<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1997.
REGISTRATION NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SOUTHWEST ROYALTIES, INC. SOUTHWEST ROYALTIES HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS (EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER) SPECIFIED IN ITS CHARTER)
DELAWARE DELAWARE
(STATE OF ORGANIZATION) (STATE OF ORGANIZATION)
1311 1311
(PRIMARY STANDARD INDUSTRIAL (PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER) CLASSIFICATION CODE NUMBER)
75-1917432 75-2724264
(I.R.S. EMPLOYER IDENTIFICATION (I.R.S. EMPLOYER IDENTIFICATION
NUMBER) NUMBER)
407 NORTH BIG SPRING, SUITE 300
MIDLAND, TEXAS 79701
(915) 686-9927
(ADDRESS AND PHONE NUMBER OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
WITH COPIES TO:
H. H. WOMMACK, III J. PORTER DURHAM, JR., ESQ.
PRESIDENT, SOUTHWEST ROYALTIES, INC. BAKER, DONELSON, BEARMAN & CALDWELL,
PRESIDENT, SOUTHWEST ROYALTIES P.C.
HOLDINGS, INC. 1800 REPUBLIC CENTRE
P.O. DRAWER 11390 633 CHESTNUT STREET
MIDLAND, TEXAS 79702 CHATTANOOGA, TENNESSEE 37450
(915) 686-9927 (423) 756-2010
(NAME AND ADDRESS OF REGISTRANT'S
AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO 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. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/2% Senior Notes due
2004................... 200,000 $1,000 $200,000,000 $59,000
- -------------------------------------------------------------------------------------
Guarantee of Southwest
Royalties Holdings,
Inc. (1)............... not applicable not applicable not applicable not applicable
- -------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Represents the separate guarantee of Southwest Royalties Holdings, Inc.,
parent of Southwest Royalties, Inc., of 10 1/2% Senior Notes due 2004, to
be registered hereunder.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(A) MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
BETWEEN ITEMS OF PART I OF FORM S-4 AND THE PROSPECTUS
A. Information About the Transaction
<TABLE>
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Facing Page of Registration Statement;
2. Inside Front and Outside Back Outside Front Cover Page
Cover Pages of Prospectus.... Available Information; Outside Back Cover
Page
3. Risk Factors, Ratio of
Earnings to Fixed Charges and
Other Information............ Prospectus Summary; Risk Factors; The
Company
4. Terms of the Transaction...... Prospectus Summary; Description of Notes;
Certain United States Federal Income Tax
Considerations
5. Pro Forma Financial
Information.................. Index to Financial Statements;
Capitalization; Selected Historical & Pro
Forma Financial Information
6. Material Contracts with the
Company Being Acquired....... Not Applicable
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed to
be Underwriters.............. Not Applicable
8. Interests of Named Experts and
Counsel...................... Legal Matters; Experts
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
B. Information About the Registrant
10. Information with Respect to
S-3 Registrants.............. Not Applicable
11. Incorporation of Certain
Information by Reference..... Not Applicable
12. Information with Respect to
S-2 or S-3 Registrants....... Not Applicable
13. Incorporation of Certain
Information by Reference..... Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or
S-2 Registrants.............. The Company; Private Placement;
Capitalization; Business; Index to
Financial Statements; Selected Historical
and Pro Forma Financial Information;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Experts
C. Information About the Company Being Acquired
15. Information with Respect to
S-3 Companies................ Not Applicable
16. Information with Respect to
S-2 or S-3 Companies......... Not Applicable
17. Information with Respect to
Companies Other than S-2 or
S-3 Companies................ Not Applicable
D. Voting and Management Information
18. Information if Proxies,
Consents or Authorizations
are to be Solicited.......... Not Applicable
19. Information if Proxies,
Consents of Authorizations
are not to be Solicited or in
an Exchange Offer............ Certain Transactions; Principal
Stockholders and Ownership of Management;
Management
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1997
PROSPECTUS
SOUTHWEST ROYALTIES, INC.
OFFER TO EXCHANGE
10 1/2% SERIES B SENIOR NOTES DUE 2004
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
FOR ALL OUTSTANDING 10 1/2% SERIES A SENIOR NOTES DUE 2004
PAYMENT UNCONDITIONALLY GUARANTEED ON A SENIOR BASIS BY
SOUTHWEST ROYALTIES HOLDINGS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED
Southwest Royalties, Inc., a Delaware corporation ("Southwest" or the
"Issuer"), and Southwest Royalties Holdings, Inc., a Delaware corporation
("SRH"), and the parent of the Issuer, hereby offer, upon the terms and
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal," and together with this Prospectus,
the "Exchange Offer"), to exchange $1,000 principal amount of its 10 1/2%
Series B Senior Notes due 2004 of the Issuer and which are unconditionally
guaranteed on a senior basis by SRH (the "Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement (as defined) of which this Prospectus
constitutes a part, for each $1,000 principal amount of its outstanding 10 1/2%
Series A Senior Notes due 2004 of the Issuer and which are unconditionally
guaranteed on a senior basis by SRH (the "Old Notes"), of which $200,000,000
principal amount is outstanding. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Old Notes
except for certain transfer restrictions and registration rights relating to
the Old Notes. The Exchange Notes will evidence the same debt as the Old Notes
and will be issued under and be entitled to the benefits of the Indenture (as
defined). The Exchange Notes and the Old Notes are collectively referred to
herein as the "Notes."
The Notes are senior obligations of the Issuer, ranking pari passu in right
of payment with all existing and future senior Indebtedness (as defined) and
senior to all existing or future Subordinated Indebtedness (as defined) of the
Issuer. The Notes are unconditionally guaranteed by SRH (the "Parent
Guarantee") on a senior basis. The Parent Guarantee is secured by a pledge of
the common stock of Midland Red Oak Realty, Inc. and Sierra Well Service, Inc.
owned directly by SRH. Such collateral may be released under certain
circumstances. See "Description of Notes--Collateral."
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
The Issuer and SRH will accept for exchange any and all Old Notes that are
validly tendered on or prior to 5:00 p.m., New York City time, on the date the
Exchange Offer expires, which will be , 1998, unless the
Exchange Offer is extended. See "The Exchange Offer--Expiration Date;
Extensions; Amendments." Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the business day prior to the
Expiration Date (as defined), unless previously accepted for exchange. The
Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain conditions which may be waived by the Issuer and SRH and to the terms
and provisions of the Registration Rights Agreement (as defined). Old Notes
may be tendered only in denominations of $1,000 principal amount and integral
multiples thereof. The Issuer and SRH have agreed to pay the expenses of the
Exchange Offer. See "Exchange Offer."
The Exchange Notes will bear interest at the rate of 10 1/2% per annum,
payable semi-annually on April 15 and October 15 of each year, commencing on
April 15, 1998. Interest on the 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, October 14, 1997. Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of the Exchange Notes.
The Old Notes were sold by the Issuer and SRH on October 14, 1997 to the
Initial Purchasers (as defined) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Old
Notes were thereupon offered and sold by the Initial Purchasers only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act). Accordingly, the Old Notes may not be offered, resold or otherwise
transferred unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Issuer and SRH under the Registration Rights Agreement
entered into with the Initial Purchasers in connection with the offering of
the Old Notes. See "Exchange Offer" and "Exchange and Registration Rights
Agreement."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission" or "SEC") to third parties, including
EXXON CAPITAL HOLDINGS CORPORATION, SEC No-action Letter (available April 13,
1989), MORGAN STANLEY & CO. INC., SEC No-action Letter (available June 5,
1991) (the "Morgan Stanley Letter") and MARY KAY COSMETICS, INC., SEC No-
action Letter (available June 5, 1991), the Issuer and SRH believe that the
Exchange Notes issued pursuant to the Exchange Offer maybe offered for resale,
resold and otherwise transferred by the respective holders thereof (other than
a "Restricted Holder," being (i) a broker-dealer who purchased Old Notes
exchanged for such Exchange Notes directly from the Issuer and SRH to resell
pursuant to Rule 144A or any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the Issuer and SRH within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder is not participating in, and has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of such Exchange Notes. Eligible holders
wishing to accept the Exchange Offer must represent to the Issuer and SRH that
such conditions have been met. Holders who tender Old Notes in the Exchange
Offer with the intention to participate in the distribution of the Exchange
Notes may not rely upon the Morgan Stanley Letter or similar no-action
letters. See "Exchange Offer." Each broker-dealer that receives Exchange Notes
for its own account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Exchange Notes were acquired by such broker-
dealer as a result
2
<PAGE>
of market-making activities or other trading activities. The Issuer and SRH
have agreed that, starting on the Expiration Date and ending on the close of
the business 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." A broker-dealer which delivers such a prospectus to
purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Neither the Issuer nor SRH will receive any proceeds from the Exchange
Offer.
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity
of any markets that may develop for the Exchange Notes or as to the ability of
the holders of Exchange Notes to sell their Exchange Notes or as to or the
price at which the holders of Exchange Notes would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on
many factors, including, among others, prevailing interest rates, the
Company's operating results and the market for similar securities. The Issuer
and SRH do not intend to apply for listing of the Exchange Notes on any
securities exchange. Jefferies & Company, Inc., Banc One Capital Corporation,
and Paribas Corporation (the "Initial Purchasers") have informed the Company
that they currently intend to make a market for the Exchange Notes. However,
they are not so obligated, and any such market making may be discontinued at
any time without notice. Accordingly, no assurance can be given that an active
public or other market will develop for the Exchange Notes or as to the
liquidity of or the trading market for the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUER OR SRH ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
AVAILABLE INFORMATION
Neither the Issuer nor SRH is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Pursuant
to the Indenture, the Issuer and SRH have agreed to provide to the holders
annual reports and the information, documents and other reports otherwise
required pursuant to Section 13 of the Exchange Act. While any Old Notes
remain outstanding, the Issuer and SRH will make available, upon request, to
any holder and any prospective purchaser of Old Notes, the information
required pursuant to Rule 144A(d)(4) under the Securities Act during any
period in which the Issuer and SRH are not subject to Section 13 or 15(d) of
the Exchange Act. Any such request should be directed to the Secretary of the
Issuer at 407 North Big Spring, Suite 300, Midland, Texas, 79701; (915) 686-
9927.
This Prospectus constitutes part of a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Issuer and SRH with the Commission
under the Securities Act. This Prospectus omits certain of the information set
forth in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits relating thereto for further
information with respect to the Company and the securities offered hereby.
Statements contained herein concerning the provisions of contracts or other
documents are not necessarily complete, and each such statement is qualified
in its entirety by reference to the copy of the applicable contract or other
document filed with the Commission. Copies of the Registration Statement and
the exhibits thereto are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, may be examined
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following regional offices of the Commission: Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information filed
electronically by the Issuer and SRH with the Commission which can be accessed
over the Internet at http://www.sec.gov.
3
<PAGE>
INCORPORATION BY REFERENCE
The Issuer and SRH hereby undertake to provide without charge to each
person, including any beneficial owner, to whom a copy of this Prospectus has
been delivered, upon the written or oral request of such person, a copy of any
or all of the information that has been incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference herein unless such exhibits are specifically incorporated by
reference in such information.) Requests for such copies should be directed to
the Secretary of the Issuer at 407 North Big Spring, Suite 300, Midland,
Texas, 79701; (915) 686-9927. In order to ensure timely delivery of the
documents, any request should be made by , 1997.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAT THOSE CONTAINED
IN THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE ISSUER, SRH OR THE INITIAL PURCHASERS. NEITHER
THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFER HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and in the documents incorporated herein by
reference. Certain terms relating to the oil and gas and well servicing
businesses are defined in the "Glossary of Terms" section of this Prospectus.
Unless otherwise indicated, references to "Southwest" or the "Issuer" are to
Southwest Royalties, Inc. References in this Prospectus to "SRH" are to
Southwest Royalties Holdings, Inc., exclusive of all subsidiaries and
affiliates. References in this Prospectus to the "Company" are to SRH, the
corporate parent of the Issuer and the guarantor of the Notes, and its
consolidated subsidiaries, including Southwest, Midland Red Oak Realty, Inc.
("Red Oak") and Sierra Well Service, Inc. ("Sierra"), an affiliate of SRH and
Southwest. Unless otherwise indicated, all financial and quantitative
information provided in this Prospectus on a "pro forma" basis gives effect, on
the date and for the periods indicated, to the completion of the Private
Placement (as defined) and the Transactions (as defined).
THE COMPANY
The Company is an independent oil and gas company engaged in the acquisition,
development and production of oil and gas properties, primarily in the Permian
Basin of West Texas and southeastern New Mexico, through its wholly-owned
subsidiary, Southwest. Since 1983, the Company has grown primarily through
selective acquisitions of producing oil and gas properties, completing over
$320 million in acquisitions, both directly and through the oil and gas
partnerships it manages. Consistent with this strategy, the Company recently
purchased additional producing oil and gas properties in the Permian Basin from
a major oil company for approximately $72.3 million, (the "Oil and Gas
Properties Acquisition"). The Company also participates in the well servicing
industry through its affiliate, Sierra, and owns and manages real estate
properties through its subsidiary, Red Oak.
The Company pursues a strategy of acquiring long-life, producing oil and gas
properties, which offer current cash flow, significant development potential
and opportunities to reduce operating and administrative costs. Many of the
Company's previous acquisitions were completed during periods of relatively low
oil and gas prices, and the Company generally deferred development of such
acquired properties to invest available capital in additional acquisitions. Due
to increased oil and gas prices and improved availability of capital, the
Company has increased its oil and gas development activities. The Company plans
to increase capital spending on development and exploitation opportunities.
At June 30, 1997, on a pro forma basis, the Company owned interests in
approximately 2.6 million gross leasehold acres, approximately 75% of which
were classified as developed. At such date, the Company's estimated net proved
reserves, on a pro forma basis, would have been 32.5 MMBbls of oil and 75.3 Bcf
of natural gas, or 45.0 MMBoe. The Company's properties are located primarily
in the Permian Basin and generally have well-established production histories
with a pro forma reserve life of approximately 15 years. At June 30, 1997, PV-
10 Value of the Company's pro forma oil and gas reserves would have been $214.5
million.
The Company's development projects generally involve moderate drilling and
completion costs as they are located primarily in shallow to intermediate
depth, normally pressured reservoirs. Additionally, many of these projects
contain multiple horizons that are potentially productive, thereby further
reducing development drilling risk. The Company has identified over 500
recompletion and development opportunities on its properties, including the
properties acquired in the Oil and Gas Properties Acquisition. For the nine
months ended September 30, 1997, Southwest has spent approximately $27 million
in the aggregate for oil and gas acquisition, development and exploration
activities and has budgeted additional capital spending, of approximately $45
million for the remainder of 1997 and 1998, principally to complete over 190
planned development drilling and recompletion projects. The Company anticipates
that its development activities, when combined with new seismic and other data,
will result in the identification of additional development drilling prospects
and proved reserves.
5
<PAGE>
The Company engages in the well servicing business through Sierra, in which
SRH has approximately a 40% direct and indirect ownership interest. Sierra,
which was formed in 1992, provides a broad range of well services to oil and
gas companies, including workover rig services, liquids handling, fresh and/or
brine water supply and disposal and other services. Since January 1996, Sierra
has purchased 15 well servicing companies for a cost of $42.1 million and
expects to close two additional acquisitions in December 1997 for $16.8
million. In total, these acquisitions will increase the equipment fleet to 86
workover rigs. Management believes that Sierra is the fourth largest land-based
well servicing company in the United States.
Red Oak, an 82%-owned subsidiary of SRH, on a pro forma basis, owns and
manages retail shopping centers and office buildings in Texas, Oklahoma and
Arizona. Since December 1993, Red Oak has acquired 17 properties for
approximately $82.8 million.
STRATEGY
The Company's objective is to increase its revenues, cash flow, earnings and
assets through a balanced growth strategy of acquisition, development and
exploitation of oil and gas properties, and through its investments in the well
servicing and real estate businesses.
Complete Selective Oil and Gas Acquisitions. The Company seeks to acquire
producing oil and gas properties that provide opportunities for the addition of
reserves, production and cash flow through operational improvements, production
enhancement and additional development. The Company believes these criteria are
met in the Permian Basin due to the region's long history of production and
multiple producing oil and gas horizons. The Company has acquired over $320
million of oil and gas properties since inception, both directly and through
the oil and gas partnerships it manages. Management believes that acquisition
opportunities will continue to be available in the Permian Basin.
Develop and Exploit Existing Oil and Gas Properties. The Company has acquired
a diversified portfolio of oil and gas properties that contains numerous
identified development opportunities. The Company believes that current oil and
gas prices, combined with technical and operating advances, have improved the
attractiveness of accelerated development of these properties. The Company
plans to significantly increase its capital spending during 1997 and 1998 to
pursue these opportunities, which consist principally of infill drilling,
recompletions, enhanced recovery operations and workover opportunities. The
Company is pursuing these projects to increase cash flow and to identify
additional reserves and development projects.
Maintain Geographic Focus. The Company concentrates its oil and gas
activities in the Permian Basin, with properties in this region representing
over 90% of the Company's pro forma PV-10 Value at June 30, 1997. The Company
believes that its long-life oil and gas properties and large inventory of
development projects in the Permian Basin, coupled with region-specific
geological, engineering and production experience, provide it with focused
operations. Company-operated properties comprised approximately 60% of its pro
forma PV-10 Value at June 30, 1997, allowing substantial control over the
incurrence and timing of capital and operating expenditures.
Selectively Grow Well Servicing and Real Estate Businesses. The Company plans
to continue the expansion of its well servicing and real estate businesses,
primarily in the southwestern United States. The Company expects that Sierra's
and Red Oak's active management practices will lead to consolidation benefits,
cost savings, more efficient utilization and improved cash flow, thereby
enhancing the return on capital invested.
6
<PAGE>
THE TRANSACTIONS
In conjunction with the Private Placement, the Company completed certain
acquisition and financing transactions (the "Transactions") to provide
additional capital for oil and gas development activities and acquisitions by
Southwest, to finance acquisitions by Sierra and Red Oak and to provide the
Company with additional financing and operating flexibility. The Transactions
are summarized below:
Oil and Gas Properties Acquisition. On October 14, 1997, the Company acquired
various working interests in 431 producing oil and gas wells, located in seven
oil and gas fields in the Permian Basin of West Texas and southeastern New
Mexico. The Company operates 133 of these wells. The purchase price for the Oil
and Gas Properties Acquisition was $72.3 million. The Oil and Gas Properties
Acquisition added approximately 14.0 MMBoe of estimated net proved reserves, as
of June 30, 1997. These properties complement the Company's existing proved
reserve base with an average reserve life of approximately 15 years and over
130 identified development opportunities. The Company believes that it has
significant opportunities to improve production and cash flow from these
properties through additional development, reconfiguration of operations and
reduction of operating and administrative costs. Southwest also amended its $75
million revolving credit facility (the "Southwest Credit Facility") resulting
in unutilized availability of $40 million.
Sierra Acquisitions. Since January 1996, Sierra has acquired 15 Texas and New
Mexico well servicing companies and equipment for a total cost of $42.1 million
and expects to close two additional acquisitions in December 1997 for $16.8
million. In total, these acquisitions will add 64 workover rigs, 134 vaccum and
transport trucks, 279 frac and test tanks, 32 brine and/or fresh water stations
and eight injection wells and significantly increased the size and scope of
Sierra's well servicing business. Sierra financed these acquisitions with
proceeds from the sale of Sierra common stock (the "Sierra Equity Sale") and
borrowings from an institutional lender (the "Sierra Acquisition Facility").
The Sierra Equity Sale resulted in a reduction of SRH's direct and indirect
ownership of Sierra to approximately 40%.
Red Oak Acquisitions. Red Oak recently acquired four shopping centers and two
office buildings in Texas and Oklahoma for a total cost of $40.7 million. These
acquisitions expanded Red Oak's commercial real estate portfolio to 14 shopping
centers and three office buildings. Red Oak financed the acquisitions with $10
million in equity proceeds received from SRH and with certain mortgage
facilities (the "Red Oak Acquisition Facilities").
PRIVATE PLACEMENT
On October 14, 1997 Southwest completed a $200 million private placement sale
of the Old Notes to the Initial Purchasers (the "Private Placement"). Thereupon
the Old Notes were offered and sold by the Initial Purchasers only to qualified
institutional buyers. The net proceeds from the Private Placement were
approximately $190 million. The Issuer used the net proceeds primarily to (i)
fund the Oil and Gas Properties Acquisition (net of deposits paid), (ii) repay
substantially all indebtedness outstanding under Southwest's bank credit
facility and its reserve-based loan facilities, (iii) fund a $10 million equity
investment by SRH in Red Oak through a dividend in that amount from the Issuer
to SRH, (iv) make a general partner capital contribution to Partners III of
approximately $1.7 million, which funds were immediately invested in Sierra
common stock, and (v) provide additional working capital for general corporate
purposes, including future acquisitions and development of producing oil and
gas properties.
7
<PAGE>
THE OFFERING
The Exchange Offer relates to the exchange of up to $200,000,000 principal
amount of Exchange Notes for up to $200,000,000 principal amount of the Old
Notes. The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Old Notes except that the Exchange Notes
have been registered under the Securities Act and will not contain certain
transfer restrictions and hence are not entitled to the benefits of the
Registration Rights Agreement relating to the contingent increases in the
interest rate provided for pursuant thereto. See "Exchange Offer" and "Exchange
and Registration Rights Agreement." The Exchange Notes will evidence the same
debt as the Old Notes and will be issued under and be entitled to the benefits
of the Indenture governing the Old Notes. See "Description of Notes."
Exchange Offer............ Each $1,000 principal amount of Exchange Note will
be issued in exchange for each $1,000 principal
amount of outstanding Old Notes. As of the date
hereof, $200,000,000 principal amount of Old Notes
are issued and outstanding. The Issuer will issue
the Exchange Notes to tendering holders of Old
Notes on or promptly after the Expiration Date.
Resale.................... The Company believes that the Exchange Notes issued
in the Exchange Offer generally will be freely
transferable by the holders thereof without
registration or any prospectus delivery requirement
under the Securities Act, except for certain
Restricted Holders who may be required to deliver
copies of this Prospectus in connection with any
resale of the Exchange Notes. See "Exchange Offer"
and "Plan of Distribution."
Expiration Date........... 5:00 p.m., New York City time, on , 1998, unless
the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date to
which the Exchange Offer is extended. See "Exchange
Offer--Expiration Date; Extensions; Amendments."
Interest on the Notes..... The Exchange Notes will bear interest at the rate
of 10 1/2% per annum, payable semi-annually on
April 15 and October 15 of each year, commencing on
April 15, 1998. Interest on the 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 or the original issuance of the Notes, October
14, 1997. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
Exchange Notes. See "Exchange Offer--Interest on
the Exchange Notes."
Procedures for Tendering
Old Notes................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or an
Agent's Message (as defined herein) together with
the Old Notes to be exchanged and any required
documentation to the Exchange Agent at the address
set forth herein and therein or effect a tender of
8
<PAGE>
Old Notes pursuant to the procedures for book-entry
transfer as provided for herein. See "Exchange
Offer--Procedures for Tendering."
Special Procedures for
Beneficial Holders........ Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on the
beneficial holder's behalf. If such beneficial
holder wishes to tender directly, such beneficial
holder must, prior to completing and executing the
Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or
obtain a properly completed bond power from the
registered holder. The transfer of record ownership
may take considerable time. See "Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery
Procedures................ Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and
a properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis
and deliver an Agent's Message, may tender their
Old Notes according to the guaranteed delivery
procedures set forth in the "Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
business day prior to the Expiration Date, unless
previously accepted for exchange. See "Exchange
Offer--Withdrawal of Tenders."
Termination of the
Exchange Offer............ The Issuer and SRH may terminate the Exchange Offer
if they determine that the Exchange Offer violates
any applicable law or interpretation of the staff
of the SEC. Holders of Old Notes will have certain
rights against the Issuer and SRH under the
Registration Agreement should the Issuer and SRH
fail to consummate the Exchange Offer. See
"Exchange Offer" and "Registration Rights
Agreement."
Acceptance of Old Notes
and Delivery of Exchange
Notes..................... Subject to certain conditions (as summarized above
in "Termination of the Exchange Offer" and
described more fully in the "Exchange Offer--
Termination"), the Issuer and the Company will
accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly following
the Expiration Date. See "Exchange Offer."
Exchange Agent............ State Street Bank and Trust Company is serving as
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer. The
9
<PAGE>
mailing address of the Exchange Agent is Corporate
Trust Dept., P.O. Box 778, Boston, Massachusetts
02102-0078, Attn: Ms. Sandra Szozsponik. Hand
deliveries and deliveries by overnight courier
should be sent to Corporate Trust Department, 4th
Floor, Two International Plaza, Boston,
Massachusetts 02110, Attention: Ms. Sandra
Szozsponik. For information with respect to the
Exchange Offer, the telephone number for the
Exchange Agent is (617) 664-5587 and the facsimile
number for the Exchange Agent is (617) 664-5393.
See "The Exchange Offer--Exchange Agent."
Use of Proceeds........... There will be no cash proceeds payable to Issuer or
SRH from the issuance of the Exchange Notes
pursuant to the Exchange Offer. See "Use of
Proceeds." For a discussion of the use of the net
proceeds received by the Issuer and SRH from the
Private Placement, see "Private Placement."
TERMS OF THE NOTES
Notes Offered............. $200,000,000 aggregate principal amount of 10 1/2%
Series B Senior Notes due 2004.
Issuer.................... Southwest Royalties, Inc., a wholly-owned
subsidiary of Southwest Royalties Holdings, Inc.
Maturity Date............. October 15, 2004.
Interest Rate and Payment
Dates..................... The Notes will bear interest at a rate of 10 1/2%
per annum. Interest is payable semi-annually in
cash in arrears on April 15 and October 15 of each
year commencing April 15, 1998.
Ranking................... The Notes will be senior obligations of the Issuer,
ranking pari passu in right of payment with all
existing and future senior Indebtedness of the
Issuer and senior to all existing and future
Subordinated Indebtedness of the Issuer. Subject to
certain limitations, the Issuer may incur
additional indebtedness in the future. See
"Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Parent Guarantee.......... The Notes will be unconditionally guaranteed on a
senior basis by SRH. The Parent Guarantee will rank
pari passu in right of payment to all existing and
future senior Indebtedness of SRH and senior to all
existing and future Subordinated Indebtedness of
SRH. See "Description of Notes--Ranking and
Guarantees."
Security.................. The Parent Guarantee will be secured by a pledge of
the Red Oak common stock and Sierra common stock
directly owned by SRH (collectively, the
"Collateral"). Such collateral may be released
under certain circumstances. See "Description of
Notes--Collateral."
Subsidiary Guarantees..... Under certain circumstances, the Notes may be
guaranteed in the future on a senior unsecured
basis by other subsidiaries of SRH in accordance
with the Indenture (the "Subsidiary Guarantors").
Each Subsidiary Guarantee will rank pari passu in
right of payment with all senior Indebtedness of
the Subsidiary Guarantor and senior to all future
Subordinated Indebtedness of the Subsidiary
Guarantor. See "Description of Notes--Ranking and
Guarantees."
10
<PAGE>
Optional Redemption....... The Notes will be redeemable at the option of the
Issuer, in whole or in part, at any time on or
after October 15, 2001, at the redemption prices
set forth herein, together with accrued and unpaid
interest to the date of redemption. In the event
SRH or the Issuer consummates a Public Equity
Offering (as defined) on or prior to October 15,
2000, the Issuer has the option to use all or a
portion of the proceeds from such offering to
redeem up to $70,000,000 aggregate principal amount
of the Notes at a redemption price equal to 110.50%
of the principal amount thereof, together with
accrued and unpaid interest to the date of
redemption, provided that at least $130,000,000
aggregate principal amount of the Notes remains
outstanding after such redemption. See "Description
of Notes--Optional Redemption."
Change of Control......... Upon the occurrence of a Change of Control (as
defined), each holder of the Notes will have the
right to require the Issuer to purchase all or a
portion of such holder's Notes at a price equal to
101% of the principal amount thereof, together with
accrued and unpaid interest to the date of
purchase. See "Description of Notes--Repurchase of
Notes at the Option of the Holder Upon a Change of
Control."
Certain Covenants......... The indenture under which the Notes will be issued
(the "Indenture") contains certain covenants
including, but not limited to, covenants that
limit: (i) incurrence of additional indebtedness
and issuances of disqualified capital stock; (ii)
dividend and other payment restrictions affecting
subsidiaries; (iii) restricted payments; (iv) asset
sales; (v) transactions with Affiliates; (vi)
liens; (vii) merger, sale or consolidation; (viii)
sale or issuance of capital stock of Restricted
Subsidiaries; and (ix) lines of business. The
Indenture also contains covenants regarding the
designation of Unrestricted Subsidiaries, ownership
of Restricted Subsidiaries and issuance of reports.
See "Description of Notes--Covenants."
Exchange Offer............ Pursuant to a Registration Rights Agreement between
the Issuer, SRH and the Initial Purchasers, the
Issuer and SRH agreed to use their best efforts (i)
to make a registered exchange offer (the "Exchange
Offer") pursuant to which holders of the Old Notes
will have the opportunity to exchange their Old
Notes for a like principal amount of new notes (the
"Exchange Notes") that are identical in all
material respects to the Notes and that may be
offered and sold by the holders without
restrictions or limitations under the Securities
Act or (ii) under certain circumstances, to effect
a shelf registration of the Old Notes (the "Shelf
Registration Statement") that would include a
prospectus under which holders would be free to
offer and sell their Notes from time to time. The
Issuer and SRH have agreed to use their best
efforts to file with the Commission a registration
statement relating to the Exchange Offer (the
"Exchange Offer Registration Statement") or the
Shelf Registration Statement within 60 days after
the date of issuance of the Notes (the "Issue
Date"), and to use their best efforts to cause such
registration statement to be declared effective by
the Commission within 120 days after the Issue Date
and, in the case of the Shelf Registration
Statement, to cause such to remain effective until
the
11
<PAGE>
second anniversary after the Issue Date. The
interest rate on the Notes is subject to increase
under certain circumstances if the Issuer and SRH
are not in compliance with their obligations under
the Registration Rights Agreement. See "Exchange
and Registration Rights Agreement."
Transfer Restrictions;
Trading Market............ The Old Notes have not previously been registered
under the Securities Act and are subject to
restrictions on transferability and resale. See
"Notice to Investors." The Notes are newly issued
securities for which there is currently no
established market. The Exchange Notes will
generally be freely transferable (subject to the
restrictions discussed elsewhere herein) but will
be new securities for which there will not
initially be a market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the Old Notes or the Exchange Notes. The
Initial Purchasers have advised the Issuer that
they currently intend to make a market in the Old
Notes and the Exchange Notes. However, the Initial
Purchasers are not obligated to do so, and any
market making with respect to the Old Notes or the
Exchange Notes may be discontinued at any time
without notice.
PORTAL Listing............ The Old Notes sold to QIBs are eligible for trading
in the PORTAL market.
RISK FACTORS
For a discussion of certain factors that should be considered by prospective
purchasers in evaluating an investment in the Notes, see "Risk Factors."
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following summary historical and pro forma financial and operating data
were derived from the consolidated financial statements of the Company,
including the notes thereto (the "Company Financial Statements"), as well as
the selected historical and pro forma financial and operating information
included elsewhere in this Prospectus. The pro forma consolidated financial
data are based on the assumptions and adjustments described in the accompanying
notes and do not purport to present the results of operations and financial
position of the Company nor are they necessarily indicative of the results of
operations that may be achieved in the future. The information set forth below
should be read in conjunction with "Selected Historical and Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company Financial Statements and the Unaudited Pro
Forma Combined Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------------
PRO PRO
FORMA FORMA
1994 1995 1996 1996(1) 1996 1997 1997(1)
------- ------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues:
Oil and gas.......... $16,321 $22,717 $ 35,296 $ 53,174 $24,638 $ 26,068 $ 37,984
Well servicing....... 2,377 4,218 8,013 -- 6,163 7,789 --
Real estate.......... 605 3,213 4,487 17,710 3,092 5,029 13,877
Other................ 325 352 622 362 424 948 904
------- ------- -------- -------- ------- -------- --------
Total operating
revenues.......... 19,628 30,500 48,418 71,246 34,317 39,834 52,765
Operating expenses:
Oil and gas.......... 7,879 11,511 14,846 20,533 10,833 12,166 16,139
Well servicing....... 2,136 3,315 6,145 -- 4,519 5,600 --
Real estate.......... 195 1,414 1,887 8,458 1,295 1,907 6,166
General and
administrative...... 4,292 5,018 6,953 5,984 4,580 5,059 4,261
Depreciation,
depletion and
amortization........ 4,437 6,719 8,430 13,513 6,249 8,093 11,968
Other................ 105 228 554 554 407 1,003 1,003
------- ------- -------- -------- ------- -------- --------
Total operating
expenses.......... 19,044 28,205 38,815 49,042 27,883 33,828 39,537
Operating income....... 584 2,295 9,603 22,204 6,434 6,006 13,228
Other income
(expense):
Interest expense..... (1,975) (5,635) (10,016) (31,862) (7,180) (10,950) (24,617)
Interest income...... 229 269 441 430 275 545 536
Other................ 1,687 (78) 561 592 438 (66) (52)
------- ------- -------- -------- ------- -------- --------
Income (loss) before
income taxes,
minority interest and
equity in earnings of
subsidiary............ 525 (3,149) 589 (8,636) (33) (4,465) (10,905)
Income tax benefit
(provision)........... (171) 1,044 (365) 3,179 (54) 1,526 3,818
Minority interest in
subsidiaries.......... (1) (15) 181 (3) 71 322 321
Equity in earnings of
subsidiary............ -- -- -- (448) -- -- (4)
------- ------- -------- -------- ------- -------- --------
Income (loss) before
extraordinary item.... 353 (2,120) 405 (5,908) (16) (2,617) (6,770)
Extraordinary item,
net of tax............ -- -- -- -- -- (490) --
------- ------- -------- -------- ------- -------- --------
Net income (loss)...... $ 353 $(2,120) $ 405 $ (5,908) $ (16) $ (3,107) $ (6,770)
======= ======= ======== ======== ======= ======== ========
OTHER FINANCIAL DATA:
Capital
expenditures(2)....... $15,948 $46,914 $ 34,513 NA $12,891 $ 60,973 NA
Capital expenditures--
Oil and gas(2)........ 9,988 32,077 16,740 NA 9,808 26,522 NA
Ratio of earnings to
fixed charges(3)...... 1.3x NM 1.1x NM NM NM NM
Adusted EBITDA(4)...... 6,880 7,605 16,760 28,682 11,337 11,063 18,884
Adjusted EBITDA to
Interest(5)........... 3.8x 1.8x 2.1x 1.3x 1.9x 1.6x 1.1x
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1997
-----------------
PRO
ACTUAL FORMA(6)
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 11,152 $ 47,026
Net property and equipment.................................. 141,450 234,843
Total assets................................................ 180,825 317,506
Long-term debt, including current portion................... 142,213 285,782
ACNTA(7).................................................... 487,468
Ratio of ACNTA to Indebtedness(7)........................... 2.4x
</TABLE>
- --------
(1) Pro forma to reflect the Offering and the Transactions and certain other
acquisitions as if they had occurred on January 1, 1996, as well as the
deconsolidation of Sierra, which will be accounted for using the equity
method in future periods.
(2) Includes acquisitions. NA--not applicable.
(3) Earnings were insufficient to cover fixed charges by $3,149,000, $33,000
and $4,465,000 for the historical periods ended December 31, 1995,
September 30, 1996 and September 30, 1997, respectively, and $8,636,000 and
$10,905,000 for the pro forma periods ended December 31, 1996 and September
30, 1997, respectively. For purposes of computing the ratio of earnings to
fixed charges, earnings are computed as income from continuing operations,
plus fixed charges. Fixed charges consist of interest expense and an
estimated portion of rentals representing interest costs. NM--not
meaningful.
(4) Adjusted EBITDA (as used herein) is calculated as the sum of EBITDA of SRH
and Southwest only. EBITDA means earnings before interest expense, income
taxes, depreciation, depletion and amortization and extraordinary item,
less minority interest in subsidiaries. EBITDA is commonly used by debt
holders and financial statement users as a measurement to determine the
ability of an entity to meet its interest obligations. EBITDA is not a
measurement presented in accordance with generally accepted accounting
principles ("GAAP") and is not intended to be used in lieu of GAAP
presentation of results of operations and cash provided by operating
activities.
(5) Adjusted EBITDA to Interest (as used herein) is the ratio of Adjusted
EBITDA to interest on the Notes plus interest on any other debt of SRH and
Southwest only.
(6) Pro forma to reflect the Offering and the Transactions as if they had
occurred on September 30, 1997.
(7) ACNTA means Adjusted Consolidated Net Tangible Assets, as defined in the
Indenture (see "Description of Notes--Certain Definitions"). In accordance
with the Indenture, ACNTA is calculated using oil and gas prices utilized
in the Company's year end reserve report. Indebtedness (as used herein)
means Indebtedness of SRH and Southwest only, which, on a pro forma basis
as of September 30, 1997, would have been $199.9 million.
14
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA RESERVE AND OPERATING DATA
The following tables set forth summary information with respect to the
Company's estimated proved oil and natural gas reserves and the Company's
operating data as of or for the periods shown. See "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Experts," the Company Financial Statements and the
Unaudited Pro Forma Combined Financial Statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------- -----------------
PRO
FORMA
1994 1995 1996 1997 1997(1)
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
RESERVE DATA:
Proved reserves:
Oil and condensate (MBbls)...... 10,008 16,580 18,806 19,114 32,456
Natural gas (MMcf).............. 37,990 70,590 76,776 71,128 75,313
Total (MBoe).................... 16,340 28,345 31,602 30,969 45,008
Proved Developed Reserves:
Oil and condensate (MBbls)...... 4,760 7,349 10,302 9,485 21,125
Natural gas (MMcf).............. 27,587 51,926 58,961 51,649 55,214
Total (MBoe).................... 9,358 16,003 20,129 18,093 30,327
PV-10 Value (in thousands)(2)... $59,064 $117,902 $252,170 $137,688 $214,539
</TABLE>
- --------
(1) Pro forma to reflect the Oil and Gas Properties Acquisition as if it had
occurred on June 30, 1997.
(2) PV-10 Value represents the present value of estimated future net revenues
before income tax discounted at 10% using prices in effect at the end of
the respective periods presented and including the effects of hedging
activities. In accordance with applicable requirements of the Commission,
estimates of Southwest's proved reserves and future net revenues are made
using oil and natural gas sales prices estimated to be in effect as of the
date of such reserve estimates and are held constant throughout the life of
the properties (except to the extent a contract specifically provides for
escalation). The average prices used in calculating PV-10 Value as of June
30, 1997 were $17.00 per Bbl of oil and $2.16 per Mcf of natural gas,
compared to average prices used as of December 31, 1996 of $23.89 per Bbl
of oil and $3.67 per Mcf of natural gas. The average prices used in
calculating the pro forma PV-10 Value as of June 30, 1997 were $17.34 per
Bbl of oil and $2.16 per Mcf of natural gas.
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1997
---------------------------- ---------------------
PRO PRO
FORMA FORMA
1994 1995 1996 1996(1) 1996 1997 1997(1)
------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production Volumes:
Oil and condensate
(MBbls)................ 629 814 1,001 1,812 743 818 1,391
Natural gas (MMcf)...... 3,178 4,639 5,403 5,888 3,986 4,142 4,276
Total (MBoe)............ 1,159 1,587 1,901 2,793 1,407 1,508 2,104
Average Realized
Prices(2):
Oil and condensate (per
Bbl)................... $14.30 $16.40 $20.44 $20.26 $19.72 $19.39 $19.57
Natural gas (per Mcf)... 1.72 1.51 2.22 2.29 2.05 2.01 2.10
Per Boe................. 12.47 12.83 17.07 17.97 16.23 16.05 17.20
Expenses (per Boe):
Lease operating
(including production
taxes)............... $ 6.80 $ 7.25 $ 7.81 $ 7.35 $ 7.83 $ 8.10 $ 7.69
Oil and gas
depreciation,
depletion and
amortization......... 3.03 3.19 3.38 3.94 3.42 4.08 4.73
Oil and gas general
and administrative,
net.................. 2.87 2.17 2.17 1.58 1.93 2.31 1.71
Reserve life index (in
years)(3)............ 14.1 17.9 16.6 16.9 NA 15.5 15.3
</TABLE>
- --------
(1) Pro forma to reflect the Oil and Gas Properties Acquisition and certain
other acquisitions as if they had occurred on January 1, 1996.
(2) Reflects the actual realized prices received by the Company, including the
results of the Company's hedging activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Calculated by dividing period-end proved reserves by production for the
prior twelve-month period. September 30, 1997 ratios calculated using June
30, 1997 proved reserves. NA-not applicable.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Prospectus, including, without
limitation, statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding planned capital expenditures, increases
in oil and gas production, the number of anticipated wells to be drilled in
1997 and 1998, the Company's financial position, business strategies and other
plans and objectives for future operations, are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct.
17
<PAGE>
RISK FACTORS
The following factors, together with the other information contained in this
Prospectus, should be considered carefully before purchasing the Notes offered
hereby.
SUBSTANTIAL LEVERAGE
As of September 30, 1997, as adjusted for the Offering and the application
of the proceeds therefrom and the Transactions, the total indebtedness of SRH
and Southwest, including current portion, would have been $199.9 million. See
"Capitalization." In addition, the Indenture allows the Issuer, SRH and its
other Restricted Subsidiaries to incur a minimum of $51 million in additional
Indebtedness under certain circumstances. See "Description of Notes--
Covenants."
The Company's level of indebtedness has several important effects on its
operations, including: (i) the covenants may limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in business conditions,
(ii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired, and (iii) a substantial portion of
the Company's cash flow may be dedicated to the payment of interest. Moreover,
future acquisition or development activities may require the Company to alter
its capitalization significantly. These changes in capitalization may
significantly alter the leverage of the Company. The Company's ability to meet
its debt service obligations and to reduce its total indebtedness will be
dependent upon the Company's future performance, which will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
There can be no assurance that the Company's future performance will not be
adversely affected by such economic conditions and financial, business and
other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Certain holders, who collectively own approximately 12% of SRH's common
stock, have an option to cause SRH to redeem such holders' common stock at any
time beginning December 31, 2001, five years from the date of issuance of such
common stock, subject to the terms of a subscription agreement under which SRH
sold the common stock (the "Subscription Agreement") and subject to any
restrictions imposed by law. The Subscription Agreement provides that this
redemption right terminates on the effective date of any registration
statement under the Securities Act filed with the Commission relative to the
offer and sale of any amount of SRH's common stock to the public. SRH is
unable to predict the amount of money it would be required to pay if the
redemption right is exercised. The Indenture may also restrict SRH's ability
to make such payments. In addition, SRH can give no assurance that it will be
able to cause a registration statement to become effective under the
Securities Act in order to terminate the redemption option.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Issuer to purchase all or a portion of such holder's Notes at 101%
of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date of purchase. If a Change of Control were to
occur, the Issuer may not have the financial resources to repay all of the
Notes and the other indebtedness that might become payable upon the occurrence
of such Change of Control. See "Description of Notes--Repurchase of Notes at
the Option of the Holder Upon a Change of Control."
ADEQUACY OF COLLATERAL; RISKS OF FORECLOSURE
SRH has pledged to the Trustee (under the Indenture), for the ratable
benefit of the holders of the Notes, all of the Sierra common stock and Red
Oak common stock directly owned by SRH as security for the Parent Guarantee
(collectively, the "Collateral").
In the event of a default under the Indenture, there can be no assurance
that the Trustee would be able to foreclose on or dispose of any of the
Collateral without substantial delays and other risks or that the proceeds
obtained therefrom would be sufficient to pay all amounts owing to holders of
the Notes. SRH would be required
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to file a shelf registration statement and any of SRH's other subsidiaries
whose stock is pledged to the Trustee would be required to grant registration
rights with respect to such stock, in each case to allow the Trustee to be
able to sell the pledged shares of their common stock publicly. Circumstances
beyond the control of the Company, however, may delay the availability of a
current prospectus. There is currently no public market for the shares of SRH
common stock and there can be no assurance that there will be any public
market for the common stock of any subsidiary of SRH.
In addition, if the Issuer becomes a debtor in a case under the United
States Bankruptcy Code (the "Bankruptcy Code"), the automatic stay imposed by
the Bankruptcy Code would prevent the Trustee from selling or otherwise
disposing of the Collateral without bankruptcy court authorization. In that
case, the foreclosure might be delayed indefinitely. Moreover, the bankruptcy
of any entity related to the Issuer might result in a similar delay if the
Issuer were "substantively consolidated" with the related entity.
POSSIBLE LIMITATIONS ON ENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Issuer's obligations under the Notes may under certain circumstances be
guaranteed on a senior unsecured basis by the Subsidiary Guarantors. Various
fraudulent conveyance laws have been enacted for the protection of creditors
and may be utilized by a court of competent jurisdiction to subordinate or
void any Subsidiary Guarantee issued by a Subsidiary Guarantor. It is also
possible that under certain circumstances a court could hold that the direct
obligations of a Subsidiary Guarantor could be superior to the obligations
under its Subsidiary Guarantee.
To the extent that a court were to find that at the time a Subsidiary
Guarantor entered into a Subsidiary Guarantee either (1) the Subsidiary
Guarantee was incurred by the Subsidiary Guarantor with the intent to hinder,
delay or defraud any present or future creditor or that the Subsidiary
Guarantor contemplated insolvency with a design to favor one or more creditors
to the exclusion in whole or in part of others or (2) the Subsidiary Guarantor
did not receive fair consideration or reasonably equivalent value for issuing
the Subsidiary Guarantee and, at the time it issued the Subsidiary Guarantee,
the Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of
the issuance of the Subsidiary Guarantee, (ii) was engaged or about to engage
in a business or transaction for which the remaining assets of the Subsidiary
Guarantor constituted unreasonably small capital or (iii) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured, the court could void or subordinate the Subsidiary Guarantee in
favor of the Subsidiary Guarantor's other creditors. Among other things, a
legal challenge of a Subsidiary Guarantee issued by a Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
the Subsidiary Guarantor as a result of the issuance by the Issuer of the
Notes. To the extent that proceeds from the Offering are used to refinance the
indebtedness of the Company, a court might find that the Subsidiary Guarantors
did not benefit from incurrence of the indebtedness represented by the Notes.
The measure of insolvency for purposes of determining whether a transfer is
voidable as a fraudulent transfer varies depending upon the law of the
jurisdiction that is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its debts, including contingent
liabilities, was greater than the value of all its assets at a fair valuation
or if the present fair saleable value of the debtor's assets was less than the
amount required to repay its probable liability on its debts, including
contingent liabilities, as they become absolute and mature.
To the extent that a Subsidiary Guarantee is voided as a fraudulent
conveyance or found unenforceable for any other reason, holders of the Notes
would cease to have any claim in respect of the applicable Subsidiary
Guarantor. In such event, the claims of the holders of the Notes against such
Subsidiary Guarantor would be subject to the prior payment of all liabilities
and preferred stock claims of such Subsidiary Guarantor. There can be no
assurance that, after providing for all prior claims and preferred stock
interests, if any, there would be sufficient assets to satisfy the claims of
the holders of the Notes relating to any voided portion of such Subsidiary
Guarantee.
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LACK OF PUBLIC MARKET; RESTRICTION ON TRANSFERABILITY
The Notes are a new securities issue for which there is currently no active
trading market. If the Notes are traded after their initial issuance, they may
trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities and other
factors, including general economic conditions and the financial condition of
the Company. The Issuer does not currently intend to apply for a listing or
quotation of the Notes or the Exchange Notes, on any securities exchange or
stock market. The Initial Purchasers have informed the Issuer that they
currently intend to make a market in the Notes and the Exchange Notes.
However, the Initial Purchasers are not obligated to do so, and any such
market making may be discontinued at any time without notice. No assurance can
be given as to the liquidity of the trading market for the Notes and, if
issued, the Exchange Notes. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes.
The Exchange Notes generally will be permitted to be resold or otherwise
transferred (subject to the restrictions described under "Exchange and
Registration Rights Agreement" and "Notice to Investors") by each holder of
the Exchange Notes without the requirement of further registration. The
Exchange Offer will not be conditioned upon any minimum or maximum aggregate
principal amount of Notes being tendered for exchange. No assurance can be
given as to the liquidity of the trading market for the Exchange Notes, or, in
the case of non-tendering holders of the Old Notes, the trading market for the
Old Notes following the Exchange Offer. Holders of Old Notes who do not accept
the Exchange Offer will continue to hold restricted Notes subject to certain
transfer restrictions. Any benefits they had under the Registration Rights
Agreement herein described will be terminated.
The liquidity of, and trading market for, the Notes or the Exchange Notes
also may be adversely affected by general declines in the market for similar
securities. Such a decline may adversely affect such liquidity and trading
markets independent of the financial performance of the Company.
VOTING CONTROL
As of September 30, 1997, H. H. Wommack, III, Chairman of the Board,
President and Chief Executive Officer of SRH and Southwest, owned 72.9% of the
outstanding voting shares of common stock of SRH, which owns 100% of the
common stock of Southwest. See "Principal Stockholders and Ownership of
Management." Therefore, Mr. Wommack has the ability to elect all of the
directors of SRH and Southwest and, directly and indirectly, influence all
decisions made by SRH and Southwest.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of H. H. Wommack, III
and certain other senior management personnel. See "Management." The loss of
the services of Mr. Wommack and other senior management personnel could have a
material adverse effect on the Company's operations. The Company does not
currently have an employment contract with any senior management or key
personnel. The Company believes that its success is also dependent upon its
ability to continue to employ and retain skilled technical personnel. The
inability of the Company to employ or retain skilled technical personnel could
have a material adverse effect on the Company's operations.
VOLATILITY OF OIL AND NATURAL GAS PRICES
Revenues generated from Southwest's operations are highly dependent upon the
price of, and demand for, oil and natural gas. Historically, the markets for
oil and natural gas have been volatile and are likely to continue to be
volatile in the future. Prices for oil and natural gas are subject to wide
fluctuations in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond the control of Southwest. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in the Middle East, the foreign supply of oil and natural
gas, the price of foreign imports and
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overall economic conditions. It is impossible to predict future oil and
natural gas price movements with any certainty. Declines in oil and natural
gas prices may materially adversely affect Southwest's financial condition,
liquidity and results of operations. Lower oil and natural gas prices also may
reduce the amount of Southwest's oil and natural gas that can be produced
economically. In order to reduce its exposure to price risks in the sale of
its oil and natural gas, Southwest may enter into hedging arrangements from
time to time; however, Southwest's hedging arrangements are likely to apply to
only a portion of its production and provide only limited price protection
against fluctuations in the oil and natural gas markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General" and "Business."
Southwest uses the full cost method of accounting for its investment in oil
and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties
in the pool are depleted and charged to operations using the future gross
revenues method based on the ratio of current gross revenues to total proved
future gross revenues, computed based on current prices. Significant downward
revisions of quantity estimates or declines in oil and natural gas prices that
are not offset by other factors could result in a write down for impairment of
oil and natural gas properties. Once incurred, a write down of oil and natural
gas properties is not reversible at a later date even if oil or natural gas
prices increase.
RISKS OF ACQUISITION STRATEGY
The Company's growth strategy includes the acquisition of oil and gas
properties, well servicing businesses and commercial real estate properties.
There can be no assurance, however, that the Company will be able to continue
to identify attractive acquisition opportunities, obtain financing for
acquisitions on satisfactory terms or successfully acquire identified targets.
In addition, no assurance can be given that the Company will be successful in
integrating acquired businesses into its existing operations, and such
integration may result in unforeseen operational difficulties or require a
disproportionate amount of management's attention. Future acquisitions may be
financed through the incurrence of additional indebtedness to the extent
permitted under the Indenture or through the issuance of capital stock.
Furthermore, there can be no assurance that competition for acquisition
opportunities in these industries will not escalate, thereby increasing the
cost to the Company of making further acquisitions or causing the Company to
refrain from making additional acquisitions.
REPLACEMENT OF RESERVES
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent Southwest acquires
properties containing proved reserves or conducts successful development and
exploration activities, or both, the proved reserves of Southwest will decline
as reserves are produced. Southwest's future oil and natural gas production
is, therefore, highly dependent upon its level of success in finding or
acquiring additional reserves. The business of exploring for, developing or
acquiring reserves is capital intensive. To the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable, Southwest's ability to make the necessary capital investment to
maintain or expand its asset base of oil and natural gas reserves would be
impaired. In addition, there can be no assurance that Southwest's future
development, acquisition and exploration activities will result in additional
proved reserves or that Southwest will be able to drill productive wells at
acceptable costs.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values, including many factors beyond the control
of Southwest. The reserve data set forth in this Prospectus represent only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. Estimates of economically recoverable oil and natural gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
natural
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gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
recovery and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times
may vary substantially and such reserve estimates may be subject to downward
or upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to Southwest's reserves will likely vary from
estimates, and such variances may be material. See "Business--Oil and Gas
Reserves."
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the
estimated oil and natural gas reserves attributable to Southwest's properties.
In accordance with applicable requirements of the Commission, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the date of the estimate, whereas actual future prices
and costs may be materially higher or lower. Actual future net cash flows also
will be affected by factors such as the amount and timing of actual
production, supply and demand for oil and natural gas, curtailments or
increases in consumption by gas purchasers and changes in governmental
regulations or taxation. The timing of actual future net cash flows from
proved reserves, and their actual present value, will be affected by the
timing of both the production and the incurrence of expenses in connection
with development and production of oil and natural gas properties. In
addition, the calculation of the present value of the future net revenues
using a 10% discount, as required by the Commission, is not necessarily the
most appropriate discount factor based on interest rates in effect from time
to time and risks associated with Southwest's reserves or the oil and natural
gas industry in general.
SUBSTANTIAL CAPITAL REQUIREMENTS
Southwest makes, and will continue to make, substantial capital expenditures
for the exploration, development and acquisition of oil and natural gas
reserves. Southwest made capital expenditures of $32.1 million during 1995 and
$16.7 million during 1996. For the nine months ended September 30, 1997,
Southwest has spent approximately $27 million in the aggregate for oil and gas
acquisition, development and exploration activities and has budgeted
additional capital spending of approximately $45 million for the remainder of
1997 and 1998, principally to complete over 190 planned development drilling
and recompletion projects. Although management believes that Southwest will
have sufficient cash provided by operating activities, bank lines and the
proceeds from the Offering to fund planned capital expenditures in 1997 and
1998, if revenues decrease as a result of lower oil and natural gas prices or
operating difficulties, Southwest may be limited in its ability to expend the
capital necessary to undertake or complete its drilling program in future
years. There can be no assurance that additional debt or equity financing or
cash generated by operations will be available to meet these requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive oil or natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities
in formations, equipment failures or accidents, adverse weather conditions,
title problems and shortages or delays in the delivery of equipment.
Southwest's future drilling activities may not be successful and, if
unsuccessful, such failure will have an adverse effect on Southwest's future
results of operations and financial condition.
MARKETABILITY OF PRODUCTION
The marketability of Southwest's oil and natural gas production depends upon
the availability and capacity of gas gathering systems, pipelines and
processing facilities, and the unavailability or lack of capacity thereof
could result in the shut-in of producing wells or the delay or discontinuance
of development plans for properties.
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In addition, federal and state regulation of oil and natural gas production
and transportation, general economic conditions and changes in supply and
demand could adversely affect Southwest's ability to produce and market its
oil and natural gas on a profitable basis.
OPERATING RISKS OF OIL AND NATURAL GAS OPERATIONS
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blowouts, pipe failure, casing
collapse, abnormally pressured formations and hazards such as oil spills,
natural gas leaks, ruptures or discharges of toxic gases. The occurrence of
any of these operating risks could result in substantial losses to Southwest
due to injury or loss of life, severe damage to or destruction of property and
equipment, pollution or other environmental damage, including damage to
natural resources, clean-up responsibilities, penalties and suspension of
operations. In accordance with customary industry practice, Southwest
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance obtained by Southwest will be
adequate to cover any losses or liabilities. Southwest cannot predict the
continued availability of insurance or the availability of insurance at
premium levels that justify its purchase.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS
The Company's oil and natural gas and well service operations are subject to
various federal, state and local governmental laws and regulations that may be
changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling
operations, drilling and abandonment bonds or other financial responsibility
requirements, reports concerning operations, the spacing of wells, utilization
and pooling of properties and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity to
conserve supplies of oil and natural gas. In addition, the production,
handling, storage, transportation and disposal of oil and natural gas, by-
products thereof and other substances and materials produced or used in
connection with oil and natural gas operations are subject to regulation under
federal, state and local laws and regulations primarily relating to protection
of human health and the environment. These laws and regulations may impose
increasingly strict requirements for water and air pollution control and solid
waste management and can result in the imposition of civil and even criminal
penalties.
The Company's commercial real estate properties are subject to various
federal, state and local regulatory requirements, such as laws with respect to
access by disabled persons and state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the properties are currently in
compliance in all material respects with all such regulatory requirements.
However, there can be no assurance that these requirements will not be changed
or that new requirements will not be imposed which would require significant
unanticipated expenditures by the Company's real estate business and could
have an adverse effect on expected distributions by the Company's real estate
business.
SUBSTANTIAL COMPETITION
The Company experiences intense competition in its markets. Such markets are
highly competitive and no one competitor is dominant. Southwest competes with
major and independent oil and natural gas companies for the acquisition of
desirable oil and natural gas properties, as well as for the equipment and
labor required to develop and operate such properties. Southwest also competes
with major and independent oil and natural gas companies in the marketing and
sale of oil and natural gas to marketers and end-users. Sierra competes on the
basis of the quality of its equipment and service, its safety record and
pricing. Several competitors have access to greater financial and other
resources than those of Sierra, which could allow those companies to price
their services more aggressively than Sierra. Red Oak competes with other
companies for the acquisition of desirable real estate properties principally
on the basis of price. Although the Company believes that it has certain
advantages over these competitors, some of these competitors have greater
financial and other resources than the Company. See "Business--Competition."
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ENVIRONMENTAL RISKS
The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use, discharge and disposal of toxic,
volatile or otherwise hazardous materials. The Company does not currently
anticipate any material adverse effect on its business, financial condition or
results of operations as a result of the Company's required compliance with
U.S. federal, state, provincial, local or foreign environmental laws or
regulations or remediation costs. However, some risk of environmental
liability and other costs is inherent in the nature of the Company's business.
Moreover, the Company anticipates that such laws and regulations will become
increasingly stringent in the future, which could lead to material costs for
environmental compliance and remediation by the Company. See "Business--
Regulation."
Any failure by the Company to obtain required permits for, control the use
of, or adequately restrict the discharge of, hazardous substances under
present or future regulations could subject the Company to substantial
liability or could cause its operations to be suspended. Such liability or
suspension of operations could have a material adverse effect on the Company's
business, financial condition and results of operations.
SIERRA OPERATIONS--DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS
Sierra's business is substantially dependent upon conditions in the oil and
gas industry and, specifically, the expenditures of oil and gas companies. The
demand for well servicing activities is directly influenced by oil and gas
prices, expectations about future prices, the cost of producing and delivering
oil and gas, government regulation, including environmental regulations, local
and international political and economic conditions, and governmental policies
regarding exploration and development of oil and gas reserves. The demand for
well servicing and related services in the United States was severely
depressed for most of the last decade due in large part to prolonged weakness
and uncertainty in oil and gas prices. As a consequence, diminished demand
during that period led to lower rates and reduced use of available equipment.
Demand for well services has improved over the last two years, and prices for
such services have stabilized or increased during that period. Nonetheless,
there can be no assurance that periods of diminished demand in the oil field
service industry will not occur.
RED OAK OPERATIONS--ECONOMIC PERFORMANCE AND VALUE OF REAL ESTATE DEPENDENT ON
MANY FACTORS
Real estate property investments are subject to varying degrees of risk. The
economic performance and values of real estate can be affected by many
factors, including changes in the national, regional and local economic
climates, local conditions such as an oversupply of space or a reduction in
demand for real estate in the area, the attractiveness of the properties to
tenants, competition from other available space, the ability of the owner to
provide adequate maintenance and insurance and increased operating costs. In
recent years, there has been a proliferation of new retailers and a growing
consumer preference for value-oriented shopping alternatives that have, among
other factors, heightened competitive pressures. In certain areas of the
country, there may also be an oversupply of retail space. As a consequence,
many companies in all sectors of the retailing industry have encountered
significant financial difficulties. A substantial portion of Red Oak's income
is derived from rental revenues from retailers in neighborhood and community
shopping centers. Red Oak's income would be adversely affected if a
significant number of Red Oak's tenants were unable to meet their obligations
to Red Oak or if Red Oak were unable to lease a significant amount of space in
its properties on economically favorable lease terms. Accordingly, no
assurance can be given that Red Oak's financial results will not be adversely
affected by these developments in the retail industry.
