pursuant
to Section 4.06, 4.08 or 4.19 of the Indenture, check the box:
[ ] Section 4.06
[ ] Section 4.08
[ ] Section 4.19
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:
[ ] $____________________
Dated:_________________ Your Signature:________________________________________
(Sign exactly as your name appears on
the other side of this Security.)
Dated:_________________ 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.)
Exhibit A - Page 11
<PAGE> 79
[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>
Exhibit A - Page 12
<PAGE> 80
EXHIBIT B
[FORM OF FACE OF EXCHANGE SECURITY]
[1/] CUSIP No.: [________________]
[2/] ISIN: [________________]
KELLEY OIL & GAS CORPORATION
14% SENIOR SECURED NOTE DUE 2003 AND
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT
NO.[_________________] $[___________________]
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay
to ________________________________________, or registered assigns, the
principal sum of ________________________________ DOLLARS ($__________________)
on April 15, 2003, plus a redemption premium equal to five percent (5%) of the
outstanding stated principal amount hereof as of such date.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
Additional provisions of this Security are set forth on the other side
of this Security.
KELLEY OIL & GAS CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
Dated:_______________________________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 14% Senior Secured Notes Due 2003 and Maturing at
105% of the Stated Principal Amount referred to in the within-mentioned
Indenture.
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By:_____________________________________
Authorized Signatory
Date of Authentication:_________________
Exhibit B - Page 1
<PAGE> 81
/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.]
Exhibit B - Page 2
<PAGE> 82
[FORM OF REVERSE SIDE OF EXCHANGE SECURITY]
14% SENIOR SECURED NOTE DUE 2003 AND
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT
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 final principal amount of this Security payable at
maturity at the rate per annum shown above and, if applicable, Liquidated
Damages pursuant to the Registration Rights Agreement. 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 the date the Securities are issued
and authenticated. 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. In
addition, the Company will pay a commitment fee of 14% per annum on the Initial
Deposit (as defined in the Escrow Agreement) for the period from the Closing
Date to the Issue Date calculated on the basis of a 360-day year of twelve
30-day months. Such commitment fee will be payable on the first interest
payment date following the Issue Date.
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, Norwest Bank
Minnesota, National Association ("Trustee"), will act as Paying Agent and
Registrar. The Company may appoint and change any Paying Agent, Registrar or
co-registrar as set forth in Section 2.03 of the Indenture. 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 April 15, 1999 ("Indenture"), between the Company, the
Subsidiary Guarantors 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 Security holders
are referred to the Indenture and the Act for a statement of those terms. The
Securities are senior secured obligations of the Company limited to
$135,000,000 aggregate stated 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 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
Restricted Subsidiary of the Company (other than the Programs) to Guarantee the
Securities pursuant to a Subsidiary Guarantee. Any such Subsidiary Guarantee
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
Exhibit B - Page 3
<PAGE> 83
at maturity, by acceleration or otherwise. Any Subsidiary Guarantee will
unconditionally guarantee the Obligations on a senior secured basis pursuant to
the terms of the Indenture.
5. Redemption. (a) Optional Redemption. Except as set forth in
the next paragraph, the Securities shall not be redeemable at the option of the
Company prior to April 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 105% (expressed as a percentage of stated 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 on or after April 15, 2001.
In addition, at any time and from time to time prior to April 15,
2001, the Company may redeem in the aggregate up to 35% of the original stated
principal amount of Securities with the proceeds of one or more Equity
Offerings at a redemption price (expressed as a percentage of stated principal
amount) of 114% 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
65% of the original stated principal amount of Securities must remain
outstanding after each such redemption or such redemption must retire the
Securities in their entirety and the redemption occurs within 60 days after the
consummation of such Equity Offering.
(b) Scheduled Mandatory Redemption. On the 15th day of each
January, April, July and October, commencing July 15, 2002, the Company will
redeem $2.0 million of the stated principal amount of the Securities (expressed
as an integral multiple of $1,000) at a redemption price equal to 103% of the
stated principal amount thereof plus accrued and unpaid interest thereon to
such date.
(c) Reserve Deficiency Redemption. All of the Securities will
also be subject to mandatory redemption as provided for in Section 4.19(c) of
the Indenture.
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 stated 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. Security. The Securities are secured by a first Lien, subject
only to Permitted Liens, on the Collateral.
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 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.
Exhibit B - Page 4
<PAGE> 84
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, the Subsidiary Guarantees, any Security
Document 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, the
Subsidiary Guarantees, any Security Document 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 provide for the assumption by a Successor
Company of the obligations of the Company under the Indenture or of a
Subsidiary Guarantor under a Subsidiary Guarantee or to add guarantees with
respect to the Securities, or to further 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 any Subsidiary Guarantor, 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.
14. Defaults and Remedies. Under the Indenture, Events of Default
include (i) default for 20 days in payment of interest on the Securities when
due; (ii) default in payment of principal on the Securities when due at their
stated 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, the Securities or any Security
Document, 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 days after notice, (viii) a Subsidiary
Guarantee or Security Document ceases to be in full force and effect (other
than in accordance with the terms of such Subsidiary Guarantee or such Security
Document) or a Subsidiary Guarantor or the Company denies or disaffirms its
obligations under any Security Document to which it is a party or its
Subsidiary Guarantee, as applicable, if such default continues for a period of
10 days after notice thereof to the Company, or (ix) the Company shall
ultimately realize Net Available Cash from the Designated Transaction of less
than $80.0 million minus any non-material, usual and customary price
adjustments for transactions similar to the Designated Transaction in the Oil
and Gas Business. 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 (ix) 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.
Security holders 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 and
security. Subject to certain limitations, Holders of a majority in principal
amount of the Securities may direct the Trustee in its
Exhibit B - Page 5
<PAGE> 85
exercise of any trust or power. The Trustee may withhold from Security holders
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.
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
Security holders. 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 Rights Agreement. Each
Holder of a Security, by acceptance hereof, acknowledges and agrees to the
provisions of the Registration Rights 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.
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.
Exhibit B - Page 6
<PAGE> 86
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint ___________________________, agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
Date:_________________ Signed:_________________________________________________
(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.)
Exhibit B - Page 7
<PAGE> 87
[OPTION OF HOLDER TO ELECT PURCHASE]
If you elect to have this Security purchased by the Company pursuant
to Section 4.06, 4.08 or 4.19 of the Indenture, check the box:
[ ] Section 4.06
[ ] Section 4.08
[ ] Section 4.19
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:
[ ] $__________________
Dated:__________________ Your Signature:_______________________________________
(Sign exactly as your name appears on
the other side of this Security.)
Dated:__________________ 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.)
Exhibit B - Page 8
<PAGE> 88
[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>
Exhibit B - Page 9
<PAGE> 1
EXHIBIT 4.15
REGISTRATION RIGHTS AGREEMENT
Dated as of April 16, 1999
By and Among
KELLEY OIL & GAS CORPORATION,
KELLEY OIL CORPORATION,
KELLEY OPERATING COMPANY, LTD.,
CONCORDE GAS MARKETING, INC.
and
JEFFERIES & COMPANY, INC.,
as Initial Purchaser
14% Senior Secured Notes due 2003
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is dated as of
April 16, 1999, by and among KELLEY OIL & GAS CORPORATION, a Delaware
corporation (the "Company"), KELLEY OIL CORPORATION, a Delaware corporation and
a wholly owned subsidiary of the Company ("Kelley Oil"), KELLEY OPERATING
COMPANY, LTD., a Texas limited partnership and a wholly owned subsidiary of the
Company ("Kelley Operating"), CONCORDE GAS MARKETING, INC., a Delaware
corporation and a wholly owned subsidiary of the Company ("Concorde"), and
JEFFERIES & COMPANY, INC., as initial purchaser (the "Initial Purchaser"). The
Company, Kelley Oil, Kelley Operating and Concorde are referred to collectively
herein as the "Issuers."
This Agreement is entered into in connection with the Purchase
Agreement, dated as of April 13, 1999, by and among the Issuers and the Initial
Purchaser (the "Purchase Agreement"), which provides for the sale by the Company
to the Initial Purchaser of $135,000,000 aggregate principal amount of 14%
Senior Secured Notes due 2003, Series A (the "Notes"), unconditionally
guaranteed on a senior secured basis by Kelley Oil and Kelley Operating,
initially, and by each of the Company's future Restricted Subsidiaries (as
defined in the Indenture) (collectively, the "Subsidiary Guarantors"). In order
to induce the Initial Purchaser to enter into the Purchase Agreement, the
Issuers have agreed to provide the registration rights set forth in this
Agreement for the benefit of the Initial Purchaser and any subsequent holder or
holders of the Notes. The execution and delivery of this Agreement is a
condition to the Initial Purchaser's obligation to purchase the Notes under the
Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the following
meanings:
Advice: See Section 5 hereof.
Agreement: See the introductory paragraphs hereto.
Applicable Period: See Section 2 hereof.
Blackout Period: See Section 5(k) hereof.
Company: See the introductory paragraphs hereto.
Damages Payment Date: With respect to the Notes, each Interest
Payment Date.
Effectiveness Date: With respect to any Registration
Statement, the 60th day after the Filing Date with respect thereto.
<PAGE> 3
Effectiveness Period: See Section 3 hereof.
Escrow Agreement: That certain escrow agreement dated April
16, 1999 among the Issuer and Norwest Bank Minnesota, National
Association, as escrow agent.
Escrowed Account: The account established with Norwest Bank
Minnesota, National Association, as escrow agent, pursuant to the
Escrow Agreement whereby the Notes and the consideration received from
the Holders for the Notes, together with the other documents delivered
at the Closing of the offering of the Notes, will be delivered pending
release in accordance with the terms of the Escrow Agreement.