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THE COMPANY
SRH, a Delaware corporation, was formed in 1997 to serve as a holding
company for Southwest, Sierra and Red Oak. The principal operating subsidiary
of SRH is Southwest, a Delaware corporation that was formed in 1983 to acquire
and develop oil and gas properties. Southwest initially financed the
acquisition of oil and gas reserves and its exploration and development
efforts through public and private limited partnership offerings. Southwest
raised approximately $115 million in 31 public and private limited partnership
offerings from 1983 to 1994. Southwest is a general partner of these limited
partnerships, owns interests in these partnerships and receives management
fees and operating cost reimbursements from such partnerships. Since
inception, Southwest, on behalf of itself and the investment partnerships, has
acquired over $320 million of oil and gas properties. As of June 30, 1997,
Southwest had total estimated net proved reserves of 32.5 MMBbls of oil and
75.3 Bcf of natural gas, aggregating 45.0 MMBoe, with a PV-10 Value of
approximately $214.5 million. Southwest's primary operations are in the
Permian Basin of West Texas and southeastern New Mexico. Southwest is the
Issuer of the Notes and a Restricted Subsidiary of SRH, the guarantor of the
Notes.
Sierra, a Delaware corporation, was formed in 1992 to provide certain well
services for Southwest and other oil and gas companies. Sierra expanded its
focus to provide a broader range of services, including workover rig services,
liquids handling and other services. Since January 1996, Sierra has pursued a
consolidation strategy, acquiring 15 well servicing companies in New Mexico
and Texas. SRH owns, directly and indirectly, approximately 40% of the common
stock of Sierra. Southwest is also the general partner and 15% interest holder
in two partnerships that own the remaining interests in Sierra. Sierra, an
affiliate of SRH, is not classified as a Subsidiary of SRH for purposes of the
Indenture.
Red Oak, a Delaware corporation, was formed in 1992 to own and manage
commercial real estate properties, including shopping centers and office
buildings, in secondary real estate markets in the southwestern United States.
Through October 31, 1997, Red Oak has acquired 17 commercial real estate
properties for $82.8 million. SRH owns approximately 82% of the common stock
of Red Oak on a fully-diluted basis. Red Oak is an Unrestricted Subsidiary.
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The following chart depicts the organizational structure of the Company and
includes certain additional information with respect to SRH and its
subsidiaries and affiliate related to the Notes. In addition, the chart
indicates SRH's direct ownership percentage in its subsidiaries and affiliate
and the ownership interest held by Southwest in Sierra, as general partner of
Southwest Partners II, L.P. ("Partners II") and Southwest Partners III, L.P.
("Partners III").
SOUTHWEST ROYALTIES
HOLDINGS, INC. ("SRH")
.Parent Guarantor of the
Notes on a Senior
Secured Basis
.Owns Capital Stock
of Sierra and Red Oak,
Pledged as Collateral
to the Parent Guarantee
100% 30% 82%
SOUTHWEST SIERRA RED OAK
OIL AND GAS WELL SERVICING REAL ESTATE
.Issuer of the Notes .Unconsolidated Entity .Unrestricted
Subsidiary
.Restricted Subsidiary .30% of Common Stock .82% of Common
of SRH Directly Owned by SRH Stock Directly
Pledged as Collateral Owned by SRH
.General Partner of 10% to the Parent Guarantee Pledged as
Partners II and Collateral to the
Partners III which Parent Guarantee
own 70% of the
Common Stock .$52.3 Million of Pro .$85.9 Million of
of Sierra Forma Debt Non-Recourse Pro Forma Debt
to SRH Non-Recourse
to SRH
Southwest has three subsidiaries, Midland Southwest Software, Inc.
("Southwest Software"), Threading Products International, LLC ("TPI"), and
Espero Energy Corporation ("Espero"), in which Southwest owns approximately
99%, 97%, and 100%, respectively, of the common stock or membership interests.
Southwest Software creates and markets computer software to the oil and gas
industry. TPI produces inserts used to cut threads by manufacturers of
threaded products. Espero is an oil and gas company. Southwest also owns 40%
of the membership interests in SWV Aviation, LLC, which owns an aircraft used
by the Company and others. Software, TPI and Espero will be Restricted
Subsidiaries under the terms of the Indenture, but SWV Aviation, LLC will not
be a Subsidiary thereunder. Sierra currently has no subsidiaries, but expects
to form or acquire subsidiaries as a result of future acquisition activities,
none of which would be Subsidiaries for purposes of the Indenture. Red Oak has
two wholly-owned subsidiaries, MRO Properties, Inc. ("MROP") and MRO
Management, Inc. ("MRO Management"), both of which will be Unrestricted
Subsidiaries. MROP holds titles to certain real estate properties and is the
borrower under a credit agreement related to such properties. This credit
agreement is non-recourse to Red Oak. MRO Management performs real estate
management services for MROP and Red Oak.
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Both Sierra and Red Oak are operated separately from Southwest; however,
Southwest provides both with significant administrative and accounting
support. Under the terms of separate service agreements dated September 1,
1997, Southwest has agreed to provide to Sierra and Red Oak administrative
services including accounting, bookkeeping, tax preparation and banking and
disbursement services. Both agreements have an initial term of five years and
renew from year to year if not terminated. Under each agreement, Southwest
receives a fixed fee of $12,000 per month. These fees may be adjusted at any
time by agreement of the parties. The service agreements may be terminated
upon 30 days' notice by either party to the agreements.
SRH has also entered into a tax sharing agreement effective September 1,
1997 with Southwest and Red Oak. This agreement provides, in general, that the
consolidated federal income tax liability of the members of the consolidated
group will be apportioned among the members in accordance with the method set
forth in Section 1.152-1(a)(2) of the Internal Revenue Code of 1986, as
amended and Sections 1.1502-33(d)(2)(i) of the Regulations promulgated
thereunder. In order to compensate members of the consolidated group for the
use of any net operating losses or tax credits and arriving at the
consolidated federal income tax liability for the group, group members have
agreed to determine and allocate the tax liability among themselves as
provided in the tax regulations.
The Company's principal executive offices are located at 407 North Big
Spring, Suite 300, Midland, Texas 79701. The Company's telephone number is
(915) 686-9927.
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PRIVATE PLACEMENT
On October 14, 1997, Southwest completed a $200 million private placement
sale of the Old Notes to the Initial Purchasers. Thereupon the Old Notes were
offered and sold by the Initial Purchasers only to qualified institutional
buyers. The net proceeds from the Private Placement were approximately $190
million. The Issuer used the net proceeds primarily to (i) fund the Oil and
Gas Properties Acquisition (net of deposits paid), (ii) repay substantially
all indebtedness outstanding under Southwest's bank credit facility and its
reserve-based loan facilities, (iii) fund a $10 million equity investment by
SRH in Red Oak through a dividend in that amount from the Issuer to SRH, (iv)
make a general partner capital contribution to Partners III of approximately
$1.7 million, which funds were immediately invested in Sierra common stock,
and (v) provide additional working capital for general corporate purposes,
including future acquisitions and development of producing oil and gas
properties. The following table illustrates the sources and uses of the gross
proceeds of the Offering:
<TABLE>
<CAPTION>
SOURCES OF FUNDS USES OF FUNDS
---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross proceeds from sale of
Notes....................... $197,600 Oil and Gas Properties Acquisition................................ $ 67,700
Repayment of Southwest debt(1).................................... 83,500
Red Oak equity investment by SRH.................................. 10,000
General partner contribution to
Partners III..................................................... 1,700
Working capital................................................... 27,100
Fees and expenses................................................. 7,600
-------- --------
Total sources................ $197,600 Total uses........................................................ $197,600
========
</TABLE>
- --------
(1) Includes amounts owed by Southwest at September 30, 1997 and prepayment
penalties. Southwest's indebtedness as of the Offering includes
approximately $44.9 million under Southwest's bank credit facility, $29.7
million under a reserve-based facility with Trust Company of the West and
TCW Asset Management Company (the "TCW Facility") and $8.9 million under a
reserve-based facility with Enron Capital and Trade Resources and Joint
Energy Development Investments Limited Partnership (the "ECT Facility").
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Notes to
Consolidated Financial Statements.
USE OF PROCEEDS
Neither the Issuer nor SRH will receive any cash proceeds from the issuance
of the Exchange Notes offered hereby. In consideration for issuing the
Exchange Notes as contemplated in this Prospectus, the Issuer and SRH will
receive in exchange a like principal amount of Old Notes, the terms of which
are identical in all material respects to the Exchange Notes. The Old Notes
surrendered in exchange for the Exchange Notes will not result in any change
in capitalization of the Company.
28
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997, the actual
capitalization of the Company and pro forma for the Private Placement and the
Transactions as if such transactions had occurred on September 30, 1997. The
information was derived from, and is qualified by reference to, the Company
Financial Statements, included elsewhere in this Prospectus. This information
should be read in conjunction with such financial statements, including the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
------------------
PRO
ACTUAL FORMA
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Bank credit facility--Southwest.......................... $ 44,900 $ --
9.0% TCW Facility........................................ 26,338 --
12.0% ECT Facility(1).................................... 7,229 --
13.0% mortgage note--Red Oak............................. 55,357 70,357
Other mortgage notes--Red Oak............................ 6,855 15,536
Capital leases and other debt............................ 1,534 2,307
10.5% Senior Notes due 2004.............................. -- 197,582
-------- --------
Total debt and capital leases, including current
portion............................................... 142,213 285,782
Redeemable Common Stock of Red Oak......................... 2,630 2,630
Redeemable Common Stock of SRH(2).......................... 8,291 8,291
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common Stock, $.01 par value, 5,000,000 shares
authorized, 1,160,537 issued and 946,821 outstanding.... 116 116
Additional paid in capital(1)............................ 2,196 2,196
Retained earnings........................................ (935) (3,384)
Note receivable from officer(3).......................... (1,714) (1,714)
Treasury stock........................................... (3,090) (3,090)
-------- --------
Total stockholders' equity (deficit)................... (3,427) (5,876)
-------- --------
Total capitalization................................... $149,707 $290,827
======== ========
</TABLE>
- --------
(1) Represents an $8.0 million note payable, due November 2001, net of a
$771,000 discount remaining for SRH stock purchase warrants issued in
connection with the note. The discount is being amortized to interest
expense, using the interest method, over the life of the note.
(2) Redeemable only if SRH does not file, and cause to become effective, by
December 31, 2001, a registration statement under the Securities Act
related to the offer and sale of any amount of SRH's common stock. The
Indenture will contain restrictions that will require SRH to meet certain
tests to redeem the stock if the holders elect to require SRH to redeem
those shares of common stock. This obligation does not extend to the
Issuer.
(3) See "Certain Transactions" regarding the terms of this note.
29
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma financial
information of the Company for the periods shown. The following information
should be read in conjunction with "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company
Financial Statements and the Unaudited Pro Forma Combined Financial Statements
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ---------------------------
PRO PRO
FORMA FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------- ------- ------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues:
Oil and gas.......... $17,999 $19,612 $16,321 $22,717 $ 35,296 $ 53,174 $24,638 $ 26,068 $ 37,984
Well service......... 746 1,363 2,377 4,218 8,013 -- 6,163 7,789 --
Real estate.......... -- -- 605 3,213 4,487 17,710 3,092 5,029 13,877
Other................ -- 279 325 352 622 362 424 948 904
------- ------- ------- ------- -------- -------- ------- -------- --------
Total operating
revenue........... 18,745 21,254 19,628 30,500 48,418 71,246 34,317 39,834 52,765
Operating expenses:
Oil and gas.......... 6,921 7,472 7,879 11,511 14,846 20,533 10,833 12,166 16,139
Well service......... 623 1,349 2,136 3,315 6,145 -- 4,519 5,600 --
Real estate.......... -- -- 195 1,414 1,887 8,458 1,295 1,907 6,166
General and
administrative...... 4,026 4,191 4,292 5,018 6,953 5,984 4,580 5,059 4,261
Depreciation,
depletion and
amortization........ 4,682 6,072 4,437 6,719 8,430 13,513 6,249 8,093 11,968
Other................ 10 4 105 228 554 554 407 1,003 1,003
------- ------- ------- ------- -------- -------- ------- -------- --------
Total operating
expenses.......... 16,262 19,088 19,044 28,205 38,815 49,042 27,883 33,828 39,537
Operating income....... 2,483 2,166 584 2,295 9,603 22,204 6,434 6,006 13,228
Other income
(expense):
Interest expense..... (1,999) (2,260) (1,975) (5,635) (10,016) (31,862) (7,180) (10,950) (24,617)
Interest income...... 112 287 229 269 441 430 275 545 536
Other................ 425 26 1,687 (78) 561 592 438 (66) (52)
------- ------- ------- ------- -------- -------- ------- -------- --------
Income (loss) before
income taxes,
minority interest and
equity in earnings of
subsidiary............ 1,021 219 525 (3,149) 589 (8,636) (33) (4,465) (10,905)
Income tax benefit
(provision)........... (327) (72) (171) 1,044 (365) 3,179 (54) 1,526 3,818
Minority interest in
subsidiaries.......... -- -- (1) (15) 181 (3) 71 322 321
Equity in earnings of
subsidiary............ -- -- -- -- -- (448) -- -- (4)
------- ------- ------- ------- -------- -------- ------- -------- --------
Income (loss) before
extraordianry item
and cumulative effect
of accounting change.. 694 147 353 (2,120) 405 (5,908) (16) (2,617) (6,770)
Extraordinary item,
net of tax............ -- -- -- -- -- -- -- (490) --
Cumulative effect of
accounting change..... 446 -- -- -- -- -- -- -- --
------- ------- ------- ------- -------- -------- ------- -------- --------
Net income (loss)...... $ 1,140 $ 147 $ 353 $(2,120) $ 405 $ (5,908) $ (16) $ (3,107) $ (6,770)
======= ======= ======= ======= ======== ======== ======= ======== ========
OTHER FINANCIAL DATA:
Capital
expenditures(2)....... $40,018 $13,032 $15,948 $46,914 $ 34,513 NA $12,891 $ 60,973 NA
Capital expenditures--
oil and gas........... 33,577 10,588 9,988 32,077 16,740 NA 9,808 26,522 NA
Ratio of earnings to
fixed charges(3)...... 1.5x 1.1x 1.3x NM 1.1x NM NM NM NM
Adusted EBITDA(4)...... 8,204 8,769 6,880 7,605 16,760 28,682 11,337 11,063 18,884
Adjusted EBITDA to
Interest(5)........... 4.1x 3.9x 3.8x 1.8x 2.1x 1.3x 1.9x 1.6x 1.1x
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER
AS OF DECEMBER 31, 30,
---------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents........... $ 5,296 $ 2,461 $ 3,095 $ 3,364 $ 8,284 $ 4,827 $ 11,152
Net property and
equipment............. 29,888 28,257 36,886 78,231 100,176 83,755 141,450
Total assets........... 46,955 42,128 49,709 95,434 130,284 105,866 180,825
Long-term debt,
including current
portion............... 35,590 29,875 33,723 73,486 93,805 81,875 142,213
</TABLE>
- --------
(1) Pro forma to reflect the Offering and the Transaction and certain other
acquisitions as if they had occurred on January 1, 1996, as well as the
deconsolidation of Sierra, which will be accounted for using the equity
method in future periods.
(2) Includes acquisitions. NA--not applicable
(3) Earnings were insufficient to cover fixed charges by $3,149,000, $33,000
and $4,465,000 for the historical periods ended December 31, 1995,
September 30, 1996 and September 30, 1997, respectively, and $8,636,000
and $10,905,000 for the pro forma periods ended December 31, 1996 and
September 30, 1997, respectively. For purposes of computing the ratio of
earnings to fixed charges, earnings are computed as income from continuing
operations plus fixed charges. Fixed charges consist of interest expense
and an estimated portion of rentals representing interest costs. NM--not
meaningful.
(4) Adjusted EBITDA (as used herein) is calculated as the sum of EBITDA of SRH
and Southwest only. EBITDA means earnings before interest expense, income
taxes, depreciation, depletion, and amortization and extraordinary item,
less minority interest in subsidiaries. EBITDA is commonly used by debt
holders and financial statement users as a measurement to determine the
ability of an entity to meet its interest obligations. EBITDA is not a
measurement presented in accordance with generally accepted accounting
principles ("GAAP") and is not intended to be used in lieu of GAAP
presentation of results of operations and cash provided by operating
activities.
(5) Adjusted EBITDA to Interest (as used herein) is the ratio of Adjusted
EBITDA to interest on the Notes plus interest on any other debt of SRH and
Southwest only.
31
<PAGE>
HISTORICAL AND PRO FORMA OPERATING DATA
The following table sets forth selected information with respect to the
Company's operating data for the periods shown and pro forma to give effect to
the Oil and Gas Properties Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------
PRO PRO
FORMA FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------ ------ ------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production Volumes:
Oil and condensate
(MBbls)........... 751 647 629 814 1,001 1,812 743 818 1,391
Natural gas (MMcf). 3,390 4,737 3,178 4,639 5,403 5,888 3,986 4,142 4,276
Total (MBoe)....... 1,316 1,437 1,159 1,587 1,901 2,793 1,407 1,508 2,104
Average Realized
Prices(2):
Oil and condensate
(per Bbl)......... $17.76 $16.23 $14.30 $16.40 $20.44 $20.26 $19.72 $19.39 $19.57
Natural gas (per
Mcf).............. 1.31 1.61 1.72 1.51 2.22 2.29 2.05 2.01 2.10
Per Boe............ 12.80 12.60 12.47 12.83 17.07 17.97 16.23 16.05 17.20
Expenses (per Boe):
Lease operating
(including
production
taxes).......... $ 5.26 $ 5.20 $ 6.80 $ 7.25 $ 7.81 $ 7.35 $ 7.83 $ 8.10 $ 7.69
Oil and gas
depreciation,
depletion and
amortization.... 3.05 3.61 3.03 3.19 3.38 3.94 3.42 4.08 4.73
Oil and gas
general and
administrative,
net............. 2.69 2.49 2.87 2.17 2.17 1.58 1.93 2.31 1.71
</TABLE>
- --------
(1) Pro forma to reflect the Oil and Gas Properties Acquisition and certain
other acquisitions as if they had occurred on January 1, 1996.
(2) Reflects the actual realized prices received by the Company, including the
results of the Company's hedging activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
SRH is a holding company that conducts its operations through three
principal businesses. The Company's oil and gas operations are conducted
through Southwest, primarily in the Permian Basin of West Texas and
southeastern New Mexico. Well servicing operations, consisting of workover rig
services, liquids handling and other services, are conducted through Sierra in
Texas and New Mexico. Real estate operations are conducted through Red Oak and
are focused in Texas, Oklahoma and Arizona.
The Company has grown substantially over the last several years primarily
through acquisitions in each of its businesses. As a result of these
acquisitions, operating results may not be comparable from period to period.
The Company's acquisition expenditures for the period from 1994 to September
30, 1997, by business, are listed below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ---------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Oil and gas (Southwest)........................ $ 7,795 $24,116 $ 3,234 $11,384
Well servicing (Sierra)........................ 790 923 2,941 6,677
Real estate (Red Oak).......................... 4,400 12,631 12,528 26,954
------- ------- ------- -------
Total acquisition expenditures............... $12,985 $37,670 $18,703 $45,015
======= ======= ======= =======
</TABLE>
On October 14, 1997, the Company purchased additional oil and gas properties
in the Permian Basin from a major oil company for $72.3 million.
Southwest's revenue, profitability and cash flow are substantially dependent
upon prevailing prices for crude oil and natural gas and the volumes of crude
oil and natural gas it produces. In addition, Southwest's proved reserves and
oil and gas production will decline as crude oil and natural gas are produced
unless Southwest is successful in acquiring producing properties or conducts
successful exploration and development activities.
Southwest uses the full cost method of accounting for its investment in oil
and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are
capitalized into a "full cost pool" as incurred, and properties in the pool
are depleted and charged to operations using the future gross revenues method
based on the ratio of current gross revenues to total proved future gross
revenues, computed based on current prices. Significant downward revisions of
quantity estimates or declines in oil and gas prices that are not offset by
other factors could result in a write down for impairment of oil and gas
properties. Once incurred, a writedown of oil and gas properties is not
reversible at a later date, even if oil or natural gas prices increase.
The Sierra Equity Sale resulted in a reduction in the direct and indirect
ownership of Sierra by SRH to approximately 40%. Beginning July 1, 1997, SRH
began accounting for its ownership of Sierra as an investment in an
unconsolidated subsidiary, consistent with the equity method of accounting
under GAAP.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues for the Company increased $5.5 million, or 16%, for the
nine months ended September 30, 1997, reflecting increased revenues in each of
the Company's businesses.
33
<PAGE>
The following table summarizes production volumes, average sales prices and
period to period comparisons for the Company's oil and gas operations,
including the effect on revenues, for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED 1997 PERIOD COMPARED
SEPTEMBER 30, TO 1996 PERIOD
------------- ---------------------
REVENUE
% INCREASE INCREASE
1996 1997 (DECREASE) (DECREASE)
------ ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Production volumes:
Oil and condensate (MBbls)................ 743 818 10 % $1,479
Natural gas (MMcf)........................ 3,986 4,142 4 % 320
Average sales prices:
Oil and condensate (per Bbl).............. $19.72 $19.39 (2)% $ (270)
Natural gas (per Mcf)..................... 2.05 2.01 (2)% (166)
</TABLE>
Oil and gas revenues increased $1.4 million, or 6%, for the nine months
ended September 30, 1997 compared to the same period in 1996, due primarily to
increases in oil production. Oil and gas production increased 10% and 4%,
respectively, due principally to several acquisitions. Changes in production
contributed $1.8 million to increased oil and gas revenues. The average price
per barrel of oil was $19.39, a decrease of 2%, and the average price of
natural gas was $2.01 per Mcf, a decrease of 2%, for the nine months ended
September 30, 1997 compared to the prior period. These lower oil and gas
prices contributed to a decrease of $436,000 to revenues.
Well servicing revenues increased $1.6 million, or 26%, attributable
primarily to acquisitions completed in the last half of 1996 and first half of
1997, as well as an increase in rates for well servicing rigs resulting from
increased demand for workover and completion services, partially offset by the
effects of deconsolidating Sierra at July 1, 1997. The Sierra Equity Sale
resulted in a reduction in the direct and indirect ownership of Sierra by SRH
to approximately 40%. Beginning July 1, 1997, SRH began accounting for its
ownership of Sierra as an investment in an unconsolidated subsidiary,
consistent with the equity method of accounting under GAAP. Real estate
operations revenues increased $1.9 million, or 63%, for the nine months ended
September 30, 1997, due primarily to acquisitions completed in the last half
of 1996 and first three quarters of 1997.
Operating Expenses. Operating expenses, before general and administrative
expense and depreciation, depletion and amortization, increased $3.6 million,
or 21%, for the nine months ended September 30, 1997, due primarily to growth
in the Company's businesses through acquisitions.
Oil and gas operating expense increased $1.3 million, or 12%, for the nine
months ended September 30, 1997, due primarily to an increase in the number of
oil and gas properties owned by the Company and increased workover activity
during the period. The average operating expense was $8.10 per Boe in the nine
months ended September 30, 1997, an increase of 3% from $7.83 per Boe for the
same period in 1996. This increase in per unit operating costs was
attributable primarily to the acquisition of oil and gas properties which
affected 1997 results.
Well servicing operating expense increased $1.1 million, or 23%, for the
nine months ended September 30, 1997, attributable primarily to increased
activity from recently acquired companies, partially offset by the effects of
deconsolidating Sierra at July 1, 1997. Real estate operating expense
increased $612,000, or 47%, for the nine months ended September 30, 1997, due
primarily to acquisitions. Both well servicing and real estate operating
expenses declined, 2% and 4%, respectively, as a percentage of revenues as the
Company experienced efficiencies resulting from integrating acquisitions in
each of these businesses.
General and Administrative ("G&A") Expense. G&A expense for the Company
increased $479,000, or 10%, for the nine months ended September 30, 1997, due
primarily to an increase in the Company's activities resulting from recent
acquisitions. Oil and gas G&A expense increased approximately $768,000, or
28%, for the nine months ended September 30, 1997, and was $2.31 per Boe, an
increase of 20% from the comparable prior period, due primarily to additions
to oil and gas technical and administrative staff in conjunction with planned
34
<PAGE>
increases in future oil and gas development activity. Well servicing G&A
expense increased $192,000, or 17%, for the nine months ended September 30,
1997, due primarily to growth through acquisitions and increased business
insurance expense associated with those acquisitions, partially offset by the
effects of deconsolidating Sierra at July 1, 1997. Well servicing G&A expense
declined as a percentage of revenues as the Company experienced the benefits
of scale resulting from acquisitions in this business. Real estate G&A expense
decreased $31,000, or 6%, for the nine months ended September 30, 1997.
Depreciation, Depletion and Amortization ("DD&A") Expense. DD&A expense for
the Company increased $1.8 million, or 30%, for the nine months ended
September 30, 1997 due to growth in each of the Company's businesses. Oil and
gas DD&A expense increased approximately $1.4 million, or 28%, and was $4.08
per Boe, an increase of 20% from the comparable prior period. The increase in
oil and gas DD&A expense on an overall basis and per Boe was due to a higher
increase in production compared to the decrease in prices which resulted in
increased revenues and a higher depletion rate. Well servicing DD&A expense
remained constant as a percentage of well servicing revenue at 10% for both
periods. Real estate DD&A expense increased as a percentage of real estate
revenues from 15% in the nine months ended September 30, 1996 to 16% in the
nine months ended September 30, 1997.
Interest Expense. Interest expense for the Company increased $3.8 million,
or 53%, for the nine months ended September 30, 1997, primarily as a result of
increased borrowings incurred to fund a portion of the Company's acquisitions
and oil and gas development. Oil and gas interest expense increased
approximately $919,000, or 15%, as a result of increased borrowings for
development drilling and acquisitions made in the last quarter of 1996 and the
first three quarters of 1997. The average interest rate paid on these
borrowings also increased by approximately 1.0%. Well servicing interest
expense increased $132,000, attributable to increased debt incurred for
acquisitions, partially offset by the effects of deconsolidating Sierra at
July 1, 1997. Real estate interest expense increased $2.7 million, or 240%,
due to increased debt used to finance acquisitions and an increase of
approximately 3.0% in the average interest rate paid on these borrowings, as
compared to the prior year. This increase is primarily attributable to the
borrowing of non-recourse debt at Red Oak during the period.
Net Income. Due to the factors described above, net loss for the Company
increased $3.1 million to a loss of $3.1 million for the nine months ended
September 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues for the Company increased $17.9 million, or 59%, for the
year ended December 31, 1996, reflecting increased revenues in each of the
Company's businesses.
The following table summarizes production volumes, average sales prices and
period to period comparisons for the Company's oil and gas operations,
including the effect on revenues, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED 1996 COMPARED
DECEMBER 31, TO 1995
------------- ---------------------
REVENUE
% INCREASE INCREASE
1995 1996 (DECREASE) (DECREASE)
------ ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Production volumes:
Oil and condensate (MBbls)................ 814 1,001 23% $3,067
Natural gas (MMcf)........................ 4,639 5,403 16% 1,156
Average sales prices:
Oil and condensate (per Bbl).............. $16.40 $20.44 25% $4,043
Natural gas (per Mcf)..................... 1.51 2.22 47% 3,834
</TABLE>
Oil and gas revenues increased $12.6 million, or 55%, from 1995 to 1996, due
primarily to increases in oil and gas production and prices. Production of oil
and gas increased 23% and 16%, respectively, due to the inclusion of
production attributable to several acquisitions completed in late 1995, as
well as to acquisitions in 1996, resulting in an increase in revenues of $4.2
million. The average realized oil price was $20.44 per Bbl, an
35
<PAGE>
increase of 25%, and the average realized gas price was $2.22 per Mcf, an
increase of 47%, for 1996 as compared to 1995. These price increases resulted
in increased revenues of $7.9 million. Management fees and other oil and gas
income also increased at Southwest.
Well servicing revenues increased $3.8 million, or 90%, attributable
primarily to acquisitions completed in 1996, which increased the number of
well servicing rigs owned at year end 1996 to 22 from 10 at year end 1995, as
well as to an increase in rates for well servicing rigs resulting from
increased demand for these services. Real estate revenues increased $1.3
million, or 40%, for 1996, primarily due to the acquisition of three
properties in 1996.
Operating Expenses. Operating expenses, before general and administrative
expense and depreciation, depletion and amortization, for the Company
increased $7.0 million, or 42%, for 1996, due primarily to growth in the
Company's businesses through acquisitions.
Oil and gas operating expense increased $3.3 million, or 29%, for 1996, due
principally to the overall increase in production generated from properties
acquired during 1996 and the prior year. The average operating expense was
$7.81 per Boe in 1996, an increase of 8% from the prior year, attributable
primarily to acquisitions of properties with generally higher per unit
operating expenses and to increased production taxes resulting from higher oil
and gas prices.
Well servicing operating expense increased $2.8 million, or 85%, for 1996,
attributable primarily to increases in expenses arising from acquisitions, but
partially offset by a reduction in expenses due to a shift from plugging and
abandonment to well servicing activities. Real estate operating expense
increased $473,000, or 33%, for 1996, due principally to acquisitions and
related increases in direct operating costs. Both well servicing and real
estate operating expenses declined as a percentage of revenues as the Company
experienced efficiencies resulting from acquisitions in each of these
businesses.
G&A Expense. G&A expense for the Company increased $1.9 million, or 39%, for
1996, due to an increase in the Company's activities resulting primarily from
acquisitions. Oil and gas G&A expense increased approximately $686,000, or
20%, for 1996, and was $2.17 per Boe in each year. This expense increased as
the result of the addition of technical and administrative personnel relating
to growth in the Company's oil and gas business. Well servicing G&A expense
increased $905,000, or 104%, for 1996 compared to the prior year, due
primarily to growth through acquisitions and the related additions of
operating and administrative personnel. Real estate G&A expense increased
$232,000, or 55%, for 1996 compared to the prior year, primarily as the result
of a one time incentive compensation payment to management. Both well
servicing and real estate G&A expenses increased slightly as a percentage of
revenues.
DD&A Expense. DD&A expense for the Company increased $1.7 million, or 25%,
for 1996 due primarily to acquisitions. Oil and gas DD&A expense increased
$1.4 million, or 27%, for 1996 due primarily to increases in oil and gas
production. The DD&A rate was $3.38 per Boe, an increase of 6% as compared to
1995 results. Well servicing DD&A expense increased $415,000, or 93%, and real
estate DD&A expense increased $214,000, or 48%, in 1996 compared to the prior
year, attributable primarily to the impact of acquisitions.
Interest Expense. Interest expense for the Company increased $4.4 million,
or 78%, for 1996, primarily as a result of increased borrowings. Oil and gas
interest expense increased $3.7 million, or 85% for 1996, as a result of a
higher average outstanding debt balance due primarily to development
activities and acquisitions made in 1995 and 1996. Well servicing interest
expense increased $12,000 for 1996, attributable to an increase in average
debt balances. Real estate interest expense increased $632,000, or 50%, for
1996, due principally to increased debt used to finance acquisitions.
Net Income. Due to the factors described above, net income for the Company
increased $2.5 million to $405,000 for 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues for the Company increased $10.9 million, or 55%, for
1995, reflecting increased revenues in each of the Company's businesses,
primarily from acquisitions.
36
<PAGE>
The following table summarizes production volumes, average sales prices and
period to period comparisons for the Company's oil and gas operations,
including the effect on revenues, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED 1995 COMPARED
DECEMBER 31, TO 1994
------------- ---------------------
REVENUE
% INCREASE INCREASE
1994 1995 (DECREASE) (DECREASE)
------ ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Production volumes:
Oil and condensate (MBbls)................ 629 814 29 % $2,645
Natural gas (MMcf)........................ 3,178 4,639 46 % 2,510
Average sales prices:
Oil and condensate (per Bbl).............. $14.30 $16.40 15 % $1,712
Natural gas (per Mcf)..................... 1.72 1.51 (12)% (952)
</TABLE>
Oil and gas revenues increased $6.4 million, or 39%, from 1994 to 1995, due
principally to increased oil and gas production and oil prices. Production of
oil and gas increased 29% and 46%, respectively, due primarily to production
from acquired properties, resulting in an increase in revenues of $5.2
million. The average realized price per barrel of oil was $16.40, an increase
of 15%, and the average realized gas price was $1.51 per Mcf, a decrease of
12%, for 1995 compared to 1994. These price changes resulted in increased
revenues of $760,000 for 1995 compared to 1994. Management fees and other
income also increased at Southwest.
Well servicing revenues increased $1.8 million, or 77%, attributable
primarily to the addition of four well servicing rigs in 1995, resulting in a
fleet of ten rigs at year end 1995 compared to six rigs at year end 1994. Real
estate revenues increased $2.6 million, for 1995, due primarily to the
acquisition of two properties in 1995.
Operating Expenses. Operating expenses, before general and administrative
expense and depreciation, depletion and amortization, for the Company
increased $6.2 million, or 60%, for 1995, due primarily to growth in the
Company's businesses through acquisitions.
Oil and gas operating expense increased $3.6 million, or 46%, for 1995, due
principally to increased production from acquired properties. The average
operating expense was $7.25 per Boe in 1995, an increase of 7% from $6.80 per
Boe for the prior year, attributable primarily to acquisitions of properties
with generally higher per unit operating expenses and to increased production
taxes resulting from higher oil and gas prices.
Well servicing operating expense increased $1.2 million, or 55%, for 1995,
attributable primarily to increased expense from businesses acquired. Well
servicing operating expense declined as a percentage of revenues, from 90% in
1994 to 79% in 1995 on a consolidated basis, as Sierra achieved improved
pricing for its services and efficiencies from its acquisitions. Real estate
operating expense increased $1.2 million for 1995, due to increased expense
resulting from acquisitions.
G&A Expense. G&A expense for the Company increased $726,000, or 17%, for
1995, compared with 1994, due principally to an increase in the Company's
activities from acquisitions. Oil and gas G&A expense increased $123,000, or
4%, for 1995, and was $2.17 per Boe, a decrease of 24% from the prior year.
This expense increased as the result of an increase in technical and
administrative personnel attributable to growth in the oil and gas business,
but decreased on a per unit basis due primarily to increases in oil and gas
production. Well servicing G&A expense increased $437,000, or 102%, for 1995
compared to the prior year, due principally to the establishment of the East
Texas field office. Real estate G&A expense increased $6,000, or 1%, for 1995
compared to the prior year. Real estate G&A expenses declined as a percentage
of revenues as the Company experienced the benefits of scale resulting from
acquisitions.
DD&A Expense. DD&A expense for the Company increased $2.3 million, or 51%,
for 1995, compared with 1994. This increase was due primarily to an increase
in oil and gas production. Oil and gas DD&A expense increased $1.6 million, or
44%, for 1995, and was $3.19 per Boe, an increase of 5%, compared to the prior
year. The increase in oil and gas DD&A expense was attributable primarily to a
doubling of the oil and gas property
37
<PAGE>
base resulting from acquisitions, and was partially offset by a decreased DD&A
rate. Well servicing DD&A expense increased $294,000, or 191%, for 1995, due
principally to a significant increase in the well servicing asset base from
acquisitions. Real estate DD&A expense increased $364,000, for 1995, due
primarily to the acquisition of new properties.
Interest Expense. Interest expense for the Company increased $3.7 million,
or 185%, for 1995, compared with the same period in 1994, due primarily to
increased borrowings attributable to acquisitions at Southwest and Red Oak.
Oil and gas interest expense increased $2.5 million, or 135%, for 1995. Well
servicing interest expense increased $47,000 for 1995, and real estate
interest expense increased $1.2 million for 1995.
Net Income. Due to the factors described above, net income for the Company
decreased $2.5 million to a loss of $2.1 million for 1995.
LIQUIDITY AND CAPITAL RESOURCES
Funding for the Company's business activities has historically been provided
by operating cash flows, bank borrowings, reserve-based financing and sales of
equity. While the Company regularly engages in discussions relating to
potential acquisitions of oil and gas properties, well servicing businesses
and real estate properties, it has no present agreement, commitment or
understanding with respect to any such acquisition. Any future acquisitions
may require additional financing and will be dependent upon financing
arrangements available at the time.
Net Cash Provided by Operating Activities. Cash flows provided by operating
activities from the Company's operations were $5.2 million, $5.6 million and
$10.3 million for 1994, 1995 and 1996, respectively. Increases in oil and gas
production and revenues resulting principally from acquisition and development
activities over this three-year period, as well as generally improved oil and
gas prices, increased cash flows. Additionally, growth from well servicing
acquisitions, increased cash flows, partially offset by cash used in real
estate operating activities. Cash flows from the Company's operations for the
nine-month period ended September 30, 1997 were $9.4 million, as compared to
$4.8 million for the prior year. This increase was primarily attributable to
increases in oil and gas production and prices and increased activity
attributable to well servicing and real estate acquisitions.
Net Cash Used in Investing Activities. Cash flows used in investing
activities by the Company were $9.6 million, $44.5 million and $33.2 million
for 1994, 1995 and 1996, respectively. Acquisitions and oil and gas
development activities were the primary uses of funds. Cash flows used in
investing activities by the Company for the nine months ended September 30,
1996 were $12.5 million and for the nine months ended September 30, 1997 were
$62.7 million.
The following table sets forth capital expenditures, including acquisitions,
made by the Company during the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
DECEMBER 31, 30,
--------------- ---------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Oil and gas
Development................................ $ 2,134 $ 6,683 $13,322 $13,215
Exploration................................ 59 1,278 184 1,923
Acquisitions............................... 7,795 24,116 3,234 11,384
Well servicing............................... 852 1,598 3,826 6,885
Real estate.................................. 5,108 13,239 13,947 27,566
------- ------- ------- -------
Total.................................... $15,948 $46,914 $34,513 $60,973
======= ======= ======= =======
</TABLE>
For 1997 and 1998, the Company has budgeted approximately $102.7 million and
$44.9 million, respectively, for oil and gas acquisitions, development and
exploration, including approximately $72.3 million for the Oil and Gas
Properties Acquisition. In addition, the Company anticipates capital
expenditures in 1997 and 1998 of approximately $43.6 million and $1.3 million
at Sierra, and $55.0 million and $4.0 million, respectively, at Red Oak.
38
<PAGE>
Net Cash Provided by Financing Activities. Cash provided by the Company's
financing activities was $5.1 million, $39.2 million (including additional
borrowings of $37.1 million) and $27.9 million (including additional
borrowings of $18.0 million and $9.9 million net proceeds from issuance of
additional equity securities) for 1994, 1995 and 1996, respectively. Cash
provided by financing activities for the Company's operations for the nine
months ended September 30, 1997 was $56.2 million, consisting of additional
net borrowings of $53.7 million and net proceeds from private equity sales by
a subsidiary.
In April 1997, MROP, a wholly-owned subsidiary of Red Oak, entered into a
$42 million credit facility maturing in April 2000 with an institutional
lender (the "MROP Facility"). The MROP Facility was executed in order to
consolidate six mortgage loans, originally incurred to complete the
acquisition of certain Red Oak properties, and to finance the acquisition of
an additional real estate property. Borrowings under the facility bear
interest at a rate of 13%, with 10% payable in cash and the remaining 3%
payable in cash or additional notes at MROP's option. The facility contains a
number of covenants that, among other things, restrict the ability of MROP to
incur additional indebtedness and dispose of assets. The facility is secured
by a first lien on substantially all of MROP's properties. MROP's obligations
under the facility are nonrecourse to SRH, Southwest, Red Oak and Sierra.
In conjunction with the Private Placement, the Company arranged new
borrowing facilities for each of its businesses. The following discussion
summarizes the material terms of such facilities.
Southwest Credit Facility. The Southwest Credit Facility has been amended to
provide for a $75 million revolving line of credit maturing in February 1999,
resulting in availability of $40 million, subject to semi-annual borrowing
base redetermination. The initial borrowing base of $40 million is subject to
a $15 million sub-limit on availability for oil and gas acquisitions, with the
balance of the borrowing base available for general corporate purposes.
Borrowings accrue interest at LIBOR plus a margin ranging from 1.75% to 2.50%
and incur a quarterly commitment fee of three-eighths of one percent ( 3/8%)
per annum on the daily average of the unadvanced amount of the borrowing base.
The Southwest Credit Facility is secured by substantially all of Southwest's
proved oil and gas properties. The facility contains a number of covenants
that limit loans and advances, investments, and dividends, as well as setting
a minimum interest coverage ratio for SRH.
Sierra Acquisition Facility. Sierra arranged the Sierra Acquisition
Facility, in the amount of $60 million, secured by all of Sierra's assets,
with an institutional lender. Tranche A of the Sierra Acquisition Facility is
for up to $30 million, with interest payable monthly at the prime rate plus
1.0%. The full amount of Tranche A was used to finance part of Sierra's recent
acquisitions and the related working capital and costs and expenses of such
transactions. Tranche B of the Sierra Acquisition Facility is for $30 million,
with an initial availability of $10 million and subsequent advances subject to
lender approval. Interest will be payable monthly on funds advanced under
Tranche B, initially at the prime rate plus 3.0%, subject to adjustment. The
final maturity of the Sierra Acquisition Facility is 18 months after the date
of closing of the facility. Under the terms of the Sierra Acquisition
Facility, the lender received certain fees and warrants to purchase common
stock of Sierra.
Red Oak Acquisition Facilities. In order to partially fund Red Oak's recent
acquisitions, the MROP Facility was increased by an additional $30 million and
Red Oak entered into two additional mortgage facilities with separate lenders
(the "Red Oak Acquisition Facilities"). The Red Oak Acquisition Facilities are
secured by a first lien on the properties acquired. The two additional
mortgage facilities contain a number of covenants that, among other things,
restrict the ability of Red Oak to incur additional indebtedness and dispose
of assets, and borrowings thereunder bear interest at 9.25%. Red Oak's
obligations under the Red Oak Acquisition Facilities are nonrecourse to SRH,
Southwest and Sierra.
To partially fund its recent acquisitions, Red Oak sold additional common
stock to SRH for $10 million. SRH funded its purchase of additional common
stock from the proceeds of a dividend of $10 million from Southwest, paid out
of a portion of the net proceeds from the Private Placement.
The Company believes that availability under the Southwest Credit Facility,
the Sierra Acquisition Facility, the Red Oak Acquisition Facilities, cash flow
from operations and the proceeds from the private placement Note Offering,
will be sufficient for planned operating and capital expenditure requirements
in 1997 and 1998. If the Company makes capital expenditures in excess of
planned levels, it may be required to seek additional financing.
39
<PAGE>
BUSINESS
GENERAL
The Company is an independent oil and gas company engaged in the
acquisition, development and production of oil and gas properties, primarily
in the Permian Basin of West Texas and southeastern New Mexico, through its
wholly-owned subsidiary, Southwest. Since 1983, the Company has grown
primarily through selective acquisitions of producing oil and gas properties,
completing over $320 million in acquisitions, both directly and through the
oil and gas partnerships it manages. The Company also participates in the well
servicing industry through its affiliate, Sierra, and owns and manages real
estate properties through its subsidiary, Red Oak.
The Company pursues a strategy of acquiring long-life, producing oil and gas
properties, which offer both current cash flow, significant development
potential and opportunities to reduce operating and administrative costs. Many
of the Company's previous acquisitions were completed during periods of
relatively low oil and gas prices, and the Company generally deferred
development of such acquired properties to invest available capital in
additional acquisitions. Due to increased oil and gas prices and improved
availability of capital, the Company has increased its oil and gas development
activities. The Company plans to increase capital spending on development and
exploitation opportunities.
At June 30, 1997, on a pro forma basis, the Company owned interests in
approximately $2.6 million gross leasehold acres, approximately 75% of which
were classified as developed. At such date, the Company's estimated net proved
reserves, on a pro forma basis, would have been 32.5 MMBbls of oil and 75.3
Bcf of natural gas, or 45.0 MMBoe. The Company's properties are located
primarily in the Permian Basin and generally have well-established production
histories with a pro forma reserve life of approximately 15 years. At June 30,
1997, the Company's pro forma PV-10 Value would have been $214.5 million.
The Company's development projects generally involve moderate drilling and
completion costs as they are located primarily in shallow to intermediate
depth, normally pressured reservoirs. Additionally, many of these projects
contain multiple horizons that are potentially productive, thereby further
reducing development drilling risk. The Company has identified over 500
recompletion and development opportunities on its properties. For the nine
months ended September 30, 1997, Southwest has spent approximately $27 million
in the aggregate for oil and gas acquisition, development and exploration
activities and has budgeted additional capital spending of approximately $45
million for the remainder of 1997 and 1998 principally to complete over 190
planned development drilling and recompletion projects. The Company
anticipates that its development activities, when combined with new seismic
and other data, will result in the identification of additional development
drilling prospects and proved reserves.
The Company engages in the well servicing business through Sierra, in which
SRH has a 40% direct and indirect ownership interest. Sierra, which was formed
in 1992, provides a broad range of well services to oil and gas companies,
including workover rig services, liquids handling and other services. Since
January 1996, Sierra has purchased 15 well servicing companies for a total
cost of $42.1 million, increasing its equipment fleet to 86 workover rigs.
Management believes that Sierra is the fourth largest land-based well
servicing company in the United States.
Red Oak, an 82%-owned subsidiary of SRH, on a pro forma basis, owns and
manages retail shopping centers and office buildings in Texas, Oklahoma and
Arizona. Since December 1993, Red Oak has acquired 17 properties for
approximately $82.8 million.
STRATEGY
The Company's objective is to increase its revenues, cash flow, earnings and
assets through a balanced growth strategy of acquisition, development and
exploitation of oil and gas properties, and through its investments in the
well servicing and real estate businesses.
40
<PAGE>
Complete Selective Oil and Gas Acquisitions. The Company seeks to acquire
producing oil and gas properties that provide opportunities for the addition
of reserves, production and cash flow through operational improvements,
production enhancement and additional development. The Company believes these
criteria are met in the Permian Basin due to the region's long history of
production and multiple producing oil and gas horizons. The Company has
acquired over $320 million of oil and gas properties since inception, both
directly and through the oil and gas partnerships it manages. Management
believes that acquisition opportunities will continue to be available in the
Permian Basin.
Develop and Exploit Existing Oil and Gas Properties. The Company has
acquired a diversified portfolio of oil and gas properties that contains
numerous identified development opportunities. The Company believes that
current oil and gas prices, combined with technical and operating advances,
have improved the attractiveness of accelerated development of these
properties. The Company plans to significantly increase its capital spending
during 1997 and 1998 to pursue these opportunities, which consist principally
of infill drilling, recompletions, enhanced recovery operations and workover
opportunities. The Company is pursuing these projects to increase cash flow
and to identify additional reserves and development projects.
Maintain Geographic Focus. The Company concentrates its oil and gas
activities in the Permian Basin, with properties in this region representing
over 90% of the Company's pro forma PV-10 Value at June 30, 1997. The Company
believes that its long-life oil and gas properties and large inventory of
development projects in the Permian Basin, coupled with region-specific
geological, engineering and production experience, provide it with focused
operations. Company-operated properties comprised approximately 60% of its pro
forma PV-10 Value at June 30, 1997, allowing substantial control over the
incurrence and timing of capital and operating expenditures.
Selectively Grow Well Servicing and Real Estate Businesses. The Company
plans to continue the expansion of its well servicing and real estate
businesses, primarily in the southwestern United States. The Company expects
that Sierra's and Red Oak's active management practices will lead to
consolidation benefits, cost savings, more efficient utilization and improved
cash flow, thereby enhancing the return on capital invested.
SOUTHWEST
Prior to 1996, Southwest grew principally through the acquisition of
producing properties, establishing a substantial base of producing and
undeveloped properties in the Permian Basin. Due to relatively low oil and gas
prices, as well as certain other constraints, Southwest pursued limited
exploration and development of its properties during this period. With the
recovery of oil and gas prices, Southwest increased its development activities
in 1996. Southwest plans to accelerate the internal development and
exploitation projects. Southwest's development program focuses on its operated
properties. For the second half of 1997 and for 1998, Southwest has budgeted
capital spending for over 190 drilling and recompletion opportunities within
its existing property base, approximately 90% of which are identified as
proved in its reserve report. Southwest intends to devote a limited amount of
its capital spending to lower risk exploration drilling opportunities,
consisting principally of step-out drilling prospects adjacent to existing
producing fields.
Southwest's estimated actual and pro forma net proved reserves as of June
30, 1997 were approximately 31.0 MMBoe and 45.0 MMBoe, respectively, and
actual and pro forma production during the first nine months of 1997 was
approximately 1.5 MMBoe and 2.1 MMBoe, respectively. Approximately 67% of the
pro forma reserves would have been classified as proved developed. As of June
30, 1997, Southwest's PV-10 Value, on a pro forma basis, would have been
$214.5 million.
Principal Oil and Gas Properties
The Company's oil and gas properties are primarily located in the Permian
Basin of West Texas and southeastern New Mexico. Approximately 86% of the
Company's PV-10 Value is concentrated in this region (91% on a pro forma
basis). The region is characterized by numerous known producing horizons,
providing
41
<PAGE>
significant opportunities to increase reserves, production and ultimate
recoveries through additional development, horizontal drilling, recompletions,
enhanced recovery methods, and the use of 3-D seismic, reprocessed 2-D seismic
data and other advanced technologies. As of June 30, 1997, the Company
operated properties comprising approximately 60% of its PV-10 Value (60% on a
pro forma basis). The following table provides information for the Company's
ten largest fields which contribute approximately 50% of its reserves and PV-
10 Value as of June 30, 1997.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
NET % OF
PROVED PV-10 TOTAL
RESERVES VALUE (IN PV-10
FIELD (MBOE) THOUSANDS) VALUE
----- -------- ---------- -----
<S> <C> <C> <C>
Flying M.......................................... 3,778 $10,786 7.8%
Halley............................................ 2,010 10,376 7.5
Magnolia Sealy.................................... 2,450 9,491 6.9
Rhoda Walker...................................... 1,785 8,444 6.1
T.J. Good......................................... 1,202 7,430 5.4
Vealmoor.......................................... 1,476 6,839 5.0
Ward-Estes North.................................. 787 4,574 3.3
Maljamar.......................................... 688 3,533 2.6
Hendrick.......................................... 864 3,190 2.3
Oceanic........................................... 518 2,204 1.6
------ ------- ----
Total........................................... 15,558 $66,867 48.6%
====== ======= ====
</TABLE>
Flying M Field. The Flying M Field is located in northern Lea County, New
Mexico and produces from the San Andres oil reservoir. The field was
discovered in 1964 and was unitized in 1967 when water injection commenced. In
1997, Southwest acquired working interests ranging from 83% to 100% in 6,160
gross acres of the field area, of which 2,240 gross acres are undeveloped.
Southwest operates all 46 producing wells and nine active water injection
wells, including wells that are not contained within the unitized portion of
the field. Development plans for this field include the drilling of ten
undrilled 40-acre proved undeveloped locations and the conversion of ten wells
to water injection. Further development of the field, including the reduction
to 20-acre spacing from the current 40-acre spacing, is presently under
evaluation.
Halley Field. The Halley Field is located in Winkler County, Texas and
consists of two leases totaling 7,608 gross acres, of which 3,190 gross acres
have been developed. Southwest acquired working interests ranging from 43% to
70% in this field in 1995 and currently operates 123 active producing wells
and 33 water injection wells. The field was discovered in 1937 and produces
from multiple zones ranging from 2,400 to 3,000 feet in depth. To date,
Southwest has performed 30 workovers, increasing average daily production from
approximately 200 Bopd and 280 Mcfd of natural gas in 1995 to 321 Bopd and
1,500 Mcfd of natural gas in 1996. Development plans, which have commenced,
include the drilling of 20 proved undeveloped locations. An additional 15
potential well locations have been identified and five workovers are scheduled
to be completed by the end of 1997.
Magnolia Sealy Field. The Magnolia Sealy Field is located in Ward County,
Texas and produces from the Upper Yates oil reservoir. Southwest acquired its
interest in this field in 1988 and operates 21 producing wells and three water
disposal wells with a working interest of 90%. There are currently 33 proved
undeveloped locations to be drilled on the 1,800 gross acres operated by
Southwest. Development plans also include the initiation of a water flood on a
portion of the field by early 1998.
Rhoda Walker Field. The Rhoda Walker Field is located in Ward County, Texas
and produces from 18 different reservoirs ranging in depth from 4,700 to 7,000
feet. Southwest acquired its working interests in this field, ranging from 1%
to 34%, in 1990. Southwest operates 37 producing wells and five water disposal
wells and also owns non-operated interests in 46 wells. The field was
discovered in 1971 and contains significant proved developed non-producing
reserves. Development plans include 24 recompletions, the drilling of 47
proved undeveloped locations and infill drilling.
42
<PAGE>
T.J. Good Field. The T.J. Good Field is located in Dawson and Borden
Counties, Texas. Southwest and Apache Corporation each own a 50% working
interest and Apache operates the 30 producing wells and five injection wells.
The field was discovered in 1949 and produces from the Spraberry, Dean and
Canyon formations. Southwest acquired its interest in this field in 1995.
Development plans include conversion of two producing wells to water
injection, additional development and recompletion of the Spraberry and Dean
formations and the drilling of two Canyon Reef wells.
Vealmoor Field. The Vealmoor Field is located in northwest Howard County,
Texas. Southwest acquired its 35% non-operated working interest in this field
in 1995. The field was discovered in 1948 and is currently producing from 20
wells in the Horseshoe Atoll-Canyon Reef trend. Development plans include the
drilling of nine infill wells resulting in 20-acre spacing in a portion of the
field. Additionally, seven development locations have been identified to test
proved undeveloped locations and Southwest is currently evaluating 3-D seismic
data over the field.
Ward-Estes North Field. The Ward-Estes North Field is located in Ward
County, Texas and produces from the Yates, Seven Rivers, Queen and Dense
Dolomite formations. Southwest acquired its working interests in this field,
ranging from 52% to 98%, in 1988 and operates 32 producing and eight injection
wells. The field was discovered in 1933. Southwest initiated several infill
drilling and recompletion programs since purchasing its interests, increasing
production and reserves. Development plans include five workovers in the Yates
and Queen formations and a reduction in spacing to ten acres from 20 acres,
with additional water injection wells to be added as needed.
Maljamar Field. The Maljamar Field is located in Lea County, New Mexico and
produces from the Queen, Grayburg, Premier and San Andres reservoirs at depths
ranging from 4,200 to 5,500 feet. Southwest acquired its 100% working
interests in this field in 1989. The field was discovered in 1954. Development
and exploration plans include two workovers and the drilling of five proved
undeveloped locations.
Hendrick Field. The Hendrick Field is located in Winkler County, Texas and
produces from the Seven Rivers, Yates and Dolomite formations. Southwest
acquired its interests in this field, ranging from 21% to 54%, in 1991 and
operates 13 producing wells and five disposal wells. The field was discovered
in 1929. Development plans include the completion of three recently drilled
wells, installation of pumps to accelerate production and the drilling of nine
additional development locations.
Oceanic Field. The Oceanic Field is located in Howard County, Texas and
produces from the Horseshoe Atoll-Canyon Reef trend from multiple pay zones
ranging in thickness from 200 to 300 feet. Southwest acquired its 33% non-
operated working interest in this field in 1995. The field was discovered in
1953. Development and exploration plans include the drilling of five
additional proven undeveloped locations and the interpretation of 3-D seismic
data to determine well placement for additional recovery of oil and gas
reserves.
43
<PAGE>
The Oil and Gas Properties Acquisition
On October 14, 1997, the Company acquired various working interests in 431
producing oil and gas wells, located in seven fields in the Permian Basin of
West Texas and southeastern New Mexico. The Company will operate 133 of these
wells. The Company believes that it has significant opportunities to improve
production and cash flow from these properties through additional development,
reconfiguration of operations and reduction of operating and administrative
costs. These acquisitions added estimated net proved reserves of approximately
13.3 MMBbls of oil and 4.2 Bcf of gas, or 14.0 MMBoe, as of June 30, 1997. The
following table provides information for the seven fields included in the
acquisition, and the largest fields are described thereafter.
<TABLE>
<CAPTION>
AS OF JUNE 30,
1997
------------------
NET
PROVED PV-10
RESERVE VALUE (IN
FIELD (MBOE) THOUSANDS)
----- ------- ----------
<S> <C> <C>
Huntley................................................ 3,513 $22,591
Ackerly................................................ 3,327 17,850
Foster................................................. 2,255 13,317
Huntley East........................................... 2,229 12,209
Jo-Mill................................................ 2,425 9,571
South Maljamar Young................................... 172 915
Buffalo................................................ 117 397
------ -------
Total................................................ 14,038 $76,850
</TABLE>
Huntley Field. The Huntley Field is located in Garza County, Texas. The
field was discovered in 1953 and produces from the San Andres and Glorieta
reservoirs. Southwest owns a 74% working interest and operates 33 producing
and 12 injection wells.
Ackerly (Dean) Field. The Ackerly (Dean) Field is located in Dawson County,
Texas and produces from the Dean Sand oil reservoir. The field was discovered
in 1954 with the drilling and completion of the Pan American Graves "A" No. 1
well. Southwest owns a 60% working interest in the East Ackerly Dean Unit--
Phase II, along with interests in two additional leases. Henry Petroleum
operates 70 producing and 30 injection wells.
Foster Field. The Foster Field is located in Ector County, Texas. The field
was discovered in 1936 and produces from the Grayburg and Queen formations in
the Gist Unit. Southwest owns working interests ranging from 46% to 100% and
operates 63 producing and 57 injection wells.
Huntley East Field. The Huntley East Field is located in Garza County,
Texas. The field was discovered in 1956 and produces from a low-relief
anticline which covers approximately 1,400 surface acres. Southwest has a 100%
working interest in the Huntley East San Andres Unit, which comprises
substantially all of the field, and a 100% working interest in the Harold L.
Davies lease, and operates 37 producing and seven injection wells.
Jo-Mill Field. The Jo-Mill Field is located in Borden County, Texas. The
field was discovered in 1954, unitized in 1969, and produces from the Upper
Spraberry, Lower Spraberry and Dean Sand reservoirs. Southwest owns a 6%
working interest in the Jo-Mill Unit. Texaco, Inc. operates 172 producing and
73 injection wells.
44
<PAGE>
Oil and Gas Reserves
The following table summarizes the estimates of Southwest's historical and
pro forma net proved reserves and the related present values of such reserves
at the dates shown. The reserve and present value data for the Company's
existing properties as of June 30, 1997 were prepared by Ryder Scott Company
Petroleum Engineers for properties representing 89% of the Company's PV-10
Value and by the Company for the remainder of the properties. The reserve and
present value data as of December 31, 1996 and for prior periods were prepared
by independent petroleum engineer, Donald R. Creamer.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------- ------------------
PRO FORMA
1994 1995 1996 1997 1997(1)
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Proved Reserves:
Oil and Condensate (MBbls)....... 10,008 16,580 18,806 19,114 32,456
Natural Gas (MMcf)............... 37,990 70,590 76,776 71,128 75,313
Total (MBoe)................... 16,340 28,345 31,602 30,969 45,008
Proved Developed Reserves:
Oil and Condensate (MBbls)....... 4,760 7,349 10,302 9,485 21,125
Natural Gas (MMcf)............... 27,587 51,926 58,961 51,649 55,214
Total (MBoe)................... 9,358 16,003 20,129 18,093 30,327
PV-10 Value (in thousands)(2)...... $59,064 $117,902 $252,170 $137,688 $214,539
</TABLE>
- --------
(1) Pro forma to reflect the Oil and Gas Properties Acquisition as if it had
occurred on June 30, 1997.
(2) The present value of future net revenues attributable to Southwest's
reserves was prepared using prices in effect at the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis. Such
amounts reflect the effects, if any, of the Company's hedging activities.
See "--Oil and Natural Gas Marketing and Hedging."
In accordance with applicable requirements of the Commission, estimates of
Southwest's proved reserves and future net revenues are made using oil and
natural gas sales prices estimated to be in effect as of the date of such
reserve estimates and are held constant throughout the life of the properties
(except to the extent a contract specifically provides for escalation). The
average prices used in the reserve report as of June 30, 1997, were $17.34 per
Bbl of oil and $2.16 per Mcf of natural gas, compared to average prices used
as of December 31, 1996 of $23.89 per Bbl of oil and $3.67 per Mcf of natural
gas.
Estimated quantities of proved reserves and future net revenues therefrom
are affected by oil and natural gas prices, which have fluctuated widely in
recent years. There are numerous uncertainties inherent in estimating oil and
natural gas reserves and their values, including many factors beyond the
control of the producer. The reserve data set forth in this Prospectus
represent only estimates. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured in an exact manner. The accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers,
including those used by Southwest, may vary. In addition, estimates of
reserves are subject to revision based upon actual production, results of
future development and exploration activities, prevailing oil and natural gas
prices, operating costs and other factors, which revisions may be material.
Accordingly, reserve estimates are often different from the quantities of oil
and natural gas that are ultimately recovered and are highly dependent upon
the accuracy of the assumptions upon which they are based.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent Southwest acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of Southwest will decline
as reserves are produced. Southwest's future oil and natural gas production
is, therefore, highly dependent upon its level of success in finding or
acquiring additional reserves. See "Risk Factors--Replacement of Reserves" and
"--Uncertainty of Reserve Information and Future Net Revenue Estimates."
45
<PAGE>
Net Production, Unit Prices and Costs
The following table presents certain information with respect to oil and gas
production, prices and costs attributable to all oil and gas property interests
owned by Southwest for the periods shown:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(1) 1997 1997(1)
------ ------ ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)... 629 814 1,001 1,812 818 1,391
Natural gas (MMcf)........... 3,178 4,639 5,403 5,888 4,142 4,276
Total (MBoe)............... 1,159 1,587 1,901 2,793 1,508 2,104
AVERAGE REALIZED PRICES:
Oil and condensate (per Bbl). $14.30 $16.40 $20.44 $20.26 $19.39 $19.57
Natural gas (per Mcf)........ 1.72 1.51 2.22 2.29 2.01 2.10
Per Boe.................... 12.47 12.83 17.07 17.97 16.05 17.20
EXPENSES (PER BOE):
Lease operating (including
production taxes)........... $ 6.80 $ 7.25 $ 7.81 $ 7.35 $ 8.10 $ 7.69
Depreciation, depletion and
amortization................ 3.03 3.19 3.38 3.94 4.08 4.73
General and administrative,
net......................... 2.87 2.17 2.17 1.58 2.31 1.71
</TABLE>
- --------
(1) Pro forma to reflect the Oil and Gas Properties Acquisition and certain
other acquisitions as if they had occurred on January 1, 1996.
Producing Wells
The following table sets forth the number of productive wells in which
Southwest owned an interest as of September 30, 1997:
<TABLE>
<CAPTION>
GROSS NET
WELLS WELLS
------ -----
<S> <C> <C>
Oil.......................................................... 10,445 493.3
Natural Gas.................................................. 874 85.2
------ -----
Total...................................................... 11,319 578.5
====== =====
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connections and oil wells awaiting
connection to production facilities. Wells that are completed in more than one
producing horizon are counted as one well.
Acreage
The following table sets forth Southwest's developed and undeveloped gross
and net leasehold acreage as of September 30, 1997:
<TABLE>
<CAPTION>
GROSS NET
--------- -------
<S> <C> <C>
Developed............................................... 1,904,181 230,751
Undeveloped............................................. 618,338 74,931
--------- -------
Total................................................. 2,522,519 305,682
========= =======
</TABLE>
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such
46
<PAGE>
acreage contains proved reserves. A gross acre is an acre in which an interest
is owned. A net acre is deemed to exist when the sum of fractional ownership
interests in gross acres equals one. The number of net acres is the sum of the
fractional interests owned in gross acres.
Drilling Activities
The table below sets forth the drilling activity of Southwest on its
properties for the periods ending December 31, 1994 through December 31, 1996,
and for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1994 1995 1996 1997
--------- --------- --------- ---------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development wells:
Productive................... 16 8.0 28 5.6 14 5.7 47 25.2
Non-productive............... 3 1.5 2 0.4 -- -- 3 2.4
--- --- --- --- --- --- ------ -------
Total...................... 19 9.5 30 6.0 14 5.7 50 27.6
Exploratory wells:
Productive................. 1 0.3 -- -- 1 0.1 8 3.0
Non-productive............. 3 0.7 5 1.0 6 -- 3 0.9
--- --- --- --- --- --- ------ -------
Total...................... 4 1.0 5 1.0 7 0.1 11 3.9
</TABLE>
From October 1, 1997 through October 31, 1997, Southwest participated in
drilling activities on 12 gross wells. Of the 12 gross (3.3 net) wells, 4
gross (1.4 net) well have been completed as commercial producers, no wells
were dry holes and 8 gross (1.9 net) wells are currently being drilled.
Oil and Natural Gas Marketing and Hedging
The revenues generated by Southwest's operations are highly dependent upon
the prices of and demand for oil and natural gas. The price received by
Southwest for its oil and natural gas production depends on numerous factors
beyond Southwest's control. Historically, the markets for oil and natural gas
have been volatile and are likely to continue to be volatile in the future.
Prices for oil and natural gas are subject to wide fluctuation in response to
relatively minor changes in the supply and demand for oil and natural gas,
market uncertainty and a variety of additional factors. These factors include
the level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in the Middle East, the actions of OPEC, the foreign
supply of oil and natural gas and overall economic conditions. It is
impossible to predict future oil and natural gas price movements with any
certainty. Declines in oil and natural gas prices may adversely affect
Southwest's financial condition, liquidity, and results of operations. See
"Risk Factors--Volatility of Oil and Natural Gas Prices" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
During 1996, Scurlock Permian Corporation purchased crude oil from Southwest
that contributed 13% of Southwest's oil revenue. Southwest does not believe
the loss of this purchaser would have a material adverse effect on its
operations, revenues or cash flow.
All of Southwest's oil and natural gas production is currently sold at spot
market prices, under various short term and intermediate term contracts.
Southwest currently does not utilize commodity swap agreements or fixed price
arrangements to reduce its exposure to oil or natural gas price movements.
SIERRA
Sierra provides a broad range of services used by oil and gas companies in
Texas and New Mexico, including workover rig services, liquids handling, fresh
and brine water supply and disposal and other services. Sierra's workover rig
services include the completion of newly drilled wells, the recompletion and
maintenance of existing wells and the plugging and abandonment of wells at the
end of their useful life. Complementary services include liquids handling
services and fresh and brine water supply and disposal services. SRH currently
owns, directly and indirectly, approximately a 40% interest in Sierra.
47
<PAGE>
Sierra's strategy emphasizes diversification and expansion through the
acquisition of well servicing companies and internal growth in order to
provide an integrated group of oil field services. Sierra is a participant in
the consolidation of the well servicing industry and believes that the highly
fragmented well servicing market will continue to provide attractive
acquisition opportunities.
From January 1996 through November 30, 1997, Sierra completed 15
acquisitions of well servicing companies for an aggregate cost of $42.1
million and expects to close two additional acquisitions in December 1997 for
$16.8 million. In total, these acquisitions will add 64 well servicing rigs,
134 trucks, 279 frac and test tanks, 32 brine and/or fresh water stations,
eight injection wells and various related equipment. However, there can be no
assurance that such acquisitions will occur as expected in December or ever.
Sierra believes it has been generally successful in acquiring well servicing
companies and assets, subsequently reducing overhead expenses and improving
the marketing, utilization and efficiency of its growing asset base.
Well Servicing
Sierra uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services to major and independent oil
and gas companies. Ancillary equipment such as pumps, tanks, blowout
preventers and power swivels are provided by Sierra as may be required for a
particular job. Sierra also provides trucking services for moving large
equipment to and from the job sites of its customers. Sierra generally charges
its customers an hourly rate for its well services, which varies based on
numerous considerations including market conditions in each region, the type
of rig, the amount of ancillary equipment required and the necessary
personnel.
Well services are classified by type of job performed and are generally
categorized as completion, maintenance, workover, recompletion or plugging and
abandonment. Completion services involve the preparation of a newly drilled
well for production and generally involve the installation of permanent
equipment. Maintenance services are required on producing wells to ensure
efficient and continuous operation and generally involve routine mechanical
repairs. Workover and recompletion services involve major repairs and
modifications to existing wells and include extension of existing wells to new
formations, accessing previously bypassed productive zones and conversion of
producing wells to water injection wells. Workover rigs are also used in the
plugging and abandonment of oil and natural gas wells no longer capable of
producing economic quantities.
As of December 5, 1997, Sierra operated 86 land-based well servicing rigs
and ancillary equipment from 9 yards in Texas and New Mexico.
Liquids Handling Services
Sierra provides liquids handling services, comprised of vacuum truck
services, frac tank rentals and test tank rentals. After the pending
transactions have been completed in December 1997, Sierra will own 134 vacuum
and transport trucks. A vacuum truck is a tractor trailer with a fluid hauling
capacity of up to 130 barrels. A large vacuum pump mounted on each truck
extracts fluids from pits, tanks and other storage facilities. Vacuum trucks
are used to transport water to fill frac tanks, to transport produced salt
water to injection wells and to transport drilling and completion fluids to
and from well locations.
48
<PAGE>
After the pending acquisitions have been completed in December 1997, Sierra
will own 235 frac tanks. Each frac tank can store up to 500 barrels of fluid
and is used by oil field operators to store various fluids at the well site,
including water, drilling mud, acid and brine. Frac tanks are used during all
phases of the life of a producing well and are generally rented on a daily
basis.
Sierra will own 44 test tanks after the pending acquisitions. Each test tank
can store up to 250 barrels of fluid and is used by oil field operators to
store various well bore fluids at the well site during the testing of
production of oil wells. Test tanks are rented on a four-day minimum plus any
additional days needed by the operator. Sierra also charges for delivery, set-
up and removal of the test tanks.
Sierra will also own 90 Enviro-Vat systems, the patent for their production
and the right to royalties created by the sale of these systems to other
operators. The Enviro-Vat is a unitized, trailer mounted system that connects
to the well-head to catch normal oil and other liquid spills that occur during
regular maintenance, workovers and completions. Sierra believes that the
Enviro-Vat system will be a profitable addition to its existing well servicing
business as companies increase efforts to minimize the impact of their
operations on the environment.
Fresh and Brine Water Supply and Disposal Services
Sierra provides fresh and brine water supply and disposal services,
including injection wells and fresh water and brine stations.
After the pending acquisitions have been completed in December 1997, Sierra
will own or lease eight injection wells that are authorized to dispose of salt
water and incidental non-hazardous oil and gas wastes. These wells are
strategically located in close proximity to customers' producing oil and gas
wells. Sierra maintains separation equipment at each of its injection wells,
permitting it to salvage residual crude oil which is later sold for Sierra's
account.
After the pending acquisitions have been completed in December 1997, Sierra
owns 32 brine and/or fresh water stations which are used to supply water
necessary for the drilling and completion of oil and gas wells. This
complementary business gives Sierra an advantage over certain competitors for
water sales and the associated transportation and expands Sierra's customer
base.
Other Services
Sierra provides other well services, including pit lining and hot oil
services. Pit lining services consist of excavating, preparing and eventually
closing a pit used during the drilling or completion of oil and gas wells for
the collection of fluids such as drilling mud, other well bore fluids and
fresh water. Hot oil services consist of pumping hot oil into a gathering line
or well tubing to melt paraffin and asphaltines that solidify and restrict
production. Sierra intends to acquire and subsequently offer additional well
services and products that are complementary to its well servicing strategy.
RED OAK
Red Oak was formed by the Company in 1992 to acquire and manage neighborhood
and community shopping centers, other retail and commercial properties and
office buildings. These properties are primarily leased, on a long-term basis,
to major retail companies, local specialty retailers and professional and
business tenants throughout secondary urban markets in the southwestern United
States. As of October 31, 1997, Red Oak owned and managed 14 shopping centers,
three office buildings and raw land held for future development.
Red Oak's primary objective is to acquire, own and manage a portfolio of
commercial properties that provides opportunity to increase net operating
income and results in significant capital appreciation. Consistent with this
strategy, Red Oak focuses its activities primarily in secondary markets in the
southwestern United States, including San Antonio, Midland, San Angelo, El
Paso, and Corpus Christi in Texas; Reno, Nevada; Tucson, Arizona; and Tulsa
and Oklahoma City, Oklahoma. Red Oak believes that the potential for
population growth in these markets and a lower level of interest from
institutional real estate buyers, as compared to primary markets, result in
attractive acquisition opportunities of multi-tenant, income producing
properties ranging in purchase price from $1 million to $20 million.
49
<PAGE>
Recent Acquisitions
From December 1993 through October 31, 1997, Red Oak completed the
acquisition of 14 regional shopping centers and three office buildings for a
total acquisition cost of $82.8 million. Red Oak has financed and expects to
continue to finance the acquisition of its real estate properties with senior
secured credit arrangements between Red Oak and private lenders, that are
generally non-recourse to the Company. Red Oak believes that as a result of
minor capital investment and limited releasing activities, the performance of
these properties will improve in a manner consistent with Red Oak's historical
experience. Red Oak's existing property portfolio is shown in the table below.
<TABLE>
<CAPTION>
YEAR SEPTEMBER 30, GROSS LEASABLE
COMPLETED/ 1997 AREA
SHOPPING CENTERS LOCATION RENOVATED OCCUPANCY (SQUARE FEET)
---------------- ----------------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Plaza Oaks.............. Midland, TX 1974/1979 100.0% 94,779
Southwest Plaza......... San Angelo, TX 1978 88.9% 198,983
Town & Country.......... Odessa, TX 1959 61.2% 120,855
State Bank Plaza........ Tulsa, OK 1985 97.8% 34,867
The Plaza............... Tulsa, OK 1985 84.0% 116,605
Madera Village.......... Tucson, AZ 1988 93.3% 96,702
Bear Canyon............. Tucson, AZ 1982 98.0% 70,941
Bears Path.............. Tucson, AZ 1988 72.3% 40,728
Plaza Palomino.......... Tucson, AZ 1985/1986 95.0% 98,634
River Oaks.............. Abilene, TX 1958/1984 82.6% 140,899
San Miguel Square....... Midland, TX 1977 77.0% 77,582
Colonnade at Polo Park.. Midland, TX 1984 96.2% 105,018
Crossroads.............. San Antonio, TX 1961/1990 92.0% 676,705
50 Penn Place........... Oklahoma City, OK 1973 84.0% 129,183
<CAPTION>
OFFICE BUILDING
---------------
<S> <C> <C> <C> <C>
Woodhill................ Midland, TX 1980/1995 98.0% 45,920
Independence Plaza...... Midland, TX 1984 95.6% 148,397
50 Penn Place........... Oklahoma City, OK 1973 85.5% 182,146
<CAPTION>
LAND ACRES
---- ----------
<S> <C> <C> <C> <C>
Red Oak (residential)... Midland, TX 398.3
Southwest Corner
(commercial)........... Midland, TX 3.9
Lewisville
(residential).......... Lewisville, TX 95.3
</TABLE>
EMPLOYEES
As of September 30, 1997, the Company employed 497 people. Of this total,
123 people were employed by Southwest, 359 by Sierra, and 15 by Red Oak. The
Company's future success will depend partially on its ability to attract,
retain and motivate qualified personnel. The Company is not a party to any
collective bargaining agreements and has not experienced any strikes or work
stoppages. The Company considers its relations with its employees to be
satisfactory.
COMPETITION
The oil and natural gas industry is highly competitive. The Company's oil
and gas business competes for the acquisition of oil and natural gas
properties, primarily on the basis of the price to be paid for such
properties, with numerous entities including major oil companies, other
independent oil and natural gas concerns and individual producers and
operators. Many of these competitors are large, well established companies and
have financial and other resources substantially greater than those of the
Company's oil and gas business. The Company's ability to acquire additional
oil and gas properties and to discover reserves in the future will depend upon
its ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
50
<PAGE>
Competition is intense in all markets in which the Company's businesses
operate. Surplus capacity in the well servicing industry has resulted in price
being the primary means of competition. Pool Energy Services Co., Key Energy
Group, Inc. and Dawson Production Services, Inc., all of which provide
workover rig and liquids handling services, are the largest companies in the
domestic well servicing market. These companies operate in multiple geographic
regions and are larger than the Company's well servicing business. The
Company's well servicing business competes on the basis of pricing,
performance, safety, availability of equipment to meet customer needs and
availability of experienced, skilled personnel in those areas in which it
operates. Several competitors have access to greater financial and other
resources than those of the Company's well servicing business. The Company's
real estate business also competes for the acquisition of desirable commercial
real estate properties, primarily on the basis of price.
OPERATING HAZARDS AND RISKS
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blow outs, pipe failure, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases. Any of these occurrences could result
in substantial losses to the Company due to injury or loss of life, severe
damage to or destruction of property, natural resources and equipment,
environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations.
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil
and gas may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return
a profit after drilling, operating or other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including title
problems, weather conditions, mechanical problems, compliance with
governmental requirements and shortages and delays in the delivery of
equipment and services. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse
effect on the Company's future results of operations and financial condition.
The Company's well servicing operations are also subject to hazards inherent
in the oil and gas industry, such as blowouts, explosions, craterings, fires
and oil spills, that can cause personal injury or loss of life, damage to or
destruction of property, equipment, the environment, and suspension of
operations. In addition, claims for loss of oil and gas production and damage
to formations can occur in the workover business. If a serious accident were
to occur at a location where Sierra's equipment and services are used, it
could result in the Company or Sierra being named as a defendant in a lawsuit
asserting potentially large claims. Additionally, because Sierra's vacuum
trucks and frac/test tank rentals involve the transport of heavy equipment and
materials, traffic accidents resulting in spills, property damage and personal
injury may occur.
Although the Company maintains insurance coverage considered to be customary
in each industry in which it participates, it is not fully insured against
certain risks, either because insurance is not available or because of the
high premium costs. The Company's real estate business carries business
interruption insurance. The Company does maintain physical damage, employer's
liability, comprehensive commercial general liability and workers'
compensation insurance. There can be no assurance that any insurance obtained
by the Company will be adequate to cover any losses or liabilities, or that
such insurance will continue to be available or available on terms which are
acceptable to the Company.
LEGAL PROCEEDINGS
From time to time, the Company is party to litigation or other legal
proceedings that each company considers to be a part of the ordinary course of
its business. The Company is not involved in any legal proceedings nor is it
party to any pending or threatened claims that could reasonably be expected to
have a material adverse effect on its financial condition or results of
operations.
51
<PAGE>
REGULATION
General. Various aspects of the Company's oil and natural gas operations are
subject to extensive and continually changing regulation, as legislation
affecting the oil and natural gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue, and have issued, rules and
regulations binding upon the oil and natural gas industry and its individual
members. The Federal Energy Regulatory Commission ("FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act
of 1978 ("NGPA"). In the past, the Federal government has regulated the prices
at which oil and natural gas could be sold. While sales by producers of
natural gas and all sales of crude oil, condensate and natural gas liquids can
currently be made at uncontrolled market prices, Congress could reenact price
controls in the future. Deregulation of wellhead sales in the natural gas
industry began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The
Decontrol Act removed all remaining NGA and NGPA price and nonprice controls
affecting wellhead sales of natural gas effective January 1, 1993.
Regulation of Sales and Transportation of Natural Gas. The Company's sales
of natural gas are affected by the availability, terms and cost of
transportation. The price and terms for access to pipeline transportation are
subject to extensive regulation. In recent years, the FERC has undertaken
various initiatives to increase competition within the natural gas industry.
As a result of initiatives like FERC Order No. 636, issued in April 1992, the
interstate natural gas transportation and marketing system has been
substantially restructured to remove various barriers and practices that
historically limited non-pipeline natural gas sellers, including producers,
from effectively competing with interstate pipelines for sales to local
distribution companies and large industrial and commercial customers. The most
significant provisions of Order No. 636 require that interstate pipelines
provide firm and interruptible transportation service on an open access basis
that is equal for all natural gas supplies. In many instances, the results of
Order No. 636 and related initiatives have been to substantially reduce or
eliminate the interstate pipelines' traditional role as wholesalers of natural
gas in favor of providing only storage and transportation services. While the
United States Court of Appeals upheld most of Order No. 636 last year, certain
related FERC orders, including the individual pipeline restructuring
proceedings, are still subject to judicial review and may be reversed or
remanded in whole or in part. While the outcome of these proceedings cannot be
predicted with certainty, the Company does not believe that it will be
affected materially differently than its competitors.
The FERC has also announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy and a
request for comments concerning alternatives to its traditional cost-of-
service ratemaking methodology to establish the rates interstate pipelines may
charge for their services. A number of pipelines have obtained FERC
authorization to charge negotiated rates as one such alternative. In February
1997, the FERC announced a broad inquiry into issues facing the natural gas
industry to assist the FERC in establishing regulatory goals and priorities in
the post-Order No. 636 environment. Similarly, the Texas Railroad Commission
has been reviewing changes to its regulations governing transportation and
gathering services provided by intrastate pipelines and gatherers. While the
changes being considered by these federal and state regulators would affect
the Company only indirectly, they are intended to further enhance competition
in natural gas markets. The Company cannot predict what further action the
FERC or state regulators will take on these matters, however, the Company does
not believe that it will be affected by any action taken materially
differently than other natural gas producers with which it competes.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC, state commissions and the
courts. The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue.
Oil Price Controls and Transportation Rates. Sales of crude oil, condensate
and gas liquids by the Company are not currently regulated and are made at
market prices. The price the Company receives from the sale of these products
may be affected by the cost of transporting the products to market.
52
<PAGE>
Environmental. Extensive federal, state and local laws regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment affect Southwest's oil and natural gas
operations and Sierra's well servicing activities. Numerous governmental
departments issue rules and regulations to implement and enforce such laws,
which are often difficult and costly to comply with and which carry
substantial civil and even criminal penalties for failure to comply. Some
laws, rules and regulations relating to protection of the environment may, in
certain circumstances, impose strict liability for environmental
contamination, rendering a person liable for environmental damages and cleanup
costs without regard to negligence or fault on the part of such person. Other
laws, rules and regulations may restrict the rate of oil and natural gas
production below the rate that would otherwise exist or even prohibit
exploration and production activities in sensitive areas. In addition, state
laws often require various forms of remedial action to prevent pollution, such
as closure of inactive pits and plugging of abandoned wells. The regulatory
burden on the oil and natural gas industry, including the well servicing
industry, increases the Company's cost of doing business and consequently
affects the Company's profitability. The Company believes that it is in
substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company's operations. However,
environmental laws and regulations have been subject to frequent changes over
the years, and the imposition of more stringent requirements could have a
material adverse effect upon the capital expenditures, earnings or competitive
position of the Company.
In addition, Red Oak's real estate management activities are subject to
federal, state and local laws, rules and regulations pertaining to protection
of the environment which may, in certain circumstances, impose strict
liability for environmental contamination, thus rendering Red Oak liable for
environmental damages and clean up costs without regard to negligence or fault
on the part of Red Oak. Asbestos-containing materials may be present at Red
Oak's real estate holdings which may dictate costly remediation to abate
asbestos or which may increase the cost of renovations to property when they
become necessary. Further, activities on adjacent properties, such as dry
cleaning, gasoline retailing, and automobile maintenance, may result in
subsurface soil and groundwater contamination that could impair Red Oak's use
or sale of real estate holdings or cause Red Oak to incur costs to remediate
any contamination caused by activities of lessors or adjacent properties.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability, without regard to fault on certain classes of
persons that are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the current or former
owner or operator of the disposal site or sites where the release occurred and
companies that disposed or arranged for the disposal of hazardous substances.
Under CERCLA such persons may be subject to joint and several liability for
the costs of investigating and cleaning up hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies. In addition, companies that incur liability
frequently also confront third party claims because it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous substances or other
pollutants released into the environment from a polluted site.
The Federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976 ("RCRA"), regulates the generation,
transportation, storage, treatment and disposal of hazardous wastes and can
require cleanup of hazardous waste disposal sites. RCRA currently excludes
drilling fluids, produced waters and other wastes associated with the
exploration, development or production of oil and natural gas from regulation
as "hazardous waste." Disposal of such non-hazardous oil and natural gas
exploration, development and production wastes usually are regulated by state
law. Other wastes handled at exploration and production sites or used in the
course of providing well services may not fall within this exclusion.
Moreover, stricter standards for waste handling and disposal may be imposed on
the oil and natural gas industry in the future. From time to time legislation
is proposed in Congress that would revoke or alter the current exclusion of
exploration, development and production wastes from the RCRA definition of
"hazardous wastes" thereby potentially subjecting such wastes to more
stringent handling, disposal and cleanup requirements. If such legislation
were
53
<PAGE>
enacted it could have a significant impact on the operating costs of Southwest
and Sierra, as well as the oil and natural gas industry and well servicing
industry in general. The impact of future revisions to environmental laws and
regulations cannot be predicted.
The Company's operations are also subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from
operations of Southwest and/or Sierra. Southwest and/or Sierra may be required
to incur certain capital expenditures in the next several years for air
pollution control equipment in connection with obtaining and maintaining
operating permits and approvals for air emissions. However, neither Southwest
nor Sierra believes its operations will be materially adversely affected by
any such requirements, and the requirements are not expected to be any more
burdensome to Southwest or to Sierra than to other similarly situated
companies involved in oil and natural gas exploration and production
activities or well servicing activities.
Southwest maintains insurance against "sudden and accidental" occurrences
which may cover some, but not all, of the risks described above. Most
significantly, the insurance maintained by Southwest will not cover the risks
described above which occur over a sustained period of time. Further, there
can be no assurance that such insurance will continue to be available to cover
all such costs or that such insurance will be available at premium levels that
justify its purchase. Sierra also maintains insurance against certain risks
associated with underground contamination that may occur as a result of well
service activities. However, such insurance is limited to activities at the
wellsite and there can be no assurance that such insurance will continue to be
available to cover all such costs or that such insurance will be available at
premium levels that justify its purchase. The occurrence of a significant
event not fully insured or indemnified against could have a material adverse
effect on Southwest's financial condition and operations.
Regulation of Oil and Natural Gas Exploration and Production. Exploration
and production operations of the Company are subject to various types of
regulation at the federal, state and local levels. Such regulations include
requiring permits and drilling bonds for the drilling of wells, regulating the
location of wells, the method of drilling and casing wells, and the surface
use and restoration of properties upon which wells are drilled. Many states
also have statutes or regulations addressing conservation matters, including
provisions for the utilization 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 spacing, plugging and abandonment of such wells.
Some state statutes limit the rate at which oil and natural gas can be
produced from Southwest's properties. See "Risk Factors--Compliance with
Governmental Regulations."
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its properties in
accordance with standards generally accepted in the oil and gas, well
servicing and real estate industries. As is customary in the oil and natural
gas industry, Southwest makes only a cursory review of title to farmout
acreage and to undeveloped oil and natural gas leases upon execution of any
contracts. Prior to the commencement of drilling operations, a thorough title
examination is conducted and curative work is performed with respect to
significant defects. To the extent title opinions or other investigations
reflect title defects, Southwest, rather than the seller of the undeveloped
property, is typically responsible to cure any such title defects at its
expense. If Southwest were unable to remedy or cure any title defect of a
nature such that it would not be prudent to commence drilling operations on
the property, Southwest could suffer a loss of its entire investment in the
property. Southwest has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and
natural gas industry. Prior to completing an acquisition of producing oil and
natural gas leases, Southwest obtains title opinions on all leases.
Southwest's oil and natural gas properties are subject to customary royalty
interests, liens for current taxes and other burdens that Southwest believes
do not materially interfere with the use of or affect the value of such
properties.
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<PAGE>
FACILITIES
The principal offices of SRH, Southwest, Sierra and Red Oak are located in
Midland, Texas. Sierra also has 12 yards in Texas and one in New Mexico. One
building in the principal office complex and nine of Sierra's yards are owned,
and all other facilities are leased by the Company. SRH, Southwest, Sierra and
Red Oak believe that their leased and owned properties, none of which
individually is material to any of the companies, are adequate for current
needs.
55
<PAGE>
MANAGEMENT
The directors and executive officers of SRH and Southwest are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------------------------------------------------------
<S> <C> <C>
H. H. Wommack, III...... 42 Chairman, President, Chief Executive Officer and Director
H. Allen Corey.......... 41 Secretary and Director
Bill E. Coggin.......... 43 Vice President and Chief Financial Officer
J. Steven Person........ 39 Vice President, Marketing
</TABLE>
The Company expects that following registration of the Notes it will add at
least one outside director.
Set forth below is a description of the backgrounds of the directors and
executive officers of SRH and Southwest.
H. H. Wommack, III has served as Chairman of the Board, President, Chief
Executive Officer and a director of SRH since it was formed in July 1997 and
of Southwest since its founding in 1983. Mr. Wommack has served as Chairman
and a director of Sierra and Red Oak since 1992 and 1992, respectively. Prior
to the formation of Southwest, Mr. Wommack was a self-employed independent oil
and gas producer engaged in the purchase and sale of royalty and working
interests in oil and gas leases and the drilling of wells.
H. Allen Corey has served as Secretary and a director of SRH since it was
formed in July 1997 and of Southwest since its founding in 1983. Mr. Corey has
served as a director of Sierra since 1992 and as a director and Assistant
Secretary of Red Oak since 1992. Since January 1997, Mr. Corey has been
president of Trolley Barn Brewery, Inc., a brew pub restaurant chain based in
the southeastern United States, and of counsel to the law firm of Baker,
Donelson, Bearman & Caldwell, P.C. From 1986 to 1997, Mr. Corey was a partner
at the law firm of Miller & Martin in Chattanooga, Tennessee.
Bill E. Coggin has served as Vice President and Chief Financial Officer of
SRH since it was formed in July 1997. Mr. Coggin has served as Vice President
and Chief Financial Officer of Southwest since 1985, and Vice President,
Treasurer and a director of Sierra since 1995. Mr. Coggin has served as a
director and Vice President, Finance of Red Oak since 1995. Previously, Mr.
Coggin was controller for an oil and gas drilling company and an independent
oil and gas operator.
J. Steven Person has served as Vice President, Marketing of SRH since it was
formed in July 1997. Mr. Person has served as Vice President, Marketing for
Southwest since 1989 and as Vice President, Marketing of Red Oak since 1996.
Prior to joining Southwest, Mr. Person was involved in the syndication of
mortgage-based securities.
Other key employees of Southwest, Sierra, and Red Oak include:
Southwest.
Jon P. Tate, age 40, has served as Vice President, Land and Assistant
Secretary of Southwest since 1989. From 1981 to 1989, Mr. Tate was employed by
C.F. Lawrence & Associates, Inc., an independent oil and gas company, as land
manager. Mr. Tate is a member of the Permian Basin Landman's Association.
R. Douglas Keathley, age 42, has served as Vice President, Operations of
Southwest since 1992. Before joining Southwest, Mr. Keathley worked as a
senior drilling engineer for ARCO Oil and Gas Company and in similar
capacities for Reading & Bates Petroleum Co. and Tenneco Oil Co.
Joel D. Talley, age 36, has served as Vice President, Operations of
Southwest since 1996. Before joining Southwest, Mr. Talley worked in various
capacities, including regional manager, for Merit Energy Company from 1992 to
1996 and prior to that as a production and drilling engineer and production
foreman for ARCO Oil & Gas Company.
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<PAGE>
Sierra.
Joey D. Fields, age 40, has been the President of Sierra since 1993. From
1988 to 1992, Mr. Fields was operations manager for Smith Brothers Casing
Pullers and Smith Brothers Pipe, Inc. of Midland, Texas. Mr. Fields has also
served as purchasing agent for Permian West Pipe, Inc. in Odessa, Texas.
Dub W. Harrison, age 39, has served as Executive Vice President of Sierra
since 1995 and manages its East Texas operations. From 1987 to 1995, Mr.
Harrison was an area manager for Pool Energy Services Co., with
responsibilities including all aspects of workover rig services and liquids
handling services. Mr. Harrison also served as equipment superintendent and a
safety representative for Pool Energy Services Co.
Charles W. Swift, age 48, has served as Vice President, Operations for
Sierra since July 1997 and manages operations for the Permian Basin. From 1986
to 1997, Mr. Swift was a partner of S & N Well Servicing Ltd. of Midland,
Texas, which was acquired by Sierra in July 1997. Prior to founding S & N, Mr.
Swift served in various capacities in the well servicing industry for over 15
years.
Red Oak.
W. Neil McClung, age 47, has served as President and a director of Red Oak
since 1994. Prior to his involvement with Red Oak, Mr. McClung was senior vice
president of Heitman Properties, Ltd. from 1989 through 1993 where he was
responsible for marketing, budget development and leasing for three million
square feet of high-rise office building and industrial center space in
several metropolitan and secondary markets. Mr. McClung has also served as a
property and leasing manager for Heitman in Midland, Texas.
J. Wesley Tune, age 38, has served as Vice President and Secretary of Red
Oak since 1994. Mr. Tune was employed by Heitman Properties, Ltd. in Midland,
Texas as property and leasing manager from 1992 until 1994. Prior to his
involvement with Heitman, Mr. Tune was a property manager for Mike Lewis &
Associates in Midland, Texas, from 1990 to 1992, and manager and controller
for Mission Country Club from 1988 to 1990.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information for the year ended
December 31, 1996 with respect to the compensation paid to Mr. Wommack, the
Chairman and President, and the three other most highly compensated executive
officers of Southwest. No other executive officers of Southwest received
annual compensation (including salary and bonuses earned) that exceeded
$100,000 for the year ended December 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR 1996 COMPENSATION
-----------------------------------------
BONUS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) ($)(2) COMPENSATION ($)(1)
--------------------------- ---------- ---------- -------------------
<S> <C> <C> <C>
H. H. Wommack, III, President and
Treasurer (3)....................... 586,320.00 231,569.95 7,471.60
Bill E. Coggin, Vice President and
Chief Financial Officer............. 153,000.00 71,681.14 7,471.60
Richard E. Masterson, Vice President,
Exploration and Acquisitions (4).... 92,000.00 9,043.18 15,495.45
J. Steven Person, Vice President,
Marketing........................... 96,062.04 4,800.00 7,064.93
</TABLE>
- --------
(1) Reflects (i) Southwest's contributions to the Southwest Royalties, Inc.
Employee Profit Sharing and 401(k) Plan and premium payments made by
Southwest for health, disability and life insurance policies for the
referenced individuals and (ii) net cash received from carried interests
in Oil and Gas Properties.
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<PAGE>
Mr. Masterson, in his capacity as Vice President, Exploration and
Acquisitions, received overrided and carried interests in Oil and Gas
Properties acquired by Southwest for its own portfolio as part of his annual
compensation.
<TABLE>
<CAPTION>
CARRIED
INTEREST
PROFIT IN OIL AND
INSURANCE SHARING/401(K) GAS
NAME PREMIUMS CONTRIBUTION PROPERTIES
---- --------- -------------- ----------
<S> <C> <C> <C>
H. H. Wommack, III.......................... $5,571.60 $1,900.00 $ --
Bill E. Coggin.............................. $5,571.60 $1,900.00 $ --
Richard E. Masterson........................ $4,362.60 $ 690.00 $10,442.85
J. Steven Person............................ $5,571.60 $1,493.33 $ --
</TABLE>
(2) Amount includes club dues and automobiles furnished by Southwest.
(3) Mr. Wommack has acted as a general partner of the income funds and certain
of the drilling funds sponsored by Southwest since 1983, holding a 1%
interest in these partnerships. The value of these partnership interests
as of September 30, 1997 was in excess of $1.2 million, but this value is
contingent upon future events such as the price and value of the
partnerships' oil and gas reserves and the economic recovery and the
ultimate depletion of those reserves, and cannot be accurately
ascertained.
Directors of Southwest received $40,000 in 1996 for acting as such.
(4) Mr. Masterson left Southwest in November 1997.
58
<PAGE>
PRINCIPAL STOCKHOLDERS AND
OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the common stock, excluding treasury shares, of SRH by each
person who is known by the Company to own beneficially 5% or more of the
common stock of SRH, by each director, and by all officers and directors of
SRH as a group. Southwest is a wholly-owned subsidiary of SRH.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS OF SHARES PERCENTAGE
BENEFICIAL OWNER OWNED OF CLASS
------------------- --------- ----------
<S> <C> <C>
H. Allen Corey............................................ 48,968 4.6%
c/o Southwest Royalties Holdings, Inc.
Southwest Royalties Building
407 N. Big Spring
Midland, TX 79701-4326
George H. Jewell.......................................... 61,855 5.7%
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002
H. H. Wommack, III........................................ 783,977 72.9%
c/o Southwest Royalties Holdings, Inc.
Southwest Royalties Building
407 N. Big Spring
Midland, TX 79701-4326
Directors and officers as a group (five (5) persons)...... 848,925 78.9%
</TABLE>
CERTAIN TRANSACTIONS
The descriptions set forth below do not purport to be complete and are
qualified in their entirety by reference to the applicable agreements.
On December 15, 1994, H. H. Wommack, III borrowed approximately $1.7 million
on an unsecured basis from Southwest for the purpose of purchasing the
Southwest common stock held by a certain stockholder. The note held by
Southwest was amended on March 15, 1995 to include $35,225 of accrued but
unpaid interest. The note carries a 6% interest rate and is being amortized
over 30 years with payments of $5,500 semi-monthly. As of September 30, 1997,
the outstanding balance of this loan was $1.7 million. Mr. Wommack serves as a
general partner of substantially all of the oil and gas limited partnerships
sponsored by Southwest since 1983, and he holds an interest in these
partnerships of approximately 1%.
59
<PAGE>
EXCHANGE OFFER
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Rights Agreement. The Exchange Notes are being offered hereunder in order to
satisfy the obligations of the Issuer and SRH under the Registration Rights
Agreement. See "Exchange and Registration Rights Agreement."
For each $1,000 principal amount of Old Notes surrendered to the Issuer and
SRH pursuant to the Exchange Offer, the holder of such Old Notes will receive
$1,000 principal amount of Exchange Notes. Upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, SRH and the Issuer will accept all Old Notes properly tendered
prior to 5:00 p.m., New York City time, on the Expiration Date. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer in
integral multiples of $1,000 principal amount.
Under existing interpretations of the staff of the SEC, including EXXON
CAPITAL HOLDINGS CORPORATION, SEC No-action Letter (available April 13, 1989),
the Morgan Stanley Letter and MARY KAY COSMETICS, INC., SEC No-action Letter
(available June 5, 1991), the Issuer and SRH believe that the Exchange Notes
would in general be freely transferable after the Exchange Offer without
further registration under the Securities Act by the respective holders
thereof (other than a "Restricted Holder," being (i) a broker-dealer who
purchased Old Notes exchanged for such Exchange Notes directly from the Issuer
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of the Issuer or SRH
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holder's business and such holder is not participating in, and has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of such Exchange Notes. Eligible holders
wishing to accept the Exchange Offer must represent to the Issuer and SRH that
such conditions have been met. Any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange Notes
in the Exchange Offer will be required to make certain representations,
including that (i) it is not an affiliate of the Issuer or SRH nor a broker-
dealer tendering Old Notes acquired directly from the Issuer or SRH for its
own account, (ii) any Exchange Notes to be received by it are being acquired
in the ordinary course of its business and (iii) it is not participating in,
and it has no arrangement with any person to participate in, the distribution
(within the meaning of the Securities Act) of the Exchange Notes. In addition,
in connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") who acquired Old Notes for its own account as a
result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The staff
of the SEC has taken the position in no-action letters issued to third parties
including SHEARMAN & STERLING, SEC No-action Letter (available July 2, 1993),
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of Old Notes) with this Prospectus, as
it may be amended or supplemented from time to time. Under the Registration
Rights Agreement, the Issuer and SRH are required to allow Participating
Broker-Dealers to use this Prospectus, as it may be amended or supplemented
from time to time, in connection with the resale of such Exchange Notes. See
"Plan of Distribution."
The Exchange Offer shall be deemed to have been consummated upon the earlier
to occur of (i) the Issuer and SRH having exchanged Exchange Notes for all
outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Issuer and SRH having exchanged,
pursuant to the Exchange Offer, Exchange Notes for all Old Notes that have
been tendered and not withdrawn on the
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<PAGE>
Expiration Date. In such event, holders of Old Notes seeking liquidity in
their investment would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Old Notes are issued and outstanding. In connection with the issuance of
the Old Notes, the Issuer and SRH arranged for the Old Notes to be eligible
for trading in the Private Offering, Resale and Trading through Automated
Linkages (PORTAL) Market, the National Association of Securities Dealers'
screen based, automated market trading of securities eligible for resale under
Rule 144A.
The Issuer and SRH shall be deemed to have accepted for exchange validly
tendered Old Notes when, as and if the Issuer and SRH have given oral or
written notice thereof to the Exchange Agent. See "--Exchange Agent." The
Exchange Agent will act as agent for the tendering holders of Old Notes for
the purpose of receiving Exchange Notes from the Issuer and delivering
Exchange Notes to such holders. If any tendered Old Notes are not accepted for
exchange because of an invalid tender or the occurrence of certain other
events set forth herein, certificates for any such unaccepted Old Notes will
be returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date. Holders of Old Notes who tender in the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Old Notes pursuant to the Exchange Offer. The
Issuer and SRH will pay all charges and expenses, other than certain
applicable taxes, in connection with the Exchange Offer. See "--Fees and
Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 1998 unless the Issuer and
SRH, in their sole discretion, extend the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date to which the Exchange Offer
is extended. In order to extend the Expiration Date, the Issuer and SRH will
notify the Exchange Agent of any extension by oral or written notice and will
mail to the record holders of Old Notes an announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that SRH and the Issuer
are extending the Exchange Offer for a specified period of time. The Issuer
and SRH reserve the right (i) to delay acceptance of any Old Notes, to extend
the Exchange Offer or to terminate the Exchange Offer and to refuse to accept
Old Notes not previously accepted, if any of the conditions set forth herein
under "--Termination" shall have occurred and shall not have been waived by
the Issuer and SRH (if permitted to be waived by the Issuer and SRH), by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent, and (ii) to amend the terms of the Exchange Offer in any
manner deemed by it to be advantageous to the holders of the Old Notes. Any
such delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice thereof. If the Exchange
Offer is amended in a manner determined by the Issuer and SRH to constitute a
material change, the Issuer and SRH will promptly disclose such amendment in a
manner reasonably calculated to inform the holders of the Old Notes of such
amendment. Without limiting the manner in which the Issuer and SRH may choose
to make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Issuer and SRH shall have
no obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 10 1/2% per annum,
payable semi-annually on April 15 and October 15 of each year, commencing on
April 15, 1998. Interest on the 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
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<PAGE>
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, October 14, 1997. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or an Agent's Message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) the certificates for such Old Notes must be received by
the Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "DTC") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
along with an Agent's Message prior to the Expiration Date or (iii) the Holder
must comply with the guaranteed delivery procedures described below. The
tender by a holder of Old Notes will constitute an agreement between such
holder and the Issuer and SRH in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The term "Agent's Message" means a message, transmitted by the DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that such DTC has received an express
acknowledgment from the participant in such DTC tendering Old Notes which are
the subject of such Book-Entry Confirmation that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal, and that the
Issuer and SRH may enforce such agreement against such participant.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes
should be sent to the Issuer or SRH. Only a holder of Old Notes may tender
such Old Notes in the Exchange Offer. The term "holder" with respect to the
Exchange Offer means any person in whose name Old Notes are registered on the
books of the Issuer or any other person who has obtained a properly completed
stock power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on behalf of the registered holder.
If such beneficial holder wishes to tender directly, such beneficial holder
must, prior to completing and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or obtain a properly
completed bond power from the registered holder. The transfer of record
ownership may take considerable time. If the Letter of Transmittal is signed
by the record holder(s) of the Old Notes tendered thereby, the signature must
correspond with the name(s) written on the face of the Old Notes without
alteration, enlargement or any change whatsoever. If the Letter of Transmittal
is signed by a participant in DTC, the signature must correspond with the name
as it appears on the security position listing as the holder of the Old Notes.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (an
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<PAGE>
"Eligible Institution") unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder (or by a participant in DTC whose name
appears on a security position listing as the owner) who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal and the Exchange Notes are being
issued directly to such registered holder (or deposited into the participant's
account at DTC) or (ii) for the account of an Eligible Institution. If the
Letter of Transmittal is signed by a person other than the registered holder
of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender
the Old Notes on behalf of the registered holder, in either case signed as the
name of the registered holder or holders appears on the Old Notes. If the
Letter of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Issuer and SRH,
evidence satisfactory to the Issuer and SRH of their authority to so act must
be submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC with an Agent's Message) or a Notice of
Guaranteed Delivery from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Old Notes tendered pursuant
to a Notice of Guaranteed Delivery by an Eligible Institution will be made
only against delivery of the Letter of Transmittal (and any other required
documents) and the tendered Old Notes (or a timely confirmation received of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC with
an Agent's Message) with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be
determined by the Issuer and SRH in their sole discretion, which determination
will be final and binding. The Issuer and SRH reserve the absolute right to
reject any and all Old Notes not properly tendered or any Old Notes their
acceptance of which would, in the opinion of the Issuer and SRH or its
counsel, be unlawful. The Issuer and SRH also reserve the absolute right to
waive any conditions of the Exchange Offer or defects or irregularities in
tender as to particular Old Notes. The Issuer and SRH's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Issuer and SRH shall determine. Neither
the Issuer, SRH, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give
such notification. Tenders of Old Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Old Notes received by
the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost
by the Exchange Agent to the tendering holder of such Old Notes unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date. In addition, the Issuer and SRH reserves the
right in their sole discretion to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date, or, as set
forth under "--Termination," to terminate the Exchange Offer and (ii) to the
extent permitted by applicable law, purchase Old Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such
purchases or offers may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Exchange
Notes at DTC within two business days after the date of this Prospectus, and
any financial institution which is a participant in DTC may make book-entry
delivery of the Old Notes by causing DTC to transfer such Old Notes into the
Exchange Agent's account in accordance with DTC's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer
into the Exchange Agent's account at DTC, an Agent's Message must be
transmitted to and received by the Exchange Agent on or prior to the
Expiration Date at one of its addresses set forth below under "--Exchange
Agent," or the guaranteed delivery procedure described below must be
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complied with. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT. All references in this Prospectus to deposit or delivery
of Old Notes shall be deemed to include DTC's book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer
on a timely basis and deliver an Agent's Message, may effect a tender if: (i)
the tender is made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder of the Old Notes, the registration number or numbers of
such Old Notes (if applicable), and the total principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that,
within five business days after the Expiration Date, the Letter of
Transmittal, together with the Old Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's account at DTC
with an Agent's Message) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal,
together with the certificate(s) representing all tendered Old Notes in proper
form for transfer (or a confirmation of such a book-entry transfer) and all
other documents required by the Letter of Transmittal are received by the
Exchange Agent within five business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account
at DTC) must be received by the Exchange Agent, with the Letter of Transmittal
or an Agent's Message and any other required documents, by the Expiration Date
or within the time periods set forth above pursuant to a Notice of Guaranteed
Delivery from an Eligible Institution. Each holder tendering the Old Notes for
exchange sells, assigns and transfers the Old Notes to the Exchange Agent, as
agent of the Issuer, and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
transferred and exchanged. The holder warrants that it has full power and
authority to tender, exchange, sell, assign and transfer the Old Notes and to
acquire the Exchange Notes issuable upon the exchange of such tendered Old
Notes, that the Exchange Agent, as agent of the Issuer, will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances, and that the Old Notes tendered for
exchange are not subject to any adverse claims when accepted by the Exchange
Agent, as agent of the Issuer.
The holder also warrants and agrees that it will, upon request, execute and
deliver any additional documents deemed by the Issuer, the SRH or the Exchange
Agent to be necessary or desirable to complete the exchange, sale, assignment
and transfer of the Old Notes. All authority conferred or agreed to be
conferred in the Letter of Transmittal by the holder will survive the death,
incapacity or dissolution of the holder and any obligation of the holder shall
be binding upon the heirs, personal representatives, successors and assigns of
such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date, unless previously accepted for exchange.
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To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the business day prior to the Expiration Date and prior to acceptance for
exchange thereof by the Issuer and SRH. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including, if
applicable, the registration number or numbers and total principal amount of
such Old Notes), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to the Old
Notes to register the transfer of such Old Notes into the name of the
Depositor withdrawing the tender, (iv)specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor and (v) if
applicable because the Old Notes have been tendered pursuant to the book-entry
procedures, specify the name and number of the participant's account at DTC to
be credited, if different than that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such withdrawal
notices will be determined by the Issuer and SRH, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no
Exchange Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Any Old Notes which have been tendered but
which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Old Notes
may be retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, SRH and the Issuer
will not be required to accept for exchange any Old Notes not theretofore
accepted for exchange, and may terminate the Exchange Offer if they determine
that the Exchange Offer violates any applicable law or interpretation of the
staff of the SEC.
If the Issuer and SRH determine that they may terminate the Exchange Offer,
as set forth above, the Issuer and SRH may (i) refuse to accept any Old Notes
and return any Old Notes that have been tendered to the holders thereof, (ii)
extend the Exchange Offer and retain all Old Notes tendered prior to the
Expiration of the Exchange Offer, subject to the rights of such holders of
tendered Old Notes to withdraw their tendered Old Notes or (iii) waive such
termination event with respect to the Exchange Offer and accept all properly
tendered Old Notes that have not been withdrawn. If such waiver constitutes a
material change in the Exchange Offer, the Issuer and SRH will disclose such
change by means of a supplement to this Prospectus that will be distributed to
each registered holder of Old Notes, and the Issuer and SRH will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders of the Old Notes, if the Exchange Offer would otherwise expire during
such period. Holders of Old Notes will have certain rights against the Issuer
and SRH under the Registration Agreement should the Issuer and SRH fail to
consummate the Exchange Offer.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent.
Delivery of Old Notes, the Letter of Transmittal and all other required
documents to the Exchange Agent may be made by (i) Hand/Overnight Courier to
the Corporate Trust Department, 4th Floor, Two International Plaza, Boston
Massachusetts 02110, Attn: Ms. Sandra Szozsponik or (ii) by mail to the
Corporate Trust Department, P.O. Box 778, Boston, Massachusetts 02102-0078,
Attn: Ms. Sandra Szozsponik; or (iii) by facsimile transmission (for Eligible
Institutions only): 617-664-5393. Confirmation may be made by calling 617-664-
5587.
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
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FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Issuer and SRH. The principal solicitation for tenders pursuant
to the Exchange Offer is being made by mail. Additional solicitations may be
made by officers and regular employees of the Issuer and SRH in person, by
telegraph or telephone. The Issuer and SRH will not make any payments to
brokers, dealers or other persons soliciting acceptances of the Exchange
Offer. The Issuer and SRH, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse the Exchange Agent for its
reasonable out-of-pocket expenses in connection therewith. The Issuer and SRH
may also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Old Notes and in handling or forwarding tenders for
exchange.
The other expenses incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Issuer and SRH. The Issuer and SRH will pay all
transfer taxes, if any, applicable to the exchange of Old Notes pursuant to
the Exchange Offer. If, however, Exchange Notes or Old Notes not tendered or
accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Issuer or
SRH upon the consummation of the Exchange Offer. The expenses of the Exchange
Offer will be amortized by the Issuer over the term of the Exchange Notes
under generally accepted accounting principles.
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DESCRIPTION OF NOTES
The Old Notes were issued and the Exchange Notes will be issued pursuant to
an indenture, dated October 14, 1997 (the "Indenture"), by and among
Southwest, as Issuer, SRH, as the Parent Guarantor, and State Street Bank and
Trust Company, N.A., as Trustee (the "Trustee"). References to the "Notes"
shall include the "Exchange Notes" except where the context otherwise
requires. The Indenture is governed by certain provisions contained in the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The terms
of the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act. The following summaries of
certain provisions of the Notes, the Indenture and the Security Documents do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to all of the provisions of the Indenture or the
Security Documents, as applicable. A copy of the form of the Indenture, the
Registration Rights Agreement and each of the Security Documents is available
from the Issuer upon request. Capitalized terms used herein, and not otherwise
defined herein, have the meanings defined under the heading "Certain
Definitions." Other capitalized terms not otherwise defined herein have the
meanings assigned to them in the Indenture.
The Notes will be issued in full registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar, which currently is the Trustee's corporate trust office in
Hartford, Connecticut. The Issuer may change the Paying Agent and Registrar
without notice to Holders of the Notes. The Issuer will pay principal
(premium, if any) and interest on the Notes at the corporate trust offices of
the Trustee or its agency in New York, New York. In addition, in the event the
Notes do not remain in book-entry form, interest may be paid, at the Issuer's
option, by wire transfer or check mailed to the registered addresses of the
Holders as shown on the Note Register.
As of the Issue Date, the Issuer is a Restricted Subsidiary of SRH, the
Parent Guarantor of the Notes. As of the Issue Date, Red Oak will be an
Unrestricted Subsidiary of SRH. Subject to the requirements of the Indenture,
SRH will be able to designate future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive
covenants set forth in the Indenture.
Any Notes that remain outstanding after the completion of this Offer,
together with the Exchange Notes issued in connection with this Offer, will be
treated as a single class of securities under the Indenture.
Under certain circumstances, the obligations of the Issuer under the Notes
may be guaranteed in the future by other Restricted Subsidiaries of SRH. See
"--Ranking and Guarantees."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $200 million and
will mature on October 15, 2004. Interest on the Notes will accrue at the rate
of 10 1/2% per annum and will be payable semi-annually on each April 15 and
October 15 commencing on April 15, 1998 to the Persons who are registered
Holders at the close of business on April 1 and October 1 immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from and including the most recent date to which interest has been paid
or, if no interest has been paid, from and including the Issue Date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
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OPTIONAL REDEMPTION
The Issuer does not have the right to redeem the Notes prior to October 15,
2001. Thereafter, the Issuer may redeem the Notes, at its option, in whole or
in part, at any time, at the following redemption prices (expressed as a
percentage of the outstanding principal amount) if redeemed during the twelve-
month period commencing on October 15 of the year set forth below, plus, in
each case, accrued and unpaid interest thereon to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001........................................................... 105.250%
2002........................................................... 102.625%
2003 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to October 15, 2000,
the Issuer may redeem up to $70 million of the aggregate principal amount of
the Notes in cash at a redemption price equal to 110.50% of the principal
amount of the Notes so redeemed, together with accrued and unpaid interest
thereon to the redemption date, with the net proceeds of any Public Equity
Offering, provided that at least $130 million in aggregate principal amount of
the Notes remains outstanding immediately after the occurrence of such
redemption and provided further that such redemption occurs within 60 days of
the date of the closing of such Public Equity Offering.
Selection and Notice
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed,
or if the Notes are not listed, on a pro rata basis, by lot or by such other
method as the Trustee shall deem fair and appropriate, provided that no Note
of $1,000 or less shall be redeemed in part. Notice of redemption will be sent
by first class mail, at least 30 days and not more than 60 days prior to the
date fixed for redemption, to the Holder of each Note to be redeemed to such
Holder's last address as then shown upon the Note Register. Any notice which
relates to a Note to be redeemed in part only must state the portion of the
principal amount to be redeemed and must state that on and after the date
fixed for redemption, upon surrender of such Note, a new Note in a principal
amount equal to the unredeemed portion thereof will be issued. On and after
the date fixed for redemption, unless the Issuer defaults on its payment
obligations, interest will cease to accrue on the Notes or portions thereof
called for redemption.
RANKING AND GUARANTEES
The indebtedness of the Issuer evidenced by the Notes ranks senior in right
of payment to all Subordinated Indebtedness of the Issuer and pari passu in
right of payment with all existing and future senior Indebtedness of the
Issuer. Pursuant to the Parent Guarantee, SRH unconditionally guarantees on a
senior basis, to each Holder and the Trustee, the full and prompt performance
of the Issuer's obligations under the Indenture and the Notes, including the
payment of principal of, premium, if any, and interest on the Notes. The
Parent Guarantee ranks pari passu in right of payment to all existing and
future senior Indebtedness of SRH. The Parent Guarantee is secured by pledges
of the Capital Stock of Sierra and Red Oak directly owned by SRH. See "--
Collateral." The Notes, the Parent Guarantee and the Subsidiary Guarantees are
effectively subordinated, however, to any secured Indebtedness of the Issuer,
SRH and the Subsidiary Guarantors to the extent of the collateral therefor,
including any Indebtedness under the Southwest Credit Facility, which is
secured by substantially all of the Issuer's oil and gas properties. As of
September 30, 1997, SRH and the Issuer would have had $1.5 million of senior
Indebtedness outstanding, excluding the Notes and the Parent Guarantee. See
"Capitalization."
The Indenture also provides that each Significant Subsidiary of SRH (other
than the Issuer), whether now existing or hereafter formed or acquired,
becomes a Subsidiary Guarantor either by execution of the Indenture or a
supplemental indenture and thereby guarantee the Notes as described herein. In
addition, the Indenture provides that each Restricted Subsidiary (other than
the Issuer) which Incurs any Indebtedness (other than to SRH or the
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Issuer) shall, within 10 days following the Incurrence of such Indebtedness,
become a Subsidiary Guarantor by execution of a supplemental indenture and
thereby guarantee the Notes as described herein. As of the Issue Date, there
will be no Subsidiary Guarantor.
Each Subsidiary Guarantor will unconditionally guarantee on a senior
unsecured basis, jointly and severally, to each Holder and the Trustee, the
full and prompt performance of the Issuer's obligations under the Indenture
and the Notes, including the payment of principal of, premium, if any, and
interest on the Notes. The Subsidiary Guarantee of each Subsidiary Guarantor
will rank pari passu in right of payment to all existing and future senior
Indebtedness of such Subsidiary Guarantor.
The obligation of each Subsidiary Guarantor is limited to the maximum amount
which, after giving effect to all other contingent and fixed liabilities of
such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Subsidiary
Guarantee or pursuant to its contribution obligations under the Indenture,
will result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under applicable federal or state law. SRH and each Subsidiary
Guarantor that makes a payment or distribution under the Parent Guarantee or a
Subsidiary Guarantee shall be entitled to a contribution from each other
Guarantor in a pro rata amount, based on the net assets of SRH and each
Subsidiary Guarantor, determined in accordance with GAAP. See "Risk Factors--
Possible Limitations on Enforceability of Subsidiary Guarantees."
The Indenture provides that, subject to the following paragraph, each
Subsidiary Guarantor (including any existing or future Restricted Subsidiary
that becomes a Subsidiary Guarantor) may not consolidate or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person) another
Person or sell or convey all or substantially all of its assets to another
Person or group unless (i) the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) or the
transferee entity (A) is a corporation organized and existing under the laws
of the United States of America, any state thereof, or the District of
Columbia and (B) expressly assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture, in a form satisfactory to the
Trustee, under the Notes and the Indenture, (ii) immediately before and after
giving effect to such transaction, no Default or Event of Default exists and
immediately after giving effect to such transaction, the resulting surviving
or transferee entity could Incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to paragraph (i) of the covenant described
herein under the caption "Limitation on Incurrences of Additional Indebtedness
and Issuances of Disqualified Capital Stock," and (iii) such Subsidiary
Guarantor or the Person formed by or surviving any such consolidation or
merger or the transferee entity on a pro forma basis will have Net Worth
(immediately after the transaction) equal to or greater than the Net Worth of
such Subsidiary Guarantor immediately preceding the transaction. The foregoing
does not apply to a merger, consolidation, sale or other such transaction
between Subsidiary Guarantors, between the Issuer and any Subsidiary Guarantor
or between SRH and any Subsidiary Guarantor.
The Indenture provides that in the event of (i) the designation of any
Subsidiary Guarantor as an Unrestricted Subsidiary or (ii) a sale or other
disposition of all or substantially all of the properties or assets of any
Subsidiary Guarantor to a third party or an Unrestricted Subsidiary, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of
the Capital Stock of any Subsidiary Guarantor, in either case, in a
transaction or manner that does not violate any of the covenants in the
Indenture, then such Subsidiary Guarantor (in the event of such a designation
or a sale or other disposition, by way of such a merger, consolidation or
otherwise, or a disposition of all of the Capital Stock of such Subsidiary
Guarantor) or the Person acquiring such properties or assets (in the event of
a sale or other disposition of all or substantially all of the properties or
assets of such Subsidiary Guarantor) will be released from and relieved of any
obligations under its Subsidiary Guarantee, provided that any Net Cash
Proceeds of such sale or other disposition are applied in accordance with the
covenant described under the caption "--Covenants--Limitation on Asset Sales,"
and provided, further, however, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests that secure, any other Indebtedness of SRH or its Restricted
Subsidiaries shall also terminate upon such release, sale or disposition.
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REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder has the right, at
such Holder's option, subject to the terms and conditions of the Indenture, to
require the Issuer to repurchase all or any part of such Holder's Notes
(provided that the principal amount of such Notes must be $1,000 or an
integral multiple thereof) on a date that is no later than 60 Business Days
after the occurrence of such Change of Control (the date on which the
repurchase is effected being referred to herein as the "Change of Control
Payment Date"), at a cash purchase price equal to 101% of the principal amount
thereof (the "Change of Control Purchase Price"), plus accrued and unpaid
interest thereon to the Change of Control Payment Date.
The Issuer shall notify the Trustee within five Business Days after each
date upon which a Change of Control has occurred. Within 20 Business Days
after the occurrence of each Change of Control, the Issuer will make an
irrevocable, unconditional offer (a "Change of Control Offer") to the Holders
of Notes to purchase all of the Notes at the Change of Control Purchase Price,
plus accrued and unpaid interest thereon to the Change of Control Payment
Date, by sending written notice of a Change of Control Offer, by first class
mail, to each Holder at its registered address, with a copy to the Trustee.
The notice to Holders will contain all instructions and materials required by
applicable law and will contain or make available to Holders other information
material to such Holders' decision to tender Notes pursuant to the Change of
Control Offer.
On or before the Change of Control Payment Date, the Issuer will, to the
extent lawful, (i) accept for payment Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount sufficient to pay the Change of Control Purchase Price of all
Notes so tendered, and (iii) deliver or cause to be delivered to the Trustee
all Notes so accepted, together with an officers' certificate listing the
Notes or portions thereof being purchased by the Issuer. The Paying Agent will
promptly mail to the Holders of Notes so accepted payment in an amount equal
to the Change of Control Purchase Price for such Notes, plus accrued and
unpaid interest thereon to the Change of Control Payment Date, and the Trustee
will promptly cancel all Notes so accepted by the Issuer pursuant to the
Change of Control Offer and authenticate and mail (or cause to be transferred
by book entry) to such Holders a new Note equal in principal amount, as
applicable, to any unpurchased portion of the Note surrendered. Any Notes not
so accepted will be promptly mailed by the Issuer to the Holder thereof. The
Issuer will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Purchase Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders to require that the Issuer repurchase or
redeem the Notes in the event of a takeover, recapitalization or other similar
transaction of SRH or the Issuer. The provisions of the Indenture may not
afford Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or other similar transaction affecting
SRH or the Issuer that may adversely affect the Holders if such transaction is
not the type of transaction included within the definition of "Change of
Control." A transaction involving the management of SRH, the Issuer or any
Affiliate or a transaction involving a recapitalization of SRH or the Issuer
will result in a Change of Control only if it is the type of transaction
specified in such definition.