Event Date: See Section 4(b) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
Exchange Notes: See Section 2 hereof.
Exchange Offer: See Section 2 hereof.
Exchange Offer Registration Statement: See Section 2 hereof.
Filing Date: If no Registration Statement has been filed by
the Issuers pursuant to this Agreement, the 75th day after the Issue
Date; provided, however, that if a Shelf Notice is given, then the
Filing Date with respect to the Initial Shelf Registration shall be the
60th calendar day after the date of the giving of such Shelf Notice.
Holder: Any registered holder of a Transfer Restricted
Security or Transfer Restricted Securities.
Indemnified Person: See Section 7(c) hereof.
Indemnifying Person: See Section 7(c) hereof.
Indenture: The Indenture, dated as of April 15, 1999, by and
among the Issuers and Norwest Bank Minnesota, National Association, as
trustee, pursuant to which the Notes are being issued, as the same may
be amended or supplemented from time to time in accordance with the
terms thereof.
Initial Purchaser: See the introductory paragraphs hereto.
Initial Shelf Registration: See Section 3(a) hereof.
Inspectors: See Section 5(n) hereof.
Interest Payment Date: As defined in the Indenture and the
Notes.
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Issue Date: The date the Notes are released from the Escrowed
Account.
Issuers: See the introductory paragraphs hereto.
Kelley Oil: See the introductory paragraphs hereto.
Kelley Operating: See the introductory paragraphs hereto.
Liquidated Damages: See Section 4 hereof.
NASD: See Section 5(s) hereof.
Notes: See the introductory paragraphs hereof.
Participant: See Section 7(a) hereof.
Participating Broker-Dealer: See Section 2 hereof.
Person: An individual, trustee, corporation, partnership,
joint stock company, trust, unincorporated association, union, business
association, firm or other legal entity.
Private Exchange: See Section 2 hereof.
Private Exchange Notes: See Section 2 hereof.
Prospectus: The prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to
completion and a prospectus that includes any information previously
omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities
Act and any term sheet filed pursuant to Rule 434 under the Securities
Act), as amended or supplemented by any prospectus supplement, and all
other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.
Purchase Agreement: See the introductory paragraphs hereof.
Record Holders: See Section 4(b) hereof.
Records: See Section 5(n) hereof.
Registration Default: See Section 4 hereof.
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<PAGE> 5
Registration Statement: Any registration statement of the
Issuers and the other Subsidiary Guarantors (if any) that covers any of
the Notes, the Exchange Notes or the Private Exchange Notes filed with
the SEC under the Securities Act, including the Prospectus, amendments
and supplements to such registration statement, including
post-effective amendments, all exhibits, and all material incorporated
by reference or deemed to be incorporated by reference in such
registration statement.
Rule 144: Rule 144 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other
than Rule 144A) or regulation hereafter adopted by the SEC providing
for offers and sales of securities made in compliance therewith
resulting in offers and sales by subsequent holders that are not
affiliates of an issuer of such securities being free of the
registration and prospectus delivery requirements of the Securities
Act.
Rule 144A: Rule 144A promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other
than Rule 144) or regulation hereafter adopted by the SEC.
Rule 415: Rule 415 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
Security Documents: The Security Documents as defined in the
Purchase Agreement.
Shelf Notice: See Section 2 hereof.
Shelf Registration: See Section 3(b) hereof.
Subsequent Shelf Registration: See Section 3(b) hereof.
Subsidiary Guarantor: See the introductory paragraphs hereto.
TIA: The Trust Indenture Act of 1939, as amended.
Transfer Restricted Securities. Each Note until (i) the date
on which such Note has been exchanged by a person other than a
Broker-Dealer for an Exchange Note in the Exchange Offer, (ii)
following the exchange by a Broker-Dealer in the Exchange Offer of a
Note for an Exchange Note, the date on which such Exchange Note is sold
to a purchaser who receives from such Broker-Dealer on or prior to the
date of such sale a copy of the Prospectus contained in the Exchange
Offer Registration Statement, (iii) the date on which such Note has
been effectively registered under the Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such
Note is distributed to the
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<PAGE> 6
public pursuant to Rule 144 under the Act or may be distributed to the
public pursuant to Rule 144(k) under the Act.
Trustee: The trustee under the Indenture and the trustee (if
any) under any indenture governing the Exchange Notes and Private
Exchange Notes.
Underwritten registration or underwritten offering: A
registration in which securities of the Company are sold to an
underwriter for reoffering to the public.
2. Exchange Offer
(a) To the extent permitted by applicable law or applicable
interpretation of the staff of the Division of Corporation Finance of the SEC,
the Issuers shall file with the SEC, no later than the Filing Date, a
Registration Statement (the "Exchange Offer Registration Statement") on an
appropriate registration form with respect to a registered offer (the "Exchange
Offer") to exchange any and all of the Transfer Restricted Securities for a like
aggregate principal amount of notes (the "Exchange Notes") of the Issuers,
guaranteed by any then existing Subsidiary Guarantor and secured by the same
collateral as the Notes, that are identical in all material respects to the
Notes except that the Exchange Notes (and the guarantees, if any, of the
Subsidiary Guarantors) shall have been registered pursuant to an effective
Registration Statement under the Securities Act and shall contain no restrictive
legend thereon. The Exchange Offer shall comply with all applicable tender offer
rules and regulations under the Exchange Act and other applicable law. Each of
the Issuers shall use its best efforts to (x) cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act on or
before the Effectiveness Date; (y) keep the Exchange Offer open for at least 30
days (or longer if required by applicable law) after the date that notice of the
Exchange Offer is mailed to Holders; and (z) consummate the Exchange Offer on or
prior to the 180th day following the Issue Date. If, after the Exchange Offer
Registration Statement is initially declared effective by the SEC, the Exchange
Offer or the issuance of the Exchange Notes thereunder is interfered with by any
stop order, injunction or other order or requirement of the SEC or any other
governmental agency or court, the Exchange Offer Registration Statement shall be
deemed not to have become effective for purposes of this Agreement.
Each Holder that participates in the Exchange Offer will be required to
represent that any Exchange Notes to be received by it will be acquired in the
ordinary course of its business, that at the time of the consummation of the
Exchange Offer such Holder will have no arrangement or understanding with any
Person to participate in the distribution of the Exchange Notes in violation of
the provisions of the Securities Act, and that such Holder is not an affiliate
of any of the Issuers within the meaning of the Securities Act.
No securities other than the Exchange Notes shall be included in the
Exchange Offer Registration Statement.
(b) The Issuers shall include within the Prospectus contained in the
Exchange Offer Registration Statement a section entitled "Plan of Distribution,"
which shall contain a summary statement of the positions taken or policies made
by the staff of the SEC with respect to the potential "underwriter" status of
any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under
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the Exchange Act) of Exchange Notes received by such broker-dealer in the
Exchange Offer (a "Participating Broker-Dealer"), whether such positions or
policies have been publicly disseminated by the staff of the SEC or such
positions or policies represent the prevailing views of the staff of the SEC.
Such "Plan of Distribution" section shall also expressly permit, to the extent
permitted by applicable policies and regulations of the SEC, the use of the
Prospectus by all Persons subject to the prospectus delivery requirements of the
Securities Act, including, to the extent permitted by applicable policies and
regulations of the SEC, all Participating Broker-Dealers, and include a
statement describing the means by which Participating Broker-Dealers may resell
the Exchange Notes in compliance with the Securities Act.
Each of the Issuers shall use its best efforts to keep the Exchange
Offer Registration Statement effective and to amend and supplement the
Prospectus contained therein in order to permit such Prospectus to be lawfully
delivered by all Persons subject to the prospectus delivery requirements of the
Securities Act for such period of time as is necessary to comply with applicable
law in connection with any resale of the Exchange Notes covered thereby;
provided, however, that such period shall not exceed 180 days after such
Exchange Offer Registration Statement is declared effective (or such longer
period if extended pursuant to the last paragraph of Section 5 hereof) (the
"Applicable Period").
If, prior to consummation of the Exchange Offer, any Holder holds any
Notes acquired by it that have, or that are reasonably likely to be determined
to have, the status of an unsold allotment in an initial distribution, or any
Holder is not entitled to participate in the Exchange Offer, the Issuers upon
the request of any such Holder shall simultaneously with the delivery of the
Exchange Notes in the Exchange Offer, issue and deliver to any such Holder, in
exchange (the "Private Exchange") for such Notes held by any such Holder, a like
principal amount of notes (the "Private Exchange Notes") of the Issuers,
guaranteed by any then existing Subsidiary Guarantor and secured by the same
collateral as the Exchange Notes, that are identical in all material respects to
the Exchange Notes, except for the existence of restrictions on transfer thereof
under the Securities Act and securities laws of the several states of the United
States. The Private Exchange Notes shall be issued pursuant to the same
indenture as the Exchange Notes and bear the same CUSIP number as the Exchange
Notes.
Interest on the Exchange Notes and the Private Exchange Notes will
accrue from (A) the later of (i) the last interest payment date on which
interest was paid on the Notes surrendered in exchange therefor or (ii) if the
Notes are surrendered for exchange on a date in a period which includes the
record date for an interest payment date to occur on or after the date of such
exchange and as to which interest will be paid, the date of such interest
payment date or (B) if no interest has been paid on the Notes, from the date of
the original issuance of the Notes.