The existence of a Holder's right to require the Issuer to repurchase Notes
in connection with a Change of Control may deter a third party from acquiring
SRH or the Issuer in a transaction that would constitute a Change of Control.
The source of funds for any repurchase of Notes upon a Change of Control
will be the Company's cash or cash generated from operation or other sources,
including borrowings or sales of assets; however, there can be no assurance
that sufficient funds will be available at the time of any Change of Control
to repay all Indebtedness owing or to make any required repurchase of the
Notes. Any failure by the Issuer to repurchase Notes tendered pursuant to a
Change of Control Offer will constitute an Event of Default. See "--Events of
Default and Remedies."
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The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuer and repurchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of (i) SRH and its Restricted Subsidiaries, taken as a whole, or
(ii) the Issuer. Although there is a developing body of judicial opinions
interpreting the phrase "all or substantially all," no precise standard exists
under New York law, which is the law governing the Indenture and the Notes.
Accordingly, the ability of a Holder of Notes to require the Issuer to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of (i) SRH and its Restricted
Subsidiaries, taken as a whole, or (ii) the Issuer, to another Person or group
is uncertain.
To the extent applicable and if required by law, SRH and the Issuer will
comply with Section 14 of the Exchange Act, the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act and other securities
laws, rules, and regulations which may then be applicable to any offer by the
Issuer to repurchase the Notes at the option of Holders upon a Change of
Control; and, if such laws, rules, and regulations require or prohibit any
action inconsistent with the foregoing, compliance by SRH and the Issuer with
such laws, rules, and regulations will not constitute a breach of the Issuer's
obligations with respect to the foregoing.
COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrences of Additional Indebtedness and Issuances of
Disqualified Capital Stock
The Indenture provides that SRH may not, and may not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume,
guarantee, or otherwise become liable for, contingently or otherwise (to
"Incur" or, as appropriate, an "Incurrence"), any Indebtedness or issue any
Disqualified Capital Stock, except that SRH or a Restricted Subsidiary may
Incur Indebtedness and SRH or the Issuer may issue shares of Disqualified
Capital Stock if:
(i) the Consolidated Fixed Charge Coverage Ratio for SRH's Reference
Period for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is Incurred or
such Disqualified Capital Stock is issued would have been (A) at least 2.0
to 1.0 if such additional Indebtedness is Incurred or such Disqualified
Capital Stock is issued during the period commencing on the Issue Date and
ending on December 31, 1998 or (B) at least 2.5 to 1.0 if such additional
Indebtedness is Incurred or such Disqualified Capital Stock is issued at
any time thereafter;
(ii) no Default or Event of Default shall have occurred and be continuing
at the time such additional Indebtedness is Incurred or such Disqualified
Capital Stock is issued or would occur as the result of such Incurrence of
such additional Indebtedness or the issuance of such Disqualified Capital
Stock; and
(iii) SRH's Adjusted Consolidated Net Tangible Assets are equal to or
greater than 150% of the consolidated Indebtedness of SRH and its
Restricted Subsidiaries.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the Incurrrence
of such Indebtedness, SRH and any Restricted Subsidiary may Incur Permitted
Indebtedness.
Any Indebtedness Incurred or Disqualified Capital Stock issued by any Person
that is not a Subsidiary of SRH or any of its Restricted Subsidiaries, as the
case may be, which Indebtedness or Disqualified Capital Stock is outstanding
at the time such Person becomes a Restricted Subsidiary of, or is merged into,
or consolidated with SRH or such Restricted Subsidiary, as the case may be,
shall be deemed to have been Incurred or issued, as the case may be, at the
time such Person becomes a Restricted Subsidiary of, or is merged into, or
consolidated with SRH or such Restricted Subsidiary.
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Limitation on Restricted Payments
(a) The Indenture provides that SRH will not, and will not permit any
Restricted Subsidiary to, directly or indirectly (i) declare or pay any
dividend on, or make any other distribution to holders of, any shares of
Capital Stock of SRH or any Restricted Subsidiary (other than dividends or
distributions payable solely in shares of Qualified Capital Stock of SRH or
any Restricted Subsidiary or dividends or distributions payable to SRH or the
Issuer or any wholly-owned Restricted Subsidiary of SRH or the Issuer or
warrants, rights or options to acquire Qualified Capital Stock of SRH or any
Restricted Subsidiary), (ii) purchase, redeem or otherwise acquire or retire
for value any such shares of Capital Stock of SRH or any Affiliate (other than
any Capital Stock owned by SRH or any of its wholly-owned Restricted
Subsidiaries), or any options, warrants or other rights to acquire such
Capital Stock, (iii) make any principal payment on or repurchase, redeem,
defease or otherwise acquire or retire for value, prior to any scheduled
principal payment, scheduled sinking fund payment or maturity, any
Subordinated Indebtedness, or (iv) make any Restricted Investment (such
payments or other actions described in clauses (i) through (iv) being
collectively referred to as a "Restricted Payment"), unless at the time of and
after giving effect to the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the amount determined by the
Board of Directors of SRH, whose determination shall be conclusive and
evidenced by a Board Resolution),
(1) no Default or Event of Default shall have occurred and be continuing,
(2) SRH could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in accordance with clause (i) of the covenant "--Limitation on
Incurrences of Additional Indebtedness and Issuances of Disqualified Capital
Stock," and
(3) the aggregate amount of all Restricted Payments declared or made after
the Issue Date shall not exceed the sum (without duplication) of the
following:
(A) 50% of the Adjusted Consolidated Net Income of SRH accrued on a
cumulative basis during the period commencing with the first full quarter
after the Issue Date and ending on the last day of SRH's last fiscal
quarter ending prior to the date of such proposed Restricted Payment (or if
Adjusted Consolidated Net Income is a loss, minus 100% of such loss), plus
(B) the aggregate Net Proceeds received after the Issue Date by SRH or
the Issuer from the issuance or sale (other than to any of its Restricted
Subsidiaries) of shares of Qualified Capital Stock of SRH or the Issuer or
any options, warrants or rights to purchase such shares of Qualified
Capital Stock of SRH or the Issuer, plus
(C) the aggregate Net Proceeds received after the Issue Date by SRH or
the Issuer (other than from any of its Restricted Subsidiaries) upon the
exercise of any options, warrants or rights to purchase shares of Qualified
Capital Stock of SRH or the Issuer, plus
(D) the aggregate Net Proceeds received after the Issue Date by SRH or
the Issuer from the issuance or sale (other than to any of its Restricted
Subsidiaries) of Indebtedness or shares of Disqualified Capital Stock that
have been converted into or exchanged for Qualified Capital Stock of SRH or
the Issuer, together with the aggregate cash received by SRH or the Issuer
at the time of such conversion or exchange, minus
(E) the amount of any write-downs, writeoffs, other negative
revaluations, and other negative extraordinary charges not otherwise
reflected in Adjusted Consolidated Net Income of SRH during such period.
(b) Notwithstanding paragraph (a) above, SRH and its Restricted Subsidiaries
may take the following actions so long as (in the case of clauses (2), (3),
(4), (5) and (7) below) no Default or Event of Default shall have occurred and
be continuing:
(1) the payment of any dividend on Capital Stock of SRH or any Restricted
Subsidiary within 60 days after the date of declaration thereof, if at such
declaration date such declaration complied with the provisions of paragraph
(a) above;
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(2) the repurchase, redemption or other acquisition or retirement of any
shares of any class of Capital Stock of SRH or any Restricted Subsidiary,
in exchange for, or out of the aggregate Net Proceeds from, a substantially
concurrent issue and sale (other than to a Restricted Subsidiary) of shares
of Qualified Capital Stock of SRH or the Issuer;
(3) the repurchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness in
exchange for, or out of the aggregate Net Proceeds from, a substantially
concurrent issue and sale (other than to a Restricted Subsidiary) of (i)
Subordinated Indebtedness (provided such Indebtedness is on terms no less
favorable to the Holders of the Notes than the terms of the Subordinated
Indebtedness being redeemed) or (ii) shares of Qualified Capital Stock of
SRH or the Issuer;
(4) the repurchase, redemption or other acquisition of any Capital Stock
of any Affiliate organized as a limited partnership in which SRH or the
Issuer is a general partner pursuant to a redemption which is mandatory
under the terms of such partnership's limited partnership agreement;
(5) the repurchase or other acquisition of any Capital Stock of any
Restricted Subsidiary, whether in one or a series of substantially
contemporaneous transactions, which causes such Person to become a wholly-
owned Restricted Subsidiary of SRH;
(6) the payment on behalf of any Subsidiary or Affiliate of its allocated
pro rata costs associated with the issuance of the Notes and any Investment
in Capital Stock of such Person taken by SRH in payment thereof;
(7) the distribution or dividend by SRH to its stockholders of the shares
of Capital Stock of Red Oak owned by SRH, provided at the time of such
distribution or dividend (and after giving effect thereto):
(i) the Consolidated Fixed Charge Coverage Ratio for SRH's Reference
Period for which internal financial statements are available
immediately preceding the date of such distribution would have been at
least 3.0 to 1.0; and
(ii) SRH's Adjusted Consolidated Net Tangible Assets are equal to or
greater than 200% of the consolidated Indebtedness of SRH and its
Restricted Subsidiaries.
The actions described in clause (1) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be made in accordance with this
paragraph (b) but shall reduce the amount that would otherwise be available
for Restricted Payments under clause (3) of paragraph (a), provided that any
dividend paid pursuant to clause (1) of this paragraph (b) shall reduce the
amount that would otherwise be available under clause (3) of paragraph (a)
when declared, but not also when subsequently paid pursuant to clause (1) of
this paragraph (b), and provided that any Net Proceeds received under clauses
(2) or (3)(ii) of paragraph (b) shall not be included in subclauses (B) or (C)
of clause (3) of paragraph (a) above.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Indenture provides that SRH may not, and may not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, or permit or
suffer to exist or become effective any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary of SRH to (a) pay dividends or
make other distributions on its Capital Stock to SRH or any of its other
Restricted Subsidiaries, (b) make loans or advances or pay any Indebtedness or
other obligations owed to SRH or to any other Restricted Subsidiary, or (c)
transfer any of its properties or assets to SRH or to any other Restricted
Subsidiary, except encumbrances and restrictions existing under (i) this
Indenture, any Permitted Bank Credit Facility as in effect on the Issue Date
and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more restrictive
with respect to such dividend and other payment or transfer restrictions than
those contained in the Permitted Bank Credit Facility as in effect on the
Issue Date and (ii) any agreement of a Person acquired by SRH or a Restricted
Subsidiary of SRH, which restrictions existed at the time of acquisition, were
not put in place in anticipation of such acquisition, and are not applicable
to any Person or property, other than the Person or any property of the Person
so acquired.
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Limitation on Transactions with Affiliates
The Indenture provides that SRH may not, and may not permit any of its
Subsidiaries to, enter directly or indirectly into, or permit to exist, any
transaction or series of related transactions with or for the benefit of any
Affiliate except for transactions made in good faith, the terms of which are
fair and reasonable to SRH or such Subsidiary, as the case may be, and are at
least as favorable as the terms which could be obtained by SRH or such
Subsidiary, as the case may be, in a comparable transaction made on an arm's
length basis with Persons who are not Affiliates and SRH delivers: (i) with
respect to any transaction or series of transactions with an Affiliate
involving aggregate consideration in excess of $1 million, an officers'
certificate certifying that such transaction or transactions comply with this
covenant, (ii) with respect to any transaction or series of transactions with
an Affiliate involving aggregate consideration in excess of $2 million, a
resolution of the Board of Directors set forth in an officers' certificate
certifying that such transaction or transactions comply with this covenant and
that such transaction or transactions have been approved in good faith by a
majority of the members of the Board of Directors who are independent (which
resolution shall be conclusive evidence of compliance with this provision),
provided that if there is not a majority of independent directors able to
approve such transaction, SRH shall also deliver an opinion as to the fairness
to SRH or such Subsidiary of such transaction or transactions from a financial
point of view issued by an investment banking firm of recognized national
standing, which opinion shall be conclusive evidence of compliance with this
provision; and (iii) with respect to any transaction or series of transactions
with an Affiliate involving aggregate consideration in excess of $5 million,
an officers' certificate as described in subclause (ii) above and an opinion
as to the fairness to SRH or such Subsidiary of such transaction or
transactions from a financial point of view issued by an investment banking
firm of recognized national standing, which resolution and opinion shall be
conclusive evidence of compliance with this provision; provided, however, that
this covenant will not restrict: (1) transactions between SRH and any of its
Restricted Subsidiaries or transactions between Restricted Subsidiaries of
SRH, (2) transactions pursuant to the Tax Sharing Agreement and the Security
Documents, (3) Restricted Payments permitted by the provisions of the
Indenture described under the covenant captioned "--Limitation on Restricted
Payments," (4) any employee compensation arrangements by SRH or any of its
Subsidiaries which has been approved by a majority of SRH's disinterested
directors and found in good faith by such directors to be in the best
interests of SRH or such Subsidiary, as the case may be; and (5) customary
directors' fees and indemnification and similar arrangements.
Limitation on Asset Sales
The Indenture provides that SRH may not, and may not permit any Restricted
Subsidiary to, consummate an Asset Sale unless: (a) SRH or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Sale at least equal to the fair market value (as determined in good
faith by resolution of the Board of Directors set forth in an officers'
certificate delivered to the Trustee, which determination shall be conclusive
evidence of compliance with this provision) of the assets or Capital Stock
being sold or issued or otherwise disposed of; and (b) at least 75% of the
value of the consideration for such Asset Sales consists of cash, Cash
Equivalents or Exchange Assets or any combination thereof; provided that the
amount of any liabilities (as shown on SRH's or such Restricted Subsidiary's
most recent balance sheet) of SRH or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are Subordinated Indebtedness or
otherwise by their terms subordinated to the Notes, the Parent Guarantee or
the Subsidiary Guarantees) that are assumed by the transferee of such assets
pursuant to a customary novation agreement that releases SRH and such
Restricted Subsidiary from further liability shall also be deemed to be cash
for purposes of this provision.
Within 365 days after the receipt of any Net Cash Proceeds from an Asset
Sale, SRH or such Restricted Subsidiary may apply such Net Cash Proceeds, at
its option, in any order or combination: (a) to repay and permanently reduce
Indebtedness outstanding under any Permitted Bank Credit Facility to which it,
the Issuer or any other Restricted Subsidiary of SRH is a party, (b) to make
Capital Expenditures or (c) to make other acquisitions of assets to be used in
SRH's and its Restricted Subsidiaries' oil and gas business. Pending the final
application of any such Net Cash Proceeds, SRH or such Restricted Subsidiary
may temporarily invest such Net Cash Proceeds in any manner that is not
prohibited by the terms of the Indenture. Any Net Cash Proceeds from Asset
Sales that are not applied as provided in clauses (a) through (c) of the first
sentence of this paragraph will (after expiration of the relevant periods) be
deemed to constitute "Excess Cash."
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When the amount of Excess Cash exceeds $10 million, the Issuer or SRH will
make an irrevocable, unconditional offer (an "Excess Cash Offer") to the
Holders to purchase the maximum amount of Notes which could be acquired by
application of such amount of Excess Cash as described herein (the "Excess
Cash Offer Amount"), in cash at the purchase price equal to 100% of the
principal amount thereof (the "Excess Cash Offer Price"), together with
accrued and unpaid interest to the Excess Cash Purchase Date.
Notice of an Excess Cash Offer will be sent at least 30 and not more than 60
days prior to the Excess Cash Purchase Date, by first-class mail, by the
Issuer or SRH to each Holder at the address on the Note Register, with a copy
to the Trustee. Such notice will set forth a date on which the Notes tendered
shall be accepted (the "Excess Cash Purchase Date") and the Excess Cash Offer
shall remain open for at least 20 Business Days and close no later than 30
Business Days after the date such notice is given. The notice to the Holders
will contain all information, instructions and materials required by
applicable law or otherwise material to such Holders' decision to tender Notes
pursuant to the Excess Cash Offer.
To the extent applicable and if required by law, the Issuer and SRH will
comply with Section 14 of the Exchange Act, the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act and other securities
laws, rules, and regulations which may then be applicable to any Excess Cash
Offer by the Issuer or SRH; and, if such laws, rules, and regulations require
or prohibit any action inconsistent with the foregoing, compliance by the
Issuer or SRH with such laws, rules, and regulations will not constitute a
breach of its obligations with respect to the foregoing.
On or before an Excess Cash Purchase Date, the Issuer or SRH shall (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Excess Cash Offer, (ii) deposit with the Paying Agent money sufficient to pay
the Excess Cash Offer Price, plus accrued and unpaid interest thereon to the
Excess Cash Purchase Date of all Notes or portions thereof so accepted, and
(iii) deliver to the Trustee all Notes so accepted together with an officers'
certificate listing the Notes or portions thereof being purchased by the
Issuer or SRH. The Paying Agent shall promptly mail to Holders of Notes so
accepted payment in an amount equal to the Excess Cash Offer Price, plus
accrued and unpaid interest thereon to the Excess Cash Purchase Date. The
Trustee shall promptly cancel all Notes accepted by the Issuer pursuant to the
Excess Cash Offer and authenticate and mail to the Holders of Notes so
accepted a new Note equal to the principal amount of any unpurchased portion
of the Note surrendered. Any Notes not so accepted shall be promptly mailed by
the Issuer to the Holder thereof. The Issuer or SRH will publicly announce the
results of the Excess Cash Offer on or as soon as practicable after the Excess
Cash Purchase Date.
If the amount required to acquire all Notes tendered by Holders pursuant to
the Excess Cash Offer (the "Excess Cash Acceptance Amount") shall be less than
the aggregate Excess Cash Offer Amount, then the excess of the Excess Cash
Offer Amount over the Excess Cash Acceptance Amount may be used by SRH or any
Restricted Subsidiary in any manner permitted by the Indenture. Upon
consummation of any Excess Cash Offer made in accordance with the terms of the
Indenture, the amount of Excess Cash will be reduced to zero.
Limitation on Liens
The Indenture provides that SRH may not, and may not permit any Restricted
Subsidiary to, directly or indirectly, incur, or suffer to exist any Lien upon
any of their respective properties or assets, whether now owned or hereafter
acquired, other than Permitted Liens.
Limitation on Lines of Business
The Indenture provides that SRH will not engage in any line of business
other than to act as a holding company for the Issuer, Sierra and Red Oak and
such other business activities as are reasonably related or incidental
thereto. The Indenture will provide that the Restricted Subsidiaries will not
engage in any line of business other than the oil and gas exploration and
production business, such other business activities as are reasonably related
or incidental thereto and any other business activities of SRH and its
Restricted Subsidiaries conducted as of the Issue Date.
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Designation of Unrestricted Subsidiaries
The Board of Directors of SRH may designate any Restricted Subsidiary (other
than the Issuer) to be an Unrestricted Subsidiary if such designation would
not cause a Default or an Event of Default and following such designation, SRH
could Incur $1.00 of additional Indebtedness pursuant to paragraph (i) of the
covenant described herein under the caption "Limitation on Incurrences of
Additional Indebtedness and Issuances of Disqualified Capital Stock." For
purposes of making such determination, all outstanding Investments by SRH and
its Restricted Subsidiaries in the Subsidiary so designated which have not
been repaid in cash will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under clause (3) of paragraph (a) of the covenant "Limitation on Restricted
Payments." All such outstanding Investments will be deemed to constitute
Restricted Investments in an amount equal to the greater of the fair market
value or book value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary. In addition, the definition of
"Unrestricted Subsidiary" set forth under the caption "Certain Definitions"
describes the circumstances under which a future Unrestricted Subsidiary of
SRH may be designated as a Restricted Subsidiary by the Board of Directors of
SRH.
The Board of Directors of SRH or any Restricted Subsidiary may designate any
Unrestricted Subsidiary of such Person (other than Red Oak) as a Restricted
Subsidiary of such Person; provided that, (a) if the Unrestricted Subsidiary
has any Indebtedness outstanding or is otherwise liable for any Indebtedness
or has a negative Net Worth, then immediately after giving pro forma effect to
such designation, such Person could Incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the provisions
described under the heading "--Covenants--Limitation on Incurrences of
Additional Indebtedness and Issuances of Disqualified Capital Stock"
(assuming, for purposes of this calculation, that each dollar of negative Net
Worth is equal to one dollar of Indebtedness), (b) all Indebtedness of such
Unrestricted Subsidiary shall be deemed to be Incurred by a Restricted
Subsidiary of the Person on the date such Unrestricted Subsidiary becomes a
Restricted Subsidiary, and (c) no Default or Event of Default would occur or
be continuing after giving effect to such designation. Any Subsidiary of an
Unrestricted Subsidiary shall be an Unrestricted Subsidiary for purposes of
the Indenture.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries
The Indenture provides that SRH will not sell or otherwise dispose of any
shares of Capital Stock of any Restricted Subsidiary (other than the Issuer),
and shall not permit any Restricted Subsidiary (other than the Issuer),
directly or indirectly, to issue or sell or otherwise dispose of any of its
Capital Stock except (a) to SRH or a wholly-owned Restricted Subsidiary, or
(b) if all shares of Capital Stock of such Restricted Subsidiary are sold or
otherwise disposed of. In connection with any sale or disposition of Capital
Stock of any Restricted Subsidiary, SRH will be required to comply with the
covenant described under the caption "Limitation on Asset Sales," and in the
case of a sale of the Issuer, the covenants described under the captions
"Repurchase of Notes at the Option of the Holder Upon a Change of Control" and
"Limitation on Merger, Sale or Consolidation."
Ownership of Restricted Subsidiaries
The Indenture provides that all of the Capital Stock of each Restricted
Subsidiary (other than the Issuer, TPI and Southwest Software) be owned,
whether directly or indirectly, by SRH. The Indenture will also provide that
SRH will ensure that the Issuer remain a Restricted Subsidiary so long as any
of the Notes remains outstanding.
Limitation on Merger, Sale or Consolidation
The Indenture provides that SRH will not consolidate with or merge with or
into any other Person or, directly or indirectly, sell, lease, assign,
transfer, or convey all or substantially all of its assets (computed on a
consolidated basis), to another Person or group of Persons acting in concert,
whether in a single transaction or
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through a series of related transactions, unless (i) either (a) SRH is the
continuing Person or (b) the resulting, surviving, or transferee entity is a
corporation organized under the laws of the United States, any state thereof,
or the District of Columbia, and shall expressly assume all of the obligations
of SRH under the Indenture, the Parent Guarantee and the Security Documents by
appropriate documents supplemental thereto, executed and delivered to the
Trustee on or prior to the consummation of such transaction, in form
satisfactory to the Trustee; (ii) no Default or Event of Default shall exist
or shall occur immediately after giving effect to such transaction; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Net Worth of the resulting surviving or transferee entity is at least equal to
the Net Worth of SRH immediately prior to such transaction; and (iv) except
for a merger of SRH with or into any wholly-owned Restricted Subsidiary, the
resulting surviving or transferee entity would immediately thereafter be
permitted to Incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to paragraph (i) of the covenant described
herein under the caption "Limitation on Incurrences of Additional Indebtedness
and Issuances of Disqualified Capital Stock." For purposes of this covenant,
the Consolidated Fixed Charge Coverage Ratio shall be determined on a pro
forma consolidated basis (giving effect to the transaction) for the Reference
Period immediately preceding such transaction.
The Indenture provides that the Issuer will not consolidate with or merge
with or into any other Person, or, directly or indirectly, sell, lease,
assign, transfer, or convey all or substantially all of its assets (computed
on a consolidated basis), to another Person or group of Persons acting in
concert, whether in a single transaction or through a series of related
transactions, unless (i) either (a) the Issuer is the continuing Person or (b)
the resulting, surviving, or transferee entity is a corporation organized
under the laws of the United States, any state thereof, or the District of
Columbia, and shall expressly assume all of the obligations of the Issuer
under the Indenture and the Notes by a supplemental indenture, executed and
delivered to the Trustee on or prior to the consummation of such transaction,
in form satisfactory to the Trustee; (ii) no Default or Event of Default shall
exist or shall occur immediately after giving effect to such transaction;
(iii) immediately after giving effect to such transaction on a pro forma
basis, the Net Worth of the surviving or transferee entity is at least equal
to the Net Worth of the Issuer immediately prior to such transaction; (iv)
except for a merger of the Issuer with or into SRH or any wholly-owned
Restricted Subsidiary, the resulting surviving or transferee entity would
immediately thereafter be permitted to Incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to paragraph (i) of
the covenant described herein under the caption "Limitation on Incurrences of
Additional Indebtedness and Issuances of Disqualified Capital Stock"; (v) SRH
shall have executed and delivered to the Trustee, in form satisfactory to the
Trustee, a supplemental indenture confirming the obligation of SRH to pay the
principal of and interest on the Notes pursuant to the Parent Guarantee and to
perform all the covenants of SRH under the Indenture and the Parent Guarantee;
(vi) each Subsidiary Guarantor shall have executed and delivered to the
Trustee, in form satisfactory to the Trustee, a supplemental indenture
confirming such Subsidiary Guarantor's obligations to pay the principal of and
interest on the Notes pursuant to its Subsidiary Guarantee; and (vii) the
Trustee shall have received an opinion of counsel to the effect that such
consolidation, merger, conveyance, transfer or lease will not result in the
Issuer being required to make any deduction for or on account of taxes from
payments made under or in respect of the Notes. For purposes of this covenant,
the Consolidated Fixed Charge Coverage Ratio shall be determined on a pro
forma consolidated basis (giving effect to the transaction) for the Reference
Period immediately preceding such transaction.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of SRH or the Issuer in accordance with the foregoing, the
successor Person formed by such consolidation or merger or the Person to whom
such transfer is made, shall succeed to, and be substituted for, and may
exercise every right and power of, SRH under the Parent Guarantee and the
Security Documents or the Issuer under the Indenture, as the case may be, with
the same effect as if such successor corporation had been named as SRH or the
Issuer therein.
This covenant includes a phrase relating to the sale, lease, transfer,
conveyance or other dispositions of "all or substantially all" of the assets
of a Person. Although there is a developing body of judicial opinions
interpreting the phrase "all or substantially all," no precise standard exists
under applicable law. Accordingly, the ability of the Holders of the Notes to
declare an Event of Default as the result of such a disposition or series of
dispositions is uncertain.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Issuer
to pay installments of interest on the Notes as and when the same become due
and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Issuer to pay all or any part of the principal or premium, if
any, on the Notes when and as the same become due and payable at maturity,
redemption, by acceleration or otherwise, (iii) the failure by the Issuer or
SRH to comply with the provisions under the caption "Repurchase of Notes at
the Option of the Holder Upon a Change of Control," "Limitation on Asset
Sales" or "Limitation on Merger, Sale or Consolidation," (iv) the failure by
SRH, the Issuer or any of its other Restricted Subsidiaries to observe or
perform any other covenant, agreement or warranty contained in the Notes, the
Indenture, the Parent Guarantee, any Subsidiary Guarantee or any Security
Document and, subject to certain exceptions, the continuance of such failure
for a period of 30 days after written notice is given to the Issuer by the
Trustee or to the Issuer and the Trustee by the Holders of at least 25% of the
principal amount of the Notes then outstanding, (v) certain events of
bankruptcy, insolvency, or reorganization in respect of SRH, the Issuer or any
of its other Significant Subsidiaries, (vi) a default which extends beyond any
stated period of grace applicable thereto (including any extension thereof)
under any mortgage, indenture, or instrument under which there is outstanding
any Indebtedness of SRH, the Issuer or any of its other Restricted
Subsidiaries aggregating in excess of $1 million or a failure to pay such
Indebtedness at its stated maturity, provided that a waiver by all of the
lenders of such Indebtedness of such default shall constitute a waiver
hereunder for the same period, (vii) one or more final judgments not covered
by insurance aggregating at least $1 million at any one time rendered against
SRH, the Issuer or any of its other Restricted Subsidiaries and not stayed or
discharged within 60 days, (viii) any Note, the Indenture or any Security
Document not being in full force and effect (except where no material adverse
effect to the Holders of the Notes would result) or ceasing to give the
Trustee a perfected Lien on the Collateral, or (ix) the Parent Guarantee or
any of the Subsidiary Guarantees ceases to be in full force and effect or the
Parent Guarantee or any of the Subsidiary Guarantees is declared to be null
and void or unenforceable or the Parent Guarantee or any of the Subsidiary
Guarantees is found to be invalid or any Guarantor denies its liability under
the Parent Guarantee or its Subsidiary Guarantee (other than by reason of
release of a Subsidiary Guarantor in accordance with the terms of the
Indenture).
The Indenture provides that if an Event of Default occurs and is continuing
and if it is known to the Trustee, the Trustee must, within 90 days after the
occurrence of such Event of Default, give to the Holders notice of such
default; provided, that, except in the case of default in payment of principal
of, premium, if any, or interest on the Notes, the Trustee will be protected
in withholding such notice if it in good faith determines that the withholding
of such notice is in the interest of the Holders of the Notes.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (v) above), then in every such case, unless the
principal of all of the Notes shall have already become due and payable,
either the Trustee or the Holders of 25% of the principal amount of Notes then
outstanding, by notice in writing to the Issuer (and to the Trustee if given
by Holders), may declare all principal of, premium, if any, and accrued
interest on the Notes to be due and payable immediately. If an Event of
Default specified in clause (v) above occurs, all principal, premium, if any,
and accrued interest on the Notes will be immediately due and payable on all
outstanding Notes without any declaration or other act on the part of the
Trustee or the Holders. The Holders of not less than a majority of the
principal amount of Notes are authorized to rescind such acceleration if any
existing Events of Default, other than the non-payment of the principal of,
premium, if any, and interest on the Notes which have become due solely by
such acceleration, have been cured or waived.
Prior to the declaration of acceleration of the Notes, the Holders of a
majority of the Notes at the time outstanding may waive on behalf of all the
Holders any Default or Event of Default, except a Default in the payment of
principal of, premium, if any, or interest on any Note not yet cured, or a
Default, or Event of Default with respect to any covenant or provision which
cannot be modified or amended without the consent of all of the Holders of the
Notes. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity.
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Subject to all provisions of the Indenture, the Holders of a majority of the
Notes at the time outstanding will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
COLLATERAL
The Parent Guarantee is secured by the pledge to the Trustee for the ratable
benefit of the Holders of (x) all of the Capital Stock of Sierra now or
hereafter directly owned by SRH, equals approximately 30% of the outstanding
shares of Capital Stock of Sierra, and (y) all of the Capital Stock of Red Oak
now or hereafter directly owned by SRH, which equals approximately 82% of the
outstanding shares of Capital Stock of Red Oak.
In the event of an Equity Offering in which SRH sells its shares of Sierra
or Red Oak, such shares may be released by the Trustee from the Lien of the
Security Documents for sale in connection with such Equity Offering. The
Trustee would have no Lien on the proceeds from any such sale of released
shares. Notwithstanding the foregoing, no such shares may be released by the
Trustee if at the time of such proposed release, a Default or Event of Default
has occurred and is continuing or would occur as a result of such release. In
addition, the Trustee will release the shares of Red Oak from the Lien of the
Security Documents to the extent such shares are subject to a transaction
permitted by clause (7) of paragraph (b) of the covenant. See "--Limitation on
Restricted Payments."
FORECLOSURE ON COLLATERAL
If the Notes become due and payable prior to the Stated Maturity Date
thereof or are not paid in full at the Stated Maturity Date thereof, 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 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 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.
There can be no assurance 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 Holders of the Notes. See "Risk
Factors--Adequacy of Collateral; Risks of Foreclosure" and "--Possible
Limitations on Enforceability of Subsidiary Guarantees."
LEGAL DEFEASANCE; SATISFACTION AND DISCHARGE OF THE INDENTURE
The Issuer will be deemed to have paid and discharged the entire
indebtedness on all of the outstanding Notes (except as to (i) Issuer's right
of optional redemption, (ii) rights of Holders to receive payments of
principal of, premium, if any, and interest on the Notes (but not the Change
of Control Purchase Price or the Excess Cash Offer Price) and any other rights
of the Holders with respect to such amounts, (iii) the rights, obligations and
immunities of the Trustee under the Indenture, and (iv) certain other
specified provisions in the Indenture (the foregoing exceptions (i) through
(iv) are collectively referred to as the "Reserved Rights")) on the 91st day
(or one day after such other greater period of time in which any such deposit
of trust funds may remain subject to set aside or avoidance under applicable
bankruptcy or insolvency laws, e.g., one year after any such deposit) after
the irrevocable deposit by the Issuer with the Trustee, in trust for the
benefit of the Holders, of (i) money in an amount, (ii) U.S. Government
Obligations which through the payment of interest and principal will provide,
not later than one day before the due date of payment in respect of the Notes,
money in an amount, or (iii) a combination thereof, sufficient to pay and
discharge the principal of, premium, if any, and interest on the Notes then
outstanding on the Stated Maturity Date or on the applicable redemption date,
as the case may be, and the Issuer must specify whether the Notes are being
defeased to the Stated Maturity Date or to a particular redemption date. Such
a trust may be established only if certain conditions are satisfied, including
delivery by the Issuer to the Trustee of an opinion of outside counsel
acceptable to the Trustee (who may be outside counsel to the Issuer) to the
effect that (i) the defeasance and discharge will not be deemed, or result in,
a taxable event
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for Federal income tax purposes, with respect to the Holders, (ii) the
Issuer's deposit will not result in the Issuer or any Guarantor, the trust or
the Trustee being subject to regulation under the Investment Company Act of
1940, and (iii) after the passage of 90 days (or any greater period of time in
which any such deposit of trust funds may remain subject to bankruptcy or
insolvency laws insofar as those laws apply to the Issuer or any Guarantor)
following the deposit of the trust funds, such funds will not be subject to
set aside or avoidance under any bankruptcy, insolvency, or other similar laws
affecting creditors' rights generally. The Indenture will not be discharged
if, among other things, an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Issuer or any Guarantor shall
have occurred and be continuing on the date of such deposit. The Indenture,
the Parent Guarantee, any Subsidiary Guarantee and each of the Security
Documents will cease to be of further effect as to all outstanding Notes when
(i) all outstanding Notes have been delivered to the Trustee for cancellation
or (ii) the Issuer has paid or caused to be paid the principal of, premium, if
any, and interest on the Notes.
RULE 144A INFORMATION REQUIREMENT
The Issuer and SRH have agreed to furnish to the Holders or beneficial
Holders of the Old Notes and prospective purchasers of the Old Notes
designated by the Holders of the Old Notes, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Exchange Act until such time as the Issuer either exchanges all of the Old
Notes for the Exchange Notes or has registered all of the Old Notes for resale
under the Exchange Act.
REPORTS
The Indenture requires SRH to furnish to the Trustee, within 60 days after
the end of each fiscal quarter or 90 days after the end of a fiscal quarter
that is also the end of a fiscal year, an officers' certificate to the effect
that responsible officers of SRH have conducted or supervised a review of the
activities of SRH and its Subsidiaries and of performance under the Indenture
and that, to the best of such officers' knowledge, based on their review, SRH
and the Issuer have fulfilled all of their obligations under the Indenture or,
if there has been a Default, specifying each Default known to them, its nature
and its status. SRH and the Issuer will also be required to notify the Trustee
of any changes in the composition of the Board of Directors of SRH or any of
its Subsidiaries or of any amendment to the charter or bylaws of SRH or any of
its Subsidiaries.
Each of SRH and its Subsidiaries, where applicable, shall deliver to the
Trustee and to each Holder, within 15 days after it files them with the SEC,
copies of all reports and information that it is required to file with the SEC
pursuant to Section 13 or 15(d) of the Exchange Act. In addition, whether or
not required by the rules and regulations of the SEC, SRH will file a copy of
all such information with the SEC for public availability (unless the SEC will
not accept such a filing) and make such information available to investors or
prospective investors who request it in writing.
Concurrently with the reports delivered pursuant to the preceding paragraph,
SRH will be required to deliver to the Trustee and to each Holder annual and
quarterly financial statements with appropriate footnotes of SRH and its
consolidated Subsidiaries, all prepared and presented in a manner
substantially consistent with those of SRH required by the preceding
paragraph.
The Issuer is required upon becoming aware of any Default or Event of
Default to deliver to the Trustee a statement specifying such Default or Event
of Default.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Issuer, SRH and the Trustee
to enter into a supplemental indenture or amend the Security Documents for
certain limited purposes without the consent of the Holders, including curing
ambiguities, defects or inconsistencies, releasing Subsidiary Guarantees as
described under "--Ranking and Guarantees" or making any other change with
respect to matters arising under the Indenture, so long as such change does
not adversely affect the rights of any of the Holders. With the consent of the
Holders of not less than a majority of the principal amount of the Notes then
outstanding, the Issuer, SRH and the Trustee
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will be permitted to amend or supplement the Indenture or any Security
Document or enter into any supplemental indenture or modify the rights of the
Holders; provided that no such modification may, without the consent of the
Holders of not less than 66% of the principal amount of the Notes then
outstanding, (i) prior to the date on which a Change of Control Offer is
required to be made, reduce the Change of Control Purchase Price or alter the
provisions of the covenant described herein under the heading "Repurchase of
Notes at the Option of the Holder Upon a Change of Control," or (ii) prior to
the date upon which an Excess Cash Offer is required to be made, reduce the
Excess Cash Offer Price or alter the provisions of the covenant described
herein under the heading "Limitation on Asset Sales," in a manner adverse to
the Holders; provided further, that no such modification may, without the
consent of each Holder: (i) change the stated maturity date or the date any
installment of principal of, or any installment of interest on, any Note is
due, or reduce the principal amount thereof or the rate of interest thereon or
any premium payable upon the redemption thereof, or change the place of
payment where, or the coin or currency in which, any Note or any premium or
the interest thereon is payable or impair the right to institute suit for the
enforcement of any such payment on or after the stated maturity date thereof
(or, in the case of redemption, on or after the redemption date), or, (x)
after the date upon which a Change of Control Offer is required to be made,
reduce the Change of Control Purchase Price or alter the provisions of the
covenant described herein under the heading "Repurchase of Notes at the Option
of the Holder Upon a Change of Control" or (y) after the date upon which an
Excess Cash Offer is required to be made, reduce the Excess Cash Offer Price
or alter the provisions of the covenant described herein under the heading
"Limitation on Asset Sales" in a manner adverse to the Holders, (ii) reduce
the percentage of the outstanding Notes whose consent is required for any such
amendment, supplemental indenture, or waiver provided for in the Indenture,
(iii) modify certain of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of all Holders of the Notes, (iv)
adversely affect the ranking of the Notes, the Parent Guarantee or the
Subsidiaries Guarantees; or (v) release any Collateral from the Liens created
pursuant to the Security Documents or release the Parent Guarantee or any
Subsidiary Guarantee, in any case otherwise than in accordance with the terms
of the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuer or any Guarantor, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interests, it must eliminate such conflict within 90 days, apply
to the SEC for permission to continue or resign.
The Holders of a majority of the principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of the Notes.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS OR DIRECTORS
No stockholder, officer, or director, as such, past, present, or future of
SRH or any of its Subsidiaries or any successor corporation of any of them
shall have any personal liability in respect of the obligations of SRH or such
Subsidiary under the Notes, the Indenture, the Parent Guarantee, any
Subsidiary Guarantees or any Security Document by reason of his or its status
as such stockholder, officer, or director.
GOVERNING LAW
The Indenture, the Notes, the Parent Guarantee, any Subsidiary Guarantees
and the Security Documents are governed by the laws of the State of New York.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms contained in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Adjusted Consolidated Net Income" of SRH for any period means the Net
Income (loss) of SRH and its Restricted Subsidiaries for such period,
determined in accordance with GAAP, excluding (without duplication) the Net
Income of Red Oak or any other Unrestricted Subsidiary which is a consolidated
Subsidiary for such period, reduced by the amount of the deduction from Net
Income of SRH attributable to the minority interest in Red Oak or any other
Unrestricted Subsidiary which is a consolidated Subsidiary for such period.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (a) the sum of (i) discounted future net revenue
from proved oil and gas reserves of SRH and its Restricted Subsidiaries
calculated in accordance with SEC guidelines before any state or federal
income taxes, as estimated or audited by independent petroleum engineers in
one or more Reserve Reports prepared as of the end of SRH's most recently
completed fiscal year as increased by, as of the date of determination, the
discounted future net revenue of (A) estimated proved oil and gas reserves of
SRH and its Restricted Subsidiaries attributable to any acquisition
consummated since the effective date of such year-end Reserve Reports and (B)
estimated oil and gas reserves of SRH and its Restricted Subsidiaries
attributable to extensions, discoveries and other additions and upward
revisions of estimates of proved oil and gas reserves due to exploration,
development or exploitation, production or other activities conducted or
otherwise occurring since the effective date of such year-end Reserve Reports
which, in the case of sub-clauses (A) and (B), would, in accordance with
standard industry practice, result in such increases, in each case calculated
in accordance with SEC guidelines (utilizing the prices and costs utilized in
such year-end Reserve Reports), and decreased by, as of the date of
determination, the discounted future net revenue of (C) estimated proved oil
and gas reserves of SRH and its Restricted Subsidiaries produced or disposed
of since the effective date of such year-end Reserve Reports and (D)
reductions in the estimated oil and gas reserves of SRH and its Restricted
Subsidiaries since the effective date of such year-end Reserve Reports
attributable to downward revisions of estimates of proved oil and gas reserves
due to exploration, development or exploitation, production or other
activities conducted or otherwise occurring since the effective date of such
year-end Reserve Reports which would, in accordance with standard industry
practice, result in such revisions, in each case calculated in accordance with
SEC guidelines (utilizing the prices utilized in such year-end Reserve
Reports); provided that, in the case of each of the determinations made
pursuant to sub-clauses (A) through (D) above, such increases and decreases
shall be as estimated by SRH's engineers, except that if there is a Material
Change and in connection with the Incurrence of Indebtedness for which the
Consolidated Fixed Charge Coverage Ratio must be determined, all or any part
of an increase in discounted future net revenue resulting from the matters
described in sub-clauses (A) and (B) above is needed to permit the Incurrence
of such Indebtedness, then the discounted future net revenue utilized for
purposes of this clause (a) (i) shall be confirmed in writing by independent
petroleum engineers, provided further that, if the events referred to in sub-
clauses (C) and (D) above, when taken alone, would not cause a Material
Change, then such written confirmation need only cover the incremental
additions to discounted future net revenue resulting from the determinations
made pursuant to sub-clauses (A) and (B) above to the extent needed to permit
the Incurrence of such Indebtedness, (ii) the capitalized costs that are
attributable to oil and gas properties of SRH and its Restricted Subsidiaries
to which no proved oil and gas reserves are attributed, based on SRH's books
and records as of a date no earlier than the date of SRH's latest annual or
quarterly financial statements, (iii) the Net Working Capital on a date no
earlier than the date of SRH's latest annual or quarterly financial statements
and (iv) the greater of (A) the net book value on a date no earlier than the
date of SRH's latest annual or quarterly financial statements and (B) the
appraised value, as estimated by independent appraisers, of other tangible
assets (including the amount of Investments in unconsolidated Subsidiaries,
Affiliates, other Persons or Unrestricted Subsidiaries) of SRH and its
Restricted Subsidiaries, as of a date no earlier than the date of SRH's latest
audited financial statements, minus (b) the sum of (i) minority interests,
(ii) any non-current portion of gas balancing liabilities of SRH and its
Restricted Subsidiaries reflected in SRH's latest annual or quarterly
financial statements, (iii) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the prices utilized in SRH's year-
end
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Reserve Reports), attributable to reserves which are required to be delivered
to third parties to fully satisfy the obligations of SRH and its Restricted
Subsidiaries with respect to Production Payments on the schedules specified
with respect thereto, (iv) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices utilized in SRH's
initial or year-end Reserve Reports), 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 and (v) the amount of environmental liabilities
payable by SRH or any Restricted Subsidiary. If SRH changes its method of
accounting from the full cost method to the successful efforts method or a
similar method of accounting, Adjusted Consolidated Net Tangible Assets will
continue to be calculated as if SRH was still using the full cost method of
accounting.
"Affiliate" means (i) any Person, directly or indirectly, controlling or
controlled by or under direct or indirect common control with SRH or any
Subsidiary of SRH or any officer, director, or employee of SRH or any
Subsidiary of SRH or of such Person, (ii) the spouse, any immediate family
member, or any other relative who has the same principal residence of any
Person described in clause (i) above, and any Person, directly or indirectly,
controlling or controlled by or under direct or indirect common control with,
such spouse, family member or other relative, and (iii) any trust in which any
Person described in clause (i) or (ii), above, is a fiduciary or has a
beneficial interest. For purposes of this definition the term "control" means
(a) the power to direct the management and policies of a Person, directly or
through one or more intermediaries, whether through the ownership of voting
securities, by contract, or otherwise, or (b) the beneficial ownership of 10%
or more of the voting common equity of such Person (on a fully diluted basis)
or of warrants or other rights to acquire such equity (whether or not
presently exercisable).
"Asset Sale" means (i) any direct or indirect conveyance, sale, transfer or
other disposition (including through damage or destruction for which Insurance
Proceeds are paid or by condemnation), in one transaction or a series of
related transactions, of any of the properties, businesses or assets of SRH or
any Restricted Subsidiary, whether owned on the Issue Date or thereafter
acquired or (ii) any sale or other disposition by SRH of any Capital Stock of
any Affiliate, Unrestricted Subsidiary or any Subsidiary of SRH or its
Restricted Subsidiaries (other than the Issuer). Notwithstanding the
foregoing, the following will not be deemed to be an Asset Sale: (a) the
conveyance, sale, lease, transfer or other disposition by any of SRH's
Restricted Subsidiaries of any or all of its assets (upon voluntary
liquidation or otherwise) to SRH; (b) the conveyance, sale, lease, transfer or
other disposition by any Restricted Subsidiary of any or all of its assets
(upon voluntary liquidation or otherwise) to another Restricted Subsidiary;
(c) non-material dispositions of assets in the ordinary course of business;
(d) Asset Sales not otherwise permitted by clauses (a) through (c) or (f) and
(g) of this sentence provided that the aggregate proceeds from all such Asset
Sales do not exceed $2.5 million in any twelve-month period; (e) the
disposition of all or substantially all of the assets of (i) SRH and its
Restricted Subsidiaries, taken as a whole, or (ii) the Issuer, if such
disposition is governed by the provisions of the covenant captioned
"Repurchase of Notes at the Option of Holder Upon a Change of Control"
and/or--"Covenants--Limitation on Merger, Sale or Consolidation;" (f) a
conveyance, sale, assignment, lease, license, transfer, abandonment or other
disposal by SRH and its Restricted Subsidiaries of (i) damaged, worn out,
unserviceable or other obsolete property in the ordinary course of business or
(ii) other property no longer necessary for the proper conduct of their
business; and (g) the conveyance, sale, transfer or otherwise disposition by
SRH and its Restricted Subsidiaries of crude oil and natural gas production
and refined products in the ordinary course of business.
"Attributable Indebtedness" in respect of a Sale and Leaseback Transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP
or, in the event that such rate of interest is not reasonably determinable,
discounted at the rate of interest borne by the Notes) of the obligation of
the lessee for net rental payments during the remaining term of the lease
included in such Sale and Leaseback Transaction (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended).
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the cities of New York, New York, Hartford,
Connecticut or Boston, Massachusetts are required or authorized by law or
other governmental action to be closed.
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"Capital Expenditures" of a Person means expenditures (whether paid in cash
or accrued as a liability) by such Person or any of its Subsidiaries that, in
conformity with GAAP, are or would be included in "capital expenditures,"
"additions to property, plant, or equipment" or comparable items in the
consolidated financial statements of such Person consistent with prior
accounting practices.
"Capital Stock" means, with respect to any Person, any capital stock of such
Person and shares, interests, participations, or other ownership interests
(however designated) of such Person and any rights (other than debt securities
convertible into corporate stock), warrants or options to purchase any of the
foregoing, including without limitation, each class of common stock and
preferred stock of such Person, if such Person is a corporation, and each
general or limited partnership interest or other equity interest of such
Person, if such Person is a partnership or limited liability company.
"Capitalized Lease Obligation" means obligations under a lease that are
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations, as determined in accordance with
GAAP.
"Cash Equivalents" means (a) United States dollars, (b) securities issued or
directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (c) certificates of deposit with maturities
of one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year, and overnight bank deposits, in each case,
with any Eligible Institution, (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (b) and (c) entered into with any Eligible Institution, (e) commercial
paper rated "P-l," "A-l" or the equivalent thereof by Moody's Investors
Service, Inc. or Standard & Poor's Ratings Service, respectively, and in each
case maturing within 180 days after the date of acquisition, (f) shares of
money market funds, including those of the Trustee, that invest solely in
United States dollars and securities of the types described in clauses (a)
through (e), and (g) demand and time deposits and certificates of deposit with
an Eligible Institution or with commercial banks insured by the Federal
Deposit Insurance Corporation.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by merger
or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of SRH and its Restricted Subsidiaries, taken
as a whole, to any person (as such term is used in Section 13(d)(3) of the
Exchange Act) other than to SRH or a Subsidiary Guarantor; (ii) the sale,
lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Issuer
to any person (as such term is used in Section 13(d)(3) of the Exchange Act)
other than to SRH or a Subsidiary Guarantor; (iii) SRH or the Issuer
consolidates with or merges into another Person or any Person consolidates
with, or merges into, SRH or the Issuer, in any such event pursuant to a
transaction in which the outstanding Voting Stock of SRH or the Issuer is
changed into or exchanged for cash, securities or other property, other than
any such transaction where (a) the outstanding Voting Stock of SRH or the
Issuer is changed into or exchanged for Voting Stock of the surviving or
resulting Person that is Qualified Capital Stock and (b) the holders of the
Voting Stock of SRH or the Issuer immediately prior to such transaction own,
directly or indirectly, not less than a majority of the Voting Stock of the
surviving or resulting Person immediately after such transaction; (iv) the
adoption of a plan relating to the liquidation or dissolution of SRH or the
Issuer not involving a merger or consolidation or a sale or other disposition
of assets described in clause (i) or (ii) above; (v) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person (as defined above), excluding the Permitted
Holders, becomes the "beneficial owner" (as that term is used in Rules 13d-3
and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of
the total voting power of SRH's or the Issuer's then outstanding Voting Stock;
provided that the sale of Voting Stock of SRH or the Issuer to a Person or
Persons acting as underwriters in connection with a firm commitment
underwriting shall not constitute a Change of Control; or (vi) the first day
on which a majority of the members of the Board of Directors of SRH are not
Continuing Directors (other than by action of the Permitted Holders). For
purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring Voting Stock of SRH or the Issuer
will be deemed to be a transfer of such portion of such Voting Stock as
corresponds to the portion of the equity of such entity that has been so
transferred.
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"Change of Control Offer" shall have the meaning given to it under the
covenant--"Repurchase of Notes at the Option of the Holder Upon a Change of
Control."
"Change of Control Purchaser Price" shall have the meaning given to it under
the covenant--"Repurchase of Notes at the Option of the Holder Upon a Change
of Control."
"Collateral" shall mean the Capital Stock of Sierra and Red Oak directly
owned by SRH and any other property described in the Pledge Agreement or any
other Security Documents as being subject to the Liens created thereby.
"Consolidated Fixed Charge Coverage Ratio" on any date means, with respect
to SRH, the ratio, on a pro forma basis, of (i) the aggregate amount of EBITDA
attributable to continuing operations and businesses and exclusive of the
amounts attributable to operations and businesses discontinued or disposed of,
on a pro forma basis as if such operations and businesses were discontinued or
disposed of on the first day of the Reference Period, for the Reference Period
to (ii) the aggregate Consolidated Interest Expense (exclusive of amounts
attributable to discontinued operations and businesses on a pro forma basis as
if such operations and businesses were discontinued or disposed of on the
first day of the Reference Period, but only to the extent that the obligations
giving rise to such Consolidated Interest Expense would no longer be
obligations contributing to Consolidated Interest Expense subsequent to the
date of discontinuation or disposal) during the Reference Period; provided,
that for purposes of such computation, in calculating EBITDA and Consolidated
Interest Expense, (a) the transaction giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio shall be assumed to have occurred on
the first day of the Reference Period, (b) the Incurrence of any Indebtedness
or issuance of Disqualified Capital Stock or the retirement of any
Indebtedness or Capital Stock during the Reference Period or subsequent
thereto shall be assumed to have occurred on the first day of such Reference
Period, and (c) Consolidated Interest Expense attributable to any Indebtedness
(whether existing or being incurred) bearing a floating interest rate shall be
computed as if the rate in effect on the date of determination had been the
applicable rate for the entire period, unless SRH or any of its Restricted
Subsidiaries is a party to a Swap Obligation (that remains in effect for the
12-month period after the date of determination) that has the effect of fixing
the interest rate on the date of computation, in which case such rate (whether
higher or lower) shall be used.
"Consolidated Interest Expense" of SRH means, for any period, the aggregate
interest expense (without duplication), during such period in respect of all
Indebtedness of SRH and its Restricted Subsidiaries (including all
commissions, discounts, other fees and charges owed with respect to letters of
credit and banker's acceptance financing and costs associated with Swap
Obligations, but excluding any interest accrued on intercompany payables among
SRH and its Restricted Subsidiaries or among Restricted Subsidiaries for taxes
to the extent the liability for such taxes has been assumed pursuant to the
Tax Sharing Agreement) determined on a consolidated basis in accordance with
GAAP. For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
to be the rate of interest implicit in such Capitalized Lease Obligation in
accordance with GAAP (including Statement of Financial Accounting Standards
No. 13 of the Financial Accounting Standards Board), and (y) Consolidated
Interest Expense attributable to any Indebtedness represented by the guarantee
by SRH or a Restricted Subsidiary of such Person other than with respect to
Indebtedness of SRH or a Restricted Subsidiary of SRH shall be deemed to be
the interest expense attributable to the item guaranteed.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of SRH who (i) was a member of such Board of Directors
on the Issue Date or (ii) was nominated for election or elected to such Board
of Directors with the approval of a majority of the Continuing Directors who
were members of such Board of Directors at the time of such nomination or
election.
"Default" means an event or condition, the occurrence of which is, or with
the lapse of time or giving of notice or both would be, an Event of Default.
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"Disqualified Capital Stock" means with respect to any Person any Capital
Stock of such Person or its Subsidiaries that, by its terms or by the terms of
any security into which it is convertible or exchangeable, is, or upon the
happening of an event or the passage of time would be, required to be redeemed
or repurchased by such Person or its Subsidiaries, including at the option of
the holder, in whole or in part, or has, or upon the happening of an even or
passage of time would have, a redemption or similar payment due, on or prior
to the Stated Maturity Date.
"EBITDA" means for any period the sum of the Adjusted Consolidated Net
Income of SRH for such period, plus the sum, without duplication (and only to
the extent such amounts are deducted from net revenues in determining such
Adjusted Consolidated Net Income), of (i) the provision for income taxes for
such period for SRH, (ii) depreciation, depletion, and amortization of SRH for
such period and (iii) Consolidated Interest Expense for such period,
determined, in each case, on a consolidated basis for SRH and its consolidated
Subsidiaries otherwise in accordance with GAAP.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million and that is rated
"A" (or higher) according to Moody's Investors Service, Inc. or Standard &
Poor's Ratings Service at the time as of which any investment or rollover
therein is made.
"Equity Offering" means any Public Equity Offering or other bona fide sale
of Qualified Capital Stock of Sierra and/or Red Oak to any Person (other than
SRH or any Affiliate) resulting in Net Proceeds to SRH in excess of
$15,000,000.
"Excess Cash Acceptance Amount" shall have the meaning given to it in the
covenant described herein under the heading "--Covenant--Limitation on Asset
Sales."
"Excess Cash Offer" shall have the meaning given to it under the heading "--
Covenant--Limitation on Asset Sales."
"Excess Cash Offer Amount" shall have the meaning given to it in the
covenant described herein under the heading "--Covenant--Limitation on Asset
Sales."
"Excess Cash Offer Price" shall have the meaning given to it in the covenant
described herein under the heading "--Covenant--Limitation on Asset Sales."
"Excess Cash Purchase Date" shall have the meaning given to it in the
covenant described herein under the heading "--Covenant--Limitation on Asset
Sales."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Exchange Assets" means assets acquired by SRH or any Restricted Subsidiary
in exchange for assets of SRH or any Restricted Subsidiary in connection with
an Asset Sale, which acquired assets include proved reserves with a value
that, together with the cash or Cash Equivalents received therefor by SRH or
such Restricted Subsidiary, is equal to or greater than the value of the
proved reserves included in the assets disposed of by SRH or such Restricted
Subsidiary in connection with such Asset Sale; provided, that (i) ownership of
such assets does not violate the covenant "Limitation on Lines of Business"
and (ii) during any fiscal year, SRH and its Restricted Subsidiaries can
collectively acquire assets (other than proved reserves, cash or Cash
Equivalents) with a fair market value of up to $500,000 in exchange for assets
of SRH and the Restricted Subsidiaries with proved reserves, and such assets
acquired by such Person shall constitute "Exchange Assets" hereunder.
"GAAP" means generally accepted accounting principles as in effect in the
United States on the Issue Date applied on a basis consistent with that used
in the preparation of the audited financial statements of SRH included in this
Prospectus.
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"Guarantors" means SRH and each Subsidiary Guarantor.
"Holders" means any Person from time to time in whose name any Note is
registered on the Note Register.
"Hydrocarbons" means oil, natural gas, condensate, and natural gas liquids.
"Indebtedness" means, with respect to any Person, without duplication (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property acquired by
such Person or services received by such Person, but excluding trade account
payables and accrued liabilities arising in the ordinary course of business
that are not overdue by 90 days or being contested in good faith by
appropriate proceedings, promptly instituted and diligently pursued, (c)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks or Swap Obligations, (d) for the payment of money relating to a
Capitalized Lease Obligation, (e) for the Attributable Indebtedness associated
with any Sale and Leaseback Transaction or (f) for Production Payments that
such Person or any of its Restricted Subsidiaries elect to treat as
Indebtedness; (ii) reimbursement obligations of such Person with respect to
letters of credit; (iii) all liabilities of others of the kind described in
the preceding clause (i) or (ii) that such Person has guaranteed or that is
otherwise its legal liability (to the extent of such guaranty or other legal
liability) other than for endorsements, with recourse, of negotiable
instruments in the ordinary course of business; and (iv) all obligations
secured by a Lien (other than Permitted Liens, except to the extent the
obligations secured by such Permitted Liens are otherwise included in clause
(i), (ii) or (iii) of this definition and are obligations of such Person) to
which the property or assets (including, without limitation, leasehold
interests and any other tangible or intangible property rights) of such Person
are subject, regardless of whether the obligations secured thereby shall have
been assumed by or shall otherwise be such Person's legal liability (but, if
such obligations are not assumed by such Person or are not otherwise such
Person's legal liability, the amount of such Indebtedness shall be deemed to
be limited to the fair market value of such property or assets determined as
of the end of the preceding fiscal quarter).
"Insurance Proceeds" means the interest in and to all proceeds (net of costs
of collection, including attorneys' fees) which now or hereafter may be paid
under any insurance policies now or hereafter obtained by or on behalf of SRH
or any Restricted Subsidiary in connection with any assets thereof, together
with interest payable thereon and the right to collect and receive the same,
including, without limitation, proceeds of casualty insurance, title
insurance, business interruption insurance and any other insurance now or
hereafter maintained with respect to such assets.
"Interest Rate or Currency Agreement" of any Person means any forward
contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars, puts and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates.
"Investment" by any Person in any other Person means (a) the acquisition
(whether for cash, property, services, securities or otherwise) of capital
stock, bonds, notes, debentures, partnership, or other ownership interests or
other securities of such other Person or any agreement to make any such
acquisition; (b) the making by such Person of any deposit with, or advance,
loan or other extension of credit to, such other Person (including the
purchase of property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
Person) and (without duplication) any amount committed to be advanced, loaned
or extended to such other Person; (c) the entering into of any guarantee of,
or other contingent obligation with respect to, Indebtedness or other
liability of such other Person; (d) the entering into of any Swap Obligation
with such other Person; or (e) the making of any capital contribution by such
Person to such other Person.
"Investment Grade Rating" means with respect to any Person or issue of debt
securities or preferred stock, a rating in one of the four highest letter
rating categories (without regard to "+" or "-" or other modifiers) by
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any rating agency or if any such rating agency has ceased using letter rating
categories or the four highest of such letter rating categories are not
considered to represent "investment grade" ratings, then the comparable
"investment grade" ratings (as designated by any such rating agency).
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means any mortgage, lien, pledge, charge, security interest, or other
encumbrance of any kind, regardless of whether filed, recorded, or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement and any lease deemed to constitute a security interest and
any option or other agreement to give any security interest).