In connection with the Exchange Offer, the Issuers shall:
(1) mail, or cause to be mailed, to each Holder entitled to
participate in the Exchange Offer a copy of the Prospectus forming part
of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(2) utilize the services of a depositary for the Exchange
Offer with an address in the Borough of Manhattan, The City of New
York;
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<PAGE> 8
(3) permit Holders to withdraw tendered Notes at any time
prior to the close of business, New York time, on the last business day
on which the Exchange Offer shall remain open; and
(4) otherwise comply in all material respects with all
applicable laws, rules and regulations.
As soon as practicable after the close of the Exchange Offer and the
Private Exchange, if any, the Issuers shall:
(1) accept for exchange all Transfer Restricted Securities
validly tendered and not validly withdrawn pursuant to the Exchange
Offer and the Private Exchange, if any;
(2) deliver to the Trustee for cancellation all Transfer
Restricted Securities so accepted for exchange; and
(3) cause the Trustee to authenticate and deliver promptly to
each Holder of Notes, Exchange Notes or Private Exchange Notes, as the
case may be, equal in principal amount to the Notes of such Holder so
accepted for exchange.
The Exchange Offer and the Private Exchange shall not be subject to any
conditions, other than that (i) the Exchange Offer or Private Exchange, as the
case may be, does not violate applicable law or any applicable interpretation of
the staff of the SEC, (ii) no action or proceeding shall have been instituted or
threatened in any court or by any governmental agency which might materially
impair the ability of the Issuers to proceed with the Exchange Offer or the
Private Exchange, and no material adverse development shall have occurred in any
existing action or proceeding with respect to the Issuers and (iii) all
governmental approvals shall have been obtained, which approvals the Issuers
deem necessary for the consummation of the Exchange Offer or Private Exchange.
The Exchange Notes and the Private Exchange Notes shall be issued under
(i) the Indenture or (ii) an indenture identical in all material respects to the
Indenture and which, in either case, has been qualified under the TIA or is
exempt from such qualification and shall provide that the Exchange Notes shall
not be subject to the transfer restrictions set forth in the Indenture and that
the Exchange Notes, the Private Exchange Notes and the Notes, if any, will be
deemed one class of security (subject to the provisions of the Indenture) and
entitled to participate in all the security granted by the Issuers pursuant to
the Security Documents and in any Subsidiary Guarantee (as such terms are
defined in the Indenture) on an equal and ratable basis. The Indenture or such
indenture shall provide that the Exchange Notes, the Private Exchange Notes and
the Notes shall vote and consent together on all matters as one class and that
none of the Exchange Notes, the Private Exchange Notes or the Notes will have
the right to vote or consent as a separate class on any matter.
(c) If, (i) the Issuers are not required to file an Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or SEC policy (after the
procedures set forth in Section 5 below have been complied with) or (ii) any
Holder of Transfer Restricted Securities notifies the Issuers prior to the 20th
day following the consummation of the Exchange Offer (A) that such Holder is
prohibited by applicable
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<PAGE> 9
law or SEC policy from participating in the Exchange Offer or (B) that such
Holder may not resell the Exchange Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and that the Prospectus contained in
the Exchange Offer Registration Statement is not available for such resales by
such Holder, then the Issuers shall promptly deliver to the Holders and the
Trustee written notice thereof (the "Shelf Notice") and shall file a Shelf
Registration pursuant to Section 3 hereof.
3. Shelf Registration
If at any time a Shelf Notice is delivered as contemplated by Section
2(c) hereof, then:
(a) Shelf Registration. The Issuers shall file with the SEC a
Registration Statement for an offering to be made on a continuous basis pursuant
to Rule 415 covering all of the Transfer Restricted Securities covered by
Section 2(c)(ii) above (the "Initial Shelf Registration"). The Issuers shall use
their best efforts to file with the SEC the Initial Shelf Registration on or
before the applicable Filing Date. The Initial Shelf Registration shall be on
Form S-1 or another appropriate form permitting registration of such Transfer
Restricted Securities for resale by Holders in the manner or manners designated
by them (including, without limitation, one or more underwritten offerings). The
Issuers shall not permit any securities other than the Transfer Restricted
Securities to be included in the Initial Shelf Registration or any Subsequent
Shelf Registration (as defined below).
Each of the Issuers shall use its best efforts to cause the Initial
Shelf Registration to be declared effective under the Securities Act on or prior
to the Effectiveness Date and to keep the Initial Shelf Registration
continuously effective under the Securities Act until the date which is two
years from the Effectiveness Date, subject to extension pursuant to the last
paragraph of Section 5 hereof (the "Effectiveness Period"), or such shorter
period ending when (i) all Transfer Restricted Securities covered by the Initial
Shelf Registration have been sold in the manner set forth and as contemplated in
the Initial Shelf Registration or (ii) a Subsequent Shelf Registration covering
all of the Transfer Restricted Securities covered by and not sold under the
Initial Shelf Registration or an earlier Subsequent Shelf Registration has been
declared effective under the Securities Act; provided, however, that the
Effectiveness Period in respect of the Initial Shelf Registration shall be
extended to the extent required to permit dealers to comply with the applicable
prospectus delivery requirements of Rule 174 under the Securities Act and as
otherwise provided herein and shall be subject to reduction to the extent that
the applicable provisions of Rule 144 are amended or revised.
No holder of Transfer Restricted Securities may include any of its
Transfer Restricted Securities in any Shelf Registration Statement pursuant to
this Agreement unless and until such holder furnishes to the Issuers in writing,
within 30 days after receipt of a request therefor, such information as the
Issuers may reasonably request for use in connection with any Shelf Registration
Statement or Prospectus or preliminary prospectus included therein. No holder of
Transfer Restricted Securities shall be entitled to Liquidated Damages pursuant
to Section 4 hereof unless and until such holder shall have provided all such
reasonably requested information. Each holder of Transfer Restricted Securities
as to which any Shelf Registration Statement is being effected agrees to furnish
promptly to the Issuers all information required to be disclosed in order to
make information previously furnished to the Issuers by such Holder not
materially misleading.
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<PAGE> 10
(b) Subsequent Shelf Registrations. If the Initial Shelf Registration
or any Subsequent Shelf Registration ceases to be effective for any reason at
any time during the Effectiveness Period (other than because of the sale of all
of the securities registered thereunder), the Issuers shall use their respective
best efforts to obtain the prompt withdrawal of any order suspending the
effectiveness thereof, and in any event shall within 30 days of such cessation
of effectiveness amend the Initial Shelf Registration in a manner to obtain the
withdrawal of the order suspending the effectiveness thereof, or file an
additional "shelf" Registration Statement pursuant to Rule 415 covering all of
the Transfer Restricted Securities covered by and not sold under the Initial
Shelf Registration or an earlier Subsequent Shelf Registration (each, a
"Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed,
the Issuers shall use their respective best efforts to cause the Subsequent
Shelf Registration to be declared effective under the Securities Act as soon as
practicable after such filing and to keep such subsequent Shelf Registration
continuously effective for a period equal to the number of days in the
Effectiveness Period less the aggregate number of days during which the Initial
Shelf Registration or any Subsequent Shelf Registration was previously
continuously effective. As used herein the term "Shelf Registration" means the
Initial Shelf Registration and any Subsequent Shelf Registration.
(c) Supplements and Amendments. The Issuers shall promptly supplement
and amend any Shelf Registration if required by the rules, regulations or
instructions applicable to the registration form used for such Shelf
Registration, if required by the Securities Act, or if reasonably requested by
the Holders of a majority in aggregate principal amount of the Transfer
Restricted Securities covered by such Registration Statement or by any
underwriter of such Transfer Restricted Securities.
4. Liquidated Damages
(a) The Issuers and the Initial Purchaser agree that the Holders will
suffer damages if the Issuers fail to fulfill their obligations under Section 2
or Section 3 hereof and that it would not be feasible to ascertain the extent of
such damages with precision. Accordingly, the Issuers agree, jointly and
severally, to pay, as liquidated damages, additional interest on the Notes
("Liquidated Damages") under the circumstances and to the extent set forth below
(each of which shall be given independent effect):
(i) if (A) neither the Exchange Offer Registration Statement
nor the Initial Shelf Registration has been filed on or prior to the
applicable Filing Date or (B) notwithstanding that the Issuers have
consummated or will consummate the Exchange Offer, the Issuers are
required to file a Shelf Registration and such Shelf Registration is
not filed on or prior to the Filing Date applicable thereto, then,
commencing on the day after any such Filing Date, Liquidated Damages
shall accrue on the principal amount of the Notes at a rate of .50% per
annum on the principal amount of Notes held by such Holder for the
first 180 days immediately following each such Filing Date, and such
Liquidated Damages shall increase by an additional .50% per annum on
the principal amount commencing at the beginning of each subsequent
180-day period; or
(ii) if (A) neither the Exchange Offer Registration Statement
nor the Initial Shelf Registration is declared effective by the SEC on
or prior to the relevant Effectiveness Date or (B) notwithstanding that
the Issuers have consummated or will consummate the Exchange
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Offer, the Issuers are required to file a Shelf Registration and such
Shelf Registration is not declared effective by the SEC on or prior to
the Effectiveness Date in respect of such Shelf Registration, then,
commencing on the day after such Effectiveness Date, Liquidated Damages
shall accrue on the principal amount of the Notes at a rate of .50% per
annum on the principal amount of Notes held by such Holder for the
first 180 days immediately following the day after such Effectiveness
Date, and such Liquidated Damages shall increase by an additional .50%
per annum on the principal amount commencing at the beginning of each
subsequent 180-day period; or
(iii) if (A) the Issuers have not exchanged Exchange Notes for
all Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to the 180th day after the Issue Date or (B) if
applicable, a Shelf Registration has been declared effective and such
Shelf Registration ceases to be effective at any time during the
Effectiveness Period, then Liquidated Damages shall accrue on the
principal amount of the Notes at a rate of .50% per annum on the
principal amount of Notes held by such Holder for the first 180 days
commencing on the (x) 181st day after such Issue Date, in the case of
(A) above, or (y) the day such Shelf Registration ceases to be
effective in the case of (B) above, and such Liquidated Damages shall
increase by an additional .50% per annum on the principal amount at the
beginning of each subsequent 180-day period (each such event referred
to in clauses (i) through (iii) above a "Registration Default");
provided, however, that the Liquidated Damages on the Notes may not exceed at
any one time in the aggregate 1.0% per annum on the principal amount of Notes
held by such Holder; provided, further, however, that (1) upon the filing of the
applicable Exchange Offer Registration Statement or the applicable Shelf
Registration as required hereunder (in the case of clause (i) above of this
Section 4), (2) upon the effectiveness of the Exchange Offer Registration
Statement or the applicable Shelf Registration Statement as required hereunder
(in the case of clause (ii) of this Section 4), or (3) upon the exchange of the
applicable Exchange Notes for all Notes tendered (in the case of clause (iii)(A)
of this Section 4), or upon the effectiveness of the applicable Shelf
Registration Statement which had ceased to remain effective (in the case of
(iii)(B) of this Section 4), Liquidated Damages on the Notes in respect of which
such events relate as a result of such clause (or the relevant subclause
thereof), as the case may be, shall cease to accrue.