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than either (i) 10% from the end
of the immediately preceding fiscal quarter in the estimated discounted future
net revenue from proved oil and gas reserves of SRH and its Restricted
Subsidiaries, or (ii) 20% from the end of the immediately preceding year in
the estimated discounted future net revenue from proved oil and gas reserves
of SRH and its Restricted Subsidiaries, in each case 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: (a) any acquisitions of oil and gas reserves
made after the end of the immediately preceding year for which the discounted
future net revenues have been estimated by independent petroleum engineers
since the end of the preceding year and on which a Reserve Report or Reserve
Reports exist and (b) any disposition of properties existing at the beginning
of the current quarter or current year, as the case may be, for purposes of
clause (i) or clause (ii) above, that have been disposed of in accordance with
the covenant "Limitation on Asset Sales."
"Net Cash Proceeds" means an amount equal to the aggregate amount of cash
and Cash Equivalents received by SRH or any Restricted Subsidiary in respect
of an Asset Sale, less the sum of (i) all reasonable out-of-pocket fees,
commissions, and other expenses incurred in connection with such Asset Sale,
including the amount (estimated in good faith by SRH) of income, franchise,
sales and other applicable taxes to be paid, payable or accrued by SRH or such
Restricted Subsidiary (in each case as estimated in good faith by SRH without
giving effect to tax attributes unrelated to such Asset Sale) in connection
with such Asset Sale, and (ii) the aggregate amount of cash and Cash
Equivalents so received which is used to retire any then existing Indebtedness
of SRH or such Restricted Subsidiary (other than the Notes), as the case may
be, which is secured by a Lien on the property subject of the Asset Sale or
which is required by the terms of such Indebtedness to be repaid in connection
with such Asset Sale.
"Net Income" of any Person for any period means the net income (loss) of
such Person for such period, determined on a consolidated basis in accordance
with GAAP, excluding (without duplication) (i) all extraordinary, unusual and
nonrecurring gains, (ii) the net income, if positive, of any other Person, in
which such Person or any of its consolidated Subsidiaries has an interest,
except to the extent of the amount of any dividends or distributions actually
paid in cash to such Person or a consolidated Subsidiary of such Person during
such period, (iii) the net income, if positive, of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition and (iv) the net income, if positive, of any Subsidiary of such
Person to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule,
or governmental regulation applicable to such Subsidiary.
"Net Proceeds" means (a) in the case of any sale by a Person of Qualified
Capital Stock or other securities, the aggregate net cash proceeds received by
such Person from the sale of such securities (other than to a Restricted
Subsidiary) after payment of reasonable out-of-pocket expenses, commissions
and discounts incurred in connection therewith, and (b) in the case of any
exchange, exercise, conversion or surrender of any outstanding securities or
Indebtedness of such Person for or into shares of Qualified Capital Stock of
such Person, the net book value of such outstanding securities as adjusted on
the books of such Person or Indebtedness of such Person to the extent recorded
in accordance with GAAP, in each case, on the date of such exchange, exercise,
conversion
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or surrender (plus any additional amount required to be paid by the holder of
such Indebtedness or securities to such Person upon such exchange, exercise,
conversion or surrender and less (i) any and all payments made to the holders
of such Indebtedness or securities and (ii) all other expenses incurred by
such Person in connection therewith, in each case, in so far as such payments
or expenses are incident to such exchange, exercise, conversion, or
surrender).
"Net Working Capital" of any Person means (i) all current assets of such
Person and its Restricted Subsidiaries, minus (ii) all current liabilities of
such Person and its consolidated Subsidiaries other than the current portion
of long term Indebtedness, each item to be determined on a consolidated basis
in conformity with GAAP.
"Net Worth" of any Person means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of such Person and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts included therein attributable to Disqualified
Capital Stock or any equity security convertible into or exchangeable for
Indebtedness, the cost of treasury stock (not otherwise deducted from
stockholder's equity), and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of such Person or any of its
Restricted Subsidiaries each item to be determined in conformity with GAAP.
"Note Register" means the register maintained by or for the Issuer in which
the Issuer shall provide for the registration of the Notes and the transfer of
the Notes.
"Parent Guarantee" means an unconditional senior guarantee of the Notes
given by SRH pursuant to the terms of the Indenture.
"Parent Guarantor" means SRH, which will execute the Parent Guarantee.
"Permitted Bank Credit Facility" means, with respect to any Person, a
revolving credit and/or letter of credit facility with a commercial banking
institution, the proceeds of which are used for working capital and other
general corporate purposes, as the same may be amended, extended or refinanced
from time to time.
"Permitted Hedging Transactions" means non-speculative transactions in
futures, forwards, swaps or option contracts (including both physical and
financial settlement transactions) engaged in by SRH and its Restricted
Subsidiaries as part of their normal business operations as a risk-management
strategy or hedge against adverse changes in the prices of natural gas,
feedstock or refined products; provided, that such transactions do not in the
case of SRH and its Restricted Subsidiaries, on a monthly basis, relate to
more than 90% of their combined average net natural oil and gas production per
month for the most recent 3-month period measured at the time of such
transaction; provided, further, that, at the time of such transaction (i) the
counter party to any such transaction is an Eligible Institution or a Person
that has an Investment Grade Rating or has an issue of debt securities or
preferred stock outstanding with an Investment Grade Rating or (ii) such
counter party's obligation pursuant to such transaction is unconditionally
guaranteed in full by, or secured by a letter of credit issued by, an Eligible
Institution or a Person that has an Investment Grade Rating or that has an
issue of debt securities or preferred stock outstanding with an Investment
Grade Rating.
"Permitted Holders" means H.H. Wommack III (or his heirs, his estate or any
trust in which he or his immediate family members own, directly or indirectly,
a beneficial interest in excess of 50%).
"Permitted Indebtedness" means, without duplication, each of the following:
(a) the Indebtedness evidenced by the Notes, the Parent Guarantee or the
Subsidiary Guarantees; (b) Indebtedness owed by any Restricted Subsidiary to
SRH or any other Restricted Subsidiary or Indebtedness owed by SRH to any
Restricted Subsidiary; provided that, such Indebtedness is Subordinated
Indebtedness; (c) Indebtedness outstanding under a Permitted Bank Credit
Facility so long as the aggregate principal amount of all Indebtedness
outstanding under all Permitted Bank Credit Facilities for SRH and its
Restricted Subsidiaries does not exceed $50,000,000 less the amount of Net
Cash Proceeds from any Asset Sale applied pursuant to the covenant "Limitation
on Asset Sales" to repay or prepay such Indebtedness that results in a
permanent reduction relating thereto; (d) Swap
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Obligations of SRH or its Restricted Subsidiaries; (e) Indebtedness
outstanding on the Issue Date (and not repaid with the proceeds of the
Offering); (f) other Indebtedness owed by SRH or its Restricted Subsidiaries
in an aggregate principal amount outstanding not to exceed $1,000,000 at any
one time; and (g) Permitted Refinancing Indebtedness.
"Permitted Investment" means, when used with reference to SRH or any
Restricted Subsidiary, (i) trade credit extended to Persons in the ordinary
course of business; (ii) purchases of Cash Equivalents; (iii) Investments by
SRH or its Restricted Subsidiaries in Persons which are wholly-owned
Restricted Subsidiaries and are engaged in the oil and gas exploration and
production business; (iv) Swap Obligations; (v) advances to officers and
employees of the Company or any Restricted Subsidiary in connection with the
performance of their duties in the ordinary course of business in an amount
not to exceed $500,000 in the aggregate outstanding at any time; (vi) margin
deposits in connection with Permitted Hedging Transactions; (vii) any
Investments outstanding on the Issue Date and Investments in Red Oak by SRH on
the Issue Date in an amount not to exceed $10 million; (viii) Investments and
expenditures made in the ordinary course of business by SRH or its Restricted
Subsidiaries, 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, processing, gathering, marketing or transporting oil or
gas through agreements, transactions, interests or arrangements which permit a
Person to share risks or costs, comply with regulatory requirements regarding
local ownership or satisfy other objectives customarily achieved through the
conduct of the oil and gas business jointly with third parties, including,
without limitation, (a) ownership interests in oil and gas properties or
gathering systems and (b) Investments and expenditures 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 arrangements, 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; provided
that in the case of any joint venture engaged in processing, gathering,
marketing or transporting oil or gas (i) all Indebtedness of such joint
venture (other than a joint venture that is an Unrestricted Subsidiary) that
would not otherwise constitute Indebtedness of SRH or a Restricted Subsidiary
shall be deemed Indebtedness of such Person in proportion to its direct or
indirect ownership interest in such joint venture and (ii) such joint venture
shall be reasonably calculated to enhance the value of the reserves of such
Person or marketability of production from such reserves; (ix) other
Investments not in excess of $2 million at any time outstanding; (x) loans
made to officers, directors and employees of SRH or any of its Restricted
Subsidiaries approved by the applicable Board of Directors (or by an
authorized officer), the proceeds of which are used solely to purchase stock
or to exercise stock options received pursuant to an employee stock option
plan or other incentive plan, in a principal amount not to exceed the purchase
price of such stock or the exercise price of such stock options, as
applicable; and (xi) the repayment of Indebtedness not to exceed $500,000 in
conjunction with the acquisition of all the Capital Stock of Love Petroleum
Company.
"Permitted Liens" with respect to any Person means (a) Liens imposed by
governmental authorities for taxes, assessments, or other charges not yet due
or which are being contested in good faith and by appropriate proceedings, if
adequate reserves with respect thereto are maintained on the books of any of
such Person in accordance with GAAP; (b) statutory Liens of landlords,
carriers, warehousemen, mechanics, materialmen, repairmen, mineral interest
owners, or other like Liens arising by operation of law in the ordinary course
of business provided that (i) the underlying obligations are not overdue for a
period of more than 60 days, or (ii) such Liens are being contested in good
faith and by appropriate proceedings and adequate reserves with respect
thereto are maintained on the books of any of such Person in accordance with
GAAP; (c) deposits of cash or Cash Equivalents to secure the performance of
bids, trade contracts (other than borrowed money), leases, statutory
obligations, surety bonds, performance bonds, and other obligations of a like
nature incurred in the ordinary course of business (or to secure reimbursement
obligations or letters of credit issued to secure such performance or other
obligations); (d) easements, rights-of-way, zoning, similar restrictions and
other similar encumbrances or title defects incurred in the ordinary course of
business which, in the aggregate, are not material in amount and which do not,
in any case, materially detract from the value of the property subject thereto
or materially interfere with the ordinary conduct of the business of such
Person; (e) Liens securing Parent
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Guarantee, the Notes, any Subsidiary Guarantee or Permitted Bank Credit
Facilities; (f) pledges or deposits made in the ordinary course of business in
connection with worker's compensation, unemployment insurance, other types of
social security legislation, property insurance and liability insurance; (g)
Liens on the assets of any Person existing at the time such assets are
acquired by such Person, whether by merger, consolidation, purchase of assets
or otherwise so long as such Liens (A) are not created, incurred or assumed in
contemplation of such assets being acquired by such Person and (B) do not
extend to any other assets of such Person; (h) leases or subleases granted to
others that do not materially interfere with the ordinary course of business
of any of such Person, and (i) any extension, renewal or replacement of the
Liens created pursuant to any of clauses (a) through (h); provided that such
Liens would have otherwise been permitted under such clauses, and provided
further that the Liens permitted by this clause (i) do not secure any
additional Indebtedness or encumber any additional property.
"Permitted Refinancing Indebtedness" means any Indebtedness of a Person
issued in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund other Indebtedness of such
Person; provided that: (i) the principal amount (or accredited value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accredited value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness (other than Indebtedness under Permitted Bank Credit
Facilities) has a final maturity date later than the final maturity date of,
and has a weighted average life equal to or greater than the weighted average
life of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) with respect to
any such Indebtedness of SRH being extended, refinanced, renewed, replaced,
defeased or refunded, such Permitted Refinancing Indebtedness shall not be
incurred by any Restricted Subsidiary.
"Person" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state, or political subdivision thereof, trust, municipality,
or other entity.
"Pledge Agreement" means that certain Pledge Agreement by SRH in favor of
the Trustee pursuant to which the Capital Stock in Sierra and Red Oak owned by
SRH have been pledged to the Trustee, for the ratable benefit of the Holders
of the Notes.
"Preferred Stock" means, with respect to any Person, any class or classes
(however designated) of Capital Stock of such Person that 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.
"Production Payment" means any volumetric or dollar-denominated production
payment or other similar burden on the property of SRH or any of its
Restricted Subsidiaries.
"Public Equity Offering" means an underwritten public offering by a
nationally recognized member of the National Association of Securities Dealers
of Qualified Capital Stock of the Issuer or SRH pursuant to an effective
registration statement filed with the SEC pursuant to the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Red Oak" means Midland Red Oak Realty, Inc.
"Reference Period" with regard to any Person means the four full fiscal
quarters of such Person ended on or immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or the
Indenture.
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"Reserve Report" means a report prepared by independent petroleum engineers
with respect to Hydrocarbon reserves in accordance with guidelines published
by the SEC.
"Restricted Investment" means (i) the designation of a Subsidiary as an
Unrestricted Subsidiary in the manner described in the definition of
Unrestricted Subsidiary and (ii) any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of SRH (including the Issuer)
which is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means an arrangement relating to property
owned on the Issue Date or thereafter acquired whereby a Person or a
Subsidiary of such Person transfers such property to another Person and leases
it back from such other Person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the SEC promulgated thereunder.
"Security Documents" means the Pledge Agreement and each other agreement
evidencing the pledge of assets to secure the Parent Guarantee that may be
entered into on or after the Issue Date pursuant to the terms of the
Indenture.
"Sierra" means Sierra Well Service, Inc.
"Significant Subsidiary" means (a) any Restricted Subsidiary having (i) for
the most recent fiscal year of such Subsidiary, consolidated revenues greater
than $10 million or (ii) as at the end of such fiscal year of such Subsidiary,
assets or liabilities greater than $10 million and (b) any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary;
provided however, that "Significant Subsidiary" shall not include a joint
venture if and so long as an Investment therein would constitute a Permitted
Investment under clause (viii) of the definition thereof.
"Southwest Software" means Midland Southwest Software, Inc.
"Stated Maturity Date" means October 15, 2004.
"Subordinated Indebtedness" means Indebtedness of the Issuer, SRH or a
Subsidiary Guarantor that (i) requires no payment of principal prior to or on
the Stated Maturity Date and (ii) is expressly subordinate and junior in right
of payment to the Notes, the Parent Guarantee or the Subsidiary Guarantees, as
the case may be.
"Subsidiary" with respect to any Person means (i) a corporation with respect
to which such Person or its Subsidiaries own, directly or indirectly, at least
50% of such corporation's Voting Stock, or (ii) a partnership in which such
Person or a Subsidiary of such Person is, at the time, a general partner of
such partnership and has more than 50% of the total voting power of
partnership interests, or (iii) any other Person (other than a corporation or
a partnership) in which such Person, one or more Subsidiaries of such Person,
or such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof has (x) at least a 50%
ownership interest or (y) the power to elect or direct the election of the
directors or other governing body of such other Person.
"Subsidiary Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor.
"Subsidiary Guarantor" means each Subsidiary that becomes a Subsidiary
Guarantor of the Notes in compliance with the provisions of the Indenture.
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"Swap Obligation" of any Person means any Interest Rate or Currency
Agreement entered into with one or more financial institutions or one or more
futures exchanges in the ordinary course of business and not for purposes of
speculation that is designed to protect such Person against fluctuations in
(x) interest rates with respect to Indebtedness Incurred and which shall have
a notional amount no greater than 100% of the principal amount of the
Indebtedness being hedged thereby or (y) currency exchange rate fluctuations.
"Tax Sharing Agreement" means the Tax Sharing Agreement, dated as of
September 1, 1997, among SRH and other Subsidiaries, as in effect on the Issue
Date and as amended from time to time, provided that any such amendment is not
materially adverse to the Holders of the Notes.
"TPI" means Threading Products International, LLC.
"Unrestricted Non-Recourse Indebtedness" of any Unrestricted Subsidiary
means (i) Indebtedness of such Person that is secured solely (other than with
respect to clause (ii) below) by a Lien upon the stock of an Unrestricted
Subsidiary of such Person and as to which there is no recourse (other than
with respect to clause (ii) below) against such Person or any of its assets
other than against such stock (and the dollar amount of any Indebtedness of
such Person as described in this clause (i) shall be deemed to be zero for
purposes of all other provisions of the Indenture) and (ii) guarantees of the
Indebtedness of Unrestricted Subsidiaries of such Person.
"Unrestricted Subsidiary" means, in respect of SRH, Red Oak; and in respect
of any Person, any other Person ("Other Person") that would, but for this
definition of "Unrestricted Subsidiary" be a Subsidiary of such Person
organized or acquired after the Issue Date as to which all of the following
conditions apply: (i) neither such Person nor any of its other Subsidiaries
provides credit support of any Indebtedness of such Other Person (including
any undertaking, agreement or instrument evidencing such Indebtedness); (ii)
such Other Person is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness; (iii) neither
such Person nor any of its Subsidiaries has made an Investment in such Other
Person unless such Investment was permitted by the provisions described under
"--Covenants--Limitation on Restricted Payments;" and (iv) the Board of
Directors of such Person, as provided below, shall have designated such Other
Person to be an Unrestricted Subsidiary on or prior to the date of
organization or acquisition of such Other Person. Any such designation by the
Board of Directors of such Person shall be evidenced to the Trustee by
delivering to the Trustee a resolution thereof giving effect to such
designation and an officers' certificate certifying that such designation
complies with the foregoing conditions.
"Unrestricted Subsidiary Indebtedness" means, as to any Unrestricted
Subsidiary of any Person, Indebtedness of such Unrestricted Subsidiary (i) as
to which neither such Person nor any Subsidiary of such Person is directly or
indirectly liable (by virtue of such Person or any such Subsidiary being the
primary obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), unless such liability constitutes Unrestricted Non-Recourse
Indebtedness and (ii) which, upon the occurrence of a default with respect
thereto, does not result in, or permit any holder (other than SRH or any
Subsidiary of SRH) of any Indebtedness of such Person or any Subsidiary of
such Person to declare a default on such Indebtedness of such Person or any
Subsidiary of such Person or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity Date, unless, in the case of this clause
(ii), such Indebtedness constitutes Unrestricted Non-Recourse Indebtedness.
"Voting Stock" means Capital Stock of a Person having generally the right to
vote in the election to directors of such Person.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes are represented by a
single, permanent global certificate in definitive, fully registered form (the
"Global Note"). The Global Note was deposited on October 14, with, or on
behalf of, The Depository Trust Company ("DTC") and registered in the name of
a nominee of DTC. The Global Note is subject to certain restrictions on
transfer set forth therein and bears the legend regarding such restrictions
set forth under "Notice to Investors."
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Notes (i) originally purchased by or transferred to "foreign purchasers" or
Accredited Investors who are not Qualified Institutional Buyers or (ii) held
by Qualified Institutional Buyers who elect to take physical delivery of their
certificates instead of holding their interest through the Global Note (and
which are thus ineligible to trade through DTC) (collectively referred to
herein as the "Non-Global Purchasers") will be issued in registered
certificated form ("Certificated Securities"). Upon the transfer to a
Qualified Institutional Buyer of any Certificated Security initially issued to
a Non-Global Purchaser, such Certificated Security will, unless the transferee
requests otherwise or the Global Note has previously been exchanged in whole
for Certificated Securities, be exchanged for an interest in the Global Note.
For a description of the restrictions on the transfer of Certificated
Securities and any interest in the Global Note, see "Notice to Investors."
Pursuant to procedures established by DTC (i) upon the issuance of the
Global Note, DTC or its custodian credited, on its internal system, the
principal amount of Notes of the individual beneficial interests represented
by such Global Note to the respective accounts for persons who have accounts
with DTC and (ii) ownership of beneficial interests in the Global Note is
shown on, and the transfer of such 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). Such accounts initially were designated by
or on behalf of the Initial Purchasers and ownership of beneficial interests
in the Global Note is limited to persons who have accounts with DTC
("participants") or persons who own interests through participants. Qualified
Institutional Buyers will hold their interests in the Global Note directly
through DTC, if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in any Global Note
will be able to transfer that interest except in accordance with DTC's
procedures in additional to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on, the Global Note will be made to DTC or its nominee,
as the case may be, as the registered owner thereof. None of the Issuer, the
Trustee or any paying agent of the Issuer will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Note, will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the Global Note as shown on the records of DTC or its
nominee. The Issuer also expects that payments by participants to owners of
beneficial interests in the Global Note held through such participants will be
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same day funds. If a
holder requires physical delivery of a Certified Security for any reason,
including to sell Notes to persons in states which require physical delivery
of the Certificated same day Securities, or to pledge such securities, such
holder must transfer its interest in the Global Note in accordance with the
normal procedures of DTC and with the procedures set forth in the Indenture.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described under "Exchange and Registration Rights Agreement") only at the
direction of one or more participants to whose account the interests in the
Global Note are credited and only in respect of such portion of the aggregate
principal amount of Notes as to which such participant or participants have
given such direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Note for Certificated Securities,
which it will distribute to its participants.
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DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under laws of the State of New York, 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. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations 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.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Issuer, the Initial Purchasers or 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.
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 Issuer
within 90 days, or at SRH's election at any time, Certificated Securities will
be issued in exchange for the Global Note.
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EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, SRH and the Issuer agreed to
file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to an offer to exchange
the Old Notes for the Exchange Notes. Upon the effectiveness of the Exchange
Offer Registration Statement, the Issuer will offer to the holders of Notes
who are able to make certain representations the opportunity to exchange their
Old Notes for Exchange Notes.
If (i) SRH and the Issuer are not permitted to file the Exchange Offer
Registration Statement or to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy or (ii)
any holder of Notes notifies the Issuer within the specified time period that
(A) due to a change in law or policy it is not entitled to participate in the
Exchange Offer, (B) due to a change in law or policy it may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by
holder or (C) it is a broker-dealer and owns Old Notes acquired directly from
the Issuer or an affiliate of SRH or the Issuer, SRH and the Issuer will file
with the Commission the Shelf Registration Statement to cover resales of the
Transfer Restricted Notes (as defined) by the holders thereof. SRH and the
Issuer will use their best efforts to cause the applicable registration
statement to be declared effective within specified periods by the Commission.
For purposes of the foregoing, "Transfer Restricted Notes" means each Old Note
until (i) the date on which such Old 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 an Old 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 Old Note has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement or (iv) the date on which such Old Note is
distributed to the public pursuant to Rule 144 under the Securities Act.
Under existing Commission interpretations, the Transfer Restricted Notes
would, in general, be freely transferable after the Exchange Offer without
further registration under the Securities Act; provided, however, that in the
case of broker-dealers participating in the Exchange Offer, a prospectus
meeting the requirements of the Securities Act will be delivered upon resale
by such broker-dealer in connection with resales of the Exchange Notes. SRH
and the Issuer have agreed, for a period of 180 days after consummation of the
Exchange Offer, to make available a prospectus meeting the requirements of the
Securities Act to any such broker-dealer for use in connection with any resale
of any Exchange Notes acquired in the Exchange Offer. A broker-dealer which
delivers such a prospectus to purchasers in connection with such resales will
be subject to certain of the civil liability provisions under the Securities
Act and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
Each holder of the Old Notes who wishes to exchange such Old Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii)
it is not participating in, and it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes and (iii) it is neither an "affiliate" of SRH or the
Issuer, as defined in Rule 405 of the Securities Act, nor a broker-dealer
tendering Old Notes acquired directly from the Issuer for its own account. If
the holder is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Old Notes that were acquired as a result of market-
making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, SRH and
the Issuer will file an Exchange Offer Registration Statement with the
Commission on or prior to 60 days after the date of original issuance of the
Notes (the "Closing Date"), (ii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, SRH and the Issuer will use
their best efforts to have the Exchange Offer Registration Statement declared
effective by the
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Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Issuer will commence the Exchange Offer and use commercially reasonable
best efforts to issue, on or prior to 30 business days after the date on which
the Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Notes tendered prior thereto in
the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, SRH and the Issuer will file on or prior to the later of (x) 90
days after the Closing Date or (y) 30 days after such filing obligation arises
and use their best efforts to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to 90 days after such
obligation arises; provided that if the Issuer has not consummated the
Exchange Offer within 180 days of the Closing Date, then SRH and the Issuer
will file the Shelf Registration Statement with the Commission on or prior to
the 181st day after the Closing Date and use its best efforts to cause the
Shelf Registration Statement to be declared effective within 60 days after
such filing. SRH and the Issuer will be required to use their best efforts to
keep such Shelf Registration Statement continuously effective, supplemented
and amended until the second anniversary of the Closing Date or such shorter
period that will terminate when all the Transfer Restricted Notes covered by
the Shelf Registration Statement have been sold pursuant thereto.
If (i) SRH and the Issuer fail to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (ii) any of such registration statements is not declared
effective by the Commission or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (iii) the Issuer fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (iv)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter, subject to certain exceptions, ceases to
be effective or usable in connection with the Exchange Offer or resales of
Transfer Restricted Notes, as the case may be, during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (i)
through (iv) above, a "Registration Default"), then the interest rate on
Transfer Restricted Notes will increase ("Additional Interest"), with respect
to the first 90-day period immediately following the occurrence of such
Registration Default by 0.50% per annum and will increase by an additional
0.50% per annum with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of 2% per annum
with respect to all Registration Defaults. Following the cure of all
Registration Defaults, the accrual of Additional Interest will cease and the
interest rate will revert to the original rate.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income tax
considerations relevant to holders of the Notes. This discussion is based upon
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions
now in effect, all of which are subject to change (possible with retroactive
effect) or different interpretations. This discussion does not purport to deal
with all aspects of federal income taxation that may be relevant to a
particular investor's decision to purchase the Notes, and it is not intended
to be wholly applicable to all categories of investors, some of which, such as
dealers in securities, banks, insurance companies and tax-exempt
organizations, may be subject to special rules. In addition, this discussion
is limited to persons that will hold the Notes represented thereby as a
"capital asset" within the meaning of section 1221 of the Code.
INTEREST INCOME
Interest on the Notes will be includable in the income of a holder under the
holder's regular method of accounting. The Notes will not be treated as having
been issued with original issue discount.
MARKET DISCOUNT
Investors acquiring Notes pursuant to this Prospectus should note that the
resale of the Notes may be adversely affected by the market discount
provisions of sections 1276 through 1278 of the Code. Under the market
discount rules, if a holder of a Note (other than a holder who purchased the
Note upon original issuance) purchases it at a market discount (i.e., at a
price below its stated redemption price at maturity) in excess of a
statutorily-defined de minimis amount and thereafter recognizes gain upon a
disposition or retirement of the Note, then the lesser of the gain recognized
or the portion of the market discount that accrued on a ratable basis (or, if
elected, on a constant interest rate basis) generally will be treated as
ordinary income at the time of the disposition. Moreover, any market discount
in a Note may be taxable to an investor to the extent of appreciation at the
time of certain otherwise non-taxable transactions (e.g., gifts). Absent an
election to include market discount in income as it accrues, a holder of a
market discount debt instrument may be required to defer a portion of any
interest expense that otherwise may be deductible on any indebtedness incurred
or maintained to purchase or carry such debt instrument until the holder
disposes of the debt instrument in a taxable transaction.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Each holder of Notes generally will recognize gain or loss upon the sale,
exchange, repurchase, redemption, retirement or other disposition of those
Notes measured by the difference (if any) between (i) the amount of cash and
the fair market value of any property received (except to the extent that such
cash or other property is attributable to the payment of accrued interest not
previously included in income, which amount will be taxable as ordinary
income) and (ii) the holder's adjusted tax basis in those Notes (including any
market discount previously included in income by the holder). Any such gain or
loss recognized on the sale, exchange, repurchase, redemption, retirement or
other disposition of a Note should be capital gain or loss (except as
discussed under "Market Discount" above), and would be long-term capital gain
or loss if the Note had been held for more than one year at the time of the
sale or exchange. If the Notes had been held by a noncorporate holder for more
than 12 months but not more than 18 months, such capital gains generally shall
be subject to tax at a maximum 28% rate. If the Notes had been held for more
than 18 months, however, such capital gain generally will be subject to tax at
a maximum 20% rate. An investor's initial basis in a Note will be the cash
price it paid therefor.
BACKUP WITHHOLDING
A holder of Notes may be subject to "backup withholding" at a rate of 31%
with respect to certain "reportable payments," including interest payments
and, under certain circumstances, principal payments on the Notes. These
backup withholding rules apply if the holder, among other things, (i) fails to
furnish a social security number or other taxpayer identification number
("TIN") certified under penalties of perjury within a
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reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest, or (iv) under certain circumstances,
fails to provide a certified statement, signed under penalties of perjury,
that the TIN furnished is the correct number and that such holder is not
subject to backup withholding. A holder who does not provide the Issuer with
its correct TIN also may be subject to penalties imposed by the IRS. Any
amount withheld from a payment to a holder under the backup withholding rules
is creditable against the holder's federal income tax liability, provided that
the required information is furnished to the IRS. Backup withholding will not
apply, however, with respect to payments made to certain holders, including
corporations, tax-exempt organizations and certain foreign persons ("exempt
recipients"), provided their exemptions from backup withholding are properly
established.
The amount of any "reportable payments" including interest made to the
holders of Notes (other than to holders which are exempt recipients) and the
amount of tax withheld, if any, with respect to such payments will be reported
to such holders and to the IRS for each calendar year.
FOREIGN HOLDERS
The following discussion is a summary of certain U.S. federal income tax
consequences to a Foreign Person that holds a Note. The term "Foreign Person"
means a nonresident alien individual or foreign corporation, but only if the
income or gain on the Note is not "effectively connected with the conduct of a
trade or business within the U.S." If the income or gain on the Note is
"effectively connected with the conduct of a trade or business within the
U.S.," then the nonresident alien individual or foreign corporation will be
subject to tax on such income or gain in essentially the manner as a U.S.
citizen or resident or a domestic corporation, as discussed above, and in the
case of a foreign corporation, may also be subject to the branch profits tax.
Under the portfolio interest exception to the general rules for the
withholding of tax on interest paid to a Foreign Person, a Foreign Person will
not be subject to U.S. federal income tax (or to withholding) on interest
payments on a Note, provided that (i) the Foreign Person does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Issuer entitled to vote and is not a controlled
foreign corporation with respect to the U.S. that is related to the Issuer
through stock ownership and (ii) the Issuer, its paying agent or the person
who would otherwise be required to withhold tax received either (A) a
statement (an "Owner's Statement") signed under penalties of perjury by the
beneficial owner of the Note in which the owner certifies that the owner is
not a U.S. person, or in the case of an individual, that he is neither a
citizen nor a resident of the United States, and which provides the owner's
name and address, or (B) a statement signed under penalties of perjury by the
Financial Institution holding the Note on behalf of the beneficial owner,
together with a copy of the Owner's Statement. The term "Financial
Institution" means a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business and that holds a Note on behalf of the owner of the Note. A
Foreign Person who does not qualify for the "portfolio interest" exception,
would, under current law, generally be subject to U.S. federal withholding tax
at a flat rate of 30% (or lower applicable treaty rate) on interest payments.
In general, gain recognized by a Foreign Person upon the redemption, sale or
exchange of a Note (including any gain representing accrued market discount)
will not be subject to U.S. federal income tax. However, a Foreign Person may
be subject to U.S. federal income tax at a flat rate of 30% (unless exempt by
an applicable treaty) on any such gain if the Foreign Person is an individual
present in the U.S. for 183 days or more during the taxable year in which the
Note is redeemed, sold or exchanged, and certain other requirements are met.
EXCHANGE OFFER
The exchange of the Exchange Notes for the Notes pursuant to this Offer will
not be treated as an "exchange" for U.S. federal income tax purposes because
the Exchange Notes will not be considered to differ materially in kind or
extent from the Old Notes. Rather, the Exchange Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no U.S. federal income tax consequences to
holders exchanging the Old Notes for the Exchange Notes pursuant to this
Offer. The holder must continue to include stated interest in income as if the
exchange had not occurred. Similarly, there would be no U.S. federal income
tax consequences to a holder of Old Notes that does not participate in the
Exchange Offer.
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PLAN OF DISTRIBUTION
Prior to the Initial Offering, there was no market for the Notes. The Notes
are not listed on a national securities exchange or authorized for trading on
the National Association of Securities Dealers Automated Quotation System. The
Old Notes sold to QIBs are eligible for trading in the PORTAL market. The
Issuer has been advised by the Initial Purchasers that the Initial Purchasers
currently intend to make a market in the Exchange Notes; however, they are not
obligated to do so and any market making may be discontinued by the Initial
Purchasers at any time. Therefore, there can be no assurance that an active
market for the Old Notes or the Exchange Notes will develop.
The Initial Purchasers may have engaged in transactions that stabilize,
maintain or otherwise affect the price of the Notes. Specifically, the Initial
Purchasers may have overalloted in connection with the Private Placement,
creating a short position in the Old Notes for its own account. In addition,
to cover over-allotments or to stabilize the price of the Old Notes, the
Initial Purchasers may bid for, and purchase, Old Notes in the open market.
Any of these activities may stabilize or maintain the market price of the Old
Notes above independent market levels. The Initial Purchasers were not
required to engage in these activities, and may end any of these activities at
any time.
If a trading market develops for the Old Notes or the Exchange Notes, future
trading prices of such securities will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on such factors,
such securities may trade at a discount from their offering price.
Certain of the Initial Purchasers and their respective affiliates provide or
have provided banking, advisory and other financial services for the Company
in the ordinary course of business. Banc One Capital Corporation is an
affiliate of Bank One, Texas, N.A. ("Bank One"). Bank One is a lender under
the Southwest Credit Facility and received its proportionate share (82%) of
the repayment by the Issuer of borrowings thereunder from the net proceeds of
the Private Placement. Paribas Corporation is an affiliate of Banque Paribas.
Banque Paribas is a lender under the Southwest Credit Facility and received
its proportionate share (18%) of the repayment of the Issuer of borrowings
thereunder from the net proceeds of the Private Placement.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Old
Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Issuer and SRH have agreed that,
starting on the Expiration Date and ending on the close of business 180 days
after the Expiration Date, they will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act and will be bound by the provisions of the
Registration Agreement (including certain indemnification rights and
obligations). In addition, until , , all dealers effecting transactions
in the Exchange Notes may be required to deliver a prospectus.
Neither the Issuer nor SRH will receive any proceeds from any sale of
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of
100
<PAGE>
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Issuer will promptly
send additional copies of this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Issuer and SRH have agreed in
the Registration Rights Agreement to pay all expenses incident to the Exchange
Offer other than commissions or concessions of any brokers or dealers and to
indemnify the holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
101
<PAGE>
TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES BY THE INITIAL PURCHASERS
The Old Notes have not been registered under the Securities Act and may not
be offered or sold in the United States, or to, or for the account or benefit
of, U.S. persons except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly the Old Notes were being
offered and sold only to Qualified Institutional Buyers (as defined in Rule
144A under the Securities Act) ("QIBs") under Rule 144A under the Securities
Act and other Institutional Accredited Investors in a private sale exempt from
the registration requirements of the Securities Act.
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of the Old Notes was deemed to have represented and agreed as
follows:
(1) it was acquiring the Old Notes for its own account or for an account
with respect to which it exercises sole investment discretion, and that it
or such account is a QIB or an Institutional Accredited Investor acquiring
the Old Notes for investment purposes and not for distribution;
(2) it acknowledged that the Old Notes had not been registered under the
Securities Act and could not be offered or sold except as permitted below;
(3) it understood and agreed (x) that such Old Notes were being offered
only in a transaction not involving any public offering within the meaning
of the Securities Act, and (y) that (A) if within two years after the date
of original issuance of the Old Notes or if within three months after it
ceases to be an affiliate (within the meaning of Rule 144 under the
Securities Act) of the Issuer, it decided to resell, pledge or otherwise
transfer the Old Notes on which the legend set forth below appears, such
Old Notes may be resold, pledged or transferred only (i) to the Issuer,
(ii) so long as such securities are eligible for resale pursuant to Rule
144A, to a person whom the seller 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 (as indicated by the box checked by the transferor on the Certificate
of Transfer on the reverse of the Old Note if such Old Note is not in book-
entry form), (iii) to an Institutional Accredited Investor (as indicated by
the box checked by the transferor on the Certificate of Transfer on the
reverse of the Old Note if such Old Note is not in book-entry form) who has
certified to the Issuer and the Trustee for the Old Notes that such
transferee is an Institutional Accredited Investor and is acquiring the Old
Notes for investment purposes and not for distribution, (iv) pursuant to an
exemption from the registration requirements of the Securities Act provided
by Rule 144 (if applicable) under the Securities Act or (v) 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, (B) the initial purchaser, and each subsequent holder is required
to, notify any purchaser of the Old Notes from it of the resale
restrictions referred to in (A) above, if then applicable, and (C) with
respect to any transfer of the Old Notes by an Institutional Accredited
Investor, such holder will deliver to the Issuer and the Trustee such
certificates and other information as they may reasonably require to
confirm that the transfer by it complies with the foregoing restrictions;
(4) it understands that the notification requirement referred to in (3)
above will be satisfied, in the case only of transfers by physical delivery
of Certificated Securities other than a Global Note by virtue of the fact
that the following legend will be placed on the Old Notes unless otherwise
agreed by the Issuer:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE
HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE
ISSUER THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE
102
<PAGE>
TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR
A PREDECESSOR NOTE HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF
THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH
TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS
SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES
ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER
TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE
TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE), (3)
TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE
OF THIS NOTE) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND
NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS NOTE
IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (4) PURSUANT
TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE
144 (IF APPLICABLE) UNDER THE SECURITIES ACT OR (5) 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. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES
IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY
IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER
HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF
THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR"
AS DEFINED IN RULE 5O1(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND
THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION. THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS AGREEMENT
DATED AS OF OCTOBER 14, 1997, AMONG THE COMPANY, THE ISSUER, JEFFERIES &
COMPANY, INC., BANC ONE CAPITAL CORPORATION AND PARIBAS CORPORATION, A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE ISSUER."
(5) it (i) has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its
prospective investment in the Old Notes and (ii) has the ability to bear
the economic risks of its prospective investment and can afford the
complete loss of such investment;
(6) it had received a copy of the Offering Circular relating to the
offering of the Old Notes and acknowledges that it has had access to such
financial and other information, and has been afforded the opportunity to
ask questions of the Issuer and receive answers thereto, as it deemed
necessary in connection with its decision to purchase the Old Notes; and
(7) it understood that the Issuer, the Initial Purchasers and others will
rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agreed that if any of the
acknowledgments, representations and warranties deemed to have been made by
it by its purchase of the Old Notes are no longer accurate, it shall
promptly notify the Issuer and the Initial Purchasers. If it acquired the
Old Notes as a fiduciary or agent for one or more investor accounts, it
represented that it has sole investment discretion with respect to each
such account and it has full power to make the foregoing acknowledgments,
representations and agreements on behalf of such account.
ANY OLD NOTES NOT EXCHANGED IN THE EXCHANGE OFFER FOR EXCHANGE NOTES WILL
CONTINUE TO BE SUBJECT TO THE TRANSFER RESTRICTIONS DESCRIBED ABOVE.
103
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered hereby has been passed upon for
the Company by Baker, Donelson, Bearman & Caldwell, P.C., Memphis, Tennessee.
H. Allen Corey, an officer and director of the Issuer and SRH, is also of
counsel to Baker, Donelson, Bearman & Caldwell, P.C.
EXPERTS
ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1996, and for the period ended December 31, 1996, included in this Prospectus
have been audited by KPMG Peat Marwick LLP, independent public accountants, as
stated in their report appearing herein. The consolidated financial statements
of the Company as of December 31, 1995, and for the two years in the period
ended December 31, 1995, included in this Prospectus have been audited by
Joseph Decosimo and Company, LLP, independent accountants, as stated in their
report appearing herein.
The historical statement of revenues and direct operating expenses of the
Oil and Gas Properties Acquisition for the years ended December 31, 1994, 1995
and 1996, included in this Prospectus has been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
The Board of Directors of Southwest and SRH decided to engage KPMG Peat
Marwick LLP as independent accountants. KPMG Peat Marwick was so engaged on
June 9, 1997.
Joseph Decosimo and Company, LLP had been engaged to audit the Company's
financial statements for the two years ended December 31, 1994 and 1995.
Joseph Decosimo and Company's reports on the Company's financial statements
for those years do not contain an adverse opinion or a disclaimer of opinion,
and such reports are not qualified or modified as to uncertainty, audit scope
or accounting principals. During those two years, there were no disagreements
with Joseph Decosimo and Company on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Joseph Decosimo and Company,
would have caused it to make reference thereto in such reports nor were there
any reportable events during those two years required to be disclosed. In
accordance with the rules of the Commission, Joseph Decosimo and Company has
reviewed and concurred with the above discussion. A copy of Joseph Decosimo
and Company's letter is filed as an exhibit to the registration statement of
which this Prospectus is a part.
RESERVE ENGINEERS
Information relating to the estimated proved reserves of oil and natural gas
and the related estimates of future net revenues and present values thereof as
of June 30, 1997 included in this Prospectus and in the notes to the financial
statements of the Company have been prepared by Ryder Scott Company Petroleum
Engineers for properties representing 89% of the Company's PV-10 Value at such
date. Information relating to the estimated proved reserves of oil and natural
gas and the related estimates of future net revenues and present values
thereof for the Oil and Gas Properties Acquisition as of June 30, 1997
included in this Prospectus have been prepared by Ryder Scott Company
Petroleum Engineers. Information relating to the estimated proved reserves of
oil and natural gas and the related estimates of future net revenues and
present values thereof as of December 31, 1996 and for prior periods included
in this Prospectus and in the notes to the financial statements of the Company
have been prepared by independent petroleum engineer, Donald R. Creamer.
104
<PAGE>
GLOSSARY OF TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated
at the legal pressure base to the state or area where the reserves exit and at
60 degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume.
Bcf. Billion cubic feet.
Boe. Barrel of oil equivalent, determined using the ratio of one Bbl of
crude oil, condensate or natural gas liquids to six Mcf of natural gas.
Bopd. Barrels of oil per day.
Completion. The installation of permanent equipment for the production of
oil and natural gas, or in the case of a dry hole, the reporting of
abandonment to the appropriate agency.
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.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new reservoir in a field
previously found to be productive of oil or natural gas in another reservoir
or to extend a known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Horizontal drilling. A drilling technique that permits the operator to
contact and intersect a larger portion of the producing horizon than
conventional vertical drilling techniques and can result in both increased
production rates and greater ultimate recoveries of hydrocarbons.
MBbls. One thousand barrels.
MBoe. One thousand barrels of oil equivalent, determined using the ratio of
one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural
gas.
Mcf. One thousand cubic feet.
Mcfd. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBoe. One million barrels of oil equivalent, determined using the ratio of
one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural
gas.
MMcf. One million cubic feet.
105
<PAGE>
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells, as the case may be.
Oil. Crude oil, condensate and natural gas liquids.
Present value and PV-10 Value. When used with respect to oil and natural gas
reserves, the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect as of the date indicated,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expenses or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and capable of production.
Proved developed reserves. Proved reserves that are expected to be recovered
from existing wellbores, whether or not currently producing, without drilling
additional wells. Production of such reserves may require a recompletion.
Proved reserves. The estimated quantities of crude oil, natural gas, and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage.
Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has been previously completed.
Reserve life. A ratio determined by dividing the existing reserves by
production from such reserves for the prior twelve month period.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil and/or natural gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reserves.
Royalty interest. An interest in an oil and natural gas property entitling
the owner to a share of oil or natural gas production free of costs of
production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
Wellbore. The hole drilled by the bit.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
106
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Combined Financial Statements of Southwest
Royalties, Inc......................................................... F-1
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997..... F-2
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996...................................................... F-4
Unaudited Pro Forma Combined Statement of Operations for the nine months
ended
September 30, 1997..................................................... F-5
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-6
Consolidated Financial Statements of Southwest Royalties Holdings, Inc.
and Subsidiaries:
Independent Auditors' Reports........................................... F-12
Consolidated Balance Sheets as of December 31, 1995 and 1996, and
September 30, 1997 (unaudited)......................................... F-14
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996, and the nine months ended September 30, 1996 and
1997 (unaudited)....................................................... F-16
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996, and the nine months ended September
30, 1997 (unaudited)................................................... F-17
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and the nine months ended September 30, 1996 and
1997 (unaudited)....................................................... F-18
Notes to Consolidated Financial Statements.............................. F-20
Historical Statement of the Oil and Gas Properties Acquisition:
Report of Independent Accountants....................................... F-37
Historical Statement of Revenues and Direct Operating Expenses for the
years ended
December 31, 1994, 1995 and 1996 and the nine months ended September
30, 1997 (unaudited)................................................... F-38
Notes to Historical Statement of Revenues and Direct Operating Expenses. F-39
Financial Statements of 50 Penn Place:
Independent Auditors' Report............................................ F-42
Statements of Revenue and Certain Expenses for the year ended December
31, 1996 and the nine months ended September 30, 1997 (unaudited)...... F-43
Notes to Statements of Revenue and Certain Expenses..................... F-44
Financial Statements of Bear Canyon Shopping Center:
Independent Auditors' Report............................................ F-46
Statement of Revenue and Certain Expenses for the nine months ended
September 30, 1996..................................................... F-47
Notes to Statement of Revenue and Certain Expenses...................... F-48
Financial Statements of Bears Path Center:
Independent Auditors' Report............................................ F-50
Statement of Revenue and Certain Expenses for the nine months ended
September 30, 1996..................................................... F-51
Notes to Statement of Revenue and Certain Expenses...................... F-52
Financial Statements of Colonnade at Polo Park Venture:
Independent Auditors' Report............................................ F-54
Statements of Revenue and Certain Expenses for the year ended December
31, 1996 and the nine months ended September 30, 1997 (unaudited)...... F-55
Notes to Statements of Revenue and Certain Expenses..................... F-56
Financial Statements of Independence Plaza, Ltd.:
Independent Auditors' Report............................................ F-58
Statements of Revenue and Certain Expenses for the year ended December
31, 1996 and the nine months ended September 30, 1997 (unaudited)...... F-59
Notes to Statements of Revenue and Certain Expenses..................... F-60
</TABLE>
I-1
<PAGE>
<TABLE>
<S> <C>
Financial Statements of Madera Village Shopping Center:
Independent Auditors' Report............................................ F-62
Statement of Revenue and Certain Expenses for the nine months ended
September 30, 1996..................................................... F-63
Notes to Statement of Revenue and Certain Expenses...................... F-64
Financial Statements of Plaza Palomino:
Independent Auditors' Report............................................ F-66
Statements of Revenue and Certain Expenses for the year ended December
31, 1996 and the three months ended March 31, 1997 (unaudited)......... F-67
Notes to Statements of Revenue and Certain Expenses..................... F-68
Financial Statements of Crossroads Mall:
Independent Auditors' Report............................................ F-69
Statements of Revenue and Certain Expenses for the nine months ended
December 31, 1996 and the nine months ended September 30, 1997
(unaudited)............................................................ F-70
Notes to Statements of Revenue and Certain Expenses..................... F-71
</TABLE>
I-2
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
SOUTHWEST ROYALTIES HOLDINGS, INC.
The unaudited pro forma combined financial statements have been prepared to
give effect to the Offering and the application of net proceeds therefrom, the
Transactions and certain completed and pending acquisitions of Southwest and
Red Oak (to the extent not already reflected in the consolidated financial
statements of the Company) as if such transactions had taken place on
September 30, 1997 with respect to the unaudited pro forma combined balance
sheet, and as of January 1, 1996 with respect to the unaudited pro forma
combined statements of operations.
The unaudited pro forma combined financial statements included herein are
not necessarily indicative of the results that might have occurred had the
transactions taken place at the date specified and are not intended to be a
projection of future results. In addition, future results may vary
significantly from the results reflected in the accompanying unaudited pro
forma combined financial statements because of normal production declines,
changes in product prices, future acquisitions and divestitures, changes in
the real estate market, and other factors.
The following unaudited pro forma combined financial statements should be
read in conjunction with the consolidated financial statements and the related
notes of the Company.
F-1
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO
THE ACQUISITION FORMA
COMPANY ADJUSTMENTS COMBINED
------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents................ $ 11,152 $189,982 (a) $47,026
(82,630)(b)
(67,688)(c)
(1,699)(d)
(2,091)(e)
Accounts receivable...................... 11,182 11,182
Other.................................... 1,224 1,224
-------- --------
Total current assets................... 23,558 59,432
-------- --------
Oil and gas properties, using the full cost
method
Proved .................................. 112,394 67,688 (c) 180,082
Unproved................................. 4,193 4,193
Accumulated depreciation and depletion... (35,982) (35,982)
-------- --------
Oil and gas properties, net............ 80,605 148,293
Rental property, net....................... 55,785 25,705 (e) 81,490
Other property and equipment............... 5,060 5,060
Other assets:
Investment in subsidiary................. 2,778 1,699 (d) 4,477
Real estate investments.................. 4,237 4,237
Deferred debt costs, net................. 3,466 7,600 (a) 9,181
67 (e)
(1,952)(f)
Other, net............................... 5,336 5,336
-------- --------
Total other assets..................... 15,817 23,231
-------- --------
Total assets............................... $180,825 $317,506
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-2
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO
THE ACQUISITION FORMA
COMPANY ADJUSTMENTS COMBINED
------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY
----------------------------------------
Current liabilities
Current portion of long-term debt.......... $ 3,408 $ 3,408
Accounts payable and accrued expenses...... 19,779 (242)(b) 19,537
Other current liabilities.................. 5 5
-------- --------
Total current liabilities.............. 23,192 22,950
-------- --------
Long-term debt, less current maturities..... 138,805 197,582 (a) 282,374
(77,694)(b)
23,681 (e)
Other long-term liabilities................. 4,588 (2,878)(b) 1,710
Deferred income taxes....................... 4,809 (636)(b) 3,490
(683)(f)
Minority interest........................... 1,937 1,937
Redeemable common stock of subsidiary....... 2,630 2,630
Redeemable common stock..................... 8,291 8,291
Stockholders' equity
Preferred stock............................ -- --
Common stock............................... 116 116
Additional paid-in capital................. 2,196 2,196
Retained earnings (deficit)................ (935) (1,180)(b) (3,384)
(1,269)(f)
Note receivable from an officer and
stockholder............................... (1,714) (1,714)
Treasury stock, at cost.................... (3,090) (3,090)
-------- --------
Total stockholders' equity (deficit)... (3,427) (5,876)
-------- --------
Total liabilities and stockholders' equity.. $180,825 $317,506
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-3
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------- PRO
THE OIL AND GAS RED OAK ACQUISITION DECONSOLIDATION FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS OF SIERRA(P) COMBINED
-------- ------------ ------------ ----------- --------------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Oil and gas............ $ 35,296 $18,587 $ -- $ 158(g) $ 53,174
(867)(h)
Well servicing......... 8,013 -- -- $(8,013) --
Real estate............ 4,487 -- 13,223 17,710
Other ................. 622 -- -- (260) 362
-------- ------- ------- --------
Total operating
revenues............ 48,418 18,587 13,223 71,246
-------- ------- ------- --------
Operating expenses
Oil and gas............ 14,846 9,525 -- (3,478)(h) 20,533
(360)(i)
Well servicing......... 6,145 -- -- (6,145) --
Real estate............ 1,887 -- 6,571 -- 8,458
General and
administrative........ 6,953 -- 1,108 269 (g) (1,771) 5,984
(575)(j)
Depreciation,
depletion and
amortization.......... 8,430 -- -- 4,562 (k) (863) 13,513
1,384 (l)
Other.................. 554 -- -- 554
-------- ------- ------- --------
Total operating
expenses............ 38,815 9,525 7,679 49,042
-------- ------- ------- --------
Operating income........ 9,603 9,062 5,544 22,204
-------- ------- ------- --------
Other income (expense)
Interest expense....... (10,016) -- -- (14,415)(m) 82 (31,862)
(7,513)(n)
Interest income........ 441 -- -- (11) 430
Other.................. 561 -- -- 31 592
-------- ------- ------- --------
Income (loss) before
income taxes and
minority interest...... 589 9,062 5,544 (8,636)
Income tax benefit
(provision)............ (365) -- -- 3,704 (o) (160) 3,179
Minority interest in
subsidiaries........... 181 -- -- (184) (3)
Equity in earnings of
subsidiary............. -- -- -- (448) (448)
-------- ------- ------- --------
Income (loss) from
continuing operations.. $ 405 $ 9,062 $ 5,544 $ (5,908)
======== ======= ======= ========
Income (loss) from
continuing operations
per share.............. $ 0.42 $ (6.12)
======== ========
Weighted average common
shares................. 964,009 964,009
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-4
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
THE OIL AND GAS RED OAK ACQUISITION DECONSOLIDATION PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS OF SIERRA(P) COMBINED
--------- ------------ ------------ ----------- --------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
Oil and gas ........... $ 26,068 $13,145 $ -- $ 111 (g) $ 37,984
(1,340)(h)
Well servicing ........ 7,789 -- -- $(7,789) --
Real estate............ 5,029 -- 8,848 13,877
Other.................. 948 -- -- (44) 904
--------- ------- ------ ---------
Total operating
revenues............ 39,834 13,145 8,848 52,765
--------- ------- ------ ---------
Operating expenses
Oil and gas............ 12,166 6,980 -- (2,737)(h) 16,139
(270)(i)
Well servicing......... 5,600 -- -- (5,600) --
Real estate............ 1,907 -- 4,259 6,166
General and
administrative........ 5,059 -- 894 122 (g) (1,302) 4,261
(512)(j)
Depreciation,
depletion and
amortization.......... 8,093 -- -- 3,785 (k) (747) 11,968
837 (l)
Other.................. 1,003 -- -- 1,003
--------- ------- ------ ---------
Total operating
expenses.............. 33,828 6,980 5,153 39,537
--------- ------- ------ ---------
Operating income........ 6,006 6,165 3,695 13,228
--------- ------- ------ ---------
Other income (expense)
Interest expense....... (10,950) -- -- (9,913)(m) 184 (24,617)
(3,938)(n)
Interest income........ 545 -- -- (9) 536
Other.................. (66) -- -- 14 (52)
--------- ------- ------ ---------
Income (loss) before
income taxes and
minority interest...... (4,465) 6,165 3,695 (10,905)
Income tax benefit
(provision)............ 1,526 -- -- 2,291 (o) 1 3,818
Minority interest in
subsidiaries........... 322 -- -- (l) 321
Equity in earnings of
subsidiary............. -- -- -- -- (4) (4)
--------- ------- ------ ---------
Income (loss) before
extraordinary loss..... $ (2,617) $ 6,165 $3,695 $ (6,770)
========= ======= ====== =========
Income (loss) before
extraordinary loss per
share.................. $ (2.42) $ (6.27)
========= =========
Weighted average common
shares................. 1,078,454 1,078,454
========= =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-5
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The unaudited pro forma combined financial statements have been prepared to
give effect to the Offering and the application of net proceeds therefrom, the
Transactions and certain completed and pending acquisitions of Southwest
Royalties, Inc. ("Southwest"), and Midland Red Oak Realty, Inc. ("Red Oak")
(to the extent not already reflected in the consolidated financial statements
of the Company), as if such transactions had taken place on September 30, 1997
with respect to the unaudited pro forma combined balance sheet, and as of
January 1, 1996 with respect to the unaudited pro forma combined statements of
operations. Each of the acquisitions is recorded using the purchase method of
accounting.
Following is a description of the individual columns included in the
unaudited pro forma combined balance sheet:
THE COMPANY--Represents the consolidated balance sheet of Southwest
Royalties Holdings, Inc. ("SRH") as of September 30, 1997.
Following is a description of the individual columns included in the
unaudited pro forma combined statements of operations:
THE COMPANY--Represents the consolidated statements of operations
(exclusive of extraordinary items) of SRH for the year ended December 31,
1996 and the nine months ended September 30, 1997.
OIL AND GAS ACQUISITIONS--Represents the revenues and direct operating
expenses of the oil and gas properties acquired for the period from January
1, 1996 to the earlier of the closing date of each acquisition or September
30, 1997. On December 26, 1996, Southwest acquired certain oil and gas
properties from Hondo Drilling, in January 1997, Southwest acquired an
interest in the Flying M Field, and on October 14, 1997, Southwest
completed the acquisition of certain oil and gas properties ("Oil and Gas
Properties Acquisition") for a total purchase price of $72.3 million. See
Note 3 for summarized information for these acquisitions.
RED OAK ACQUISITIONS--Represents the revenue and certain expenses of the
real estate properties acquired for the period from January 1, 1996 to the
earlier of the closing date of each acquisition or September 30, 1997. On
October 15, 1996, Red Oak completed the acquisition of Bear Canyon, Bears
Path and Madera Village, on April 7, 1997, Red Oak closed the Plaza
Palomino acquisition, on September 2, 1997 Red Oak closed the River Oaks
Village acquisition, on September 30, 1997, Red Oak closed the acquisition
of 50 Penn Place, on October 21, 1997, Red Oak closed the Colonnade,
Independence Plaza, and San Miguel acquisitions, and on October 23, 1997,
Red Oak closed the Crossroads acquisitions. See Note 4 for summarized
information for these acquisitions.
2. PRO FORMA ENTRIES
(a) To record the issuance of $200.0 million of 10 1/2% Senior Notes due
2004, including net proceeds of approximately $190.0 million, debt issuance
costs of approximately $7.6 million and discount of $2.4 million.
(b) To record the repayment of existing Southwest debt of approximately
$77.7 million and related accrued interest of approximately $3.1 million and
prepayment penalties of approximately $1.8 million.
(c) To record the Oil and Gas Properties Acquisition using the purchase
method of accounting. The allocation of the purchase price to the acquired
assets and liabilities is preliminary and, therefore, subject to change.
F-6
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(d) To record the Company's additional investment (through a partnership of
which Southwest serves as general partner) in Sierra of $1,699,000.
(e) To record the Red Oak Acquisitions using the purchase method of
accounting and to record incremental borrowings under the MROP Facility and
additional mortgage facilities. The allocation of each purchase price to the
acquired assets and liabilities is preliminary and, therefore, subject to
change.
(f) To record the write-off of deferred debt costs related to Southwest's
existing debt.
(g) To record additional general and administrative expenses associated with
the Oil and Gas acquisitions and certain other adjustments to conform to the
presentation in the Company's consolidated financial statements.
(h) To record the estimated effects on oil and gas revenues and production
costs of discontinuing the tertiary recovery (CO/2/) project on the pending
Oil and Gas Properties Acquisition. The Company has no intent to acquire and
will not continue the tertiary recovery activities of the seller.
(i) To record decrease in oil and gas production costs of the pending Oil
and Gas Properties Acquisition, due to replacement of field personnel employed
by the previous owner with Southwest personnel.
(j) To record the decrease in general and administrative expenses expected
to be realized on the Red Oak acquisitions. This decrease is due to expenses
that will not be incurred by Red Oak, such as management fees and
administrative salaries, offset by additional salary expense for additional
maintenance personnel.
(k) To record estimated incremental depletion expense on the Oil and Gas
acquisitions.
(l) To record estimated incremental depreciation expense on the Red Oak
acquisitions.
(m) To record incremental interest expense associated with the Senior Notes
including incremental interest associated with the Oil and Gas acquisitions,
amortization of the estimated debt issue costs of $7 million over the life of
the Senior Notes and the reversal of interest recognized on the debt of
Southwest to be retired with the proceeds of the Senior Notes. A 1/8% change
in interest rate on such notes would result in a $225,000 change in annual
interest expense.
(n) To record incremental interest associated with borrowings used to
finance the Red Oak Acquisitions. The associated notes are generally for 20
years with interest ranging from 9.25% to 13.00% and loan origination costs
from 1% to 3% of the respective note amounts.
(o) To adjust pro forma income tax expense.
(p) To reflect the deconsolidation of Sierra. On July 1, 1997, additional
common stock of Sierra was sold to a partnership. As a consequence, the
Company no longer has majority voting control of Sierra. Southwest is the
general partner of the partnership.
F-7
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
3. OIL AND GAS ACQUISITIONS
The following tables summarize the revenues and direct operating expenses for
the Oil and Gas Acquisitions for periods prior to their acquisition.
OIL AND GAS ACQUISITIONS
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OIL AND GAS
PROPERTIES OIL AND GAS
FLYING M HONDO ACQUISITIONS ACQUISITIONS
-------- ----- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Oil and gas revenues............. $1,660 $797 $16,130 $18,587
Oil and gas operating expenses... 668 391 8,466 9,525
------ ---- ------- -------
Operating income............... $ 992 $406 $ 7,664 $ 9,062
====== ==== ======= =======
</TABLE>
OIL AND GAS ACQUISITIONS
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OIL AND GAS
PROPERTIES OIL AND GAS
FLYING M ACQUISITIONS ACQUISITIONS
-------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas revenues................... $495 $12,650 $13,145
Oil and gas operating expenses......... 218 6,762 6,980
---- ------- -------
Operating income..................... $277 $ 5,888 $ 6,165
==== ======= =======
</TABLE>
F-8
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
4. RED OAK ACQUISITIONS
The following tables summarize the revenue and certain expenses for the Red
Oak Acquisitions for periods prior to their acquisition.
RED OAK ACQUISITIONS
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BEARS BEAR MADERA RIVER OAKS PLAZA INDEPENDENCE 50 PENN SAN RED OAK
PATH CANYON VILLAGE VILLAGE PALOMINO COLONNADE PLAZA PLACE CROSSROADS MIGUEL ACQUISITIONS
----- ------ ------- ---------- -------- --------- ------------ ------- ---------- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
revenues.......... $151 $243 $814 $627 $1,157 $675 $1,079 $3,525 $4,572 $380 $13,223
Operating expenses
Property
management....... 96 98 250 202 478 254 551 1,530 2,938 174 6,571
General and
administrative... 7 9 26 100 99 37 125 508 159 38 1,108
---- ---- ---- ---- ------ ---- ------ ------ ------ ---- -------
Total operating
expenses....... 103 107 276 302 577 291 676 2,038 3,097 212 7,679
---- ---- ---- ---- ------ ---- ------ ------ ------ ---- -------
Operating income... $ 48 $136 $538 $325 $ 580 $384 $ 403 $1,487 $1,475 $168 $ 5,544
==== ==== ==== ==== ====== ==== ====== ====== ====== ==== =======
</TABLE>
RED OAK ACQUISITIONS
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
RIVER OAKS PLAZA INDEPENDENCE 50 PENN SAN COMPLETED
VILLAGE PALOMINO COLONNADE PLAZA PLACE CROSSROADS MIGUEL ACQUISITIONS
---------- -------- --------- ------------ ------- ---------- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Revenues.... $454 $343 $623 $877 $2,725 $3,514 $312 $8,848
Operating expenses
Property management.... 96 121 196 490 1,049 2,171 136 4,259
General and
administrative........ 98 26 23 107 295 301 44 894
---- ---- ---- ---- ------ ------ ---- ------
Total operating
expenses............ 194 147 219 597 1,344 2,472 180 5,153
---- ---- ---- ---- ------ ------ ---- ------
Operating income........ $260 $196 $404 $280 $1,381 $1,042 $132 $3,695
==== ==== ==== ==== ====== ====== ==== ======
</TABLE>
F-9
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
5. OIL AND GAS RESERVE DATA
The following unaudited pro forma supplemental information regarding the oil
and gas activities of Southwest is presented pursuant to the disclosure
requirements promulgated by the Commission and Statement of Financial
Accounting Standards No. 69, "Disclosures About Oil and Gas Producing
Activities". The pro forma combined reserve information is presented as if the
acquisition of the oil and gas interests described above had occurred on
January 1, 1996.
Management emphasizes that reserve estimates are inherently imprecise and
subject to revision and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available. Such changes could
be significant.
Quantities of oil and gas reserves
<TABLE>
<CAPTION>
OIL AND NATURAL BARRELS OF
CONDENSATE GAS OIL EQUIVALENT
(MBBLS) (MMCF) (MBOE)
---------- ------- --------------
<S> <C> <C> <C>
Total Proved Reserves:
Balance, January 1, 1996.................... 36,888 84,212 50,923
Sales of minerals-in-place................. (989) (466) (1,067)
Revisions of previous estimates............ 2,291 6,143 3,315
Production................................. (1,812) (5,888) (2,793)
------ ------ ------
Balance, December 31, 1996................... 36,378 84,001 50,378
====== ====== ======
</TABLE>
F-10
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
Standardized measure of discounted future net cash flows
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(IN
THOUSANDS)
<S> <C>
Future cash inflows................................................ $1,183,721
Future production and development costs............................ (400,659)
----------
Future net cash flows before income taxes.......................... 783,062
Future income tax expense.......................................... (234,919)
----------
Future net cash flows.............................................. 548,143
10% annual discount for estimated timing of cash flows............. (245,568)
----------
Standardized measure of discounted future net cash flows........... $ 302,575
==========
</TABLE>
Changes relating to the standardized measure of discounted future net cash
flows
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(IN
THOUSANDS)
<S> <C>
Sales of oil and gas produced, net of production costs............ $(32,641)
Net change in sales prices net of production costs................ 182,229
Extensions and discoveries, net of future production and
development costs................................................ --
Revisions to estimated future development costs................... 1,854
Revisions of previous quantity estimates.......................... 28,439
Accretion of discount............................................. 17,430
Net change in income taxes........................................ (54,974)
Sale of minerals-in-place......................................... (2,439)
Changes in production rates, timing and other..................... (11,626)
--------
128,272
Discounted future net cash flows--
Beginning of period............................................. 174,303
--------
End of period................................................... $302,575
========
</TABLE>
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Southwest Royalties Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Southwest
Royalties Holdings, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statement of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southwest
Royalties Holdings, Inc. and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
August 11, 1997 (except as to Note 16,
which is as of September 18, 1997)
F-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
SOUTHWEST ROYALTIES, INC.
Midland, Texas
We have audited the accompanying consolidated balance sheet of SOUTHWEST
ROYALTIES, INC. and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31 ,1995 and 1994. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SOUTHWEST
ROYALTIES, INC. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the years ended December 31, 1995
and 1994, in conformity with generally accepted accounting principles.
Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
March 27, 1996, except for
note 14, as to which the date
is August 11, 1997
F-13
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
ASSETS 1995 1996 1997
------ ------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents..................... $ 3,364 $ 8,284 $ 11,152
Accounts receivables net of allowance of $30,
$173 and $123,respectively................... 6,504 7,728 10,366
Receivables from related parties.............. 1,116 792 816
Federal income tax receivable................. 270 -- --
Subscription receivable....................... -- 2,807 --
Deferred income taxes......................... 191 -- --
Other current assets.......................... 822 1,074 1,224
------- -------- --------
Total current assets........................ 12,267 20,685 23,558
------- -------- --------
Oil and gas properties, using the full cost
method of accounting...........................
Proved........................................ 73,788 89,453 112,394
Unproved...................................... 2,076 1,866 4,193
------- -------- --------
75,864 91,319 116,587
Less accumulated depletion, depreciation and
amortization................................. 23,387 29,821 35,982
------- -------- --------
Oil and gas properties, net................. 52,477 61,498 80,605
------- -------- --------
Well servicing property and equipment, net...... 2,010 4,628 --
------- -------- --------
Rental property, net............................ 18,789 29,177 55,785
------- -------- --------
Other property and equipment, net............... 4,955 4,873 5,060
------- -------- --------
Other assets....................................
Equity investment in subsidiary............... -- -- 2,778
Real estate investments....................... 1,973 4,510 4,237
Deferred debt costs, net of accumulated
amortization of $683, $1,041 and $1,501,
respectively................................. 1,776 2,892 3,466
Other, net.................................... 1,187 2,021 5,336
------- -------- --------
Total other assets.......................... 4,936 9,423 15,817
------- -------- --------
Total assets.................................... $95,434 $130,284 $180,825
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-14
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
LIABILITIES, REDEEMABLE COMMON STOCK AND ----------------- SEPTEMBER 30,
STOCKHOLDERS' EQUITY 1995 1996 1997
---------------------------------------- ------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities
Current maturities of long-term debt........ $ 4,661 $ 10,216 $ 3,408
Accounts payable and accrued expenses....... 10,087 9,931 18,337
Accounts payable to related parties......... 1,340 1,179 1,442
Federal income taxes payable................ -- 30 5
Deferred income taxes....................... -- 425 --
------- -------- --------
Total current liabilities................. 16,088 21,781 23,192
------- -------- --------
Long-term debt................................ 68,825 83,589 138,805
------- -------- --------
Other long-term liabilities................... 1,522 3,134 4,588
------- -------- --------
Deferred income taxes......................... 5,699 5,830 4,809
------- -------- --------
Minority interest............................. 1,240 4,931 1,937
------- -------- --------
Redeemable common stock in subsidiary......... 2,501 2,520 2,630
------- -------- --------
Redeemable common stock....................... -- 8,258 8,291
------- -------- --------
Stockholders' equity
Preferred stock--$1 par value; 5,000,000
shares authorized; none issued............. -- -- --
Common stock - $.10 par value; 5,000,000
shares authorized; 1,160,537 issued at
December 31, 1995 and 1996 and 1,161,537
issued at September 30, 1997............... 116 116 116
Additional paid-in capital.................. 1,305 2,196 2,196
Retained earnings (accumulated deficit)..... 1,767 2,172 (935)
Note receivable from an officer and
stockholder................................ (1,760) (1,735) (1,714)
Less: Treasury stock-- at cost; 194,575 and
204,575 shares at December 31, 1995 and
1996, respectively and 214,215 at September
30, 1997................................... (1,869) (2,508) (3,090)
------- -------- --------
Total stockholders' equity (deficit)........ (441) 241 (3,427)
------- -------- --------
Total liabilities and stockholders' equity.... $95,434 $130,284 $180,825
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues
Oil and gas............... $ 16,321 $ 22,717 $ 35,296 $ 24,638 $ 26,068
Well servicing............ 2,377 4,218 8,013 6,163 7,789
Real estate............... 605 3,213 4,487 3,092 5,029
Other..................... 325 352 622 424 948
-------- -------- -------- -------- ---------
Total operating
revenues............... 19,628 30,500 48,418 34,317 39,834
-------- -------- -------- -------- ---------
Operating expenses
Oil and gas............... 7,879 11,511 14,846 10,833 12,166
Well servicing............ 2,136 3,315 6,145 4,519 5,600
Real estate............... 195 1,414 1,887 1,295 1,907
General and
administrative........... 4,292 5,018 6,953 4,580 5,059
Depreciation, depletion
and amortization......... 4,437 6,719 8,430 6,249 8,093
Other..................... 105 228 554 407 1,003
-------- -------- -------- -------- ---------
Total operating
expenses............... 19,044 28,205 38,815 27,883 33,828
-------- -------- -------- -------- ---------
Operating income............ 584 2,295 9,603 6,434 6,006
-------- -------- -------- -------- ---------
Other income (expense)
Interest and dividend
income..................... 229 269 441 275 545
Interest expense.......... (1,975) (5,635) (10,016) (7,180) (10,950)
Other..................... 1,687 (78) 561 438 (66)
-------- -------- -------- -------- ---------
(59) (5,444) (9,014) (6,467) (10,471)
-------- -------- -------- -------- ---------
Income (loss) before income
taxes, minority interest
and extraordinary item.... 525 (3,149) 589 (33) (4,465)
Income tax benefit
(provision).............. (171) 1,044 (365) (54) 1,526
-------- -------- -------- -------- ---------
Income (loss) before
minority interest and
extraordinary item........ 354 (2,105) 224 (87) (2,939)
Minority interest in
subsidiaries............. (1) (15) 181 71 322
-------- -------- -------- -------- ---------
Income (loss) before
extraordinary item......... 353 (2,120) 405 (16) (2,617)
Extraordinary item, net of
tax...................... -- -- -- -- (490)
-------- -------- -------- -------- ---------
Net income (loss)........... $ 353 $ (2,120) $ 405 $ (16) $ (3,107)
======== ======== ======== ======== =========
Earnings (loss) per common
share
Earnings (loss) per common
share before
extraordinary item....... $ 0.37 $ (2.19) $ 0.42 $ (0.02) $ (2.42)
Extraordinary item, net of
tax...................... -- -- -- -- (0.45)
-------- -------- -------- -------- ---------
Earnings (loss) per common
share...................... $ 0.37 $ (2.19) $ 0.42 $ (0.02) $ (2.88)
======== ======== ======== ======== =========
Weighted average shares
outstanding................ 955,340 965,962 964,009 959,520 1,078,454
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------- PAID-IN NOTE RECEIVABLE --------------
SHARES AMOUNT CAPITAL EARNINGS FROM STOCKHOLDER SHARES AMOUNT
--------- ------ ------- -------- ---------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--January 1,
1994................... 1,156,537 $115 $1,250 $3,534 $ -- 194,575 $1,869
Issuance of stock
options as
compensation........... -- -- 56 -- -- -- --
Note receivable issued
to stockholder......... -- -- -- -- 1,736 -- --
Net income.............. -- -- -- 353 -- -- --
--------- ---- ------ ------ ------ ------- ------
Balance--December 31,
1994................... 1,156,537 115 1,306 3,887 1,736 194,575 1,869
Stock option exercised.. 4,000 1 (1) -- -- -- --
Accrued interest on note
receivable............. -- -- -- -- 24 -- --
Net loss................ -- -- -- (2,120) -- -- --
--------- ---- ------ ------ ------ ------- ------
Balance--December 31,
1995................... 1,160,537 116 1,305 1,767 1,760 194,575 1,869
Payments received on
note receivable........ -- -- -- -- (25) -- --
Issuance of common stock
warrants............... -- -- 857 -- -- -- --
Issuance of stock
options as additional
compensation........... -- -- 34 -- -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- 10,000 639
Net income.............. -- -- -- 405 -- -- --
--------- ---- ------ ------ ------ ------- ------
Balance--December 31,
1996................... 1,160,537 116 2,196 2,172 1,735 204,575 2,508
Stock option exercised
(unaudited)............ 500 -- -- -- -- -- --
Payments received on
notes receivable
(unaudited)............ -- -- -- -- (21) -- --
Purchase of treasury
stock (unaudited)...... -- -- -- -- -- 9,640 582
Net loss (unaudited).... -- -- -- (3,107) -- -- --
--------- ---- ------ ------ ------ ------- ------
Balance--September 30,
1997 (unaudited)....... 1,161,037 $116 $2,196 $ (935) $1,714 214,215 $3,090
========= ==== ====== ====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- --------------------
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss)........... $ 353 $ (2,120) $ 405 $ (16) $ (3,107)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation, depletion
and amortization......... 4,437 6,719 8,430 6,249 8,093
(Gain) loss on sale of
assets................... (1,687) 78 226 141 119
Other noncash items....... 91 47 2,159 1,495 1,856
Bad debt expense.......... 83 315 168 -- --
Provision for deferred
income taxes............. 28 (869) 747 (49) (1,494)
Minority interest in
income (loss) of
subsidiary............... 1 15 (181) (71) (323)
Changes in operating
assets and liabilities--
Accounts receivable...... (62) (2,078) (1,128) (2,217) (6,048)
Income tax receivable.... -- (270) 270 -- --
Other current assets..... 157 (297) (379) (392) (613)
Accounts payable and
accrued expenses........ 1,793 4,161 (467) (305) 10,953
Income taxes payable..... 28 (67) 30 -- (25)
------- -------- -------- --------- ---------
Net cash provided by
operating activities....... 5,222 5,634 10,280 4,835 9,411
------- -------- -------- --------- ---------
Cash flows from investing
activities
Proceeds from sale of oil
and gas properties....... 2,563 2,082 1,081 1,206 1,146
Purchase of oil and gas
properties............... (9,583) (17,897) (16,740) (9,808) (26,522)
Purchase of Espero Energy
Corporation.............. -- (13,000) -- -- --
Purchase of other property
and equipment............ (5,615) (14,737) (14,443) (3,286) (34,944)
Purchase of other assets.. (2,142) (979) (1,095) (506) (2,659)
Proceeds from sale of
other assets............. 2,345 320 196 71 182
Proceeds from sale of
other property and
equipment................ 2,949 287 274 204 (21)
Purchase of real estate
investments.............. (158) (608) (2,569) (424) (57)
Other..................... -- -- 71 64 144
------- -------- -------- --------- ---------
Net cash used by investing
activities................. (9,641) (44,532) (33,225) (12,479) (62,731)
------- -------- -------- --------- ---------
Cash flows from financing
activities
Proceeds from borrowings.. 11,446 46,514 29,094 10,314 87,119
Payments on debt.......... (7,619) (7,486) (9,379) (2,187) (31,987)
Payments on other long-
term liabilities......... (43) (105) (512) (300) (101)
Increase in other long-
term liabilities......... 55 80 46 25 724
Cash received on
subscriptions receivable. -- -- -- -- 2,807
Purchase of treasury
stock.................... -- -- (250) (250) (582)
Deferred debt costs....... (129) (1,931) (1,333) (240) (1,464)
Issuance of stock
warrants................. -- -- 857 -- --
Issuance of redeemable
common stock, net of
issue costs.............. -- -- 5,451 -- 33
Net proceeds from sale of
minority interest........ 1,344 2,094 4,158 1,966 904
Dividends paid to minority
interest owners.......... -- -- (139) (93) (91)
Purchase of treasury stock
by subsidiary............ -- -- (128) (128) (1,174)
------- -------- -------- --------- ---------
Net cash provided by
financing activities....... 5,054 39,166 27,865 9,107 56,188
------- -------- -------- --------- ---------
Net increase in cash and
cash equivalents........... 635 268 4,920 1,463 2,868
Cash and cash
equivalents--beginning of
period................... 2,461 3,096 3,364 3,364 8,284
------- -------- -------- --------- ---------
Cash and cash equivalents--
end of period.............. $ 3,096 $ 3,364 $ 8,284 $ 4,827 $ 11,152
======= ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information
Interest paid........................... $1,467 $4,964 $7,780 $6,180 $8,704
Income taxes paid (received)............ $ 114 $ 141 $ (559) $ 73 $ (74)
Supplemental schedule of noncash investing
and
financing activities--
Increase in accrued expenses from
general partner
contribution to partnership............ $ -- $ -- $ -- $ -- $1,699
Long-term debt and liabilities assumed
in acquisition
of real estate......................... $ -- $ -- $ 150 $ -- $ --
Increase in other long-term liabilities
from general
partner contribution to partnership.... $ -- $ 188 $ 198 $ 198 $ --
Debt issued for other property and
equipment.............................. $ -- $ 662 $ 604 $ 262 $ --
Deferred taxes relating to acquisition
of oil and
gas properties......................... $ -- $3,315 $ -- $ -- $ --
Increase in other long-term liabilities
from purchase
of treasury stock...................... $ -- $ -- $ 389 $ 389 $ --
Transfer oil and gas properties as debt
issue costs............................ $ -- $ -- $ 204 $ 204 $ --
Increase in accounts receivable from
sale of minority
interest in subsidiary................. $ 120 $ -- $ -- $ -- $ --
Increase in subscription receivable from
sale of
redeemable common stock................ $ -- $ -- $2,807 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Southwest Royalties Holdings, Inc. ("SRH"), a Delaware corporation was
formed in June 1997 to serve as a holding company for Southwest Royalties Inc.
("Southwest"), Sierra Well Service Inc. ("Sierra") and Midland Red Oak Realty,
Inc. ("Red Oak") (collectively, the "Company").
Southwest is principally involved in the business of oil and gas development
and production, as well as organizing and serving as managing general partner
for various public and private limited partnerships engaged in oil and gas
acquisitions, exploration, development and production. Southwest is also the
general partner of Southwest Partners II and III, which own common stock in
Sierra. Southwest sells its oil and gas production to a variety of purchasers,
with the prices it receives being dependent upon the oil and gas commodity
prices. Red Oak is principally involved in real estate investment and
development. Sierra is principally involved in the business of oil and gas
well services, which include plugging and workovers for wells.
Principles of Consolidation
The consolidated financial statements include the accounts of SRH and its
subsidiaries, each of which are wholly owned, except Red Oak, Sierra and
Threading Products International, LLC ("TPI" (a subsidiary of Southwest)). As
of December 31, 1995 and 1996, the Company owned approximately 78% and 76% of
Red Oak, 99% and 54% of Sierra and 95% of TPI. Effective July 1997, Southwest
Partners III purchased additional shares of Sierra stock thus decreasing the
Company's total direct and indirect ownership percentage to 45%. Therefore,
effective July 1, 1997, Sierra was deconsolidated and is reported upon using
the equity method (see Note 3). The consolidated financial statements include
the Company's proportionate share of the assets, liabilities, income and
expenses of oil and gas limited partnerships for which it serves as managing
general partner. All significant intercompany transactions have been
eliminated.
Estimates and Uncertainties
Preparation of the accompanying consolidated 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 disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. In addition, the
Company maintains its excess cash in several interest bearing accounts in
various financial institutions.
Concentrations of Credit Risk
The Company is subject to credit risk through trade receivables. Although a
substantial portion of its debtors' ability to pay is dependent upon the oil
and gas industry, credit risk is minimized due to a large customer base.
Oil and Gas Properties
All of the Company's oil and gas properties are located in the United States
and are accounted for at cost under the full cost method. Under this method,
all productive and nonproductive costs incurred in connection
F-20
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with the acquisition, exploration and development of oil and gas reserves are
capitalized. No gain or loss is recognized on the sale of oil and gas
properties unless nonrecognition would significantly alter the relationship
between capitalized costs and remaining proved reserves for the affected
amortization base. When gain or loss is not recognized, the amortization base
is reduced by the amount of sales proceeds.
Net capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized using the units of
revenue method, whereby the provision is computed on the basis of current
gross revenues from production in relation to future gross revenues, based on
current prices, from estimated production of proved oil and gas reserves.
Should the net capitalized costs net of related deferred income taxes exceed
the estimated present value of oil and gas reserves discounted at 10% and
adjusted for related income taxes, such excess costs would be charged to
expense in the Consolidated Statements of Operations.
It is reasonably possible that the estimates of anticipated future gross
revenues, the remaining estimated economic life of the product, or both could
change significantly in the near term due to the potential fluctuation of oil
and gas prices or production. Depletion estimates would also be affected by
such changes.
Property and Equipment
Oil and gas well servicing equipment, rental property and other property and
equipment is stated at cost. Repairs and maintenance are charged to expense as
incurred, with additions and improvements being capitalized. Upon sale or
other retirement of depreciable property, the cost and accumulated
depreciation are removed from the related accounts and any gain or loss is
reflected in the Consolidated Statements of Operations.
Depreciation is provided on the straight-line method based on the estimated
useful lives of the depreciable assets as listed below:
<TABLE>
<S> <C>
Building and improvements.................................. 20 to 30 years
Rental property and improvement............................ 5 to 30 years
Leasehold improvements..................................... 2 to 10 years
Machinery and equipment.................................... 3 to 5 years
Furniture and fixtures..................................... 3 to 5 years
Equipment under capital lease.............................. 3 to 5 years
</TABLE>
Real Estate Investments
The Company is a limited partner in various limited partnerships, which are
carried at cost. No earnings have been distributed to the Company from these
partnerships.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this Statement did not have an impact on the
Company's financial position, results of operations, or liquidity.
Deferred Debt Costs
The Company capitalizes certain cost incurred in connection with obtaining
debt. These costs are being amortized to interest expense on the straight-line
method over the term of the related debt.
F-21
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gas Balancing
The Company utilizes the sales method of accounting for over or under
deliveries of natural gas. Under this method, the Company recognizes sales
revenue on all natural gas sold. As of December 31, 1995 and December 31,
1996, the Company was underproduced by approximately 990 and 693 MMcf,
respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax effects attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rate is recognized in
income in the period that includes the enactment date. Deferred tax assets are
reduced, if necessary, by a valuation allowance for the amount of tax benefits
that may not be realized.
SRH and its eligible subsidiaries file a consolidated U.S. federal income
tax return. Sierra and Red Oak are consolidated for financial reporting
purposes, but beginning January 1, 1996, were not eligible to be included in
the consolidated U.S. federal income tax return. Separate provisions for
income taxes have been determined for these entities.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 amounts to
conform to the 1996 presentation.
Earnings (Loss) Per Share
Net earnings (loss) per share is computed using the weighted average number
of shares of common stock and redeemable common stock outstanding. Common
equivalent shares from warrants are excluded from the computation as their
exercise price is equivalent to the fair market value of the common stock and
there would be no dilution under the treasury stock method.
Interim Financial Statements
The interim financial information as of September 30, 1997, and for the nine
months ended September 30, 1996 and 1997, is unaudited. However, in the
opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods,
and all such adjustments are of a normal recurring nature. The interim
financial statements should be read in conjunction with the audited financial
statements for the years ended December 31, 1994, 1995 and 1996.
2. SUBSIDIARIES, ACQUISITIONS AND DISPOSITIONS
During 1994, Red Oak sold 62,384 shares of redeemable common stock for
approximately $1,560,000 through a private placement offering. During 1995,
Red Oak sold an additional 39,616 shares of redeemable common stock and 34,611
shares of its Series A cumulative convertible preferred stock, for
approximately $2,720,950. The redeemable common stock is redeemable at the
stockholder's option at a price equal to the purchase price plus a 6% annual
return computed on a cumulative, but not compounded, basis between December 1,
1996 and December 1, 1999. Redemptions are to be paid out of future earnings
of Red Oak. If there are no future earnings, redemptions will be paid out of
additional paid-in capital. As of December 31, 1996, the contingent liability
for redemption of the outstanding shares of redeemable common stock is
$3,136,000 based on an outstanding offer to purchase shares for $32 each.
F-22
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 2, 1995, SW Espero, Inc., a wholly owned subsidiary of Southwest,
acquired all of the stock of Espero Energy Corporation for approximately
$13,000,000, which was funded through a credit agreement with an asset
management company. SW Espero, Inc. and Espero Energy Corporation were
immediately merged, with Espero Energy Corporation being the surviving
corporation. The acquisition was accounted for as a purchase and the total
purchase price was allocated to the assets and liabilities acquired based upon
their estimated respective fair market values. The results of operations of
Espero Energy Corporation are included in the Consolidated Statements of
Operations beginning August 2, 1995.
On September 26, 1996, Red Oak formed a subsidiary with an unrelated third
party. On October 15, 1996, the subsidiary acquired three shopping centers for
a total purchase price of $12.5 million. The transaction was funded through a
$2.3 million contribution from Red Oak and a $1.2 million contribution from
the unrelated third party. The subsidiary funded the remaining $9 million of
the purchase price through a note payable due June 1, 1998. (See Note 6). The
transaction was accounted for using the purchase method. The results of
operations of the properties acquired are included in the Consolidated
Statements of Operations beginning September 26, 1996.
Pro Forma Results of Operations--(unaudited)
The following table reflects the pro forma results of operations as though
the acquisitions had occurred on January 1, 1995. The pro forma amounts are
not necessarily indicative of the results that may be reported in the future.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Revenues................................................ $35,942 $49,626
Net loss................................................ (3,940) (29)
Net loss per share...................................... (4.09) (0.03)
</TABLE>
3. INVESTMENT
The investment in subsidiary held by the Company consists of a 45% ownership
interest in Sierra Well Service, Inc. The investment is accounted for on the
equity method. Effective July 1997, Southwest Partners III purchased
additional shares of Sierra stock thus decreasing Southwest's total direct and
indirect ownership percentage. Therefore, with the change of Southwest's
ownership percentage from a majority to a minority interest, Sierra was
deconsolidated. The deconsolidation of Sierra required an adjustment to the
investment account to reflect the change in accounting from the consolidation
method to the equity method.
Pertinent financial information for Sierra Well Service, Inc. as of
September 30, 1997 and for the quarter ended September 30, 1997 is as follows:
<TABLE>
<S> <C>
Balance sheet
Assets......................................................... $28,472
=======
Liabilities.................................................... $11,358
Equity......................................................... 17,114
-------
$28,472
=======
Income statement
Revenues....................................................... $ 7,117
Expenses....................................................... 7,058
-------
59
x45%
-------
Company's share of net income.................................... $ 26
=======
</TABLE>
F-23
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment, including oil and gas well servicing, rental
property and other, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Land..................................................... $ 2,157 $ 2,157
Building and improvements................................ 1,310 1,326
Machinery and equipment.................................. 4,017 7,365
Furniture and fixtures................................... 1,564 1,714
Equipment under capital lease............................ 766 1,000
Rental property.......................................... 19,441 30,287
------- -------
29,255 43,849
Less accumulated depreciation............................ 3,501 5,171
------- -------
$25,754 $38,678
======= =======
</TABLE>
5. FUTURE LEASE RECEIVABLES
Red Oak leases office and retail shopping centers under noncancelable
operating leases that expire at various dates through 2028. The following is a
summary of minimum future rentals expected to be received under noncancelable
operating leases (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997............................................................ $ 2,684
1998............................................................ 9,349
1999............................................................ 7,711
2000............................................................ 5,962
2001............................................................ 4,462
2002............................................................ 2,410
Thereafter...................................................... 9,672
-------
$42,250
=======
</TABLE>
The preceding future minimum rentals do not include percentage rents.
F-24
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving line of credit with variable-rate
interest, due February 1999. Monthly payments,
beginning July 1, 1997, of $550 plus interest.
Collateralized by oil and gas properties (see
Note 17)....................................... $32,100 $28,125 $ 44,900
9% Notes payable, with variable quarterly
payments including interest, due December 2003.
Collateralized by oil and gas properties (see
Note 17)....................................... 22,557 27,649 26,338
10% Note payable, interest payable monthly, due
June 1998. Collateralized by oil and gas
properties..................................... -- 9,000 --
12% Note payable, interest payable semi-annually
due November 2001. Collateralized by oil and
gas properties (see Note 17)................... -- 7,143 7,229
15% Subordinated note payable................... 2,500 -- --
Capital lease obligations....................... 555 692 225
Note payable at 3-year U.S. Treasury plus
3.875%, monthly payments of $41 including
interest, due February 2002. Collateralized by
real estate.................................... 4,516 4,428 --
Note payable at prime plus 1.5%................. 798 -- --
Note payable at 3-year U.S. Treasury plus 3.5%,
monthly payments of $46 including interest, due
November 2002. Collateralized by real estate... 4,764 4,954 --
Note payable at prime plus 1.125%............... 4,000 -- --
8.05% Note payable, annual payments of $87
including interest, due January 2026.
Collateralized by real estate.................. -- 968 968
Note payable, at prime plus 1.5%, monthly
payments of $68 including interest, due
September 2003. Collateralized by real estate.. -- 7,106 --
13% Notes payable, due May 2000. Cash interest
of 10% payable monthly with additional interest
payable based on excess cash flow or through
the issuance of additional notes.
Collateralized by real estate.................. -- -- 55,357
Other........................................... 1,696 3,740 7,196
------- ------- --------
73,486 93,805 142,213
Less current maturities....................... 4,661 10,216 3,408
------- ------- --------
$68,825 $83,589 $138,805
======= ======= ========
</TABLE>
Revolving Line of Credit
The revolving credit line allows Southwest to borrow the lesser of $75
million or the borrowing base which is renegotiated periodically. As of
December 31, 1996, the borrowing base was $28,125,000, and as of September 30,
1997, the borrowing base was $44,900,000. The revolving line of credit
agreement provides for the revolver to become due and payable on February 28,
1999. Fees on the unused portion of the revolving line of credit are three-
eighths of one percent ( 3/8%) per annum on the daily average of the
unadvanced amount of the borrowing base.
Southwest has the option to elect an interest rate based on LIBOR plus the
applicable Eurodollar Margin or Prime plus a base rate margin. Both margins
are based on the percentage of the revolving commitment
F-25
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding. The Eurodollar Margin ranges from a minimum of 1.75% to a maximum
of 2.50% and the Prime base rate margin ranges from a minimum of .25% to a
maximum of 1.00%. At December 31, 1996 the Company had chosen the LIBOR rate
election for approximately $28 million of its then outstanding balance on the
revolving line of credit. The LIBOR elections ranged from 7.50% to 8.44%.
Certain covenants of the revolving line of credit require a tangible net
worth of not less than $2 million, a current ratio of 1.0 to 1, a minimum
fixed coverage ratio of 1.1 to 1, restrictions on cash dividends, additional
indebtedness and purchases of investments. Substantially all of Southwest's
assets are collateralized in connection with this debt. Southwest was in
violation of several covenants as of December 31, 1996 and September 30, 1997,
and obtained waivers of the covenants from the lender for the December 31,
1996 violations. Effective June 30, 1997, the lender amended the current ratio
to 0.84 to 1, until September 30, 1997, at which time the ratio becomes 1.0 to
1, and amended the minimum fixed charge ratio to 1.0 to 1, until July 1, 1998,
at which time the ratio becomes 1.1 to 1. Management believes that it is
likely the Company will comply with these covenants as amended.
9% Notes Payable
In August 1995, a subsidiary of Southwest entered into a note agreement
which provided for $30,305,000 in five senior secured amortizing term notes,
having a stated interest of 9%, with quarterly payments which include
interest. These quarterly payments consist of all excess cash balances over
$500,000, less any funds advanced under the notes and unused for the
development of oil and gas properties. The notes are due December 31, 2003,
and are collateralized by certain oil and gas properties.
The covenants of the note agreement include: (1) a working capital base that
is never less than $100,000 at any time after December 31, 1995, $250,000 at
any time after March 31, 1996, and $500,000 at and after June 27, 1996; and
(2) an interest coverage ratio that is never less than 150% at any time after
December 31, 1995. The covenants are based on the subsidiary's financial
statements.
One of the terms of the note agreement provides for an initial 7% gross
overriding royalty interest conveyance in all oil and gas properties of the
subsidiary which shall be adjusted upward to a maximum of 9.95% or downward to
a minimum of 4% on January 1, 1998 in order for a 15.75% internal rate of
return to be achieved on December 31, 2003.
10% Note Payable
In October 1996, Red Oak, through a subsidiary, negotiated a term note of
$9,000,000 to finance the purchase of real estate. This note was repaid with a
portion of the proceeds from the 13% note payable discussed below.
12% Note Payable
In November 1996, Southwest entered into a senior subordinated note
agreement which provided for $8,000,000 to be used for developmental drilling.
The note bears interest at a stated rate of 12%, payable semi-annually,
matures November 1, 2001, and is collateralized by oil and gas properties. The
note agreement contains certain restrictive covenants that include: (1) a
leverage ratio of combined adjusted net tangible assets to combined
indebtedness that is never less than 150% at any time after November, 1996;
and (2) investments in the form of loans and advances to various subsidiaries
are less than $1,200,000 in the aggregate and not outstanding for more than 90
days. Certain covenants also place restrictions on cash dividends, additional
indebtedness and investments, and compensation to certain key employees.
F-26
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of the above noted agreement, Southwest issued common stock warrants
which are exercisable in whole or in part any time prior to November 5, 2001.
These warrants had an estimated fair value of approximately $857,000. At
December 31, 1996, the lender was entitled to 45,413 warrants at an exercise
price of $68 per share.
13% Notes Payable
In April 1997, MRO Properties, Inc. ("MROP"), a wholly-owned subsidiary of
Red Oak, entered into a $42 million credit facility maturing in April 2000
with an institutional lender (the "MROP Facility"). The MROP Facility was
executed in order to consolidate six mortgage loans, originally incurred to
complete the acquisition of certain Red Oak properties and to finance the
acquisition of an additional real estate property. Borrowings under the
facility bear interest at a rate of 13% with 10% payable in cash and the
remaining 3% payable in cash or additional notes at MROP's option. The
facility contains a number of covenants that, among other things, restrict the
ability of MROP to incur additional indebtedness and dispose of assets. The
facility is secured by a first lien on substantially all of MROP's properties.
The deferred debt costs associated with refinancing of the mortgage loans
were charged to expense as an extraordinary item. The amount relating to the
early extinguishment of debt approximated $490,000 which consisted of $742,000
in deferred debt charges with a related income tax benefit of $252,000.
Aggregate maturities of all long-term debt as of December 31, 1996,
including capital leases, are as follows and reflect the changes negotiated
subsequent to year end (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $10,216
1998.............................................................. 11,433
1999.............................................................. 22,022
2000.............................................................. 30,267
2001.............................................................. 11,507
Thereafter........................................................ 8,360
</TABLE>
Aggregate maturities of all long-term debt as of September 30, 1997,
including capital leases, are as follows and reflect the changes negotiated
subsequent to the period end (in thousands):
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED
---------------------------
<S> <C>
September 30, 1998............................................... $ 3,408
September 30, 1999............................................... 241
September 30, 2000............................................... 55,532
September 30, 2001............................................... 343
September 30, 2002............................................... 115
Thereafter....................................................... 82,574
</TABLE>
F-27
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The U.S. Federal tax provision (benefit) attributable to income (loss)
before income taxes, minority interest and extraordinary item consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995 1996
---- ------- -----
<S> <C> <C> <C>
Current............................................. $143 $ (175) $(382)
Benefit of net operating loss carryforward.......... -- (1,765) (913)
Deferred............................................ 28 896 1,660
---- ------- -----
$171 $(1,044) $ 365
==== ======= =====
</TABLE>
Reconciliations between the amount determined by applying the U.S. federal
statutory rate to income (loss) before income taxes, minority interest and
extraordinary item with the income tax provision (benefit) is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995 1996
---- ------- ----
<S> <C> <C> <C>
Computed "expected" tax expense using the U.S. federal
statutory rate........................................... $179 $(1,071) $206
Reduction in available net operating loss carryforwards
resulting from certain subsidiaries which became
ineligible for inclusion in the consolidated return...... -- -- 143
Meals and entertainment................................... 11 16 32
Other..................................................... (19) 11 (16)
---- ------- ----
Provision (benefit) for income taxes...................... $171 $(1,044) $365
==== ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards............................ $ 1,582 $ 2,485
Alternative minimum tax credit carryforwards................. 262 170
Receivables.................................................. 530 469
Note receivable.............................................. -- 55
Other long term assets....................................... 573 247
Other long term liabilities.................................. 326 397
Other........................................................ 152 --
------- -------
Total gross deferred tax assets............................ 3,425 3,823
------- -------
Deferred tax liabilities:
Oil and gas properties, principally due to differences in the
tax and book basis and depletion methods and the deduction
of intangible drilling costs for tax purpose................ (7,178) (8,406)
Other property and equipment................................. (473) (600)
Accounts payable and accrued expenses........................ (1,282) (1,026)
Other........................................................ -- (46)
------- -------
Total gross deferred tax liabilities....................... (8,933) (10,078)
------- -------
Net deferred tax liability................................. $(5,508) $(6,255)
======= =======
</TABLE>
F-28
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future and the availability of certain tax planning strategies that
would generate taxable income to realize the net tax benefits, if implemented,
management has determined that taxable income of the Company will more likely
than not be sufficient to fully utilize available carryforwards prior to their
ultimate expiration.
As of December 31, 1996, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $7,309,000, which are
available to offset future regular taxable income, if any. The net operating
loss carryforwards expire in 2010 and 2011. The Company has alternative
minimum tax credit carryforwards totaling $170,000 to offset regular income
tax, which have no scheduled expiration date.
8. LEASES
The Company rents office space on a month to month basis in a building that
it also manages. Rent expense totaled approximately $241,000, $295,000 and
$243,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
9. PROFIT SHARING PLAN
On January 1, 1991, the Company adopted an employee profit sharing plan that
is intended to provide participating employees with additional income upon
retirement. Employees may contribute between 1% and 15% of their base salary
up to a maximum of $9,240 for the years ended December 31, 1994 and 1995 and
$9,500 for the year ended December 31, 1996. For the years ended December 31,
1994, 1995 and 1996, the Company matched 20% of the employees' contributions.
For the year ended December 31, 1997, the Company will match 20% of the
employees' contributions. For subsequent years, the Company will make
contributions to the plan on a discretionary basis.
Employee contributions are fully vested at all times. Employer contributions
are fully vested upon retirement or after five years of service. For the years
ended December 31, 1994, 1995 and 1996, the Company contributed approximately
$45,000, $54,000 and $60,000, respectively, to the plan.
10. STOCKHOLDERS' EQUITY
In August 1996, the Company issued 129,046 shares of redeemable common stock
through a private placement offering for $68 per share. The stock is
redeemable at the stockholder's option at any time beginning five years from
the issuance of the stock (December 31, 2001) at a purchase price determined
as follows:
(i) The Company shall review no less than five and no more than ten
publicly traded oil and gas companies each with a market capitalization
between $50 million and $150 million ("Public Company"). The Company shall
determine the ratio of each Public Company's market capitalization to
EBITDA for the most recent fiscal year. The Company shall then average such
multiples and take this averaged multiple and apply it to the Company's
EBITDA for the most recent fiscal year, to estimate a value for the
Company's common stock.
(ii) The Company will determine the multiple of the market capitalization
of each Public Company relating to the present value of such Public
Company's oil and gas reserves. Present value will be determined by
discounting the expected net cash flow from the oil and gas reserves by
10%. The Company will then take the average multiple based on this
methodology and apply it to the present value of the Company's oil and gas
reserves discounted by 10% to determine a value for the expected net cash
flow from the Company's common stock.
F-29
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company will then take the average of (i) and (ii) to determine the
value of the Company's common stock.
The redemption right terminates on the effective date of any registration
statement filed with the Securities and Exchange Commission relative to the
offer and sale of the Company's common stock to the public.
During 1994, the Company issued a 6% note to a stockholder. The note
requires semi-monthly payments of $5,500 and is collateralized by the
Company's common stock held by the stockholder.
11. COMMITMENTS AND CONTINGENCIES
The partnership agreements relating to certain limited partnerships for
which Southwest serves as managing general partner provide for Southwest to
offer to repurchase such limited partner units. Under the terms of three of
the partnership agreements, Southwest is obligated to repurchase a maximum of
$100,000 annually of the units of limited partnerships' interests originally
outstanding. Under the terms of the other nine partnership agreements,
Southwest's obligation to repurchase units in any one year is limited to 10%
of the capital contributed by all of the respective limited partners. The
repurchase price is based on the discounted future revenues from oil and gas
reserves of the respective partnership and the value of other partnership
assets. Such amounts required for repurchase in connection with the acceptance
by a portion of the limited partners is approximately $4,833,000 at December
31, 1996. The total amount of limited partner unit repurchases for the years
ended December 31, 1995 and 1996 was approximately $176,000 and $378,000,
respectively.
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations
and that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are expensed when environmental assessment
and/or remediation is probable and the costs can be reasonably estimated.
Management recognizes a financial exposure that may require future
expenditures presently existing for oil and gas properties and other
operations. Other long-term liabilities at December 31, 1996 include $504,000
for estimated future remedial actions and cleanup costs. As of December 31,
1996, the Company has not been fined, cited or notified of any environmental
violations which would have a material adverse effect upon capital
expenditures, earnings or the competitive position in the oil and gas
industry. However, management does recognize that by the very nature of its
business, significant costs could be incurred to bring the Company into total
compliance. The amount of such future expenditures is not readily determinable
due to several factors, including the unknown magnitude of possible
contaminations, the unknown timing and extent of the corrective actions which
may be required, the determination of the Company's liability in proportion to
other responsible parties and the extent to which such expenditures are
recoverable from insurance or indemnifications from prior owners of the
Company's properties. It is reasonably possible this estimate could change
materially in the near term.
In the normal course of its business, the Company is subject to pending or
threatened legal actions; in the opinion of management, any such matters will
be resolved without material effect on the Company's operations or financial
position.
F-30
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTIONS
Southwest is the managing general partner for several public and private oil
and gas limited partnerships, with an officer of Southwest also serving as a
general partner for certain of the limited partnerships. As is usual in the
oil and gas industry, the operator is paid an amount for administrative
overhead attributable to operating such properties. As provided for in the
partnership agreements, such amounts paid by the partnerships to Southwest as
operator approximated $1,805,000, $2,039,000, and $2,139,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. In addition, Southwest
and certain officers and employees may have an interest in some of the
partnership properties.
Sierra performs various oilfield services for limited partnerships managed
by Southwest. Such services aggregated $292,000, $166,000 and $112,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. Southwest also
receives management fees as well as reimbursement of administrative costs
attributable to serving as managing general partner of certain of the limited
partnerships, with such fees aggregating $1,318,000, $1,506,000 and $1,509,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, other current assets and other current
liabilities approximates fair value because of the short maturity of these
instruments.
Based on the borrowing rates currently estimated to be available to the
Company for loans with similar terms, the fair value of long-term debt
approximates the carrying amount as of December 31, 1995 and 1996.
14. LINES OF BUSINESS
The Company operates in three major segments: Oil and Gas Activities (oil
and gas acquisition, development, exploration and production, as well as
organizing and serving as managing general partner for various public and
private limited partnerships engaged in oil and gas development and
production), Oil and Gas Well Servicing (provides well completion,
recompletion and production equipment, transportation services, tank supply
rental services and other support and well maintenance services to operating
oil and gas companies) and Real Estate Investment and Management (owns and
manages retail shopping centers and office buildings). Other items include
eliminations, manufacturing, computer service and broker/dealer.
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- --------
<S> <C> <C> <C>
Operating profit (loss)
Oil and gas................................... $ 855 $ 2,151 $ 9,676
Well service.................................. (146) (177) (506)
Real estate................................... (36) 933 1,288
Other and eliminations........................ (89) (612) (855)
----- ------- --------
$ 584 $ 2,295 $ 9,603
===== ======= ========
Identifiable assets
Oil and gas......................................... $76,170 $ 95,042
Well service........................................ 2,993 6,585
Real estate......................................... 21,666 35,365
Other and eliminations.............................. (5,395) (6,708)
------- --------
$95,434 $130,284
======= ========
</TABLE>
F-31
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. RESTATEMENT
The Company has restated its previously issued financial statements for the
year ended December 31, 1995, to adjust for understatement of previously
reported assets, liabilities and net income, resulting in the following
changes:
<TABLE>
<CAPTION>
NET
OIL AND GAS INCOME
RECEIVABLES LIABILITIES (LOSS)
----------- ----------- -------
<S> <C> <C> <C>
As previously reported........................ $2,295 $95,602 $(2,374)
Understatement of oil and gas accrual net of
lease operating expense and production....... 527 179 348
Understatement of redeemable common stock due
to redemption feature........................ -- 94 (94)
------ ------- -------
As adjusted................................. $2,822 $95,875 $(2,120)
====== ======= =======
</TABLE>
16. CONDENSED ISSUER FINANCIAL DATA (UNAUDITED)
Summarized consolidated financial information for Southwest is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Current assets................................ $11,198 $18,439 $ 17,741
Net property and equipment.................... 57,422 66,348 85,665
Other assets, net............................. 2,439 3,991 12,208
------- ------- --------
$71,059 $88,778 $115,614
======= ======= ========
Current liabilities........................... $14,548 $19,127 $ 19,211
Long-term debt................................ 53,641 55,234 79,684
Other liabilities............................. 1,404 2,968 4,303
Deferred income taxes......................... 5,620 6,025 4,809
Minority interest............................. 140 158 174
Redeemable common stock....................... -- 8,258 8,291
Stockholders equity........................... (4,294) (2,992) (858)
------- ------- --------
$71,059 $88,778 $115,614
======= ======= ========
</TABLE>
F-32
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
SOUTHWEST SIERRA RED OAK ELIMINATIONS CONSOLIDATED
--------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
For the year ended December
31, 1994:
Operating revenues....... $16,597 $2,652 $ 656 $(277) $19,628
Depreciation, depletion
and amortization........ 4,201 154 82 -- 4,437
Operating income (loss).. 765 (146) (35) -- 584
Interest expense......... 1,830 23 122 -- 1,975
Income (loss) before
taxes................... 849 (172) (152) -- 525
Net income (loss)........ 552 (96) (103) -- 353
For the year ended December
31, 1995:
Operating revenues....... $23,087 $4,437 $3,213 $(237) $30,500
Depreciation, depletion
and amortization........ 5,825 448 446 -- 6,719
Operating income (loss).. 1,539 (177) 933 -- 2,295
Interest expense......... 4,359 70 1,272 (66) 5,635
Loss before taxes........ (2,579) (248) (322) -- (3,149)
Net loss................. (1,688) (168) (221) (43) (2,120)
For the year ended December
31, 1996:
Operating revenues....... $36,109 $8,273 $4,487 $(451) $48,418
Depreciation, depletion
and amortization........ 6,907 863 660 -- 8,430
Operating income (loss).. 8,824 (506) 1,285 -- 9,603
Interest expense......... 8,030 82 1,904 -- 10,016
Income (loss) before
taxes................... 1,823 (608) (607) (19) 589
Net income (loss)........ 1,152 (448) (441) 142 405
For the period ending
September 30, 1996:
Operating revenues....... $25,201 $6,372 $3,092 $(348) $34,317
Depreciation, depletion
and amortization........ 5,166 632 451 -- 6,249
Operating income......... 5,473 111 850 -- 6,434
Interest expense......... 5,986 52 1,142 -- 7,180
Income (loss) before
taxes................... 185 76 (282) (12) (33)
Net income (loss)........ 71 52 (198) 59 (16)
For the period ending
September 30, 1997:
Operating revenues....... $27,135 $7,833 $5,029 $(163) $39,834
Depreciation, depletion
and amortization........ 6,520 747 826 -- 8,093
Operating income......... 3,991 184 1,831 -- 6,006
Interest expense......... 6,889 184 3,880 (3) 10,950
Loss before taxes........ (2,346) (5) (2,101) (13) (4,465)
Net income (loss)........ (1,489) (4) (1,937) 323 (3,107)
</TABLE>
17. SUBSEQUENT EVENTS
Southwest
In October 1997, Southwest Royalties Inc., a wholly owned subsidiary of
Southwest Royalties Holdings, Inc. issued $200,000,000 of 10 1/2% Senior Notes
due 2004. The proceeds from the sale of the notes were used to purchase
certain oil and gas properties and related assets and to cancel certain debt
held at September 30, 1997. The cancelled debt consisted of $44,900,000 on a
revolving line of credit, $26,338,000 on a 9% note payable and $7,229,000 on a
12% note payable. In consideration of the intent and ability to refinance
existing debt with the note offering, Southwest reclassified the above
mentioned debt at September 30, 1997 as non-current.
F-33
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, Southwest used a portion of the proceeds from the above
note offering to purchase 250,000 shares of Red Oak's stock for a total of
$10,000,000. In connection with the purchase of the additional shares, Red Oak
became eligible to be included in the Company's consolidated U.S. federal
income tax return.
Southwest is a general partner of Southwest Partners III, L.P., which was
formed May 12, 1997. Under the terms of the partnership agreement, Southwest
is required to make capital contributions equal to 10% of the total limited
partner capital contributions. To date, the limited partners have made capital
contributions of $16.3 million, and accordingly, the Company has a liability
to the Partnership in the amount of $1,625,675.
In September 1997, Southwest entered into an agreement to acquire certain
oil and gas properties and related assets for $72,342,000, subject to closing
adjustments. The acquisition closed on October 14, 1997.
Real Estate
Subsequent to September 1997, Red Oak was committed to purchase three
shopping centers and one office building all located in Texas, for a combined
total of approximately $25,705,000. A total of $475,000 is being held in
escrow and will be applied to each respective purchase price upon closing.
18. SUPPLEMENTAL FINANCIAL DATA OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED):
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosure about Oil and Gas Producing
Activities," (SFAS No. 69), except as noted.
Costs incurred in connection with oil and gas producing activities are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS
31, ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------- ------- -------------
<S> <C> <C> <C> <C>
Acquisition of properties.................. $7,795 $24,116 $ 3,234 $11,384
Exploration costs.......................... $ 59 $ 1,278 $ 184 $ 1,923
Development costs.......................... $2,134 $ 6,683 $13,322 $13,215
</TABLE>
Results of operations for oil and gas producing activities are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS
31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Revenues................................. $16,321 $22,717 $35,296 $26,068
Production costs......................... 7,879 11,511 14,846 12,166
Depreciation, depletion and amortization. 3,508 5,068 6,434 6,161
------- ------- ------- -------
4,934 6,138 14,016 7,741
Income tax expense....................... 1,678 2,087 4,906 2,632
------- ------- ------- -------
Results of operations from producing
activities.............................. $ 3,256 $ 4,051 $ 9,110 $ 5,109
======= ======= ======= =======
</TABLE>
RESERVE QUANTITY INFORMATION
The estimates of the Company's proved oil and gas reserves, which are
located in the United States, are based on evaluations reviewed by independent
petroleum engineers. Reserves were estimated in accordance with guidelines
established by the U. S. Securities and Exchange Commission and the Financial
Accounting Standards
F-34
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Board, which require that reserve estimates be prepared under existing
economic and operating conditions with no provision for price and cost
escalations except by contractual arrangements. The reserve estimates at
December 31, 1996 assume an average oil price of $23.89 per Bbl (reflecting
adjustments for oil quality and gathering and transportation costs) and an
average gas price of $3.67 per Mcf (reflecting adjustments for BTU content,
gathering and transportation costs and gas processing and shrinkage).
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities or proved reserves and the projection
of future rates of production and the timing of development expenditures. The
accuracy of such estimates is a function of the quality of available data and
of engineering and geological interpretation and judgement. Results of
subsequent drilling, testing and production may cause either upward or
downward revision of previous estimates. Further, the volumes considered to be
commercially recoverable fluctuate with the changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of
currently producing oil and gas properties. Accordingly, these estimates are
expected to change, as additional information becomes available in the future
<TABLE>
<CAPTION>
OIL AND NATURAL BARRELS OF
CONDENSATE GAS OIL EQUIVALENT
(MBBLS) (MMCF) (MBOE)
---------- ------- --------------
<S> <C> <C> <C>
Total Proved Reserves:
Balance, January 1, 1994.................... 7,236 27,405 11,804
Extensions and discoveries................. -- -- --
Purchase of minerals-in-place.............. 928 9,208 2,463
Sales of minerals-in-place................. (58) (840) (198)
Revisions of previous estimates............ 2,531 5,395 3,430
Production................................. (629) (3,178) (1,159)
------ ------ ------
Balance, December 31, 1994.................. 10,008 37,990 16,340
Extensions and discoveries................. -- -- --
Purchase of minerals-in-place.............. 4,760 25,156 8,953
Sales of minerals-in-place................. (1,013) (5,978) (2,009)
Revisions of previous estimates............ 3,639 18,061 6,648
Production................................. (814) (4,639) (1,587)
------ ------ ------
Balance, December 31, 1995.................. 16,580 70,590 28,345
Extensions and discoveries................. -- -- --
Purchase of minerals-in-place.............. 2,843 6,844 3,983
Sales of minerals-in-place................. (989) (466) (1,067)
Revisions of previous estimates............ 1,373 5,211 2,242
Production................................. (1,001) (5,403) (1,901)
------ ------ ------
Balance, December 31, 1996.................. 18,806 76,776 31,602
====== ====== ======
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated
future production of proved oil and gas reserves less estimated future
expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves, discounted using a rate of 10% per year to
reflect the estimated timing of the future cash flows. Future income taxes are
calculated by comparing discounted future cash flows to the tax basis of oil
and gas properties plus available carryforwards and credits and applying the
current tax rates to the difference.
F-35
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and
production costs and risks associated with future production. Because of these
and other considerations, any estimate of fair value is necessarily subjective
and imprecise.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows.............................. $227,864 $433,514 $735,100
Future production and development costs.......... (125,113) (213,698) (283,894)
-------- -------- --------
Future net cash flows before income taxes........ 102,751 219,816 451,206
Future income tax expense........................ (28,879) (64,064) (142,017)
-------- -------- --------
Future net cash flows............................ 73,872 155,752 309,189
10% annual discount for estimated timing of cash
flows........................................... (31,766) (71,646) (130,648)
-------- -------- --------
Standardized measure of discounted future net
cash flows...................................... $ 42,106 $ 84,106 $178,541
======== ======== ========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales of oil and gas produced, net of production
costs............................................ $(8,442) $(11,206) $(20,450)
Net change in sales prices net of production
costs............................................ 11,778 13,106 92,332
Extensions and discoveries, net of future
production and development costs................. -- -- --
Revisions to estimated future development costs (9,503) (78) 1,854
Purchases of minerals-in-place.................... 9,646 42,733 38,480
Revisions of previous quantity estimates.......... 17,100 17,756 19,794
Accretion of discount............................. 3,811 5,802 11,790
Net change in income taxes........................ (7,248) (18,134) (39,268)
Sales of minerals-in-place........................ (631) (7,979) (2,439)
Changes in production rates, timing and other..... -- -- (7,658)
------- -------- --------
16,511 42,000 94,435
Discounted future net cash flows--
Beginning of period............................. 25,595 42,106 84,106
------- -------- --------
End of period................................... $42,106 $ 84,106 $178,541
======= ======== ========
</TABLE>
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Southwest Royalties, Inc.
We have audited the accompanying Historical Statement of Revenues and Direct
Operating Expenses of the Oil and Gas Properties Acquisition for the years
ended December 31, 1994, 1995 and 1996. This historical statement is the
responsibility of the management of the owners of the properties. Our
responsibility is to express an opinion on this historical statement based on
our audit.
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 historical statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the historical statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the historical statement. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying statement as described in Note 1 was prepared for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission (SEC) for inclusion in a prospectus to be issued in
connection with an offering by Southwest Royalties, Inc. under Rule 144A of
the Securities Act of 1933. It is not intended to be a complete presentation
of the financial condition, operations and cash flows of the property.
In our opinion, the historical statement referred to in the first paragraph
of this report presents fairly, in all material respects, the revenue and
direct operating expenses of the property as described in Note 1 for the years
ended December 31, 1994, 1995 and 1996, in conformity with generally accepted
accounting principles.
As described in Note 2 to the historical statement, these properties have
significant transactions with related parties.
PRICE WATERHOUSE LLP
Houston, Texas
October 7, 1997
F-37
<PAGE>
OIL AND GAS PROPERTIES ACQUISITION
HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas condensate................. $11,396 $12,294 $15,325 $12,025
Gas.................................... 452 489 805 625
------- ------- ------- -------
Total................................ 11,848 12,783 16,130 12,650
------- ------- ------- -------
Direct operating expenses:
Injection gas.......................... 2,872 3,360 3,603 2,737
Taxes other than on income............. 1,313 1,203 1,014 905
Labor.................................. 664 585 596 336
Utilities.............................. 535 548 484 330
Other operating expense................ 2,068 2,168 2,769 2,454
------- ------- ------- -------
Total................................ 7,452 7,864 8,466 6,762
------- ------- ------- -------
Revenues in excess of direct operating
expenses................................ $ 4,396 $ 4,919 $ 7,664 $ 5,888
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-38
<PAGE>
OIL AND GAS PROPERTIES ACQUISITION
NOTES TO HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1994, 1995 AND 1996 AND UNAUDITED SEPTEMBER 30, 1997
(IN THOUSANDS)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On September 10, 1997, Southwest Royalties, Inc. ("Southwest") entered into
a Purchase and Sale Agreement (the "Agreement") with a major oil company (the
"Oil Company") to acquire the interests in certain producing oil and gas
properties (the "Property") which are located in the Permian Basin of the
United States as described in Exhibit A, Schedule 1 to the Agreement.
The accompanying statement of revenues and direct operating expenses
("Statement") was prepared from the historical accounting records of the Oil
Company (accrual basis, successful efforts method of accounting for oil and
gas activities, in accordance with generally accepted accounting principles).
Complete financial statements, including a balance sheet, are not presented
as the Property was not maintained as a separate business unit and assets,
liabilities or indirect operating costs applicable to the Property were not
segregated. It is not practicable to identify all assets, liabilities or
indirect operating costs applicable to the Property.
Oil revenues and associated direct operating expenses relate to the net
revenue interest and net working interest, respectively, in the Property. With
respect to gas sales, the sales method is used for recording revenues. Under
this approach, each party recognizes revenue based on sales actually made
regardless of its proportionate share of the related production. Gas
imbalances related to production on the Property do not have a material impact
on the Statement. Direct operating expenses include labor, repairs and
maintenance, fuel consumed and supplies utilized to operate and maintain the
wells, related equipment and facilities. The Statement does not include
general and administrative expenses, interest or provisions for depreciation,
depletion, amortization and dismantlement costs, or for taxes on income.
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS
Substantially all of the revenues, labor and other operating expenses relate
to transactions with the Oil Company. The Oil Company purchases a significant
portion of production from these leases based on the Oil Company's posted
prices for processing at its refineries. Services performed by the Oil Company
and other Oil Company affiliates directly related to the property's operations
are shown as direct operating expenses in the Statements.
3. COMMITMENTS AND CONTINGENCIES
In the course of its business affairs and operations, the owners of the
properties are subject to possible loss contingencies arising from government
environmental, health and safety laws and regulations and third-party
litigation. There are no matters which, in the opinion of management of the
owners of the properties, will have a material adverse effect on the financial
results of the Property.
4. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below is based on the June 30, 1997 reserve
reports prepared by an independent petroleum engineer. Changes in reserve
estimates were derived by adjusting the June 30, 1997 quantities for
historical production and changes in prices.
F-39
<PAGE>
OIL AND GAS PROPERTIES ACQUISITION
NOTES TO HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--
(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND UNAUDITED SEPTEMBER 30, 1997
(IN THOUSANDS)
Proved reserves are estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those which are expected to be recovered through existing wells with
existing equipment and operating methods. Below are the net quantities of
proved reserves and proved developed reserves for the Property:
<TABLE>
<CAPTION>
OIL GAS
------- ------
(MBBLS) (MMCF)
<S> <C> <C>
Proved reserves at December 31, 1993........................ 14,577 4,413
Production.................................................. (748) (251)
Revision of previous estimates.............................. 1,106 452
------ -----
Proved reserves at December 31, 1994........................ 14,935 4,614
Production.................................................. (748) (244)
Revision of previous estimates.............................. 329 131
------ -----
Proved reserves at December 31, 1995........................ 14,516 4,501
Production.................................................. (760) (195)
Revision of previous estimates.............................. 483 238
------ -----
Proved reserves at December 31, 1996........................ 14,239 4,544
------ -----
Proved developed reserves at:
December 31, 1994......................................... 13,341 3,460
------ -----
December 31, 1995......................................... 12,867 3,569
------ -----
December 31, 1996......................................... 12,530 3,778
------ -----
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
the Proved Oil and Gas Reserves" (Standardized Measure) has been prepared in
accordance with Statement of Financial Accounting Standards No. 69. The
Standardized Measure does not purport to present the fair market value of the
proved oil and gas reserves. This would require consideration of expected
future economic and operating conditions, which are not taken into account in
calculating the Standardized Measure.