(b) The Issuers shall notify the Trustee within one business day after
each and every date on which an event occurs in respect of which Liquidated
Damages are required to be paid (an "Event Date"). Any amounts of Liquidated
Damages due pursuant to (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be
payable in cash semi-annually on each Damages Payment Date (to the holders of
record (the "Record Holders") on the regular record date therefor (as specified
in the Indenture) immediately preceding such dates), commencing with the first
such date occurring after any such Liquidated Damages commence to accrue. The
amount of Liquidated Damages will be determined by multiplying the applicable
Liquidated Damages by the principal amount of the Transfer Restricted
Securities, multiplied by a fraction, the numerator of which is the number of
days such Liquidated Damages were applicable during such period (determined on
the basis of a 360-day year comprised of twelve 30-day months and, in the case
of a partial month, the actual number of days elapsed), and the denominator of
which is 360. All accrued Liquidated Damages shall be paid to the Record Holders
by the Issuers by wire transfer of immediately available funds or by federal
funds check on
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<PAGE> 12
each Damages Payment Date. Following the cure of all Registration Defaults
relating to any particular Transfer Restricted Securities, the accrual of
Liquidated Damages with respect to such Transfer Restricted Securities will
cease.
5. Registration Procedures
In connection with the filing of any Registration Statement pursuant to
Sections 2 or 3 hereof, the Issuers shall effect such registrations to permit
the sale of the securities covered thereby in accordance with the intended
method or methods of disposition thereof, and pursuant thereto and in connection
with any Registration Statement filed by the Issuers hereunder the Issuers
shall:
(a) Prepare and file with the SEC prior to the applicable
Filing Date, a Registration Statement or Registration Statements as
prescribed by Sections 2 or 3 hereof, and use their respective best
efforts to cause each such Registration Statement to become effective
and remain effective as provided herein; provided, however, that, if
(1) such filing is pursuant to Section 3 hereof, or (2) a Prospectus
contained in the Exchange Offer Registration Statement filed pursuant
to Section 2 hereof is required to be delivered under the Securities
Act by any Participating Broker-Dealer who seeks to sell Exchange Notes
during the Applicable Period relating thereto, before filing any
Registration Statement or Prospectus or any amendments or supplements
thereto, the Issuers shall furnish to and afford the Holders of the
Transfer Restricted Securities covered by such Registration Statement
or each such Participating Broker-Dealer, as the case may be, their
counsel and the managing underwriters, if any, a reasonable opportunity
to review copies of all such documents (including copies of any
documents to be incorporated by reference therein and all exhibits
thereto) proposed to be filed (in each case at least five days prior to
such filing, or such later date as is reasonable under the
circumstances). The Issuers shall not file any Registration Statement
or Prospectus or any amendments or supplements thereto if the Holders
of a majority in aggregate principal amount of the Transfer Restricted
Securities covered by such Registration Statement, or any such
Participating Broker-Dealer, as the case may be, their counsel, or the
managing underwriters, if any, shall reasonably object.
(b) Prepare and file with the SEC such amendments and
post-effective amendments to each Shelf Registration Statement or
Exchange Offer Registration Statement, as the case may be, as may be
necessary to keep such Registration Statement continuously effective
for the Effectiveness Period or the Applicable Period, as the case may
be; cause the related Prospectus to be supplemented by any Prospectus
supplement required by applicable law, and as so supplemented to be
filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; and comply with the provisions of
the Securities Act and the Exchange Act applicable to each of them with
respect to the disposition of all securities covered by such
Registration Statement as so amended or in such Prospectus as so
supplemented and with respect to the subsequent resale of any
securities being sold by a Participating Broker-Dealer covered by any
such Prospectus. The Issuers shall be deemed not to have used their
respective diligent best efforts to keep a Registration Statement
effective during the Effective Period or the Applicable Period, as the
case may be, relating thereto if any of the Issuers voluntarily takes
any action that would result in selling Holders of the Transfer
Restricted Securities covered thereby or Participating Broker-Dealers
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seeking to sell Exchange Notes not being able to sell such Transfer
Restricted Securities or such Exchange Notes during that period unless
(i) such action is required by applicable law or (ii) such Issuers
comply with the provisions of the last sentence of Section 5(k) or the
last paragraph of this Section 5.
(c) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period relating thereto from whom the Company has received written
notice that it will be a Participating Broker-Dealer in the Exchange
Offer, notify the selling Holders of Transfer Restricted Securities, or
each such Participating Broker-Dealer, as the case may be, their
counsel and the managing underwriters, if any, promptly (but in any
event within one day), and confirm such notice in writing, (i) when a
Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective under the
Securities Act (including in such notice a written statement that any
Holder may, upon request, obtain, at the sole expense of the Issuers,
one conformed copy of such Registration Statement or post-effective
amendment including financial statements and schedules, documents
incorporated or deemed to be incorporated by reference and exhibits),
(ii) of the issuance by the SEC of any stop order suspending the
effectiveness of a Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus or the initiation of
any proceedings for that purpose, (iii) if at any time when a
prospectus is required by the Securities Act to be delivered in
connection with sales of the Transfer Restricted Securities or resales
of Exchange Notes by Participating Broker-Dealers the representations
and warranties of any of the Issuers contained in any agreement
(including any underwriting agreement) contemplated by Section 5(m)
hereof cease to be true and correct in all material respects, (iv) of
the receipt by any of the Issuers of any notification with respect to
the suspension of the qualification or exemption from qualification of
a Registration Statement or any of the Transfer Restricted Securities
or the Exchange Notes to be sold by any Participating Broker-Dealer for
offer or sale in any jurisdiction, or the initiation or threatening of
any proceeding for such purpose, (v) of the happening of any event, the
existence of any condition or any information becoming known that makes
any statement made in such Registration Statement or related Prospectus
or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of
any changes in or amendments or supplements to such Registration
Statement, Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
that in the case of the Prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (vi) of any of the Issuers' determination that a
post-effective amendment to a Registration Statement would be
appropriate.
(d) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section
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<PAGE> 14
2 hereof is required to be delivered under the Securities Act by any
Participating Broker-Dealer who seeks to sell Exchange Notes during the
Applicable Period, use their respective best efforts to prevent the
issuance of any order suspending the effectiveness of a Registration
Statement or of any order preventing or suspending the use of a
Prospectus or suspending the qualification (or exemption from
qualification) of any of the Transfer Restricted Securities or the
Exchange Notes to be sold by any Participating Broker-Dealer, for sale
in any jurisdiction, and, if any such order is issued, to use their
respective best efforts to obtain the withdrawal of any such order at
the earliest possible date.
(e) Subject to the provisions of the last sentence of Section
5(k), if a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriter or underwriters (if any), or the
Holders of a majority in aggregate principal amount of the Transfer
Restricted Securities being sold in connection with an underwritten
offering or any Participating Broker-Dealer, (i) as promptly as
practicable incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or underwriters
(if any), such Holders, any Participating Broker-Dealer or counsel for
any of them reasonably request to be included therein, (ii) make all
required filings of such prospectus supplement or such post-effective
amendment as soon as practicable after the Issuers have received
notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement; provided, however, that the
Issuers shall not be required to take any action pursuant to this
Section 5(e) that would violate applicable law.
(f) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, furnish to each selling Holder of Transfer Restricted
Securities and to each such Participating Broker-Dealer who so requests
and to counsel and each managing underwriter, if any, at the sole
expense of the Issuers, one conformed copy of the Registration
Statement or Registration Statements and each post-effective amendment
thereto, including financial statements and schedules, and, if
requested, all documents incorporated or deemed to be incorporated
therein by reference and all exhibits.