Under the Standardized Measure, 1996, 1995 and 1994 future cash inflows were
estimated by applying December 31, 1995, 1994 and 1993 prices, respectively,
adjusted for fixed and determinable escalations, to the estimated future
production of proved reserves. Future cash inflows for 1996, 1995 and 1994
were reduced by estimated future production and development costs based on
1996, 1995 and 1994 year-end costs, respectively, to determine pre-tax cash
inflows. Future net cash inflows were discounted using a 10% annual discount
rate to arrive at the Standardized Measure. No deduction has been made for
depletion, depreciation or any indirect costs such as general corporate
overhead or interest expense.
F-40
<PAGE>
OIL AND GAS PROPERTIES ACQUISITION
NOTES TO HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--
(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND UNAUDITED SEPTEMBER 30, 1997
(IN THOUSANDS)
The following Standardized Measure and changes in the Standardized Measure
are based on the reserve estimate performed at June 30, 1997 adjusted using
appropriate year-end prices and costs.
Set forth below is the Standardized Measure (before income taxes) relating
to proved oil and gas reserves at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Future cash inflows........................... $ 247,269 $ 269,934 $ 361,634
Future production and development costs....... (113,017) (112,347) (118,013)
--------- --------- ---------
Future net cash inflows....................... 134,252 157,587 243,621
Discounted to present value at a 10% annual
rate......................................... (62,342) (73,178) (113,129)
--------- --------- ---------
Standardized Measure (before income taxes) of
discounted future net cash flows............. $ 71,910 $ 84,409 $ 130,492
========= ========= =========
</TABLE>
The Standardized Measure of discounted future net cash flows is based on the
following oil and gas prices in dollars per barrel and dollars per Mcf,
respectively, at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Oil (per Bbl)........................................... $16.00 $18.00 $24.25
Gas (per Mcf)........................................... $ 1.80 $ 1.92 $ 3.59
</TABLE>
The following is an analysis of the changes in the Standardized Measure
(before income taxes):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Standardized measure (before income taxes)--
beginning of year................................. $43,812 $71,910 $84,409
Increases (decreases):
Sales, net of production costs................... (4,396) (4,919) (7,664)
Net changes in prices and costs.................. 26,735 13,160 45,621
Revision of quantity estimates................... 5,658 2,015 4,665
Changes in production rates, timing and other.... (4,280) (4,948) (4,980)
Accretion of discount............................ 4,381 7,191 8,441
------- ------- --------
Standardized measure (before income taxes)--end of
year.............................................. $71,910 $84,409 $130,492
======= ======= ========
</TABLE>
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of 50 Penn Place for the year ended December 31, 1996. This statement is the
responsibility of Price Edwards & Company's management. Our responsibility is
to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of 50 Penn Place's revenue and
expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of 50 Penn Place for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
July 30, 1997
F-42
<PAGE>
50 PENN PLACE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenue
Rent (Note 3)...................................... $2,847,189 $2,212,825
Recoveries from tenants............................ 577,782 448,549
Other, principally parking revenue................. 100,419 63,761
---------- ----------
3,525,390 2,725,135
---------- ----------
Certain expenses
Utilities.......................................... 755,864 521,418
Contracted services................................ 452,151 327,957
Salaries and related expenses...................... 285,532 154,208
Administrative expenses............................ 150,845 85,372
Repairs and maintenance............................ 97,990 57,694
Property taxes..................................... 95,955 72,971
Management fees.................................... 71,598 56,235
Insurance.......................................... 66,570 37,565
Supplies........................................... 61,513 30,525
---------- ----------
2,038,018 1,343,945
---------- ----------
Revenue in excess of certain expenses............ $1,487,372 $1,381,190
========== ==========
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-43
<PAGE>
50 PENN PLACE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
YEAR ENDED DECEMBER 31, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying statements present revenue and certain expenses of 50 Penn
Place (the "Property"), an office building and retail center located in
Oklahoma City, Oklahoma whose operations are managed by Price Edward &
Company. Midland Red Oak Realty, Inc. ("Red Oak"), a subsidiary of Southwest
Royalties Holdings, Inc. ("SRH") as of September 30, 1997, and MBL Life
Assurance Corporation, owner of the Property, have executed a formal Purchase
and Sale Agreement allowing Red Oak to acquire the Property for approximately
$15 million.
The accompanying statements have been prepared using the accrual basis of
accounting for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of SRH. Accordingly, the statements are not representative of the
actual results of operations of the Property for the year ended December 31,
1996, and the nine months ended September 30, 1997, due to the exclusion of
the following expenses, which may not be comparable to the proposed future
operations of the Property:
.Depreciation and amortization
.Corporate expenses of Property owner
.Federal and state income taxes
.Mortgage interest
.Other costs not directly related to the proposed future operations of the
Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statements of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3. RENT REVENUE
Office and retail space is leased to tenants under various operating leases
with terms ranging from one to fifteen years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area maintenance,
and certain other operating expenses. Certain leases also contain provisions
for percentage rent. Percentage rent earned for the year ended December 31,
1996, approximated $69,000.
Future minimum rentals (base rent) to be received under noncancelable
operating leases in effect at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997............................. $ 2,163,023
1998............................. 1,898,156
1999............................. 1,640,568
2000............................. 1,354,578
2001............................. 1,080,401
Thereafter....................... 2,667,649
-----------
$10,804,375
===========
</TABLE>
F-44
<PAGE>
50 PENN PLACE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
4. CONCENTRATION OF CREDIT RISK
At December 31, 1996, one tenant, General Services Administration, accounted
for more than 10% of total revenue. Rent revenue earned from the tenant for the
year ended December 31, 1996, approximated $494,000.
5. COMMITMENTS
At December 31, 1996, the Property had two noncancelable service agreements
which expire in March and July 1999. The future minimum payments under the
agreements at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997................................ $109,524
1998................................ 109,524
1999................................ 56,381
--------
$275,429
========
</TABLE>
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Bear Canyon Shopping Center for the nine months ended September 30, 1996.
This statement is the responsibility of Southwest Royalties Holdings, Inc.'s
management. Our responsibility is to express an opinion on this statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of Bear Canyon Shopping Center's
revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Bear Canyon Shopping Center for the nine months ended September 30, 1996,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
July 31, 1997
F-46
<PAGE>
BEAR CANYON SHOPPING CENTER
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
Revenue
Rent (Note 3)....................................................... $165,590
Recoveries from tenants............................................. 77,713
--------
243,303
--------
Certain expenses
Property taxes...................................................... 23,001
Marketing expense................................................... 5,450
Repairs and maintenance............................................. 31,376
Utilities........................................................... 17,328
Management fees..................................................... 8,516
Sales taxes......................................................... 9,065
Security............................................................ 1,238
Insurance........................................................... 4,021
Other............................................................... 7,472
--------
107,467
--------
Revenue in excess of certain expenses............................. $135,836
========
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-47
<PAGE>
BEAR CANYON SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1.BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Bear Canyon Shopping Center (the "Property"), an office and
retail building located in Tucson, Arizona. The property, along with two other
offices and retail buildings located in Tucson, Arizona, was purchased by
Midland Red Oak Realty, Inc., a subsidiary of Southwest Royalties Holdings,
Inc. ("SRH"), for an aggregate of $12,500,000 in cash on October 15, 1996.
The accompanying statement of revenue and certain expenses has been prepared
using the accrual basis of accounting for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion
in the registration statement on Form S-4 of SRH. Accordingly, the statement
is not representative of the actual results of operations of the property for
the nine months ended September 30, 1996 due to the exclusion of the following
expenses, which may not be comparable to the proposed future operations of the
Property:
.Depreciation and amortization
.Interest on mortgage which was not assumed by SRH
.Federal and state income taxes
.Other costs not directly related to the proposed future operations of the
property
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3.RENT REVENUE
Office and retail space is leased to tenants under various operating leases
with terms ranging from one to 30 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area maintenance
and certain operating expenses.
Future minimum rentals to be received in calendar years subsequent to
September 30, 1996 under noncancelable operating leases in effect at the date
of this report are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997...................................... $ 272,535
1998...................................... 245,924
1999...................................... 188,519
2000...................................... 164,270
2001...................................... 150,571
Thereafter................................ 262,072
----------
$1,283,891
==========
</TABLE>
F-48
<PAGE>
BEAR CANYON SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(4)CONCENTRATION OF CREDIT RISK
At September 30, 1996, two tenants individually accounted for more than 10%
of total revenue. Rent revenue earned, including recoveries and percentage
rents from these tenants for the nine months ended September 30, 1996, were as
follows:
<TABLE>
<S> <C>
Tenant A............................. $27,434
Tenant B............................. 24,329
</TABLE>
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Bears Path Center for the nine months ended September 30, 1996. This
statement is the responsibility of Southwest Royalties Holdings, Inc.'s
management. Our responsibility is to express an opinion on this statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of Bears Path Center's revenue
and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Bears Path Center for the nine months ended September 30, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
July 31, 1997
F-50
<PAGE>
BEARS PATH CENTER
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
Revenue
Rent (Note 3)....................................................... $107,561
Recoveries from tenants............................................. 43,513
Other............................................................... 395
--------
151,469
--------
Certain expenses
Property taxes...................................................... 36,913
Marketing expense................................................... 6,406
Repairs and maintenance............................................. 26,857
Utilities........................................................... 9,070
Management fees..................................................... 7,485
Sales taxes......................................................... 5,569
Security............................................................ 825
Insurance........................................................... 3,080
Other............................................................... 6,979
--------
103,184
--------
Revenue in excess of certain expenses............................. $ 48,285
========
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-51
<PAGE>
BEARS PATH CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Bears Path Center (the "Property"), an office and retail
building located in Tucson, Arizona. The property, along with two other office
and retail buildings located in Tucson, Arizona, was purchased by Midland Red
Oak Realty, Inc., a subsidiary of Southwest Royalties Holdings, Inc. ("SRH"),
for an aggregate of $12,500,000 in cash on October 15, 1996.
The accompanying statement of revenue and certain expenses has been prepared
using the accrual basis of accounting for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion
in the registration statement on Form S-4 of SRH. Accordingly, the statement
is not representative of the actual results of operations of the property for
the nine months ended September 30, 1996 due to the exclusion of the following
expenses, which may not be comparable to the proposed future operations of the
Property:
.Depreciation and amortization
.Interest on mortgage which was not assumed by SRH
.Federal and state income taxes
.Other costs not directly related to the proposed future operations of the
property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3.RENT REVENUE
Office and retail space is leased to tenants under various operating leases
with terms ranging from one to 15 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area maintenance
and certain operating expenses.
Future minimum rentals to be received in calendar years subsequent to
September 30, 1996 under noncancelable operating leases in effect at the date
of this report are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997........................................ $170,059
1998........................................ 166,026
1999........................................ 167,894
2000........................................ 132,163
2001........................................ 53,092
Thereafter.................................. 131,357
--------
$820,591
========
</TABLE>
F-52
<PAGE>
BEARS PATH CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
4.CONCENTRATION OF CREDIT RISK
At September 30, 1996, four tenants individually accounted for more than 10%
of total revenue. Rent revenue earned, including recoveries and percentage
rents from these tenants for the nine months ended September 30, 1996, were as
follows:
<TABLE>
<S> <C>
Tenant A............................. $32,683
Tenant B............................. 28,351
Tenant C............................. 19,508
Tenant D............................. 17,414
</TABLE>
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Colonnade at Polo Park Venture for the year ended December 31, 1996. This
statement is the responsibility of Colonnade at Polo Park Venture's
management. Our responsibility is to express an opinion on this statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of Colonnade at Polo Park
Venture's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Colonnade at Polo Park Venture for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Midland, Texas
July 22, 1997
F-54
<PAGE>
COLONNADE AT POLO PARK VENTURE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenue
Rent (Notes 3 and 4)............................... $650,522 $548,134
Recoveries from tenants............................ 25,199 21,713
Other.............................................. -- 52,769
-------- --------
675,721 622,616
-------- --------
Certain expenses
Property taxes..................................... 74,679 74,586
Repairs and maintenance............................ 72,807 31,918
Management fees.................................... 21,600 16,200
General and administrative......................... 15,016 7,201
Insurance.......................................... 34,526 26,091
Utilities.......................................... 57,848 57,281
Leasing commission................................. 4,135 --
Other.............................................. 9,947 5,290
-------- --------
290,558 218,567
-------- --------
Revenue in excess of certain expenses............ $385,163 $404,049
======== ========
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-55
<PAGE>
COLONNADE AT POLO PARK VENTURE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses relates to the
operations of Colonnade at Polo Park Venture (the "Property"), a shopping
center located in Midland, Texas. As of July 22, 1997, Midland Red Oak Realty,
Inc. ("Red Oak"), a subsidiary of Southwest Royalties Holdings, Inc. ("SRH")
has executed a formal Purchase and Sale Agreement to acquire the Property for
approximately $3,950,000.
The accompanying statements of revenue and certain expenses have been
prepared using the accrual basis of accounting for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the registration statement on Form S-4 of SRH. Accordingly, the
statements are not representative of the actual results of operations of the
Property for the year ended December 31, 1996 and the nine months ended
September 30, 1997, due to the exclusion of the following expenses, which may
not be comparable to the proposed future operations of the Property:
.Depreciation and amortization
.Mortgage interest which will not be assumed by SRH
.Federal income taxes
.Other costs not directly related to the proposed future operations of the
Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statements of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3. RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from one to 10 years. The leases generally provide for minimum rent
and reimbursement of common area maintenance and certain other operating
expenses. Certain leases also contain provisions for percentage rent.
Percentage rent earned for the year ended December 31, 1996 was $14,376.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................. $ 596,615
1998.............................. 571,626
1999.............................. 363,214
2000.............................. 177,747
2001.............................. 165,481
Thereafter........................ 170,752
----------
$2,045,435
==========
</TABLE>
F-56
<PAGE>
COLONNADE AT POLO PARK VENTURE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
4. CONCENTRATION OF CREDIT RISK
At December 31, 1996, two tenants individually accounted for more than 10%
of total revenue. Rent revenue earned from these tenants for the year ended
December 31, 1996 were as follows:
<TABLE>
<S> <C>
Tenant A............................ $ 92,523
Tenant B............................ 100,352
</TABLE>
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Independence Plaza, Ltd. for the year ended December 31, 1996. This
statement is the responsibility of Independence Plaza, Ltd.'s management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of Independence Plaza, Ltd.'s
revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Independence Plaza, Ltd. for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Midland, Texas
July 22, 1997
F-58
<PAGE>
INDEPENDENCE PLAZA, LTD.
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenue
Rent (Notes 3 and 4)............................... $1,077,986 $844,301
Other.............................................. 1,145 32,427
---------- --------
1,079,131 876,728
---------- --------
Certain expenses
Property taxes..................................... 98,346 69,502
Repairs and maintenance............................ 175,054 199,428
Management fees.................................... 37,500 27,000
General and administrative......................... 87,887 80,465
Insurance.......................................... 20,964 12,935
Security service................................... 19,841 13,755
Utilities.......................................... 219,387 175,083
Other.............................................. 17,230 18,360
---------- --------
676,209 596,528
---------- --------
Revenue in excess of certain expenses............ $ 402,922 $280,200
========== ========
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-59
<PAGE>
INDEPENDENCE PLAZA, LTD.
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses relates to the
operations of Independence Plaza, Ltd. (the "Property"), an office building
located in Midland, Texas. As of July 22, 1997, Midland Red Oak Realty, Inc.
("Red Oak"), a subsidiary of Southwest Royalties Holdings, Inc. ("SRH") has
executed a formal Purchase and Sale Agreement to acquire the Property for
approximately $4,450,000.
The accompanying statements of revenue and certain expenses have been
prepared using the accrual basis of accounting for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the registration statement on Form S-4 of SRH. Accordingly, the
statements are not representative of the actual results of operations of the
Property for the year ended December 31, 1996 and the nine months ended
September 30, 1997, due to the exclusion of the following expenses, which may
not be comparable to the proposed future operations of the Property:
.Depreciation and amortization
.Mortgage interest which will not be assumed by SRH
.Federal income taxes
.Other costs not directly related to the proposed future operations of the
Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statements of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3. RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from one to 25 years. The leases generally provide for minimum rent
and reimbursement of certain operating expenses.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................. $1,012,710
1998.............................. 958,540
1999.............................. 796,520
2000.............................. 399,350
2001.............................. 371,827
Thereafter........................ 1,376,516
----------
$4,915,463
==========
</TABLE>
F-60
<PAGE>
INDEPENDENCE PLAZA, LTD.
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
4. CONCENTRATION OF CREDIT RISK
At December 31, 1996, three tenants individually accounted for more than 10%
of total revenue. Rent revenue earned from these tenants for the year ended
December 31, 1996 were as follows:
<TABLE>
<S> <C>
Tenant A............................ $211,134
Tenant B............................ 198,060
Tenant C............................ 127,896
</TABLE>
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Madera Village Shopping Center for the nine months ended September 30,
1996. This statement is the responsibility of Southwest Royalties Holdings,
Inc.'s management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of Madera Village Shopping
Center's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Madera Village Shopping Center for the nine months ended September 30,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
July 31, 1997
F-62
<PAGE>
MADERA VILLAGE SHOPPING CENTER
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
Revenue
Rent (Note 3)....................................................... $574,801
Recoveries from tenants............................................. 237,826
Other............................................................... 929
--------
813,556
--------
Certain expenses
Property taxes...................................................... 150,190
Marketing expense................................................... 5,132
Repairs and maintenance............................................. 35,811
Utilities........................................................... 13,986
Management fees..................................................... 26,152
Sales taxes......................................................... 29,866
Security............................................................ 1,237
Insurance........................................................... 3,822
Other............................................................... 9,568
--------
275,764
--------
Revenue in excess of certain expenses............................. $537,792
========
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-63
<PAGE>
MADERA VILLAGE SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1.BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Madera Village Shopping Center (the "Property"), an office and
retail building located in Tucson, Arizona. The property, along with two other
office and retail buildings located in Tucson, Arizona, was purchased by
Midland Red Oak Realty, Inc., a subsidiary of Southwest Royalties Holdings,
Inc. ("SRH"), for an aggregate of $12,500,000 in cash on October 15, 1996.
The accompanying statement of revenue and certain expenses has been prepared
using the accrual basis of accounting for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion
in the registration statement on Form S-4 of SRH. Accordingly, the statement
is not representative of the actual results of operations of the property for
the nine months ended September 30, 1996 due to the exclusion of the following
expenses, which may not be comparable to the proposed future operations of the
Property:
.Depreciation and amortization
.Interest on mortgage which was not assumed by SRH
.Federal and state income taxes
.Other costs not directly related to the proposed future operations of the
property
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3.RENT REVENUE
Office and retail space is leased to tenants under various operating leases
with terms ranging from one to 40 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area maintenance
and certain operating expenses.
Future minimum rentals to be received in calendar years subsequent to
September 30, 1996 under noncancelable operating leases in effect at the date
of this report are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997...................................... $ 789,816
1998...................................... 752,246
1999...................................... 709,935
2000...................................... 627,072
2001...................................... 578,017
Thereafter................................ 3,569,266
----------
$7,026,352
==========
</TABLE>
F-64
<PAGE>
MADERA VILLAGE SHOPPING CENTER
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
4.CONCENTRATION OF CREDIT RISK
At September 30, 1996, three tenants individually accounted for more than
10% of total revenue. Rent revenue earned, including recoveries and percentage
rents from these tenants for the nine months ended September 30, 1996, were as
follows:
<TABLE>
<S> <C>
Tenant A............................ $228,684
Tenant B............................ 104,505
Tenant C............................ 98,229
</TABLE>
F-65
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Plaza Palomino for the year ended December 31, 1996. This statement is the
responsibility of Southwest Royalties Holdings, Inc.'s management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
It is not intended to be a complete presentation of Plaza Palomino's revenue
and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Plaza Palomino for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
July 18, 1997
F-66
<PAGE>
PLAZA PALOMINO
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue
Rent (Note 3)....................................... $ 945,537 257,090
Recoveries from tenants............................. 198,594 75,569
Other............................................... 13,210 10,057
---------- --------
1,157,341 342,716
---------- --------
Certain expenses
Property taxes...................................... 114,906 28,726
Marketing expense................................... 113,686 32,761
Repairs and maintenance............................. 82,302 21,719
Utilities........................................... 77,367 16,762
Management fees..................................... 55,320 16,578
Administrative salaries............................. 43,695 9,495
Sales taxes......................................... 38,820 9,101
Security............................................ 14,343 1,955
Insurance........................................... 8,222 1,526
Other............................................... 28,117 7,996
---------- --------
576,778 146,619
---------- --------
Revenue in excess of certain expenses............. $ 580,563 196,097
========== ========
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-67
<PAGE>
PLAZA PALOMINO
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses relate to the
operations of Plaza Palomino (the "Property"), an office and retail building
located in Tucson, Arizona. The property was purchased by Midland Red Oak
Realty, Inc., a subsidiary of Southwest Royalties Holdings, Inc. ("SRH"), for
$7,025,000 in cash on April 7, 1997.
The accompanying statements of revenue and certain expenses have been
prepared using the accrual basis of accounting for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the registration statement on Form S-4 of SRH. Accordingly, the
statements are not representative of the actual results of operations of the
property for the year ended December 31, 1996 and for the three months ended
March 31, 1997 due to the exclusion of the following expenses, which may not
be comparable to the proposed future operations of the Property:
.Depreciation and amortization
.Interest on mortgage which was not assumed by SRH
.Federal and state income taxes
.Other costs not directly related to the proposed future operations of the
property
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statements of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3. RENT REVENUE
Office and retail space is leased to tenants under various operating leases
with terms ranging from one to 15 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area maintenance
and certain operating expenses.
Future minimum rentals to be received under noncancelable operating leases
subsequent to December 31, 1996, in effect at the date of this report are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997...................................... $1,023,781
1998...................................... 916,149
1999...................................... 621,427
2000...................................... 385,561
2001...................................... 181,659
Thereafter................................ 242,783
----------
$3,371,360
==========
</TABLE>
F-68
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Southwest Royalties Holdings, Inc. and Subsidiaries:
We have audited the accompanying statement of revenue and certain expenses
of Crossroads Mall for the nine months ended December 31, 1996. This statement
is the responsibility of Crossroads Mall management. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses, as described in
Note 1, was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-4 of Southwest Royalties Holdings, Inc. and
is not intended to be a complete presentation of Crossroads Mall revenue and
expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1,
of Crossroads Mall for the nine months ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
September 17, 1997
F-69
<PAGE>
CROSSROADS MALL
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Minimum rent....................................... $2,390,188 $2,283,278
Percentage rent.................................... 336,433 94,048
Expense recoveries................................. 1,028,673 1,032,712
Other.............................................. 69,343 104,178
---------- ----------
3,824,637 3,514,216
---------- ----------
Certain expenses:
Property taxes..................................... 609,586 535,759
Repairs and maintenance............................ 958,523 939,796
Utilities.......................................... 320,407 295,836
Security........................................... 152,115 129,708
Management fees.................................... 132,367 135,000
Marketing.......................................... 247,533 166,231
Other operating expenses........................... 243,597 269,735
---------- ----------
2,664,128 2,472,065
---------- ----------
Revenue in excess of certain expenses................ $1,160,509 $1,042,151
========== ==========
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-70
<PAGE>
CROSSROADS MALL
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses relates to the
operations of Crossroads Mall (the "Property"), a two-level enclosed shopping
center located in San Antonio, Texas. The property was purchased by Midland
Red Oak Realty ("Red Oak"), a subsidiary of Southwest Royalties Holdings, Inc.
("SRH") for $15,000,000 on October 23, 1997.
The accompanying statements of revenue and certain expenses have been
prepared using the accrual basis of accounting for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the registration statement on Form S-4 of SRH. Accordingly, the
statements are not representative of the actual results of operations of the
Property for the nine months ended December 31, 1996 and the nine months ended
September 30, 1997, due to the exclusion of the following expenses, which may
not be comparable to the proposed future operations of the Property:
. Depreciation and amortization
. Interest on mortgage which will not be assumed by SRH
. Federal income taxes
. Other costs not directly related to the proposed future operations of the
Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of Estimates
Management of the Property has made a number of estimates and assumptions
relating to the reporting and disclosure of revenue and certain expenses
during the reporting period to prepare the statements of revenue and certain
expenses in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
3. RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from one to 40 years. The leases generally provide for minimum rent
and reimbursement of common area maintenance and certain other operating
expenses. Certain leases also contain provisions for percentage rent.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................................................... $2,754,757
1998.......................................................... 2,684,056
1999.......................................................... 2,553,856
2000.......................................................... 2,291,137
2001.......................................................... 2,051,763
Thereafter.................................................... 3,276,010
-----------
$15,611,579
===========
</TABLE>
F-71
<PAGE>
CROSSROADS MALL
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
Certain lessees have filed Chapter 11 bankruptcy. Accordingly, collection of
future rentals under existing lease agreements is not reasonably assured;
thus, future rentals related to such lessees are not included in the above
minimum rental amounts. Management of the Property believes that all rental
revenues recognized through September 30, 1997 are collectible. They will
continuously monitor the various bankruptcy situations and recognize rental
revenues only to the extent that collection is concluded to be reasonably
assured.
4. CONCENTRATION OF CREDIT RISK
At December 31, 1996, five tenants aggregated accounted for approximately
42% of total revenue. Rent revenue earned from such tenants for the nine
months ended December 31, 1996 was as follows:
<TABLE>
<S> <C>
Tenant A (Chapter 11 bankruptcy)................................. $393,517
Tenant B......................................................... 381,143
Tenant C......................................................... 348,900
Tenant D......................................................... 265,262
Tenant E......................................................... 200,746
</TABLE>
5. MANAGEMENT AGREEMENT
The Property has a real estate management agreement with a realty service
company. This agreement can be terminated at the Property's option. A
management fee of 3 1/2 percent of gross collected revenues versus a minimum
fee of $15,000 is payable to the management company monthly. Total management
fees for the nine months ended December 31, 1996, were approximately $132,000.
F-72
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OF-
FERING MADE HEREBY TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CON-
TAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, ANY OF THE NOTES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLIC-
ITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation by Reference................................................ 4
Prospectus Summary........................................................ 5
Forward-Looking Statements................................................ 17
Risk Factors.............................................................. 18
The Company............................................................... 25
Private Placement......................................................... 28
Use of Proceeds........................................................... 28
Capitalization............................................................ 29
Selected Historical and Pro Forma Financial Information................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 33
Business.................................................................. 40
Management................................................................ 56
Principal Stockholders and Ownership of Management........................ 59
Certain Transactions...................................................... 59
Exchange Offer............................................................ 60
Description of Notes...................................................... 67
Exchange and Registration Rights Agreement................................ 96
Certain United States Federal Income Tax Considerations................... 98
Plan of Distribution...................................................... 100
Transfer Restrictions on Old Notes........................................ 102
Legal Matters............................................................. 104
Experts................................................................... 104
Glossary of Terms......................................................... 105
Index to Financial Statements............................................. I-1
</TABLE>
UNTIL ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SE-
CURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$200,000,000
LOGO
[LOGO OF SOUTHWEST ROYALTIES, INC. APPEARS HERE]
SOUTHWEST ROYALTIES, INC.
OFFER TO EXCHANGE 10 1/2% SERIES B SENIOR NOTES DUE 2004 FOR 10 1/2% SERIES A
SENIOR NOTES DUE 2004
---------------
PROSPECTUS
---------------
December 10, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Southwest and SRH are both incorporated under the laws of the State of
Delaware.
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") provides that a Delaware corporation may indemnify any person
who is, or is threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in right of such corporation), by
reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amount paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was illegal. A Delaware corporation may also
indemnify any person who is, or is threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. In addition, where an officer or director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director has actually and reasonably incurred.
Article VI Section 6.1 of Southwest's Amended Bylaws and Article VI Section
6.1 of SRH's Bylaws provide for the indemnification of directors and officers
of Southwest and SRH to the fullest extent permitted or allowed by the law of
Delaware, whether or not specifically required, permitted or allowed by
Section 145.
Section 145 also authorizes the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of Delaware law. Article VI Section 6.2 of Southwest's Amended
Bylaws and Article VI Section 6.2 of SRH's Bylaws expressly authorize
Southwest and SRH to provide such indemnity insurance. Neither Southwest or
SRH currently have any such policies.
Section 102 of the General Corporation Law of the State of Delaware
("Section 102") provides that a corporation's charter may contain a provision
eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty. However, the charter provision cannot eliminate or limit the liability
of a director for (1) any breach of the director's duty of loyalty to the
corporation or its stockholders; (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3)
unlawful payment of dividends or unlawful stock purchases or redemptions; or
(4) any transaction from which the director derived an improper personal
benefit.
Paragraph Eight of Southwest's Amended Certificate of Incorporation and
Paragraph Eight of SRH's Certificate of Incorporation provide their directors
with protection from personal liability to Southwest or its stockholders and
SRH or its stockholders for monetary damages for breach of fiduciary duty to
the full extent
II-1
<PAGE>
permitted by Section 102. SRH's Certificate of Incorporation further provides
that if Delaware law is amended to allow the corporation to further eliminate
or limit the personal liability of directors, then the liability of the
directors of SRH shall be eliminated or limited to the fullest extent
permitted.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Southwest and SRH pursuant to the foregoing provisions, or otherwise,
Southwest and SRH have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Southwest or SRH of expenses incurred or paid by an underwriter, director,
officer, or controlling person of Southwest or SRH or an agent in defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Southwest or SRH 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 express in the Act and will be governed by the final adjudication of
such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following instruments and documents are included as Exhibits to this
Registration Stat. Exhibits incorporated by reference are so indicated by
parenthetical information.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 --Certificate of Incorporation for Southwest Royalties, Inc. dated as
of August 18, 1983, as amended March 30, 1987 and November 20, 1989.
3.2 --Certificate of Incorporation for Southwest Royalties Holdings, Inc.
dated as of July 1, 1997.
3.3 --By-Laws of Southwest Royalties, Inc. dated as of August 12, 1996 as
amended.
3.4 --By-Laws of Southwest Royalties Holdings, Inc. adopted as of July 1,
1997.
4.1 --Indenture dated as of October 14, 1997 among Southwest Royalties,
Inc., as Issuer, Southwest Royalties Holdings, Inc., as Guarantor,
and State Street Bank and Trust Co., as Trustee.
4.2 --Registration Rights Agreement dated as of October 14, 1997 by and
between Southwest Royalties, Inc., Southwest Royalties Holdings,
Inc., Jefferies & Company, Inc., Banc One Capital Corporation and
Paribas Corporation.
4.3 --Warrant issued by Southwest Royalties Holdings, Inc. to Joint Energy
Development Investments Limited Partnership dated as of October 14,
1997.
4.4 --Registration Rights Agreement by Southwest Royalties Holdings, Inc.
and Joint Energy Development Investments Limited Partnership dated as
of October 14, 1997.
5.1 --Opinion of Baker, Donelson, Bearman & Caldwell, P.C.
5.2 --Opinion of Baker, Donelson, Bearman & Caldwell, P.C. as to tax
matters.
10.1 --Purchase and Sale Agreement dated as of September 10, 1997 between
Conoco, Inc. and Southwest Royalties, Inc.
10.2 --Securities Purchase Agreement dated October 14, 1997 between
Southwest Royalties Holdings, Inc. and Joint Energy Development
Investments Limited Partnership.
10.3 --Restated Senior Loan Agreement among Southwest Royalties, Inc., as
borrower and certain subsidiaries of borrower, as guarantors and Bank
One, Texas, N.A. and Banque Paribas, as banks, and Bank One, Texas as
agent dated as of October 9, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
16 --Letter of Joseph Decosimo and Company on change in certifying
accountant.
21 --List of Subsidiaries.
23.1 --Consent of Baker, Donelson, Bearman & Caldwell, P.C. (included in
exhibits 5.1 and 5.2).
23.2 --Consent of Price Waterhouse LLP.
23.3 --Consent of KPMG Peat Marwick LLP.
23.4 --Consent of Joseph Decosimo and Company, LLP.
23.5 --Consent of Ryder Scott Company Petroleum Engineers.
23.6 --Consent of Donald R. Creamer.
25 --Statement of Eligibility of State Street Bank and Trust Co.
27 --Financial Data Schedule.
99 --Form Letter of Transmittal.
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrants' annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Registrants pursuant to the foregoing provisions, or otherwise, Registrants
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrants of expenses incurred or paid by a director, officer or controlling
person of Registrants 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, Registrants 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 Act
and will be governed by the final adjudication of such issue.
The undersigned Registrants hereby undertake 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 Registrants hereby undertake 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-3
<PAGE>
SIGNATURES
SOUTHWEST ROYALTIES, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, SOUTHWEST
ROYALTIES, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
MIDLAND, STATE OF TEXAS, ON DECEMBER 10, 1997.
SOUTHWEST ROYALTIES, INC.
/s/ H. H. Wommack, III
By:__________________________________
H. H. Wommack, III,
Chairman, President, and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. H. Wommack, III Chairman/President/Chief December 10, 1997
____________________________________ Executive Officer
H. H. Wommack, III
/s/ Bill E. Coggin Vice President/Chief December 10, 1997
____________________________________ Financial Officer
Bill E. Coggin
/s/ H. Allen Corey Director/Secretary December 10, 1997
____________________________________
H. Allen Corey
</TABLE>
II-4
<PAGE>
SIGNATURES
SOUTHWEST ROYALTIES HOLDINGS, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, SOUTHWEST
ROYALTIES HOLDINGS, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF MIDLAND, STATE OF TEXAS, ON DECEMBER 10, 1997.
SOUTHWEST ROYALTIES HOLDINGS, INC.
/s/ H. H. Wommack, III
By:__________________________________
H. H. Wommack, III,
Chairman, President, and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. H. Wommack, III Chairman/President/Chief December 10, 1997
____________________________________ Executive Officer
H. H. Wommack, III
/s/ Bill E. Coggin Vice President/Chief December 10, 1997
____________________________________ Financial Officer
Bill E. Coggin
/s/ H. Allen Corey Director/Secretary December 10, 1997
____________________________________
H. Allen Corey
</TABLE>
II-5
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
SOUTHWEST ROYALTIES, INC.
FIRST: The name of the Corporation is Southwest Royalties, Inc.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 100 W. Tenth Street in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted are
acquiring, selling, leasing, exchanging and otherwise dealing in producing
oil and gas properties, producing and marketing crude oil and natural gas
obtained therefrom, to engage in exploratory or development drilling and to
engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which Corporation shall have
authority to issue is 1,000,000 shares of common stock of par value of Ten
Cents ($.10) per share, all of the same class.
FIFTH: The name and mailing address of the incorporator is H. Allen Corey,
10th Floor, Volunteer Building, Chattanooga, Tennessee 37402.
SIXTH: The election of Directors need not be by written ballot.
SEVENTH: The Board of Directors is authorized to adopt, amend, or repeal Bylaws
of the Corporation except as and to the extent provided in the Bylaws.
IN WITNESS WHEREOF, I have made, signed and sealed this Certificate of
Incorporation this 18th day of August, 1983.
H. Allen Corey, Incorporator
<PAGE>
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF
SOUTHWEST ROYALTIES, INC.
Pursuant to the provisions of Section 242 of the Delaware General
Corporation Law, the undersigned corporation adopts the following amendment to
its Certificate of Incorporation:
1. The name of the corporation is:
Southwest Royalties, Inc.
2. The amendment adopted is as follows:
A Paragraph Eighth is added to the body of the Certificate, which
Paragraph reads as follows:
"EIGHTH: A director of the Company shall under no circumstances have
any personal liability to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director except for those
specific breaches and acts or omissions with respect to which the
General Corporation Law of the State of Delaware expressly provides
that this provision shall not eliminate or limit such personal
liability of directors."
3. The amendment was duly adopted by a unanimous vote of the stockholders
on February 27, 1987.
4. The amendment will become effective when this Amendment is filed by
the Secretary of State.
Dated: March 26, 1987.
SOUTHWEST ROYALTIES, INC.
By: H. H. Wommack, III
Title: President
ATTEST:
H. Allen Corey, Secretary
<PAGE>
SECOND AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF
SOUTHWEST ROYALTIES, INC.
Pursuant to the provisions of Section 242 of the Delaware General
Corporation Law, the undersigned Corporation adopts the following amendment to
its certificate of incorporation:
FIRST: The name of the corporation is Southwest Royalties, Inc.
SECOND: The following amendments to the Certificate of Incorporation were
declared to be advisable and a meeting of stockholders for consideration
thereof was called by the Board of Directors in a written consent dated
October 26, 1989.
THIRD: The fourth paragraph of the Certificate of Incorporation is hereby
deleted in its entirety.
FOURTH: The following is substituted in place of the fourth paragraph of the
Certificate of Incorporation.
"FOURTH:
1. The total number of shares of stock which the Corporation shall
authority to issue to 10,000,000 of which (i) 5,000,000 shares of par
value of Ten Cents ($.10) per share shall be designated Common Stock
(the "Common Stock") and (ii) 5,000,000 shares of par value of One
Dollar ($1.00) per share shall be designated preferred stock (the
"Preferred Stock").
2. The relative rights, preferences and limitations of the shares of
each class are as follows:
(a) Common Stock:
------------
(i) Each holder of shares of Common Stock shall be entitled
to one vote for each share held by such holder.
(ii) Whenever there shall have been paid, or declared and
set aside for payment, to the holders of the outstanding shares of any
class of stock having preference over the Common Stock as to the
payment of dividends, the full amount of dividends and of sinking
fund, retirement fund or other retirement payments, if any, to which
such holders are respectively entitled in preference to the Common
<PAGE>
Stock, then dividends may be paid on the Common Stock and on any class
or series of stock entitled to participate therewith as to dividends
out of any assets legally available for the payment of dividends.
(iii) In the event of any liquidation, dissolution, or
winding up of the Corporation, the holders of the Common Stock (and
the holders of any class or series of stock entitled to participate
with the Common Stock in the distribution of assets) shall be entitled
to receive, in cash or in kind, the assets of the Corporation
available for distribution remaining after: (A) payment or provision
for payment of the Corporation's debt and liabilities and (B)
distributions or provisions for distributions to holders of any class
or series of stock having preference over the Common Stock in the
liquidation, dissolution, or winding up of the corporation. Each
share of Common Stock shall have the same relative rights as and be
identical in all respects with all the other shares of Common Stock.
(b) Preferred Stock:
---------------
The Board of Directors of the Corporation is hereby expressly
authorized and empowered to divide the Preferred Stock into one or
more series, and, prior to the issuance of any of such shares in any
particular series, to fix and determine, in the manner provided by
law, the following provisions of such series:
(i) The distinctive designation of such series and the
number of shares to be included in such series;
(ii) The rate of dividend, the times of payment and the date
from which the shall be accumulated;
(iii) Whether the shares can be redeemed and, if so, the
redemption price and the terms and conditions of redemption;
(iv) The amount payable upon shares in the event of
voluntary or involuntary liquidation;
(v) Purchase, retirement or sinking fund provisions, if any,
for the redemption or repurchase of the Preferred Stock;
(vi) The terms and conditions, if any, on which shares may
be converted;
2
<PAGE>
(vii) Whether or not shares have voting rights, and the
extent of any such voting rights, which rights may include, without
limitation, the right, either generally or upon the occurrence of
specified circumstances, to vote specially as a class for the election
of one or more of the Board of Directors; and
(viii) Any other preferences, rights, restrictions and
qualifications of shares of such class or series permitted by law and
this certificate of incorporation.
After the Board of Directors of the Corporation has established a
series in accordance with the terms of applicable law and this
certificate of incorporation, the Board of Directors may at any time
and from time to time increase or decrease the number of shares
contained in such series, but not below the number of shares thereof
then issued, by adopting a resolution making such change.
Each share of Preferred Stock within an individual series shall
be identical in all respects with the other shares of such series,
except as to the date, if any, from which dividends thereon shall
accumulate and other details which because of the passage of time are
required to be made in order for the substantive rights of the holders
of the shares of such series to be identical."
FIFTH: The amendment was duly adopted at a special meeting of the
stockholders on November 9, 1989.
SIXTH: The amendment shall become effective when this Amendment is filed by
the Secretary of State.
Dated: November 9, 1989.
SOUTHWEST ROYALTIES, INC.
By: H. H. Wommack, III
Title: President
ATTEST:
H. Allen Corey, Secretary
3
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
SOUTHWEST ROYALTIES HOLDINGS, INC.
FIRST: The name of the Corporation is
SOUTHWEST ROYALTIES HOLDINGS, INC.
SECOND: The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware, including, without limitation, to
invest in other entities.
FOURTH: The total number of shares which the Corporation shall have
authority to issue is 10 million shares of which (i) 5 million shares of par
value of Ten Cents ($.10) per share shall be designated Common Stock (the
"Common Stock") and (ii) 5 million shares of par value of One Dollar ($1.00) per
shares shall be designated preferred stock (the "Preferred Stock").
FIFTH: The name and mailing address of the incorporator is H. Allen
Corey, 1800 Republic Centre, 633 Chestnut Street, Chattanooga, Tennessee 37450-
1800.
SIXTH: Election of directors need not be by written ballot.
SEVENTH: In furtherance of, and not in limitation of the powers
conferred by statute, the Board of Directors is authorized to adopt, amend, or
repeal bylaws of the Corporation.
EIGHTH: No director of the Corporation shall be personally liable to
the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware General Corporation law
is amended after the filing of this Certificate of Incorporation to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted
<PAGE>
by the Delaware General Corporation Law, as so amended. Any repeal or
modification of this section EIGHTH by the stockholders of the Corporation shall
not adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
NINTH: The corporation shall have the power to indemnify its
directors to the fullest extent permitted by law.
IN WITNESS WHEREOF, I have made, signed and sealed this Certificate of
Incorporation this 1st day of July, 1997.
H. Allen Corey, Incorporator
<PAGE>
EXHIBIT 3.3
SOUTHWEST ROYALTIES, INC.
A Delaware Corporation
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
--------------
An annual meeting of stockholders for the purpose of electing
directors and of transacting such other business as may come before it shall be
held each year at such date, time, and place, either within or without the State
of Delaware, as may be specified by the Board of Directors.
Section 1.2 Special Meetings.
----------------
Special meetings of stockholders for any purpose or purposes may be
held at any time upon call of the Chairman of the Board, if any, the President,
the Secretary, or a majority of the Board of Directors, at such time and place
either within or without the State of Delaware as may be stated in the notice.
A special meeting of stockholders shall be called by the President or the
Secretary upon the written request, starting time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record a majority
of the outstanding stock of all classes entitled to vote at such meeting.
Section 1.3 Notice of Meeting.
-----------------
Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an
<PAGE>
Assistant Secretary, to each stockholder entitled to vote thereat at least ten
days but not more than sixty days before the date of the meeting, unless a
different period is prescribed by law.
Section 1.4 Quorum.
------
Except as otherwise provided by law or in the Certificate of
Incorporation or there By-laws, at any meeting of stockholders, the holders of a
majority of the outstanding shares of each class of stock entitled to vote at
the meeting shall be present or represented by proxy in order to constitute a
quorum for the transaction of any business. In the absence of a quorum, a
majority in interest of the stockholders present or the chairman of the meeting
may adjourn the meeting from time to time in the manner provided in Section 1.5
of these By-Laws until a quorum shall attend.
Section 1.5 Adjournment.
-----------
Any meeting of stockholders, annual or special, may adjourn from time
to time to reconvene at the same or some other place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 1.6 Organization.
------------
The Chairman of the Board, if any, or in his absence the President, or
in their absence any Vice President, shall call to order meetings of
stockholders and shall act as chairman of such meetings. The Board of Directors
or, if the Board fails to act, the stockholders, may appoint any
2
<PAGE>
stockholder, director, or officer of the Corporation to act as chairman of any
meeting in the absence of the Chairman of the Board, the President, and all Vice
Presidents.
The Secretary of the Corporation shall act as secretary of all
meetings of stockholders, but, in the absence of the Secretary, the chairman of
the meeting may appoint any other person to act as secretary of the meeting.
Section 1.7 Voting.
------
Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws and except for the election of directors, at any
meeting duly called and held at which a quorum is present, a majority of the
votes cast at such meeting upon a given question by the holders of outstanding
shares of stock of all classes of stock of the Corporation entitled to vote
thereon who are present in person or by proxy shall decide such question. At
any meeting duly called and held for the election of directors at which a quorum
is present, directors shall be elected by a plurality of the votes cast by the
holders (acting as such) of shares of stock of the Corporation entitled to elect
such directors.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
-------------------------
The business, property, and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors; provided, however,
that the Board, by resolution adopted by vote of a majority of the then
authorized number of directors, may increase to as many as ten (10) or decrease
to as many as two (2) the number of directors. The directors shall be elected
at the annual meeting of stockholders, and each shall serve (subject to the
provisions of Article IV) until
3
<PAGE>
the next succeeding annual meeting of stockholders and until his respective
successor has been elected and qualified.
Section 2.2 Chairman of the Board.
---------------------
The directors may elect one of their members to be Chairman of the
Board of Directors. The Chairman shall be subject to the control of and may be
removed by the Board of Directors. He shall perform such duties as may from
time to time be assigned to him by the Board.
Section 2.3 Meetings.
--------
Regular meetings of the Board of Directors may be held without notice
at such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting whenever called by
the Chairman of the Board, if any, the President or by two of the directors then
in office.
Section 2.4 Notice of Special Meetings.
--------------------------
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least ten days before the meeting,
or by telegram, cable, radiogram, or personal service at least two (2) days
before the meeting. Unless otherwise stated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.
Section 2.5 Quorum and Organization of Meetings.
-----------------------------------
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than
4
<PAGE>
a quorum present, a majority of those present may adjourn the meeting to another
time and place, and the meeting may be held as adjourned without further notice
or waiver. Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, a majority of the directors present at any
meeting at which a quorum is present may decide any question brought before such
meeting. Meetings shall be presided over by the Chairman of the Board, if any,
or in his absence by the President or in the absence of both by such other
person as the directors may select. The Secretary of the Corporation shall act
as secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.6 Committees.
----------
The Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or
more directors as alternate members of any committee. In the absence or
disqualification of a member of a committee, the member of members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the Certificate of Incorporation of the
Corporation, adopting an agreement of merger of consolidation, recommending to
the stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's
5
<PAGE>
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of dissolution, or amending these By-Laws; and,
unless the resolution expressly so provided, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Each committee which may be established by the Board of Directors or these By-
Laws may fix its own rules and procedures. Notice of meetings of committees,
other than for regular meetings provided for by the rules, shall be given to
committee members. All action taken by committees shall be recorded in minutes
of the meetings.
Section 2.7 Action Without Meeting.
----------------------
Nothing contained in these By-Laws shall be deemed to restrict the
power of the directors or members of any committee to take any action, required
or permitted to be taken by them, without a meeting.
Section 2.8 Telephone Meetings.
------------------
Nothing contained in these By-Laws shall be deemed to restrict the
power of members of the Board of Directors, or any committee designated by the
Board, to participate in a meeting of the Board, or committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
ARTICLE III
OFFICERS
Section 3.1 Executive Officers.
------------------
The executive officers of the Corporation shall be a President, one or
more Vice Presidents, a Treasurer, and a Secretary, each of whom shall be
elected by the Board of Directors. The Board of Directors may elect or appoint
such other officers (including a Controller and one or
6
<PAGE>
more Assistant Treasurers and Assistant Secretaries) as it may deem necessary or
desirable. Each officer shall hold office for such term as may be prescribed by
the Board of Directors from time to time. Any person may hold at one time two or
more offices.
3.2 Powers and Duties.
-----------------
The Chairman of the Board, if any, or, in his absence, the President,
shall preside at all meetings of the stockholders and of the Board of Directors.
The President shall be the chief executive officer of the Corporation. In the
absence of the President, a Vice President appointed by the President or, if the
President fails to make such appointment, by the Board, shall perform all the
duties of the President. The officers and agents of the Corporation shall
perform such duties in the management of the business, property, and affairs of
the Corporation as generally pertain to their respective offices, as well as
such powers and authorities and such duties as from time to time may be
prescribed by the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 Resignations.
------------
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the President, or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time be
no specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective.
7
<PAGE>
Section 4.2 Removals.
--------
The Board of Directors, by a vote of not less than a majority of the
entire Board, at any meeting thereof, or by written consent, at any time, may,
to the extent permitted by law, remove with or without cause from office or
terminate the employment of any officer or member of any committee and may, with
or without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares entitled at the time to vote at an election of directors.
Section 4.3 Vacancies.
---------
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from an increase in the number of directors, may be
filled at any time by a majority of the directors then in office (even though
less than a quorum remains) or, in the case of any vacancy in the office of any
director, by the stockholders, and, subject to the provisions of this Article
IV, the person so chosen shall hold office until his successor shall have been
elected and qualified; or, if the person so chosen is a director elected to fill
a vacancy, he shall (subject to the provisions of this Article IV) hold office
for the unexpired term of his predecessor.
ARTICLE V
CAPITAL STOCK
Section 5.1 Stock Certificates.
------------------
The certificates for shares of the capital stock of the Corporation
shall be in such form as shall be prescribed by law and approved, from time to
time, by the Board of Directors.
Section 5.2 Transfer of Shares.
------------------
8
<PAGE>
Shares of the capital stock of the Corporation may be transferred on
the books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 5.3 Fixing Record Date.
------------------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting or stockholders or any adjournment
thereof or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
Section 5.4 Lost Certificates.
-----------------
The Board of Directors or any transfer agent of the Corporation may
direct a new share certificate or certificates to be issued in place of any
certificate or certificate theretofore issued by the Corporation, alleged to
have been lost, stolen, or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate to be lost, stolen, or destroyed.
When authorizing such issue or a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as the Board of Directors shall direct to indemnify the Corporation
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen, or destroyed
9
<PAGE>
or the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
Section 5.5 Regulations.
-----------
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
Section 5.6 Restrictions on Transfer.
------------------------
No stockholder shall transfer, sell, or otherwise dispose of any
portion or all of his stock in the Corporation without the written consent of
the Corporation, except in accordance with the terms of this By-Law. A
stockholder may, however, transfer all or part of his stock by gift to or for
the benefit of himself, his spouse, his family or an affiliated person, as
hereinafter defined. In such case, the transferees shall receive and hold the
stock subject to the restrictions and obligations of this By-Law, and there
shall be no further transfer of the stock except by gift between members of such
stockholder's family or except in accordance with the other terms of this By-
Law. The transferee of stock in the Corporation to whom a sale or other
disposition has been made pursuant to written consent or after compliance with
the terms of this By-Law shall receive and hold the stock subject to the
restrictions and obligations in this By-Law.
(a) Restrictions on Sale. Should any stockholder receive a bona fide
offer to purchase all or any portion of his stock in the Corporation which he
desires to accept, he shall offer, in writing, to sell the stock to the
Corporation upon the terms contained in the initial offer and the Corporation
shall have the right to purchase all, but not less than all, of the stock so
offered at the price and upon the terms stated in the offer, for a period of
thirty (30) days. If the Corporation
10
<PAGE>
fails to exercise this right with respect to all of the offered shares within
the allotted time, H. H. Wommack, III ("Wommack") shall have the right to
purchase such stock at the same price and upon the same terms as offered to the
Corporation. The right of Wommack to purchase stock after the refusal of the
Corporation is to be exercised within thirty (30) days after the date of
termination of the Corporation's right to purchase. If Wommack fails to exercise
this right with respect to all of the offered shares within the allotted time,
the offeror may dispose of the shares of stock so offered to the person named in
the offer of purchase at the price and upon the terms set forth in the
purchaser's offer, provided, however, that such disposition must be made within
thirty (30) days following the termination of Wommack's option.
(b) Remedies. Upon the occurrence of any event by reason of which an
offer should have been made under this By-Law respecting any stock, if the offer
was not made, the Corporation or stockholder or stockholders having an option to
purchase the stock after the required offer may notify the transferee or pledgee
of the required offer and through the procedure described in this By-Law for
acceptance of an offer of stock, may, in the case of a transferee, purchase the
stock as if an offer has been properly made and accepted.
(c) Definitions. As used in the By-Law, the following terms shall
have the meaning assigned to them in this paragraph: (i) a stockholder's
"family" shall include his spouse and his descendants, (ii) "affiliate" shall
include persons who control, are controlled by or are under common control with
the stockholder, (iii) for purposes of the definition of "affiliate," the term
"control" means the power to direct the management and policies of a person,
directly or indirectly, whether through ownership of voting securities, by
contract or otherwise, and (iv) an "offer" to sell stock required by this By-Law
shall be served by certified or registered mail return receipt requested,
11
<PAGE>
and shall indicate that the stockholder has a bona fide offer for the sale of
his stock, stating the name and address of the person desiring to purchase the
shares and the sales price and terms of payment which were offered. The
references herein to stockholders as individuals are illustrative only and does
not limit stock ownership to individuals only. A stockholder may be any person,
including any individual, corporation, limited liability company, limited or
general partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
(d) Stock Certificates. The fact that the stock of the Corporation is
subject to this restriction shall be appropriately endorsed on each stock
certificate.
(e) Termination. The operation of this Section 5.6 shall be suspended
on the effective date of any registration statement under the Securities Act of
1933, as amended, filed with the Securities and Exchange Commission relative to
the offer and sale to the public of the Corporation's equity securities.
Notwithstanding the foregoing, if such offering should not close for any reason,
the stock of the Corporation shall become subject to this Section 5.6.
ARTICLE VI
INDEMNIFICATION
Section 6.1 General Authority.
-----------------
The Corporation shall indemnify its officers and directors, with
respect all matters to which Section 145 of the General Corporation Law of
Delaware may in any way relate, to the full extent permitted or allowed by the
law of Delaware, whether or not specifically required, permitted or allowed by
said Section 145.
12
<PAGE>
Section 6.2 Insurance.
---------
The Corporation shall have power to purchase and maintain insurance of
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1 Corporate Seal.
--------------
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
Section 7.2 Fiscal Year.
-----------
The fiscal year of the Corporation shall be determined by resolution
of the Board of Directors.
Section 7.3 Notices and Waivers Thereof.
---------------------------
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable, or radiogram, addressed to such address as appears on the books of the
Corporation. Any notice given by telegram, cable, or radiogram shall be deemed
to have been given when it shall
13
<PAGE>
have been delivered for transmission and any notice given by mail shall be
deemed to have been given when it shall have been deposited in the United States
mail with postage thereon prepaid. Whenever any notice is required to be given
by law, the Certificate of Incorporation, or these By-Laws, a written waiver
thereof, signed by the person entitled to such notice, whether before or after
the meeting or the time states therein, shall be deemed equivalent in all
respects to such notice to the full extent permitted by law.
Section 7.4 Stock of Other Corporations and Other Interests.
-----------------------------------------------
Unless otherwise ordered by the Board of Directors, the President, the
Secretary and such attorneys or agents of the Corporation as may be from time to
time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporation or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of the Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by this Corporation.
ARTICLE VIII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-Laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have
14
<PAGE>
power equal in all respects to that of the stockholders to adopt, amend, or
repeal the By-Laws by vote of not less than a majority of the entire Board.
However, any By-Laws adopted by the Board may be amended or repealed by vote of
the holders of a majority of the shares entitled at the time to vote for the
election of directors.
15
<PAGE>
EXHIBIT 3.4
SOUTHWEST ROYALTIES HOLDINGS, INC.
A Delaware Corporation
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
--------------
An annual meeting of stockholders for the purpose of electing
directors and of transacting such other business as may come before it shall be
held each year at such date, time, and place, either within or without the State
of Delaware, as may be specified by the Board of Directors.
Section 1.2 Special Meetings.
----------------
Special meetings of stockholders for any purpose or purposes may be
held at any time upon call of the Chairman of the Board, if any, the President,
the Secretary, or a majority of the Board of Directors, at such time and place
either within or without the State of Delaware as may be stated in the notice.
A special meeting of stockholders shall be called by the President or the
Secretary upon the written request, starting time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record a majority
of the outstanding stock of all classes entitled to vote at such meeting.
Section 1.3 Notice of Meeting.
-----------------
Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an
<PAGE>
Assistant Secretary, to each stockholder entitled to vote thereat at least ten
days but not more than sixty days before the date of the meeting, unless a
different period is prescribed by law.
Section 1.4 Quorum.
------
Except as otherwise provided by law or in the Certificate of
Incorporation or there By-laws, at any meeting of stockholders, the holders of a
majority of the outstanding shares of each class of stock entitled to vote at
the meeting shall be present or represented by proxy in order to constitute a
quorum for the transaction of any business. In the absence of a quorum, a
majority in interest of the stockholders present or the chairman of the meeting
may adjourn the meeting from time to time in the manner provided in Section 1.5
of these By-Laws until a quorum shall attend.
Section 1.5 Adjournment.
-----------
Any meeting of stockholders, annual or special, may adjourn from time
to time to reconvene at the same or some other place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 1.6 Organization.
------------
The Chairman of the Board, if any, or in his absence the President, or
in their absence any Vice President, shall call to order meetings of
stockholders and shall act as chairman of such meetings. The Board of Directors
or, if the Board fails to act, the stockholders, may appoint any
2
<PAGE>
stockholder, director, or officer of the Corporation to act as chairman of any
meeting in the absence of the Chairman of the Board, the President, and all Vice
Presidents.
The Secretary of the Corporation shall act as secretary of all
meetings of stockholders, but, in the absence of the Secretary, the chairman of
the meeting may appoint any other person to act as secretary of the meeting.
Section 1.7 Voting.
------
Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws and except for the election of directors, at any
meeting duly called and held at which a quorum is present, a majority of the
votes cast at such meeting upon a given question by the holders of outstanding
shares of stock of all classes of stock of the Corporation entitled to vote
thereon who are present in person or by proxy shall decide such question. At
any meeting duly called and held for the election of directors at which a quorum
is present, directors shall be elected by a plurality of the votes cast by the
holders (acting as such) of shares of stock of the Corporation entitled to elect
such directors.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
-------------------------
The business, property, and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors; provided, however,
that the Board, by resolution adopted by vote of a majority of the then
authorized number of directors, may increase to as many as ten (10) or decrease
to as many as two (2) the number of directors. The directors shall be elected
at the annual meeting of stockholders, and each shall serve (subject to the
provisions of Article IV) until
3
<PAGE>
the next succeeding annual meeting of stockholders and until his respective
successor has been elected and qualified.
Section 2.2 Chairman of the Board.
---------------------
The directors may elect one of their members to be Chairman of the
Board of Directors. The Chairman shall be subject to the control of and may be
removed by the Board of Directors. He shall perform such duties as may from
time to time be assigned to him by the Board.
Section 2.3 Meetings.
--------
Regular meetings of the Board of Directors may be held without notice
at such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting whenever called by
the Chairman of the Board, if any, the President or by two of the directors then
in office.
Section 2.4 Notice of Special Meetings.
--------------------------
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least ten days before the meeting,
or by telegram, cable, radiogram, or personal service at least two (2) days
before the meeting. Unless otherwise stated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.
Section 2.5 Quorum and Organization of Meetings.
-----------------------------------
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than
4
<PAGE>
a quorum present, a majority of those present may adjourn the meeting to another
time and place, and the meeting may be held as adjourned without further notice
or waiver. Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, a majority of the directors present at any
meeting at which a quorum is present may decide any question brought before such
meeting. Meetings shall be presided over by the Chairman of the Board, if any,
or in his absence by the President or in the absence of both by such other
person as the directors may select. The Secretary of the Corporation shall act
as secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.6 Committees.
----------
The Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or
more directors as alternate members of any committee. In the absence or
disqualification of a member of a committee, the member of members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the Certificate of Incorporation of the
Corporation, adopting an agreement of merger of consolidation, recommending to
the stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's
5
<PAGE>
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of dissolution, or amending these By-Laws; and,
unless the resolution expressly so provided, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Each committee which may be established by the Board of Directors or these By-
Laws may fix its own rules and procedures. Notice of meetings of committees,
other than for regular meetings provided for by the rules, shall be given to
committee members. All action taken by committees shall be recorded in minutes
of the meetings.
Section 2.7 Action Without Meeting.
----------------------
Nothing contained in these By-Laws shall be deemed to restrict the
power of the directors or members of any committee to take any action, required
or permitted to be taken by them, without a meeting.
Section 2.8 Telephone Meetings.
------------------
Nothing contained in these By-Laws shall be deemed to restrict the
power of members of the Board of Directors, or any committee designated by the
Board, to participate in a meeting of the Board, or committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
ARTICLE III
OFFICERS
Section 3.1 Executive Officers.
------------------
The executive officers of the Corporation shall be a President, one or
more Vice Presidents, a Treasurer, and a Secretary, each of whom shall be
elected by the Board of Directors. The Board of Directors may elect or appoint
such other officers (including a Controller and one or
6
<PAGE>
more Assistant Treasurers and Assistant Secretaries) as it may deem necessary or
desirable. Each officer shall hold office for such term as may be prescribed by
the Board of Directors from time to time. Any person may hold at one time two or
more offices.
3.2 Powers and Duties.
-----------------
The Chairman of the Board, if any, or, in his absence, the President,
shall preside at all meetings of the stockholders and of the Board of Directors.