(g) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, deliver to each selling Holder of Transfer Restricted
Securities, or each such Participating Broker-Dealer, as the case may
be, their respective counsel, and the underwriters, if any, at the sole
expense of the Issuers, as many copies of the Prospectus or
Prospectuses (including each form of preliminary prospectus) and each
amendment or supplement thereto and any documents incorporated by
reference therein as such Persons may reasonably request; and, subject
to the last paragraph of this Section 5, each of the Issuers hereby
consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders of Transfer Restricted
Securities or each such Participating Broker-Dealer, as the case may
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<PAGE> 15
be, and the underwriters or agents, if any, and dealers (if any), in
connection with the offering and sale of the Transfer Restricted
Securities covered by, or the sale by Participating Broker-Dealers of
the Exchange Notes pursuant to, such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Transfer Restricted
Securities or any delivery of a Prospectus contained in the Exchange
Offer Registration Statement by any Participating Broker-Dealer who
seeks to sell Exchange Notes during the Applicable Period, to use their
respective best efforts to register or qualify, and to cooperate with
the selling Holders of Transfer Restricted Securities or each such
Participating Broker-Dealer, as the case may be, the managing
underwriter or underwriters, if any, and their respective counsel in
connection with the registration or qualification (or exemption from
such registration or qualification) of such Transfer Restricted
Securities for offer and sale under the securities or Blue Sky laws of
such jurisdictions within the United States as any selling Holder,
Participating Broker-Dealer, or the managing underwriter or
underwriters reasonably request in writing; provided, however, that
where Exchange Notes held by Participating Broker-Dealers or Transfer
Restricted Securities are offered other than through an underwritten
offering, the Issuers agree to cause their counsel to perform Blue Sky
investigations and file registrations and qualifications required to be
filed pursuant to this Section 5(h); keep each such registration or
qualification (or exemption therefrom) effective during the period such
Registration Statement is required to be kept effective and do any and
all other acts or things reasonably necessary or advisable to enable
the disposition in such jurisdictions of the Exchange Notes held by
Participating Broker-Dealers or the Transfer Restricted Securities
covered by the applicable Registration Statement; provided, however,
that none of the Issuers shall be required to (A) qualify generally to
do business in any jurisdiction where it is not then so qualified, (B)
take any action that would subject it to general service of process in
any such jurisdiction where it is not then so subject or (C) subject
itself to taxation in excess of a nominal dollar amount in any such
jurisdiction where it is not then so subject.
(i) If a Shelf Registration is filed pursuant to Section 3
hereof, cooperate with the selling Holders of Transfer Restricted
Securities and the managing underwriter or underwriters, if any, to
facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a
form eligible for deposit with The Depository Trust Company; and enable
such Transfer Restricted Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters,
if any, or Holders may request.
(j) Use their respective best efforts to cause the Transfer
Restricted Securities covered by the Registration Statement to be
registered with or approved by such other governmental agencies or
authorities as may be reasonably necessary to enable the seller or
sellers thereof or the underwriter or underwriters, if any, to
consummate the disposition of such Transfer Restricted Securities,
except as may be required solely as a consequence of the nature of such
selling Holder's business, in which case the Issuers will cooperate in
all reasonable respects with the filing of such Registration Statement
and the granting of such approvals.
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<PAGE> 16
(k) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, upon the occurrence of any event contemplated by paragraph
5(c)(v) or 5(c)(vi) hereof, as promptly as practicable prepare and
(subject to Section 5(a) hereof) file with the SEC, at the sole expense
of the Issuers, a supplement or post-effective amendment to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by
reference, or file any other required document so that, as thereafter
delivered to the purchasers of the Transfer Restricted Securities being
sold thereunder or to the purchasers of the Exchange Notes to whom such
Prospectus will be delivered by a Participating Broker-Dealer, any such
Prospectus will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the
foregoing, the Issuers shall not be required to amend or supplement a
Registration Statement, any related prospectus or any document
incorporated therein by reference in the event that, and for a period
(a "Black Out Period") not to exceed, for so long as this Agreement is
in effect, an aggregate of 45 days if (x) an event occurs and is
continuing as a result of which a Registration Statement, any related
prospectus or any document incorporated therein by reference as then
amended or supplemented would, in the Issuers' good faith judgment,
contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
and (y) (1) the Issuers determine in good faith that the disclosure of
such event at such time would have a material adverse effect on the
business, operations or prospects of the Issuers or (2) the disclosure
otherwise relates to a material business transaction which has not yet
been publicly disclosed in any relevant jurisdiction.
(l) Prior to the effective date of the first Registration
Statement relating to the Transfer Restricted Securities, (i) provide
the Trustee with certificates for the Transfer Restricted Securities in
a form eligible for deposit with The Depository Trust Company and (ii)
provide a CUSIP number for the Transfer Restricted Securities.
(m) In connection with any underwritten offering of Transfer
Restricted Securities pursuant to a Shelf Registration, enter into an
underwriting agreement as is customary in underwritten offerings of
debt securities similar to the Notes in form and substance reasonably
satisfactory to the Issuers and take all such other actions as are
reasonably requested by the managing underwriter or underwriters in
order to expedite or facilitate the registration or the disposition of
such Transfer Restricted Securities and, in such connection, (i) make
such representations and warranties to, and covenants with, the
underwriters with respect to the business of the Issuers and their
respective subsidiaries (including any acquired business, properties or
entity, if applicable) and the Registration Statement, Prospectus and
documents, if any, incorporated or deemed to be incorporated by
reference therein, in each case, as are customarily made by issuers to
underwriters in underwritten offerings of debt securities similar to
the Notes, and confirm the same in writing if and when requested in
form and substance reasonably satisfactory to the Issuers; (ii) obtain
the written opinions of counsel to
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<PAGE> 17
the Issuers and written updates thereof in form, scope and substance
reasonably satisfactory to the managing underwriter or underwriters,
addressed to the underwriters covering the matters customarily covered
in opinions reasonably requested in underwritten offerings and such
other matters as may be reasonably requested by the managing
underwriter or underwriters; (iii) use their best efforts to obtain
"cold comfort" letters and updates thereof in form, scope and substance
reasonably satisfactory to the managing underwriter or underwriters
from the independent certified public accountants of the Issuers (and,
if necessary, any other independent certified public accountants of any
subsidiary of any of the Issuers or of any business acquired by any of
the Issuers for which financial statements and financial data are, or
are required to be, included or incorporated by reference in the
Registration Statement), addressed to each of the underwriters, such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
underwritten offerings of debt securities similar to the Notes and such
other matters as reasonably requested by the managing underwriter or
underwriters as permitted by the Statement on Auditing Standards No.
72; and (iv) if an underwriting agreement is entered into, the same
shall contain indemnification provisions and procedures no less
favorable to the sellers and underwriters, if any, than those set forth
in Section 7 hereof (or such other provisions and procedures acceptable
to Holders of a majority in aggregate principal amount of Transfer
Restricted Securities covered by such Registration Statement and the
managing underwriter or underwriters or agents, if any). The above
shall be done at each closing under such underwriting agreement, or as
and to the extent required thereunder.
(n) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, make available for inspection by any selling Holder of such
Transfer Restricted Securities being sold, or each such Participating
Broker-Dealer, as the case may be, any underwriter participating in any
such disposition of Transfer Restricted Securities, if any, and any
attorney, accountant or other agent retained by any such selling Holder
or each such Participating Broker-Dealer, as the case may be, or
underwriter (collectively, the "Inspectors"), at the offices where
normally kept, during reasonable business hours, all financial and
other records, pertinent corporate documents and instruments of the
Issuers and their respective subsidiaries (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise any
applicable due diligence responsibilities, and cause the officers,
directors and employees of the Issuers and their respective
subsidiaries to supply all information reasonably requested by any such
Inspector in connection with such Registration Statement and
Prospectus. Each Inspector shall agree in writing that it will keep the
Records confidential and that it will not disclose any of the Records
unless (i) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in such Registration Statement or
Prospectus, (ii) the release of such Records is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction, (iii)
disclosure of such information is necessary or advisable, in the
opinion of counsel for any Inspector, in connection with any action,
claim, suit or proceeding, directly or indirectly, involving or
potentially involving such Inspector and arising out of, based upon,
relating to, or involving this Agreement or the Purchase Agreement, or
any
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<PAGE> 18
transactions contemplated hereby or thereby or arising hereunder or
thereunder, or (iv) the information in such Records has been made
generally available to the public; provided, however, that prior notice
shall be provided as soon as practicable to the Issuers of the
potential disclosure of any information by such Inspector pursuant to
clauses (ii) or (iii) of this sentence to permit the Issuers to obtain
a protective order (or waive the provisions of this paragraph (n)) and
that such Inspector shall take such actions as are reasonably necessary
to protect the confidentiality of such information (if practicable) to
the extent such action is otherwise not inconsistent with, an
impairment of or in derogation of the rights and interests of the
Holder or any Inspector. Each selling Holder of such Transfer
Restricted Securities and each such Participating Broker-Dealer will be
required to agree that information obtained by it as a result of such
inspections shall be deemed confidential and shall not be used by it as
the basis for any market transactions in the securities of the Issuers
unless and until such is made generally available to the public. Each
selling Holder of such Transfer Restricted Securities and each such
Participating Broker-Dealer will be required to further agree that it
will, upon learning that disclosure of such Records is sought in a
court of competent jurisdiction, give notice to the Issuers and allow
the Issuers to undertake appropriate action to prevent disclosure of
the Records deemed confidential at the Issuers' expense.
(o) Provide an indenture trustee for the Transfer Restricted
Securities or the Exchange Notes, as the case may be, and cause the
Indenture or the trust indenture provided for in Section 2(a) hereof,
as the case may be, to be qualified under the TIA not later than the
effective date of the first Registration Statement relating to the
Transfer Restricted Securities; and in connection therewith, cooperate
with the trustee under any such indenture and the Holders of the
Transfer Restricted Securities, to effect such changes to such
indenture as may be required for such indenture to be so qualified in
accordance with the terms of the TIA; and execute, and use their
respective best efforts to cause such trustee to execute, all documents
as may be required to effect such changes, and all other forms and
documents required to be filed with the SEC to enable such indenture to
be so qualified in a timely manner.
(p) Comply with all applicable rules and regulations of the
SEC and make generally available to their respective securityholders
earnings statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder (or any similar rule promulgated
under the Securities Act) no later than 45 days after the end of any
12-month period (or 90 days after the end of any 12-month period if
such period is a fiscal year) (i) commencing at the end of any fiscal
quarter in which Transfer Restricted Securities are sold to
underwriters in a firm commitment or best efforts underwritten offering
and (ii) if not sold to underwriters in such an offering, commencing on
the first day of the first fiscal quarter of the Issuers after the
effective date of a Registration Statement, which statements shall
cover said 12-month periods.
(q) Upon consummation of the Exchange Offer or a Private
Exchange, obtain an opinion of counsel to the Issuers, in a form
customary for underwritten transactions, addressed to the Trustee for
the benefit of all Holders of Transfer Restricted Securities
participating in the Exchange Offer or the Private Exchange, as the
case may be, that the Exchange Notes or Private Exchange Notes, as the
case may be, and the related indenture
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<PAGE> 19
constitute legal, valid and binding obligations of the Issuers,
enforceable against the Issuers in accordance with its respective
terms, subject to customary exceptions and qualifications.
(r) If the Exchange Offer or a Private Exchange is to be
consummated, upon delivery of the Transfer Restricted Securities by
Holders to the Issuers (or to such other Person as directed by the
Issuers) in exchange for the Exchange Notes or the Private Exchange
Notes, as the case may be, the Issuers shall mark, or cause to be
marked, on such Transfer Restricted Securities that such Transfer
Restricted Securities are being cancelled in exchange for the Exchange
Notes or the Private Exchange Notes, as the case may be; in no event
shall such Transfer Restricted Securities be marked as paid or
otherwise satisfied.
(s) Cooperate with each seller of Transfer Restricted
Securities covered by any Registration Statement and each underwriter,
if any, participating in the disposition of such Transfer Restricted
Securities and their respective counsel in connection with any filings
required to be made with the National Association of Securities
Dealers, Inc. (the "NASD").
(t) Use their respective best efforts to take all other steps
reasonably necessary to effect the registration of the Exchange Notes
and/or Transfer Restricted Securities covered by a Registration
Statement contemplated hereby.
The Issuers may require each seller of Transfer Restricted Securities
as to which any registration is being effected to furnish to the Issuers such
information regarding such seller and the distribution of such Transfer
Restricted Securities as the Issuers may, from time to time, reasonably request.
The Issuers may exclude from such registration the Transfer Restricted
Securities of any seller so long as such seller fails to furnish such
information within a reasonable time after receiving such request. Each seller
as to which any Shelf Registration is being effected agrees to furnish promptly
to the Issuers all information required to be disclosed in order to make the
information previously furnished to the Issuers by such seller not materially
misleading.
If any such Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Issuers, then such Holder shall
have the right to require (i) the insertion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the holding
by such Holder of such securities is not to be construed as a recommendation by
such Holder of the investment quality of the securities covered thereby and that
such holding does not imply that such Holder will assist in meeting any future
financial requirements of any of the Issuers, or (ii) in the event that such
reference to such Holder by name or otherwise is not required by the Securities
Act or any similar federal statute then in force, the deletion of the reference
to such Holder in any amendment or supplement to the Registration Statement
filed or prepared subsequent to the time that such reference ceases to be
required.
Each Holder of Transfer Restricted Securities and each Participating
Broker-Dealer agrees by its acquisition of such Transfer Restricted Securities
or Exchange Notes to be sold by such Participating Broker-Dealer, as the case
may be, that, upon actual receipt of any notice from the Issuers of the
happening of any event of the kind described in Section 5(c)(ii), 5(c)(iv),
5(c)(v), or 5(c)(vi) hereof, such Holder will forthwith discontinue disposition
of such Transfer Restricted Securities covered by such Registration Statement or
Prospectus or Exchange Notes to be sold by
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<PAGE> 20
such Holder or Participating Broker-Dealer, as the case may be, until such
Holder's or Participating Broker-Dealer's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 5(k) hereof, or until
it is advised in writing (the "Advice") by any of the Issuers that the use of
the applicable Prospectus may be resumed, and has received copies of any
amendments or supplements thereto. In the event that the Issuers shall give any
such notice, each of the Effectiveness Period and the Applicable Period shall be
extended by the number of days during such periods from and including the date
of the giving of such notice to and including the date when each seller of
Transfer Restricted Securities covered by such Registration Statement or
Exchange Notes to be sold by such Participating Broker-Dealer, as the case may
be, shall have received (x) the copies of the supplemented or amended Prospectus
contemplated by Section 5(k) hereof or (y) the Advice.
6. Registration Expenses
All fees and expenses incident to the performance of or compliance with
this Agreement by the Issuers shall be borne by the Issuers, jointly and
severally, whether or not the Exchange Offer Registration Statement or any Shelf
Registration is filed or becomes effective or the Exchange Offer is consummated,
including, without limitation, (i) all registration and filing fees (including,
without limitation, (A) fees with respect to filings required to be made with
the NASD in connection with an underwritten offering and (B) fees and expenses
of compliance with state securities or Blue Sky laws (including, without
limitation, reasonable fees and disbursements of counsel in connection with Blue
Sky qualifications of the Transfer Restricted Securities or Exchange Notes and
determination of the eligibility of the Transfer Restricted Securities or
Exchange Notes for investment under the laws of such jurisdictions (x) where the
holders of Transfer Restricted Securities are located, in the case of the
Exchange Notes, or (y) as provided in Section 5(h) hereof, in the case of
Transfer Restricted Securities or Exchange Notes to be sold by a Participating
Broker-Dealer during the Applicable Period)), (ii) printing expenses, including,
without limitation, expenses of printing certificates for Transfer Restricted
Securities or Exchange Notes in a form eligible for deposit with The Depository
Trust Company and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriter or underwriters, if any, by the Holders of
a majority in aggregate principal amount of the Transfer Restricted Securities
included in any Registration Statement or in respect of Transfer Restricted
Securities or Exchange Notes to be sold by any Participating Broker-Dealer
during the Applicable Period, as the case may be, (iii) messenger, telephone and
delivery expenses, (iv) fees and disbursements of counsel for the Issuers and
reasonable fees and disbursements of one special counsel for all of the sellers
of Transfer Restricted Securities (exclusive of any counsel retained pursuant to
Section 7 hereof), (v) fees and disbursements of all independent certified
public accountants referred to in Section 5(m)(iii) hereof (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) Securities Act liability
insurance, if the Issuers desire such insurance, (vii) fees and expenses of all
other Persons retained by any of the Issuers, (viii) internal expenses of the
Issuers (including, without limitation, all salaries and expenses of officers
and employees of all of the Issuers performing legal or accounting duties), (ix)
the expense of any annual audit, (x) the fees and expenses incurred in
connection with the listing of the securities to be registered on any securities
exchange, and the obtaining of a rating of the securities, in each case, if
applicable, and (xi) the expenses relating to printing, word processing and
distributing all Registration Statements, underwriting agreements, indentures
and any other documents necessary in order to comply with this Agreement.
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<PAGE> 21
7. Indemnification
(a) The Issuers and any Subsidiary Guarantors agree, jointly and
severally, to indemnify and hold harmless each Holder of Transfer Restricted
Securities and each Participating Broker-Dealer selling Exchange Notes during
the Applicable Period, the officers, directors, employees and agents of each
such Person, and each Person, if any, who controls any such Person within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act (each, a "Participant"), from and against any and all losses, claims,
damages, judgments, liabilities and expenses (including, without limitation, the
reasonable legal fees and other expenses actually incurred in connection with
any suit, action or proceeding or any claim asserted) caused by, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or any amendment thereto) or
Prospectus (as amended or supplemented if any of the Issuers shall have
furnished any amendments or supplements thereto) or any preliminary prospectus,
or caused by, arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the case of the Prospectus in light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Participant furnished to the Issuers
in writing by such Participant expressly for use therein; provided, however,
that the Issuers will not be liable if such untrue statement or omission or
alleged untrue statement or omission was contained or made in any preliminary
prospectus and corrected in the final Prospectus or any amendment or supplement
thereto and any such loss, liability, claim, or damage or expense suffered or
incurred by the Participants resulted from any action, claim or suit by any
Person who purchased Transfer Restricted Securities or Exchange Notes which are
the subject thereof from such Participant and it is established in the related
proceeding that such Participant failed to deliver or provide a copy of the
final Prospectus (as amended or supplemented) to such Person with or prior to
the confirmation of the sale of such Transfer Restricted Securities or Exchange
Notes sold to such Person if required by applicable law.
(b) Each Participant agrees, severally and not jointly, to indemnify
and hold harmless each of the Issuers, their respective directors, their
respective officers who sign the Registration Statement and each Person who
controls each Issuer within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent (but on a several, and not
joint, basis) as the foregoing indemnity from the Issuers to each Participant,
but only with reference to information relating to such Participant furnished to
the Issuers in writing by such Participant expressly for use in any Registration
Statement or Prospectus, any amendment or supplement thereto, or any preliminary
prospectus. The liability of any Participant under this paragraph shall in no
event exceed the proceeds received by such Participant from sales of Transfer
Restricted Securities or Exchange Notes giving rise to such obligations.
(c) If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any Person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs, such Person (the "Indemnified Person") shall promptly
notify the Persons against whom such indemnity may be sought (the "Indemnifying
Persons") in writing, and the Indemnifying Persons, upon request of the
Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent
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<PAGE> 22
the Indemnified Person and any others the Indemnifying Persons may reasonably
designate in such proceeding and shall pay the fees and expenses actually
incurred by such counsel related to such proceeding; provided, however, that the
failure to so notify the Indemnifying Persons shall not relieve any of them of
any obligation or liability which any of them may have hereunder or otherwise.
In any such proceeding, any Indemnified Person shall have the right to retain
its own counsel, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Person unless (i) the Indemnifying Persons and the
Indemnified Person shall have mutually agreed to the contrary, (ii) the
Indemnifying Persons shall have failed within a reasonable period of time to
retain counsel reasonably satisfactory to the Indemnified Person or (iii) the
named parties in any such proceeding (including any impleaded parties) include
both any Indemnifying Person and the Indemnified Person or any affiliate thereof
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that, unless there exists a conflict among Indemnified Persons, the Indemnifying
Persons shall not, in connection with such proceeding or separate but
substantially similar related proceeding in the same jurisdiction arising out of
the same general allegations, be liable for the fees and expenses of more than
one separate firm (in addition to any local counsel) for all Indemnified
Persons, and that all such fees and expenses shall be reimbursed promptly as
they are incurred. Any such separate firm for the Participants and such control
Persons of Participants shall be designated in writing by Participants who sold
a majority in interest of Transfer Restricted Securities and Exchange Notes sold
by all such Participants and shall be reasonably acceptable to the Issuers and
any such separate firm for the Issuers, their respective directors, their
respective officers and such control Persons of the Issuers shall be designated
in writing by the Issuers and shall be reasonably acceptable to the Holders.
The Indemnifying Persons shall not be liable for any settlement of any
proceeding effected without its prior written consent (which consent shall not
be unreasonably withheld or delayed), but if settled with such consent or if
there be a final non-appealable judgment for the plaintiff for which the
Indemnified Person is entitled to indemnification pursuant to this Agreement,
each of the Indemnifying Persons agrees to indemnify and hold harmless each
Indemnified Person from and against any loss or liability by reason of such
settlement or judgment. No Indemnifying Person shall, without the prior written
consent of the Indemnified Persons (which consent shall not be unreasonably
withheld or delayed), effect any settlement or compromise of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party, or indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement (A) includes an unconditional written
release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (B) does not include any statement as
to an admission of fault, culpability or failure to act by or on behalf of such
Indemnified Person.
(d) If the indemnification provided for in the first and second
paragraphs of this Section 7 is for any reason unavailable to, or insufficient
to hold harmless, an Indemnified Person in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Person under
such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such Indemnified Person as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
(i) the relative benefits received by the Indemnifying Person or Persons on the
one hand and the Indemnified Person or Persons on the other from the offering of
the Notes or (ii) if the allocation
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<PAGE> 23
provided by the foregoing clause (i) is not permitted by applicable law, not
only such relative benefits but also the relative fault of the Indemnifying
Person or Persons on the one hand and the Indemnified Person or Persons on the
other in connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof) as well as any other relevant equitable
considerations. The relative benefits received by the Issuers on the one hand
and the Participants on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (net of discounts and commissions but
before deducting expenses) of the Notes received by the Issuers bears to the
total proceeds received by such Participant from the sale of Transfer Restricted
Securities or Exchange Notes, as the case may be, in each case as set forth in
the table on the cover page of the Offering Memorandum in respect of the sale of
the Notes. The relative fault of the parties shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Issuers on the one hand or such
Participant or such other Indemnified Person, as the case may be, on the other,
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances.
(e) The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by pro rata allocation
(even if the Participants were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Person as a result of the losses, claims,
damages, judgments, liabilities and expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any reasonable legal or other expenses actually incurred by such
Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 7, in no event shall a
Participant be required to contribute any amount in excess of the amount by
which proceeds received by such Participant from sales of Transfer Restricted
Securities or Exchange Notes, as the case may be, exceeds the amount of any
damages that such Participant has otherwise been required to pay or has paid by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the Indemnifying Party to the Indemnified Party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Issuers set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Holder or any person who controls a
Holder, any Issuer, their respective directors, officers, employees or agents or
any person controlling any Issuer, and (ii) any termination of this Agreement.
(g) The indemnity and contribution agreements contained in this Section
7 will be in addition to any liability which the Indemnifying Persons may
otherwise have to the Indemnified Persons referred to above.
-22-
<PAGE> 24
8. Rules 144 and 144A
The Issuers covenant and agree that each of them will file the reports
required to be filed by each of them under the Securities Act and the Exchange
Act and the rules and regulations adopted by the SEC thereunder in a timely
manner in accordance with the requirements of the Securities Act and the
Exchange Act and, if at any time any of the Issuers is not required to file such
reports, such Issuer will, upon the request of any Holder or beneficial owner of
Transfer Restricted Securities, make available such information necessary to
permit sales pursuant to Rule 144A under the Securities Act. The Issuers further
covenant and agree, for so long as any Transfer Restricted Securities remain
outstanding that each of them will take such further action as any Holder of
Transfer Restricted Securities may reasonably request, all to the extent
required from time to time to enable such holder to sell Transfer Restricted
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities
Act, as such Rules may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC.
9. Underwritten Registrations
If any of the Transfer Restricted Securities covered by any Shelf
Registration are to be sold in an underwritten offering, the investment banker
or investment bankers and manager or managers that will manage the offering will
be selected by the Holders of a majority in aggregate principal amount of such
Transfer Restricted Securities included in such offering and shall be reasonably
acceptable to the Issuers.
No Holder of Transfer Restricted Securities may participate in any
underwritten registration hereunder unless such Holder (a) agrees to sell such
Holder's Transfer Restricted Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
10. Miscellaneous
(a) No Inconsistent Agreements. None of the Issuers has, as of the date
hereof, and none of the Issuers shall, after the date of this Agreement, enter
into any agreement with respect to any of its securities that is inconsistent
with the rights granted to the Holders of Transfer Restricted Securities in this
Agreement or otherwise conflicts with the provisions hereof. The rights granted
to the Holders hereunder do not in any way conflict with and are not
inconsistent with the rights granted to the holders of any of the Issuers' other
issued and outstanding securities under any such agreements. Except as otherwise
disclosed to the Initial Purchaser, none of the Issuers has entered and none
will enter into any agreement with respect to any of its securities which will
grant to any Person piggy-back registration rights with respect to any
Registration Statement.
(b) Adjustments Affecting Transfer Restricted Securities. None of the
Issuers shall, directly or indirectly, take any action with respect to the
Transfer Restricted Securities as a class that
-23-
<PAGE> 25
would adversely affect the ability of the Holders of Transfer Restricted
Securities to include such Transfer Restricted Securities in a registration
undertaken pursuant to this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, otherwise than with the prior written
consent of (I) the Issuers and the Subsidiary Guarantors, if any, and (II)(A)
the Holders of not less than a majority in aggregate principal amount of the
then outstanding Transfer Restricted Securities and (B) in circumstances that
would adversely affect the Participating Broker-Dealers, the Participating
Broker-Dealers holding not less than a majority in aggregate principal amount of
the Exchange Notes held by all Participating Broker-Dealers; provided, however,
that Section 7 and this Section 10(c) may not be amended, modified or
supplemented without the prior written consent of each Holder and each
Participating Broker-Dealer (including any person who was a Holder or
Participating Broker-Dealer of Transfer Restricted Securities or Exchange Notes,
as the case may be, disposed of pursuant to any Registration Statement) affected
by any such amendment, modification or supplement. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders of Transfer
Restricted Securities whose securities are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect, impair, limit or
compromise the rights of other Holders of Transfer Restricted Securities may be
given by Holders of at least a majority in aggregate principal amount of the
Transfer Restricted Securities being sold pursuant to such Registration
Statement.
(d) Notices. All notices and other communications (including, without
limitation, any notices or other communications to the Trustee) provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next-day air courier or facsimile:
(i) if to a Holder of the Transfer Restricted Securities or
any Participating Broker-Dealer, at the most current address of such
Holder or Participating Broker-Dealer, as the case may be, set forth on
the records of the registrar under the Indenture.
(ii) if to the Issuer or any of the Subsidiary Guarantors, at
the address as follows:
c/o Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Facsimile No.: (713) 654-2562
Attention: Rick G. Lester
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address and in the manner specified in such Indenture.
-24-
<PAGE> 26
(e) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties hereto,
the Holders and the Participating Broker-Dealers.
(f) Release of Subsidiary Guarantors. If any Subsidiary Guarantor
becomes a party to this Agreement and is subsequently released from its
obligations under the Indenture in accordance with the terms thereof then such
Subsidiary Guarantor shall be released from its obligations hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE
AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
(j) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(k) Securities Held by the Issuers or Their Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Transfer Restricted
Securities is required hereunder, Transfer Restricted Securities held by any of
the Issuers or any of their respective affiliates (as such term is defined in
Rule 405 under the Securities Act) shall not be counted in determining whether
such consent or approval was given by the Holders of such required percentage.
(l) Third Party Beneficiaries. Holders of Transfer Restricted
Securities and Participating Broker-Dealers are intended third party
beneficiaries of this Agreement, and this Agreement may be enforced by such
Persons.
(m) Entire Agreement. This Agreement, together with the Purchase
Agreement and the Indenture, is intended by the parties as a final and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein and any and all prior oral or
written agreements, representations, or warranties, contracts, understandings,
correspondence, conversations and memoranda between the Holders on the one hand
and the Issuers
-25-
<PAGE> 27
on the other, or between or among any agents, representatives, parents,
subsidiaries, affiliates, predecessors in interest or successors in interest
with respect to the subject matter hereof and thereof are merged herein and
replaced hereby.
(n) Information Supplied by the Participant. The statements set forth
in the last paragraph on the front cover page, the paragraph regarding
stabilization on page ii, the second sentence on page 4 opposite the caption
"Exchange Offer; Registration Rights" and in the third and fourth paragraphs and
the fourth, fifth, sixth and seventh sentences of the fifth paragraph under the
heading "Plan of Distribution" in the Final Memorandum (to the extent such
statements relate to the Participant) constitute the only information furnished
by the Participant to the Issuers for the purposes of Section 7 hereof.
(o) Subsidiary Guarantor a Party. Immediately upon the designation of
any Subsidiary of an Issuer as a Restricted Subsidiary (as defined in the
Indenture), the Issuers shall cause such Subsidiary to become a party hereto as
a Subsidiary Guarantor by executing and delivering to the Initial Purchaser a
counterpart hereof.
-26-
<PAGE> 28
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
KELLEY OIL & GAS CORPORATION
By /s/ JOHN F. BOOKOUT
--------------------------------
Name: John F. Bookout
Title: President
KELLEY OIL CORPORATION
By /s/ JOHN F. BOOKOUT
--------------------------------
Name: John F. Bookout
Title: President
KELLEY OPERATING COMPANY, LTD.
BY: KELLEY OIL CORPORATION,
its General Partner
By /s/ JOHN F. BOOKOUT
--------------------------------
Name: John F. Bookout
Title: President
CONCORDE GAS MARKETING, INC.
By /s/ JOHN F. BOOKOUT
--------------------------------
Name: John F. Bookout
Title: President
JEFFERIES & COMPANY, INC.,
as Initial Purchaser
By /s/ JOE MALY
--------------------------------
Name: Joe Maly
Title: Managing Director
<PAGE> 29
Each of the undersigned by its execution hereof agrees to become a
party to this Agreement as a Subsidiary Guarantor as of the date first above
written:
By
--------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 5.1
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
July 30, 1999
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as counsel for Kelley Oil & Gas Corporation, a Delaware
corporation (the "Company"), in connection with the proposed issuance by the
Company of up to $100,000,000 principal amount of its 14% Senior Secured Notes
Due 2003, maturing at 105% of the stated principal amount, Series B (the "New
Notes"), in exchange for an equivalent amount of its outstanding 14% Senior
Secured Notes Due 2003, maturing at 105% of the stated principal amount, Series
A (the "Outstanding Notes"). The terms of the offer to exchange the New Notes
for the Outstanding Notes (the "Exchange Offer") are described in the
Registration Statement on Form S-4 filed by the Company on the date hereof with
the Securities and Exchange Commission (the "Registration Statement"), for the
registration of the New Notes under the Securities Act of 1933 (the "1933 Act").
The Outstanding Notes have been, and the New Notes will be, issued pursuant to
an Indenture dated as of April 15, 1999 (the "Indenture"), among the Company,
the subsidiary guarantors party thereto, and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee").
In connection with the foregoing, we have examined (i) the Certificate
of Incorporation and Bylaws of the Company, each as amended to date, (ii) the
Indenture, (iii) the Registration Statement and (iv) such certificates,
statutes and other instruments and documents as we considered appropriate for
purposes of the opinions hereafter expressed.
Based upon the foregoing, subject to the qualifications hereinafter
set forth, and having regard for such legal considerations as we have deemed
relevant, we are of the opinion that the New Notes have been duly authorized
for issuance and, when the Registration Statement has become effective under
the 1933 Act and the New Notes have been duly authorized, executed and
authenticated in accordance with the Indenture and issued and sold in exchange
for the Outstanding Notes as contemplated by the Registration Statement and the
Indenture and in accordance with the Exchange Offer, the New Notes will
constitute valid and legally binding obligations of the Company, subject to (i)
bankruptcy, insolvency, reorganization, moratorium, liquidation, rearrangement,
fraudulent transfer, fraudulent conveyance and other similar laws (including
court decisions) now or hereafter in effect and affecting the rights and
remedies of creditors generally or providing for the relief of debtors, (ii)
the refusal of a particular court to grant equitable remedies, including,
without limitation, specific performance and injunctive relief, and (iii)
general principles of equity (regardless of whether such remedies are sought in
a proceeding in equity or at law).
The opinions expressed herein are limited exclusively to the federal
laws of the United States of America, the laws of the State of New York and the
General Corporation Law of the State of Delaware, and we are expressing no
opinion as to the effect of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the statements made with respect to us under the
caption "Legal Matters" in the Prospectus included as part of the Registration
Statement.
Very truly yours,
/s/ FULBRIGHT & JAWORSKI L.L.P.
Fulbright & Jaworski L.L.P.
<PAGE> 1
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 report dated May 17, 1999 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.
DELOITTE & TOUCHE LLP
Houston, Texas
July 29, 1999
<PAGE> 1
EXHIBIT 23.2
[LETTERHEAD OF H.J. GRUY AND ASSOCIATES, INC.]
CONSENT OF H.J. GRUY AND ASSOCIATES, INC.
We hereby consent to the use of the name H.J. Gruy and Associates, Inc. and
references to H.J. Gruy and Associates, Inc. and to the inclusion of and
references to our report, or information contained therein, dated March 12,
1999, prepared for Kelley Oil & Gas Corporation in the Registration Statement on
Form S-4 of Kelley Oil & Gas Corporation for the filing dated July 29, 1999.
H.J. GRUY AND ASSOCIATES, INC.
/s/ MARILYN WILSON
Marilyn Wilson
President and Chief Operating Officer
Houston, Texas
July 29, 1999
<PAGE> 1
EXHIBIT 25.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
-----------------------------
__ CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
A U.S. NATIONAL BANKING ASSOCIATION 41-1592157
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national Identification No.)
bank)
SIXTH STREET AND MARQUETTE AVENUE
Minneapolis, Minnesota 55479
(Address of principal executive offices) (Zip code)
Stanley S. Stroup, General Counsel
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
(612) 667-1234
(Agent for Service)
-----------------------------
KELLEY OIL & GAS CORPORATION
(Exact name of obligor as specified in its charter)
DELAWARE 76-0447267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 JEFFERSON STREET, SUITE 1100
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip code)
-----------------------------
14% SENIOR SECURED NOTES DUE 2003
MATURING AT 105% OF THE STATED PRINCIPAL
(Title of the indenture securities)
================================================================================
<PAGE> 2
Item 1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor. If the obligor is an affiliate of the
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-14 of this Form T-1 because the obligor is
not in default as provided under Item 13.
Item 15. Foreign Trustee. Not applicable.
Item 16. List of Exhibits. List below all exhibits filed as a part of
this Statement of Eligibility. Norwest Bank
incorporates by reference into this Form T-1
the exhibits attached hereto.
Exhibit 1. a. A copy of the Articles of Association of the
trustee now in effect.*
Exhibit 2. a. A copy of the certificate of authority of
the trustee to commence business issued June
28, 1872, by the Comptroller of the Currency
to The Northwestern National Bank of
Minneapolis.*
b. A copy of the certificate of the Comptroller
of the Currency dated January 2, 1934,
approving the consolidation of The
Northwestern National Bank of Minneapolis
and The Minnesota Loan and Trust Company of
Minneapolis, with the surviving entity being
titled Northwestern National Bank and Trust
Company of Minneapolis.*
c. A copy of the certificate of the Acting
Comptroller of the Currency dated January
12, 1943, as to change of corporate title of
Northwestern National Bank and Trust Company
of Minneapolis to Northwestern National Bank
of Minneapolis.*
d. A copy of the letter dated May 12, 1983 from
the Regional Counsel, Comptroller of the
Currency, acknowledging receipt of notice of
<PAGE> 3
name change effective May 1, 1983 from
Northwestern National Bank of Minneapolis to
Norwest Bank Minneapolis, National
Association.*
e. A copy of the letter dated January 4, 1988
from the Administrator of National Banks for
the Comptroller of the Currency certifying
approval of consolidation and merger
effective January 1, 1988 of Norwest Bank
Minneapolis, National Association with
various other banks under the title of
"Norwest Bank Minnesota, National
Association."*
Exhibit 3. A copy of the authorization of the trustee to
exercise corporate trust powers issued January 2,
1934, by the Federal Reserve Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b)
of the Act.
Exhibit 7. A copy of the latest report of condition of the
trustee published pursuant to law or the requirements
of its supervising or examining authority.**
Exhibit 8. Not applicable.
Exhibit 9. Not applicable.
* Incorporated by reference to exhibit number 25 filed with
registration statement number 33-66026.
** Incorporated by reference to exhibit number 25 filed with
registration statement number 333-83117
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Minneapolis and State of Minnesota on the 22th day of July, 1999.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ JANE Y. SCHWEIGER
-----------------------------------
Jane Y. Schweiger
Corporate Trust Officer
<PAGE> 5
EXHIBIT 6
July 22, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as
amended, the undersigned hereby consents that reports of examination of the
undersigned made by Federal, State, Territorial, or District authorities
authorized to make such examination may be furnished by such authorities to the
Securities and Exchange Commission upon its request therefor.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ JANE Y. SCHWEIGER
-----------------------------------
Jane Y. Schweiger
Corporate Trust Officer