The President shall be the chief executive officer of the Corporation. In the
absence of the President, a Vice President appointed by the President or, if the
President fails to make such appointment, by the Board, shall perform all the
duties of the President. The officers and agents of the Corporation shall
perform such duties in the management of the business, property, and affairs of
the Corporation as generally pertain to their respective offices, as well as
such powers and authorities and such duties as from time to time may be
prescribed by the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 Resignations.
------------
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the President, or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time be
no specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective.
7
<PAGE>
Section 4.2 Removals.
--------
The Board of Directors, by a vote of not less than a majority of the
entire Board, at any meeting thereof, or by written consent, at any time, may,
to the extent permitted by law, remove with or without cause from office or
terminate the employment of any officer or member of any committee and may, with
or without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares entitled at the time to vote at an election of directors.
Section 4.3 Vacancies.
---------
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from an increase in the number of directors, may be
filled at any time by a majority of the directors then in office (even though
less than a quorum remains) or, in the case of any vacancy in the office of any
director, by the stockholders, and, subject to the provisions of this Article
IV, the person so chosen shall hold office until his successor shall have been
elected and qualified; or, if the person so chosen is a director elected to fill
a vacancy, he shall (subject to the provisions of this Article IV) hold office
for the unexpired term of his predecessor.
ARTICLE V
CAPITAL STOCK
Section 5.1 Stock Certificates.
------------------
The certificates for shares of the capital stock of the Corporation
shall be in such form as shall be prescribed by law and approved, from time to
time, by the Board of Directors.
Section 5.2 Transfer of Shares.
------------------
8
<PAGE>
Shares of the capital stock of the Corporation may be transferred on
the books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 5.3 Fixing Record Date.
------------------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting or stockholders or any adjournment
thereof or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
Section 5.4 Lost Certificates.
-----------------
The Board of Directors or any transfer agent of the Corporation may
direct a new share certificate or certificates to be issued in place of any
certificate or certificate theretofore issued by the Corporation, alleged to
have been lost, stolen, or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate to be lost, stolen, or destroyed.
When authorizing such issue or a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as the Board of Directors shall direct to indemnify the Corporation
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen, or destroyed
9
<PAGE>
or the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
Section 5.5 Regulations.
-----------
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
Section 5.6 Restrictions on Transfer.
------------------------
No stockholder shall transfer, sell, or otherwise dispose of any
portion or all of his stock in the Corporation without the written consent of
the Corporation, except in accordance with the terms of this By-Law. A
stockholder may, however, transfer all or part of his stock by gift to or for
the benefit of himself, his spouse, his family or an affiliated person, as
hereinafter defined. In such case, the transferees shall receive and hold the
stock subject to the restrictions and obligations of this By-Law, and there
shall be no further transfer of the stock except by gift between members of such
stockholder's family or except in accordance with the other terms of this By-
Law. The transferee of stock in the Corporation to whom a sale or other
disposition has been made pursuant to written consent or after compliance with
the terms of this By-Law shall receive and hold the stock subject to the
restrictions and obligations in this By-Law.
(a) Restrictions on Sale. Should any stockholder receive a bona fide
offer to purchase all or any portion of his stock in the Corporation which he
desires to accept, he shall offer, in writing, to sell the stock to the
Corporation upon the terms contained in the initial offer and the Corporation
shall have the right to purchase all, but not less than all, of the stock so
offered at the price and upon the terms stated in the offer, for a period of
thirty (30) days. If the Corporation
10
<PAGE>
fails to exercise this right with respect to all of the offered shares within
the allotted time, H. H. Wommack, III ("Wommack") shall have the right to
purchase such stock at the same price and upon the same terms as offered to the
Corporation. The right of Wommack to purchase stock after the refusal of the
Corporation is to be exercised within thirty (30) days after the date of
termination of the Corporation's right to purchase. If Wommack fails to exercise
this right with respect to all of the offered shares within the allotted time,
the offeror may dispose of the shares of stock so offered to the person named in
the offer of purchase at the price and upon the terms set forth in the
purchaser's offer, provided, however, that such disposition must be made within
thirty (30) days following the termination of Wommack's option.
(b) Remedies. Upon the occurrence of any event by reason of which an
offer should have been made under this By-Law respecting any stock, if the offer
was not made, the Corporation or stockholder or stockholders having an option to
purchase the stock after the required offer may notify the transferee or pledgee
of the required offer and through the procedure described in this By-Law for
acceptance of an offer of stock, may, in the case of a transferee, purchase the
stock as if an offer has been properly made and accepted.
(c) Definitions. As used in the By-Law, the following terms shall
have the meaning assigned to them in this paragraph: (i) a stockholder's
"family" shall include his spouse and his descendants, (ii) "affiliate" shall
include persons who control, are controlled by or are under common control with
the stockholder, (iii) for purposes of the definition of "affiliate," the term
"control" means the power to direct the management and policies of a person,
directly or indirectly, whether through ownership of voting securities, by
contract or otherwise, and (iv) an "offer" to sell stock required by this By-Law
shall be served by certified or registered mail return receipt requested,
11
<PAGE>
and shall indicate that the stockholder has a bona fide offer for the sale of
his stock, stating the name and address of the person desiring to purchase the
shares and the sales price and terms of payment which were offered. The
references herein to stockholders as individuals are illustrative only and does
not limit stock ownership to individuals only. A stockholder may be any person,
including any individual, corporation, limited liability company, limited or
general partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
(d) Stock Certificates. The fact that the stock of the Corporation is
subject to this restriction shall be appropriately endorsed on each stock
certificate.
(e) Termination. The operation of this Section 5.6 shall be suspended
on the effective date of any registration statement under the Securities Act of
1933, as amended, filed with the Securities and Exchange Commission relative to
the offer and sale to the public of the Corporation's equity securities.
Notwithstanding the foregoing, if such offering should not close for any reason,
the stock of the Corporation shall become subject to this Section 5.6.
ARTICLE VI
INDEMNIFICATION
Section 6.1 General Authority.
-----------------
The Corporation shall indemnify its officers and directors, with
respect all matters to which Section 145 of the General Corporation Law of
Delaware may in any way relate, to the full extent permitted or allowed by the
law of Delaware, whether or not specifically required, permitted or allowed by
said Section 145.
12
<PAGE>
Section 6.2 Insurance.
---------
The Corporation shall have power to purchase and maintain insurance of
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1 Corporate Seal.
--------------
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
Section 7.2 Fiscal Year.
-----------
The fiscal year of the Corporation shall be determined by resolution
of the Board of Directors.
Section 7.3 Notices and Waivers Thereof.
---------------------------
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable, or radiogram, addressed to such address as appears on the books of the
Corporation. Any notice given by telegram, cable, or radiogram shall be deemed
to have been given when it shall
13
<PAGE>
have been delivered for transmission and any notice given by mail shall be
deemed to have been given when it shall have been deposited in the United States
mail with postage thereon prepaid. Whenever any notice is required to be given
by law, the Certificate of Incorporation, or these By-Laws, a written waiver
thereof, signed by the person entitled to such notice, whether before or after
the meeting or the time states therein, shall be deemed equivalent in all
respects to such notice to the full extent permitted by law.
Section 7.4 Stock of Other Corporations and Other Interests.
-----------------------------------------------
Unless otherwise ordered by the Board of Directors, the President, the
Secretary and such attorneys or agents of the Corporation as may be from time to
time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporation or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of the Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by this Corporation.
ARTICLE VIII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-Laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have
14
<PAGE>
power equal in all respects to that of the stockholders to adopt, amend, or
repeal the By-Laws by vote of not less than a majority of the entire Board.
However, any By-Laws adopted by the Board may be amended or repealed by vote of
the holders of a majority of the shares entitled at the time to vote for the
election of directors.
15
<PAGE>
EXHIBIT 4.1
SOUTHWEST ROYALTIES, INC.
$200,000,000 10 1/2% Senior Notes due 2004, Series A
$200,000,000 10 1/2% Senior Notes due 2004, Series B
Unconditionally Guaranteed by
SOUTHWEST ROYALTIES HOLDINGS, INC.
______________________________________________________
INDENTURE
dated as of October 15, 1997
STATE STREET BANK AND TRUST COMPANY,
as Trustee
<PAGE>
CROSS-REFERENCE TABLE
TIA Indenture
Section Section
310(a)(1) 7.10
(a)(2) 7.10, 7.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 7.08, 7.10
(b) 7.08, 7.10
11.02
(c) N.A.
311(a) 7.11
(b) 7.11
(c) N.A.
312(a) 2.05
(b) 10.03
(c) 10.03
313(a) 7.06
(b)(1) N.A.
(b)(2) 7.06
(c) 7.06, 10.02
(d) 7.06
314(a) 4.06, 4.08
10.02
(b) 11.02
(c)(1) 10.04
(c)(2) 10.04
(c)(3) N.A.
(d) 11.04
(e) 10.05
(f) N.A.
315(a) 7.01(b)
(b) 7.05, 10.02
(c) 7.01(a)
(d) 7.01(c)
(e) 6.11
(i)
<PAGE>
316(a) (last sentence) 2.09
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
(c) 9.04
317(a)(1) 6.08
(a)(2) 6.09
(b) 2.04
318(a) 10.01
(c) 10.01
- ----------------
N.A. means Not Applicable
NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of the Indenture.
(ii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.01 Definitions 1
Section 1.02 Incorporation by Reference of TIA 21
Section 1.03 Rules of Construction 22
ARTICLE TWO
THE NOTES
Section 2.01 Form and Dating 22
Section 2.02 Execution and Authentication; Aggregate Principal Amount 23
Section 2.03 Registrar and Paying Agent 24
Section 2.04 Paying Agent to Hold Assets in Trust 25
Section 2.05 Holder Lists 25
Section 2.06 Transfer and Exchange 25
Section 2.07 Replacement Notes 26
Section 2.08 Outstanding Notes 26
Section 2.09 Treasury Notes 26
Section 2.10 Temporary Notes 27
Section 2.11 Cancellation 27
Section 2.12 Defaulted Interest. 27
Section 2.13 CUSIP Numbers. 28
Section 2.14 Deposit of Monies 28
Section 2.15 Restrictive Legends 28
Section 2.16 Book-Entry Provisions for Global Security 30
Section 2.17 Special Transfer Provisions 31
Section 2.18 Additional Interest Under Registration Rights Agreement 33
ARTICLE THREE
REDEMPTION
Section 3.01 Notices to Trustee 33
Section 3.02 Selection of Notes to Be Redeemed 34
Section 3.03 Optional Redemption 34
Section 3.04 Notice of Redemption. 35
Section 3.05 Effect of Notice of Redemption 36
Section 3.06 Deposit of Redemption Price 36
Section 3.07 Notes Redeemed in Part 36
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
ARTICLE FOUR
COVENANTS
Section 4.01 Payment of Notes 36
Section 4.02 Maintenance of Office or Agency 37
Section 4.03 Corporate Existence 37
Section 4.04 Payment of Taxes and Other Claims 37
Section 4.05 Maintenance of Properties and Insurance 37
Section 4.06 Compliance Certificate; Financial Statements; Notice of
Default 38
Section 4.07 Compliance with Laws 39
Section 4.08 Reports to Holders 39
Section 4.09 Waiver of Stay, Extension or Usury Laws 39
Section 4.10 Limitation on Restricted Payments 40
Section 4.11 Limitation on Transactions with Affiliates. 42
Section 4.12 Limitation on Incurrence of Additional Indebtedness and
Issuances of Disqualified Capital Stock 43
Section 4.13 Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries 44
Section 4.14 Limitation on Designation of Unrestricted Subsidiaries 44
Section 4.15 Change of Control 45
Section 4.16 Limitation on Asset Sales 47
Section 4.17 Limitation on Sale or Issuance of Capital Stock of
Restricted Subsidiaries 50
Section 4.18 Limitations on Liens 50
Section 4.19 Limitation on Lines of Business 50
Section 4.20 Subsidiary Guarantees. 51
Section 4.21 Payment of Existing Secured Debt. 51
ARTICLE FIVE
SUCCESSOR CORPORATION
Section 5.01 Merger, Consolidation and Sale of Assets 51
Section 5.02 Successor Corporation Substituted 53
ARTICLE SIX
REMEDIES
Section 6.01 Events of Default 53
Section 6.02 Acceleration 55
Section 6.03 Other Remedies 56
Section 6.04 Waiver of Past Defaults 56
Section 6.05 Control by Majority 57
Section 6.06 Limitation on Suits 57
Section 6.07 Right of Holders to Receive Payment 57
Section 6.08 Collection Suit by Trustee 57
</TABLE>
(iv)
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.09 Trustee May File Proofs of Claim 58
Section 6.10 Priorities 58
Section 6.11 Undertaking for Costs 59
Section 6.12 Restoration of Rights and Remedies 59
ARTICLE SEVEN
TRUSTEE
Section 7.01 Duties of Trustee 59
Section 7.02 Rights of Trustee 60
Section 7.03 Individual Rights of Trustee 61
Section 7.04 Trustee's Disclaimer 61
Section 7.05 Notice of Default 61
Section 7.06 Reports by Trustee to Holders 62
Section 7.07 Compensation and Indemnity 62
Section 7.08 Replacement of Trustee 63
Section 7.09 Successor Trustee by Merger, Etc 64
Section 7.10 Eligibility; Disqualification 64
Section 7.11 Preferential Collection of Claims Against Company 64
ARTICLE EIGHT
DISCHARGE OF INDENTURE; DEFEASANCE
Section 8.01 Satisfaction and Discharge of the Indenture; Legal Defeasance 65
Section 8.02 Application of Trust Money 67
Section 8.03 Repayment to the Issuer 67
Section 8.04 Reinstatement 67
ARTICLE NINE
MODIFICATION OF THE INDENTURE
Section 9.01 Without Consent of Holders 68
Section 9.02 With Consent of Holders 68
Section 9.03 Compliance with TIA 69
Section 9.04 Revocation and Effect of Consents 69
Section 9.05 Notation on or Exchange of Notes 69
Section 9.06 Trustee 69
ARTICLE TEN
MISCELLANEOUS
Section 10.01 TIA Controls 70
Section 10.02 Notices 70
Section 10.03 Communications by Holders with Other Holders 71
Section 10.04 Certificate and Opinion as to Conditions Precedent 71
Section 10.05 Statements Required in Certificate or Opinion 72
</TABLE>
(v)
<PAGE>
<TABLE>
<S> <C> <C>
Section 10.06 Rules by Trustee, Paying Agent, Registrar 72
Section 10.07 Legal Holidays 72
Section 10.08 Governing Law 72
Section 10.09 No Adverse Interpretation of Other Agreements. 73
Section 10.10 No Personal Liability 73
Section 10.11 Successors 73
Section 10.12 Duplicate Originals 73
Section 10.13 Severability 73
Section 10.14 Independence of Covenants 74
ARTICLE ELEVEN
SECURITY
Section 11.01 Grant of Security Interest. 74
Section 11.02 Recording and Opinions 74
Section 11.03 Release of Collateral. 75
Section 11.04 Specified Releases of Collateral 76
Section 11.05 Form and Sufficiency of Release 76
Section 11.06 Purchaser Protected 77
Section 11.07 Authorization of Actions to Be Taken by the
Trustee Under the Security Documents 77
Section 11.08 Authorization of Receipt of Funds by the
Trustee Under the Security Documents 77
ARTICLE TWELVE
GUARANTEES
Section 12.01 Unconditional Guarantees 78
Section 12.02 Limitations on Subsidiary Guarantees 80
Section 12.03 Execution and Delivery of Guarantees 80
Section 12.04 Release of a Subsidiary Guarantor. 80
Section 12.05 Waiver of Subrogation 81
Section 12.06 Immediate Payment 81
Section 12.07 No Set-Off 82
Section 12.08 Obligations Absolute. 82
Section 12.09 Obligations Continuing. 82
Section 12.10 Obligations Not Reduced. 82
Section 12.11 Obligations Reinstated. 82
Section 12.12 Obligations Not Affected. 83
Section 12.13 Waiver. 84
Section 12.14 No Obligation to Take Action Against the Issuer. 84
Section 12.15 Dealing with the Issuer and Others. 84
Section 12.16 Default and Enforcement. 85
Section 12.17 Amendment, Etc. 85
Section 12.18 Acknowledgment. 85
(vi)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 12.19 Costs and Expenses. 85
Section 12.20 No Merger or Waiver; Cumulative Remedies. 85
Section 12.21 Survival of Obligations. 86
Section 12.22 Guarantee in Addition to Other Obligations. 86
Section 12.23 Severability. 86
Section 12.24 Successors and Assigns. 86
SIGNATURES 96
</TABLE>
EXHIBITS
Exhibit A - Initial Note
Exhibit B - Exchange Note
Exhibit C - Pledge Agreement
Exhibit D - Certificate re transfer to Institutional Accredited Investor
Exhibit E - Certificate re transfer to Non-U.S. Person
Exhibit F - Notation of Guarantee
(vii)
<PAGE>
INDENTURE, dated as of October 14, 1997, among Southwest Royalties
Holdings, Inc., a Delaware corporation, as guarantor, Southwest Royalties, Inc.,
a Delaware corporation, as issuer, and State Street Bank and Trust Company, as
Trustee.
R E C I T A L S:
The Issuer has duly authorized the creation of an issue of 10 1/2% Senior
Notes due October 15, 2004, Series A (the "Initial Notes") and 10 1/2% Senior
Notes due October 15, 2004, Series B to be issued in exchange for the Initial
Notes pursuant to the Registration Rights Agreement (the "Exchange Notes") and,
to provide therefor, the Company and the Issuer have duly authorized the
execution and delivery of this Indenture and the Parent Guarantee contained
herein. The Parent Guarantee shall be secured by a first lien and security
interest in the Collateral, subject to release of such Collateral as provided
herein. Upon satisfaction of certain conditions precedent, the Notes shall also
be secured by the unconditional guarantee of payment thereof by other Restricted
Subsidiaries of the Company as herein provided. All things necessary to make
the Notes, when duly issued and executed by the Issuer, and authenticated and
delivered hereunder, the valid obligations of the Issuer, and to make this
Indenture a valid and binding agreement of the Company and the Issuer, have been
done.
Each party hereto agrees as follows for the benefit of each other party and
for the equal and ratable benefit of the Holders of the Notes, without
preference of one series of the Notes over the other.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.01 Definitions. As sued in this Indenture (including the
Recitals), the following terms have the following meanings:
"Additional Interest" has the meaning set forth in the Registration Rights
Agreement.
"Adjusted Consolidated Net Income" of the Company for any period means
the Net Income (loss) of the Company and its Restricted Subsidiaries for such
period, determined in accordance with GAAP, excluding (without duplication) the
Net Income of Red Oak or any other Unrestricted Subsidiary which is a
consolidated Subsidiary for such period, reduced by the amount of the deduction
from Net Income of the Company attributable to the minority interest in Red Oak
or any other Unrestricted Subsidiary which is a consolidated Subsidiary for such
period.
"Adjusted Consolidated Net Tangible Assets" means (without duplication),
as of the date of determination, (a) the sum of (i) discounted future net
revenue from proved oil and gas reserves of the Company and its Restricted
Subsidiaries calculated in accordance with Commission guidelines before any
state or federal income taxes, as estimated or audited by independent petroleum
engineers in one or more Reserve Reports prepared as of the end of the Company's
most recently completed fiscal year as increased by, as of the date of
determination, the discounted future net revenue of (A) estimated proved oil and
gas reserves of the Company and its Restricted Subsidiaries attributable to
<PAGE>
any acquisition consummated since the effective date of such year-end Reserve
Reports and (B) estimated oil and gas reserves of the Company and its Restricted
Subsidiaries attributable to extensions, discoveries and other additions and
upward revisions of estimates of proved oil and gas reserves due to exploration,
development or exploitation, production or other activities conducted or
otherwise occurring since the effective date of such year-end Reserve Reports
which, in the case of sub-clauses (A) and (B), would, in accordance with
standard industry practice, result in such increases, in each case calculated in
accordance with Commission guidelines (utilizing the prices and costs utilized
in such year-end Reserve Reports), and decreased by, as of the date of
determination, the discounted future net revenue of (C) estimated proved oil and
gas reserves of the Company and its Restricted Subsidiaries produced or disposed
of since the effective date of such year-end Reserve Reports and (D) reductions
in the estimated oil and gas reserves of the Company and its Restricted
Subsidiaries since the effective date of such year-end Reserve Reports
attributable to downward revisions of estimates of proved oil and gas reserves
due to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the effective date of such year-end
Reserve Reports which would, in accordance with standard industry practice,
result in such revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end Reserve Reports);
provided that, in the case of each of the determinations made pursuant to sub-
clauses (A) through (D) above, such increases and decreases shall be as
estimated by the Company's engineers, except that if there is a Material Change
and in connection with the incurrence of Indebtedness for which the Consolidated
Fixed Charge Coverage Ratio must be determined, all or any part of an increase
in discounted future net revenue resulting from the matters described in sub-
clauses (A) and (B) above is needed to permit the incurrence of such
Indebtedness, then the discounted future net revenue utilized for purposes of
this clause (a) (i) shall be confirmed in writing by independent petroleum
engineers, provided further that, if the events referred to in sub-clauses (C)
and (D) above, when taken alone, would not cause a Material Change, then such
written confirmation need only cover the incremental additions to discounted
future net revenue resulting from the determinations made pursuant to sub-
clauses (A) and (B) above to the extent needed to permit the incurrence of such
Indebtedness, (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 (A) the net book value on a date no earlier than the date of
the Company's latest annual or quarterly financial statements and (B) the
appraised value, as estimated by independent appraisers, of other tangible
assets (including the amount of Investments in unconsolidated Subsidiaries,
Affiliates, other Persons or Unrestricted Subsidiaries) of the Company and its
Restricted Subsidiaries, as of a date no earlier than the date of the Company's
latest audited financial statements, minus (b) the sum of (i) minority
interests, (ii) any non-current portion of gas balancing liabilities of the
Company and its Restricted Subsidiaries reflected in the Company's latest annual
or quarterly financial statements, (iii) the discounted future net revenue,
calculated in accordance with Commission guidelines (utilizing the prices
utilized in the Company's year-end Reserve Reports), attributable to reserves
which are required to be delivered to third parties to fully satisfy the
obligations of the Company and its Restricted Subsidiaries with respect to
Production Payments on the schedules specified with respect thereto, (iv) the
discounted future net revenue, calculated in accordance with Commission
guidelines (utilizing the same prices utilized in the Company's initial or year-
end Reserve Reports), attributable to reserves subject to participation
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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
and (v) the amount of environmental liabilities payable by the Company or any
Restricted Subsidiary. If the Company changes its method of accounting from the
full cost method to the successful efforts method or a similar method of
accounting, Adjusted Consolidated Net Tangible Assets will continue to be
calculated as if the Company was still using the full cost method of accounting.
"Affiliate" means (i) any Person, directly or indirectly, controlling or
controlled by or under direct or indirect common control with the Company or any
Subsidiary of the Company or any officer, director, or employee of the Company
or any Subsidiary of the Company or of such Person, (ii) the spouse, any
immediate family member, or any other relative who has the same principal
residence of any Person described in clause (i) above, and any Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with, such spouse, family member or other relative, and (iii) any trust
in which any Person described in clause (i) or (ii), above, is a fiduciary or
has a beneficial interest. For purposes of this definition the term "control"
means (a) the power to direct the management and policies of a Person, directly
or through one or more intermediaries, whether through the ownership of voting
securities, by contract, or otherwise, or (b) the beneficial ownership of 10% or
more of the voting common equity of such Person (on a fully diluted basis) or of
warrants or other rights to acquire such equity (whether or not presently
exercisable).
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Agent Members" has the meaning provided in Section 2.16.
"Asset Sale" means (i) any direct or indirect conveyance, sale, transfer
or other disposition (including through damage or destruction for which
Insurance Proceeds are paid or by condemnation), in one transaction or a series
of related transactions, of any of the properties, businesses or assets of the
Company or any Restricted Subsidiary, whether owned on the Issue Date or
thereafter acquired or (ii) any sale or other disposition by the Company of any
Capital Stock of any Affiliate, Unrestricted Subsidiary or any Subsidiary of the
Company or its Restricted Subsidiaries (other than the Issuer). Notwithstanding
the foregoing, the following will not be deemed to be an Asset Sale: (a) the
conveyance, sale, lease, transfer or other disposition by any of the Company's
Restricted Subsidiaries of any or all of its assets (upon voluntary liquidation
or otherwise) to the Company; (b) the conveyance, sale, lease, transfer or other
disposition by any Restricted Subsidiary of any or all of its assets (upon
voluntary liquidation or otherwise) to another Restricted Subsidiary; (c) non-
material dispositions of assets in the ordinary course of business; (d) Asset
Sales not otherwise permitted by clauses (a) through (c) or (f) and (g) of this
sentence provided that the aggregate proceeds from all such Asset Sales do not
exceed $2.5 million in any twelve-month period; (e) the disposition of all or
substantially all of the assets of (i) the Company and its Restricted
Subsidiaries, taken as a whole, or (ii) the Issuer, if such disposition is
governed by Section 4.15 or Section 5.01; (f) a conveyance, sale, assignment,
lease, license, transfer, abandonment or other disposal by the Company and its
Restricted Subsidiaries of (i) damaged, worn out, unserviceable or other
obsolete property in the ordinary course of business or (ii) other property no
longer necessary for the proper conduct of their business; and (g) the
conveyance, sale, transfer or
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otherwise disposition by the Company and its Restricted Subsidiaries of crude
oil and natural gas production and refined products in the ordinary course of
business.
"Attributable Indebtedness" in respect of a Sale and Leaseback Transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP or,
in the event that such rate of interest is not reasonably determinable,
discounted at the rate of interest borne by the Notes) of the obligation of the
lessee for net rental payments during the remaining term of the lease included
in such Sale and Leaseback Transaction (including any period for which such
lease has been extended or may, at the option of the lessor, be extended).
"Authenticating Agent" has the meaning provided in Section 2.02.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a day on which commercial banks are
authorized or required to close in New York, New York or Hartford, Connecticut.
"Capital Expenditures" of a Person means expenditures (whether paid in
cash or accrued as a liability) by such Person or any of its Subsidiaries that,
in conformity with GAAP, are or would be included in "capital expenditures,"
"additions to property, plant, or equipment" or comparable items in the
consolidated financial statements of such Person consistent with prior
accounting practices.
"Capital Stock" means, with respect to any Person, any capital stock of
such Person and shares, interests, participations, or other ownership interests
(however designated) of such Person and any rights (other than debt securities
convertible into corporate stock), warrants or options to purchase any of the
foregoing, including without limitation, each class of common stock and
preferred stock of such Person, if such Person is a corporation, and each
general or limited partnership interest or other equity interest of such Person,
if such Person is a partnership or limited liability company.
"Capitalized Lease Obligation" means obligations under a lease that are
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations, as determined in accordance with
GAAP.
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"Cash Equivalents" means (a) United States dollars, (b) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (c) certificates of deposit with maturities
of one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year, and overnight bank deposits, in each case,
with any Eligible Institution, (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(b) and (c) entered into with any Eligible Institution, (e) commercial paper
rated "P-l," "A-l" or the equivalent thereof by Moody's or S&P,
respectively, and in each case maturing within 180 days after the date of
acquisition, (f) shares of money market funds, including those of the Trustee,
that invest solely in United States dollars and securities of the types
described in clauses (a) through (e), and (g) demand and time deposits and
certificates of deposit with an Eligible Institution or with commercial banks
insured by the Federal Deposit Insurance Corporation.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by merger or
consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries,
taken as a whole, to any person (as such term is used in Section 13(d)(3) of the
Exchange Act) other than to the Company or a Subsidiary Guarantor; (ii) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Issuer to
any person (as such term is used in Section 13(d)(3) of the Exchange Act) other
than to the Company or a Subsidiary Guarantor; (iii) the Company or the Issuer
consolidates with or merges into another Person or any Person consolidates with,
or merges into, the Company or the Issuer, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company or the Issuer
is changed into or exchanged for cash, securities or other property, other than
any such transaction where (a) the outstanding Voting Stock of the Company or
the Issuer is changed into or exchanged for Voting Stock of the surviving or
resulting Person that is Qualified Capital Stock and (b) the holders of the
Voting Stock of the Company or the Issuer immediately prior to such transaction
own, directly or indirectly, not less than a majority of the Voting Stock of the
surviving or resulting Person immediately after such transaction; (iv) the
adoption of a plan relating to the liquidation or dissolution of the Company or
the Issuer not involving a merger or consolidation or a sale or other
disposition of assets described in clause (i) or (ii) above; (v) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any person (as defined above),
excluding the Permitted Holders, becomes the ''beneficial owner'' (as that term
is used in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the total voting power of the Company's or the
Issuer's then outstanding Voting Stock; provided that the sale of Voting Stock
of the Company or the Issuer to a Person or Persons acting as underwriters in
connection with a firm commitment underwriting shall not constitute a Change of
Control; or (vi) the first day on which a majority of the members of the Board
of Directors of the Company are not Continuing Directors (other than by action
of the Permitted Holders). For purposes of this definition, any transfer of an
equity interest of an entity that was formed for the purpose of acquiring Voting
Stock of the Company or the Issuer shall be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of such
entity that has been so transferred.
"Change of Control Offer" has the meaning provided in Section 4.15.
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"Change of Control Payment Date" has the meaning provided in Section 4.15.
"Change of Control Purchase Price" has the meaning provided in Section
4.15.
"Collateral" has the meaning set forth in Section 11.01.
"Commission" means the Securities and Exchange Commission.
"Company" means Southwest Royalties Holdings, Inc., a Delaware corporation,
until a successor replaces it in accordance with the provisions of this
Indenture and thereafter means such successor.
"Consolidated Fixed Charge Coverage Ratio" on any date means, with
respect to the Company, the ratio, on a pro forma basis, of (i) the aggregate
amount of EBITDA attributable to continuing operations and businesses and
exclusive of the amounts attributable to operations and businesses discontinued
or disposed of, on a pro forma basis as if such operations and businesses were
discontinued or disposed of on the first day of the Reference Period, for the
Reference Period to (ii) the aggregate Consolidated Interest Expense (exclusive
of amounts attributable to discontinued operations and businesses on a pro forma
basis as if such operations and businesses were discontinued or disposed of on
the first day of the Reference Period, but only to the extent that the
obligations giving rise to such Consolidated Interest Expense would no longer be
obligations contributing to Consolidated Interest Expense subsequent to the date
of discontinuation or disposal) during the Reference Period; provided, that for
purposes of such computation, in calculating EBITDA and Consolidated Interest
Expense, (a) the transaction giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio shall be assumed to have occurred on
the first day of the Reference Period, (b) the incurrence of any Indebtedness or
issuance of Disqualified Capital Stock or the retirement of any Indebtedness or
Capital Stock during the Reference Period or subsequent thereto shall be assumed
to have occurred on the first day of such Reference Period, and (c) Consolidated
Interest Expense attributable to any Indebtedness (whether existing or being
incurred) bearing a floating interest rate shall be computed as if the rate in
effect on the date of determination had been the applicable rate for the entire
period, unless the Company or any of its Restricted Subsidiaries is a party to a
Swap Obligation (that remains in effect for the 12-month period after the date
of determination) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used.
"Consolidated Interest Expense" of the Company means, for any period, the
aggregate interest expense (without duplication), during such period in respect
of all Indebtedness of the Company and its Restricted Subsidiaries (including
all commissions, discounts, other fees and charges owed with respect to letters
of credit and banker's acceptance financing and costs associated with Swap
Obligations, but excluding any interest accrued on intercompany payables among
the Company and its Restricted Subsidiaries or among Restricted Subsidiaries for
taxes to the extent the liability for such taxes has been assumed pursuant to
the Tax Sharing Agreement) determined on a consolidated basis in accordance with
GAAP. For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
to be the rate of interest implicit in such Capitalized Lease Obligation in
accordance with GAAP (including Statement of Financial Accounting Standards No.
13 of the Financial Accounting Standards Board),
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and (y) Consolidated Interest Expense attributable to any Indebtedness
represented by the guarantee by the Company or a Restricted Subsidiary of such
Person other than with respect to Indebtedness of the Company or a Restricted
Subsidiary of the Company shall be deemed to be the interest expense
attributable to the item guaranteed.
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
shall not include consolidation of the account of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board of Directors at the time of such
nomination or election.
"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 777 Main
Street, Hartford, Connecticut 06115.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Default Interest Payment Date" has the meaning provided in Section 2.12.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Disqualified Capital Stock" means with respect to any Person any Capital
Stock of such Person or its Subsidiaries that, by its terms or by the terms of
any security into which it is convertible or exchangeable, is, or upon the
happening of an event or the passage of time would be, required to be redeemed
or repurchased by such Person or its Subsidiaries, including at the option of
the holder, in whole or in part, or has, or upon the happening of an even or
passage of time would have, a redemption or similar payment due, on or prior to
the Stated Maturity Date.
"EBITDA" means for any period the sum of the Adjusted Consolidated Net
Income of the Company for such period, plus the sum, without duplication (and
only to the extent such amounts are deducted from net revenues in determining
such Adjusted Consolidated Net Income of the Company), of (i) the provision for
income taxes for such period for the Company, (ii) depreciation, depletion, and
amortization of the Company for such period and (iii) Consolidated Interest
Expense for such period, determined, in each case, on a consolidated basis for
the Company and its consolidated Subsidiaries otherwise in accordance with GAAP.
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<PAGE>
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million and that is rated
"A" (or higher) according to Moody's or S&P at the time as of which any
investment or rollover therein is made.
"Equity Offering" means any Public Equity Offering or other bona fide
sale of Qualified Capital Stock of Sierra or Red Oak to any Person (other than
the Company or any Affiliate) resulting in Net Proceeds to the Company in excess
of $15,000,000.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Cash" has the meaning given to it in Section 4.16.
"Excess Cash Acceptance Amount" has the meaning given to it in Section
4.16.
"Excess Cash Offer" has the meaning given to it in Section 4.16.
"Excess Cash Offer Amount" has the meaning given to it in Section 4.16.
"Excess Cash Offer Price" has the meaning given to it in Section 4.16.
"Excess Cash Purchase Date" has the meaning given to it in Section 4.16.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Exchange Assets" means assets acquired by the Company or any Restricted
Subsidiary in exchange for assets of the Company or any Restricted Subsidiary in
connection with an Asset Sale, which acquired assets include proved reserves
with a value that, together with the cash or Cash Equivalents received therefor
by the Company or such Restricted Subsidiary, is equal to or greater than the
value of the proved reserves included in the assets disposed of by the Company
or such Restricted Subsidiary in connection with such Asset Sale; provided, that
(i) ownership of such assets does not violate Section 4.19 and (ii) during any
fiscal year, the Company and its Restricted Subsidiaries can collectively
acquire assets (other than proved reserves, cash or Cash Equivalents) with a
Fair Market Value of up to $500,000 in exchange for assets of the Company and
the Restricted Subsidiaries with proved reserves, and such assets acquired by
such Person shall constitute "Exchange Assets" hereunder.
"Exchange Notes" has the meaning provided in the preamble to this
Indenture.
"Existing Indebtedness" means, (i) the Securities Purchase Agreement dated
November 5, 1996 between the Company and Joint Energy Development Investments
L.P.; (ii) the Credit Agreement dated August 2, 1995 among Southwest Espero,
Inc., Trust Company of the West and TCW Asset Management Co.; and (iii) Senior
Loan Agreement dated April 13, 1995 among the Company, certain of its
Affiliates, Bank One, Texas, N.A. and Banque Paribas, as amended.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair Market Value shall be determined by the Board of Directors of
the
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<PAGE>
Company acting reasonably and in good faith and shall be evidenced by a Board
Resolution of the Issuer delivered to the Trustee.
"GAAP" means generally accepted accounting principles as in effect in the
United States on the Issue Date applies on a basis consistent with that used in
the preparation of the audited financial statements of the Company included in
the Offering Circular.
"Global Note" has the meaning provided in Section 2.01.
"Global Note Legend" has the meaning provided in Section 2.15.
"guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generally of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchaser or payment of)
such Indebtedness or other obligation of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statements conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part) (but if in part, only to the extent
thereof); provided, however, that the term "guarantee" shall not include (a)
endorsements for collection or deposit in the ordinary course of business and
(b) guarantees (other than guarantees of Indebtedness) by the Issuer in respect
of assisting one or more Subsidiaries in the ordinary course of their respective
businesses, including without limitation guarantees of trade obligations and
operating leases, on ordinary business terms. The term "guarantee" used as a
verb has a corresponding meaning.
"Guarantee" means the Parent Guarantee and the Subsidiary Guarantees or any
of the foregoing as the context requires.
"Guarantors" means the Company and each Subsidiary Guarantor.
"Holders" means any Person from time to time in whose name any Note is
registered on the Note Register.
"Hydrocarbons" means oil, natural gas, condensate, and natural gas
liquids.
"incur" and "incurrence" have the meanings set forth in Section 4.12.
"Indebtedness" means, with respect to any Person, without duplication (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures,
or similar instruments or letters of credit or representing the balance deferred
and unpaid of the purchase price of any property acquired by such Person or
services received by such Person, but excluding trade account payables and
accrued liabilities arising in the ordinary course of business that are not
overdue by 90 days or being contested in good faith by appropriate proceedings,
promptly instituted and diligently pursued, (c) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks or Swap
Obligations, (d) for the payment of money relating to a Capitalized Lease
Obligation, (e) for the Attributable Indebtedness
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<PAGE>
associated with any Sale and Leaseback Transaction or (f) for Production
Payments that such Person or any of its Restricted Subsidiaries elect to treat
as Indebtedness; (ii) reimbursement obligations of such Person with respect to
letters of credit; (iii) all liabilities of others of the kind described in the
preceding clause (i) or (ii) that such Person has guaranteed or that is
otherwise its legal liability (to the extent of such guaranty or other legal
liability) other than for endorsements, with recourse, of negotiable instruments
in the ordinary course of business; and (iv) all obligations secured by a Lien
(other than Permitted Liens, except to the extent the obligations secured by
such Permitted Liens are otherwise included in clause (i), (ii) or (iii) of this
definition and are obligations of such Person) to which the property or assets
(including, without limitation, leasehold interests and any other tangible or
intangible property rights) of such Person are subject, regardless of whether
the obligations secured thereby shall have been assumed by or shall otherwise be
such Person's legal liability (but, if such obligations are not assumed by such
Person or are not otherwise such Person's legal liability, the amount of such
Indebtedness shall be deemed to be limited to the Fair Market Value of such
property or assets determined as of the end of the preceding fiscal quarter).
"Indenture" means this Indenture, as amended or supplemented from time to
time in accordance with the terms hereof.
"Initial Notes" has the meaning provided in the preamble to this Indenture.
"Initial Purchasers" means Jefferies & Company, Inc., Banc One Capital
Corporation and Paribas Corporation.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"Insurance Proceeds" means the interest in and to all proceeds (net of
costs of collection, including attorneys' fees) which now or hereafter may be
paid under any insurance policies now or hereafter obtained by or on behalf of
the Company or any Restricted Subsidiary in connection with any assets thereof,
together with interest payable thereon and the right to collect and receive the
same, including, without limitation, proceeds of casualty insurance, title
insurance, business interruption insurance and any other insurance now or
hereafter maintained with respect to such assets.
"interest" when used with respect to any Note means the amount of all
interest accruing on such Note, including applicable defaulted interest pursuant
to Section 2.12 and any Additional Interest pursuant to the Registration Rights
Agreement.
"Interest Payment Date" means April 15 and October 15 of each year,
commencing April 15, 1998.
"Interest Rate or Currency Agreement" of any Person means any forward
contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars, puts and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended
to the date hereof and from time to time hereafter.
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"Investment" by any Person in any other Person means (a) the acquisition
(whether for cash, property, services, securities or otherwise) of Capital
Stock, bonds, notes, debentures, partnership, or other ownership interests or
other securities of such other Person or any agreement to make any such
acquisition; (b) the making by such Person of any deposit with, or advance, loan
or other extension of credit to, such other Person (including the purchase of
property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) and
(without duplication) any amount committed to be advanced, loaned or extended to
such other Person; (c) the entering into of any guarantee of, or other
contingent obligation with respect to, Indebtedness or other liability of such
other Person; (d) the entering into of any Swap Obligation with such other
Person; or (e) the making of any capital contribution by such Person to such
other Person.
"Investment Grade Rating" means with respect to any Person or issue of
debt securities or preferred stock, a rating in one of the four highest letter
rating categories (without regard to "+" or "-" or other modifiers) by
Moody's or S&P or if any such rating agency has ceased using letter rating
categories or the four highest of such letter rating categories are not
considered to represent "investment grade" ratings, then the comparable
"investment grade" ratings (as designated by any such rating agency).
"Issue Date" means the date of first issuance of the Notes under this
Indenture.
"Issuer" means Southwest Royalties, Inc., a Delaware corporation, until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means such successor.
"Legal Defeasance" has the meaning set forth in Section 8.01.
"Legal Holiday" has the meaning provided in Section 10.07.
"Lien" means any mortgage, lien, pledge, charge, security interest, or
other encumbrance of any kind, regardless of whether filed, recorded, or
otherwise perfected under applicable law (including any conditional sale or
other title retention agreement and any lease deemed to constitute a security
interest and any option or other agreement to give any security interest).
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than either (i) 10% from the end
of the immediately preceding quarter in the estimated discounted future net
revenue from proved oil and gas reserves of the Company and its Restricted
Subsidiaries, or (ii) 20% from the end of the immediately preceding year in the
estimated discounted future net revenue from proved oil and gas reserves of the
Company and its Restricted Subsidiaries, in each case calculated in accordance
with clause (a) (i) of the definition of Adjusted Consolidated Net Tangible
Assets; provided, however, that the following shall be excluded from the
calculation of Material Change: (a) any acquisitions of oil and gas reserves
made after the end of the immediately preceding year for which the discounted
future net revenues have been estimated by independent petroleum engineers since
the end of the preceding year and on which a Reserve Report or Reserve Reports
exist and (b) any disposition of properties existing at the beginning of the
current quarter or current year, as the case may be, for purposes of clause (i)
or clause (ii) above, that have been disposed of in accordance with Section
4.16.
"Moody's" means Moody's Investors Service, Inc. and its successors.
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"Net Cash Proceeds" means an amount equal to the aggregate amount of cash
and Cash Equivalents received by the Company or any Restricted Subsidiary in
respect of an Asset Sale, less the sum of (i) all reasonable out-of-pocket fees,
commissions, and other expenses incurred in connection with such Asset Sale,
including the amount (estimated in good faith by the Company) of income,
franchise, sales and other applicable taxes to be paid, payable or accrued by
the Company or such Restricted Subsidiary (in each case as estimated in good
faith by the Company without giving effect to tax attributes unrelated to such
Asset Sale) in connection with such Asset Sale, and (ii) the aggregate amount of
cash and Cash Equivalents so received which is used to retire any then existing
Indebtedness of the Company or such Restricted Subsidiary (other than the
Notes), as the case may be, which is secured by a Lien on the property subject
of the Asset Sale or which is required by the terms of such Indebtedness to be
repaid in connection with such Asset Sale.
"Net Income" of any Person for any period means the net income (loss) of
such Person for such period, determined on a consolidated basis in accordance
with GAAP, excluding (without duplication) (i) all extraordinary, unusual and
nonrecurring gains, (ii) the net income, if positive, of any other Person, in
which such Person or any of its consolidated Subsidiaries has an interest,
except to the extent of the amount of any dividends or distributions actually
paid in cash to such Person or a consolidated Subsidiary of such Person during
such period, (iii) the net income, if positive, of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition and (iv) the net income, if positive, of any Subsidiary of such
Person to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule, or
governmental regulation applicable to such Subsidiary.
"Net Proceeds" means (a) in the case of any sale by a Person of Qualified
Capital Stock or other securities, the aggregate net cash proceeds received by
such Person from the sale of such securities (other than to a Restricted
Subsidiary) after payment of reasonable out-of-pocket expenses, commissions and
discounts incurred in connection therewith, and (b) in the case of any exchange,
exercise, conversion or surrender of any outstanding securities or Indebtedness
of such Person for or into shares of Qualified Capital Stock of such Person, the
net book value of such outstanding securities as adjusted on the books of such
Person or Indebtedness of such Person to the extent recorded in accordance with
GAAP, in each case, on the date of such exchange, exercise, conversion or
surrender (plus any additional amount required to be paid by the holder of such
Indebtedness or securities to such Person upon such exchange, exercise,
conversion or surrender and less (i) any and all payments made to the holders of
such Indebtedness or securities and (ii) all other expenses incurred by such
Person in connection therewith, in each case, in so far as such payments or
expenses are incident to such exchange, exercise, conversion, or surrender).
"Net Working Capital" of any Person means (i) all current assets of such
Person and its Restricted Subsidiaries, minus (ii) all current liabilities of
such Person and its consolidated Subsidiaries other than the current portion of
long term Indebtedness, each item to be determined on a consolidated basis in
conformity with GAAP.
"Net Worth" of any Person means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of such Person and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts included therein attributable to Disqualified
Capital Stock or any equity security convertible into or exchangeable for
Indebtedness, the cost of treasury stock (not otherwise deducted from
stockholder's equity), and the principal amount of any promissory
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notes receivable from the sale of the Capital Stock of such Person or any of its
Restricted Subsidiaries each item to be determined in conformity with GAAP.
"Non-U.S. Person" means a Person who is not a U.S. person, as defined in
Regulation S.
"Note Register" means the register maintained by or for the Issuer in
which the Issuer shall provide for the registration of the Notes and the
transfer of the Notes.
"Notes" means the Initial Notes, the Exchange Notes and, if required, the
Private Exchange Notes, treated as a single class of securities, as amended or
supplemented from time to time in accordance with the terms hereof, that are
issued pursuant to this Indenture.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Offering" means the sale by the Issuer of the Initial Notes to the Initial
Purchasers as contemplated by the Offering Circular.
"Offering Circular" means the Confidential Offering Circular dated October
9, 1997 of the Issuer relating to the offering of the Notes.
"Officer" means, with respect to any Person, the Chairman of the Board of
Directors, the Chief Executive Officer, the President, any Vice President, the
Chief Financial Officer, the Treasurer, the Controller, or the Secretary of such
Person, or any other officer designated by the Board of Directors serving in a
similar capacity.
"Officers' Certificate" means a certificate signed by two Officers of the
Company or the Issuer, as applicable, at least one of whom shall be the
principal executive officer, principal accounting officer or principal financial
officer of such Person.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee complying with the requirements of Sections
10.04 and 10.05, as they relate to the giving of an Opinion of Counsel.
"Parent Guarantee" means an unconditional senior guarantee of the Notes
given by the Company pursuant to the terms of this Indenture.
"Paying Agent" has the meaning provided in Section 2.03.
"Payment Default" has the meaning set forth in Section 6.01.
"Permitted Bank Credit Facility" means, with respect to any Person, a
revolving credit or letter of credit facility with a commercial banking
institution, the proceeds of which are used for working capital and other
general corporate purposes, as the same may be amended, extended or refinanced
from time to time.
"Permitted Hedging Transactions" means non-speculative transactions in
futures, forwards, swaps or option contracts (including both physical and
financial settlement transactions) engaged
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in by the Company and its Restricted Subsidiaries as part of their normal
business operations as a risk-management strategy or hedge against adverse
changes in the prices of natural gas, feedstock or refined products; provided,
that such transactions do not in the case of the Company and its Restricted
Subsidiaries, on a monthly basis, relate to more than 90% of their combined
average net oil and natural gas production per month for the most recent 3-month
period measured at the time of such transaction; provided, further, that, at the
time of such transaction (i) the counter party to any such transaction is an
Eligible Institution or a Person that has an Investment Grade Rating or has an
issue of debt securities or preferred stock outstanding with an Investment Grade
Rating or (ii) such counter party's obligation pursuant to such transaction is
unconditionally guaranteed in full by, or secured by a letter of credit issued
by, an Eligible Institution or a Person that has an Investment Grade Rating or
that has an issue of debt securities or preferred stock outstanding with an
Investment Grade Rating.
"Permitted Holders" means H.H. Wommack III (or his heirs, his estate or
any trust in which he or his immediate family members own, directly or
indirectly, a beneficial interest in excess of 50%).
"Permitted Indebtedness" means, without duplication, each of the
following: (a) the Indebtedness evidenced by the Notes, the Parent Guarantee or
the Subsidiary Guarantees; (b) Indebtedness owed by any Restricted Subsidiary to
the Company or any other Restricted Subsidiary or Indebtedness owed by the
Company to any Restricted Subsidiary; provided that, such Indebtedness is
Subordinated Indebtedness; (c) Indebtedness outstanding under a Permitted Bank
Credit Facility so long as the aggregate principal amount of all Indebtedness
outstanding under all Permitted Bank Credit Facilities for the Company and its
Restricted Subsidiaries does not exceed $50,000,000 less the amount of Net Cash
Proceeds from any Asset Sale applied pursuant to Section 4.16 to repay or prepay
such Indebtedness that results in a permanent reduction relating thereto; (d)
Swap Obligations of the Company or its Restricted Subsidiaries; (e) Indebtedness
outstanding on the Issue Date (and not repaid with the proceeds of the
Offering); (f) other Indebtedness owed by the Company or its Restricted
Subsidiaries in an aggregate principal amount outstanding not to exceed
$1,000,000 at any one time; and (g) Permitted Refinancing Indebtedness.
"Permitted Investment" means, when used with reference to the Company or
any Restricted Subsidiary, (i) trade credit extended to Persons in the ordinary
course of business; (ii) purchases of Cash Equivalents; (iii) Investments by the
Company or its Restricted Subsidiaries in Persons which are Wholly Owned
Restricted Subsidiaries and are engaged in the oil and gas exploration and
production business; (iv) Swap Obligations; (v) advances to officers and
employees of the Company or any Restricted Subsidiary in connection with the
performance of their duties in the ordinary course of business in an amount not
to exceed $500,000 in the aggregate outstanding at any time; (vi) margin
deposits in connection with Permitted Hedging Transactions; (vii) any
Investments outstanding on the Issue Date and Investments in Red Oak by the
Company on the Issue Date in an amount not to exceed $10 million; (viii)
Investments and expenditures made in the ordinary course of business by the
Company or its Restricted Subsidiaries, 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, processing, gathering, marketing or
transporting oil or gas through agreements, transactions, interests or
arrangements which permit a Person to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of the oil and gas business jointly
with third parties, including, without limitation, (a) ownership interests in
oil and gas properties or gathering systems and (b) Investments and expenditures
in the form of or pursuant to operating agreements, processing
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agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling
arrangements, 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; provided that in the case of any joint venture engaged in processing,
gathering, marketing or transporting oil or gas (i) all Indebtedness of such
joint venture (other than a joint venture that is an Unrestricted Subsidiary)
that would not otherwise constitute Indebtedness of the Company or a Restricted
Subsidiary shall be deemed Indebtedness of such Person in proportion to its
direct or indirect ownership interest in such joint venture and (ii) such joint
venture shall be reasonably calculated to enhance the value of the reserves of
such Person or marketability of production from such reserves; (ix) other
Investments not in excess of $2 million at any time outstanding; (x) loans made
to officers, directors and employees of the Company or any of its Restricted
Subsidiaries approved by the applicable Board of Directors (or by an authorized
officer), the proceeds of which are used solely to purchase stock or to exercise
stock options received pursuant to an employee stock option plan or other
incentive plan, in a principal amount not to exceed the purchase price of such
stock or the exercise price of such stock options, as applicable; and (xi) the
repayment of Indebtedness not to exceed $500,000 in conjunction with the
acquisition of all the Capital Stock of Love Petroleum Company.
"Permitted Liens" with respect to any Person means (a) Liens imposed by
governmental authorities for taxes, assessments, or other charges not yet due or
which are being contested in good faith and by appropriate proceedings, if
adequate reserves with respect thereto are maintained on the books of any of
such Person in accordance with GAAP; (b) statutory Liens of landlords, carriers,
warehousemen, mechanics, materialmen, repairmen, mineral interest owners, or
other like Liens arising by operation of law in the ordinary course of business
provided that (i) the underlying obligations are not overdue for a period of
more than 60 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of any of such Person in accordance with GAAP; (c)
deposits of cash or Cash Equivalents to secure the performance of bids, trade
contracts (other than borrowed money), leases, statutory obligations, surety
bonds, performance bonds, and other obligations of a like nature incurred in the
ordinary course of business (or to secure reimbursement obligations or letters
of credit issued to secure such performance or other obligations); (d)
easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects incurred in the ordinary course of business which,
in the aggregate, are not material in amount and which do not, in any case,
materially detract from the value of the property subject thereto or materially
interfere with the ordinary conduct of the business of such Person; (e) Liens
securing the Parent Guarantee, the Notes, any Subsidiary Guarantee or Permitted
Bank Credit Facilities; (f) pledges or deposits made in the ordinary course of
business in connection with worker's compensation, unemployment insurance, other
types of social security legislation, property insurance and liability
insurance; (g) Liens on the assets of any Person existing at the time such
assets are acquired by such Person, whether by merger, consolidation, purchase
of assets or otherwise so long as such Liens (A) are not created, incurred or
assumed in contemplation of such assets being acquired by such Person and (B) do
not extend to any other assets of such Person; (h) leases or subleases granted
to others that do not materially interfere with the ordinary course of business
of any of such Person, and (i) any extension, renewal or replacement of the
Liens created pursuant to any of clauses (a) through (h); provided that such
Liens would have otherwise been permitted under such clauses, and provided
further that the Liens permitted by this clause (i) do not secure any additional
Indebtedness or encumber any additional property.
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"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any Restricted Subsidiary issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of such Person; provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith); (ii)
such Permitted Refinancing Indebtedness (other than Indebtedness under Permitted
Bank Credit Facilities) has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Parent Guarantee, the Notes or any
Subsidiary Guarantee, then such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Parent Guarantee, the Notes or such Subsidiary
Guarantee, as the case may be, on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) with
respect to any such Indebtedness of the Company being extended, refinanced,
renewed, replaced, defeased or refunded, such Permitted Refinancing Indebtedness
shall not be incurred by any Restricted Subsidiary.
"Physical Notes" has the meaning provided in Section 2.01.
"Person" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state, or political subdivision thereof, trust, municipality,
or other entity.
"Pledge Agreement" means that certain Pledge Agreement, in substantially
the form of Exhibit C, issued by the Company in favor of the Trustee pursuant to
which the Capital Stock in Sierra and Red Oak directly owned by the Company have
been pledged to the Trustee, for the ratable benefit of the Holders of the
Notes.
"Preferred Stock" means, with respect to any Person, any class or classes
(however designated) of Capital Stock of such Person that 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 any Indebtedness (including the Notes) means the principal
amount of such Indebtedness plus the premium, if any, on such Indebtedness.
"Private Exchange Notes" has the meaning set forth in the Registration
Rights Agreement.
"Private Placement Legend" means the legend initially set forth on the
Initial Notes in the form set forth in Section 2.15.
"Production Payment" means any volumetric or dollar-denominated
production payment or other similar burden on the property of the Company or any
of its Restricted Subsidiaries.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of this Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the
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Securities Act, as determined by the Board of Directors of the Issuer in
consultation with its independent public accountants.
"Public Equity Offering" means an underwritten public offering by a
nationally recognized member of the National Association of Securities Dealers
of Qualified Capital Stock of the Issuer or the Company pursuant to an effective
registration statement filed with the Commission pursuant to the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Qualified Institutional Buyer" or "QIB" has the meaning specified in Rule
144A under the Securities Act.
"Record Date" means the Record Dates specified in the Notes.
"Redemption Date" when used with respect to any Note to be redeemed, means
the date fixed for such redemption pursuant to this Indenture and the Notes.
"Redemption Price" when used with respect to any Note to be redeemed, means
the price fixed for such redemption, including principal and premium, if any,
pursuant to this Indenture and the Notes.
"Red Oak" means Midland Red Oak Realty, Inc., a Delaware corporation.
"Reference Period" with regard to any Person means the four full fiscal
quarters of such Person ended on or immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or this
Indenture.
"Registrar" has the meaning provided in Section 2.03.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Issuer and the Initial
Purchasers.
"Regulation S" means Regulation S under the Securities Act.
"Released Interests" has the meaning provided in Section 11.04(c).
"Reserve Report" means a report prepared by independent petroleum
engineers with respect to Hydrocarbon reserves in accordance with guidelines
published by the Commission.
"Reserved Rights" has the meaning set forth in Section 8.01.
"Restricted Investment" means (i) the designation of a Subsidiary as an
Unrestricted Subsidiary in the manner described in the definition of
Unrestricted Subsidiary and (ii) any Investment other than a Permitted
Investment.
"Restricted Payment" has the meaning set forth in Section 4.10.
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"Restricted Security" has the meaning assigned to such term in Rule
144(a)(3) under the Securities Act; provided, however, that the Trustee shall be
entitled to request and conclusively rely on an Opinion of Counsel with respect
to whether any Note constitutes a Restricted Security.
"Restricted Subsidiary" means any Subsidiary of the Company (including
the Issuer) which is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"Sale and Leaseback Transaction" means an arrangement relating to
property owned on the Issue Date or thereafter acquired whereby a Person or a
Subsidiary of such Person transfers such property to another Person and leases
it back from such other Person.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Security Documents" means the Pledge Agreement and each other agreement
evidencing the pledge of assets to secure the Parent Guarantee that may be
entered into on or after the Issue Date pursuant to the terms of this Indenture.
"Sierra" means Sierra Well Service, Inc., a Delaware corporation.
"Significant Subsidiary" means (a) any Restricted Subsidiary having (i)
for the most recent fiscal year of such Subsidiary, consolidated revenues
greater than $10 million or (ii) as at the end of such fiscal year of such
Subsidiary, assets or liabilities greater than $10 million and (b) any group of
Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary; provided however, that ''Significant Subsidiary'' shall not include
a joint venture if and so long as an Investment therein would constitute a
Permitted Investment under clause (viii) of the definition thereof.
"Southwest Software" means Midland Southwest Software, Inc., a Delaware
corporation.
"S&P" means Standard & Poor's Rating Services, a division of The McGraw-
Hill Companies, Inc. and its successors.
"Stated Maturity Date" means October 15, 2004.
"Subordinated Indebtedness" means Indebtedness of the Issuer, the Company
or a Subsidiary Guarantor that (i) requires no payment of principal prior to or
on the Stated Maturity Date and (ii) is expressly subordinate and junior in
right of payment to the Notes, the Parent Guarantee or the Subsidiary
Guarantees, as the case may be.
"Subsidiary" with respect to any Person means (i) a corporation with
respect to which such Person or its Subsidiaries own, directly or indirectly, at
least 50% of such corporation's Voting Stock, or (ii) a partnership in which
such Person or a Subsidiary of such Person is, at the time, a general partner of
such partnership and has more than 50% of the total voting power of partnership
interests, or (iii) any other Person (other than a corporation or a partnership)
in which such Person, one or more Subsidiaries of such Person, or such Person
and one or more Subsidiaries of such Person, directly or indirectly, at the date
of determination thereof has (x) at least a 50% ownership interest
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or (y) the power to elect or direct the election of the directors or other
governing body of such other Person.
"Subsidiary Guarantee" has the meaning set forth in Section 12.01(b).
"Subsidiary Guarantor" means each of the Company's Restricted Subsidiaries
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 this Indenture.
"Swap Obligation" of any Person means any Interest Rate or Currency
Agreement entered into with one or more financial institutions or one or more
futures exchanges in the ordinary course of business and not for purposes of
speculation that is designed to protect such Person against fluctuations in (x)
interest rates with respect to Indebtedness incurred and which shall have a
notional amount no greater than 100% of the principal amount of the Indebtedness
being hedged thereby or (y) currency exchange rate fluctuations.
"Tax Sharing Agreement" means the Tax Sharing Agreement, dated as of
September 1, 1997, among the Company and other Subsidiaries, as in effect on the
Issue Date and as amended from time to time, provided that any such amendment is
not materially adverse to the Holders of the Notes.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S)77aaa-77bbbb),
as amended, as in effect on the date of this Indenture, except as otherwise
provided in Section 9.03.
"TPI" means Threading Products International, LLC, a Texas limited
liability company.
"Transferred Collateral" has the meaning set forth in Section 11.04(b).
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer this Indenture, or in the case of a
successor trustee, an officer assigned to the department, division or group
performing the corporation trust work of such successor and assigned to
administer this Indenture.
"Trustee" means the party named as such in this Indenture until a successor
replaces it in accordance with the provisions of this Indenture and thereafter
means such successor.
"Unrestricted Non-Recourse Indebtedness" of any Unrestricted Subsidiary
means (i) Indebtedness of such Person that is secured solely (other than with
respect to clause (ii) below) by a Lien upon the stock of an Unrestricted
Subsidiary of such Person and as to which there is no recourse (other than with
respect to clause (ii) below) against such Person or any of its assets other
than against such stock (and the dollar amount of any Indebtedness of such
Person as described in this clause (i) shall be deemed to be zero for purposes
of all other provisions of this Indenture) and (ii) guarantees of the
Indebtedness of Unrestricted Subsidiaries of such Person.
"Unrestricted Subsidiary" means, in respect of the Company, Red Oak; and
in respect of any Person, any other Person ("Other Person") that would, but
for this definition of "Unrestricted Subsidiary" be a Subsidiary of such
Person organized or acquired after the Issue Date as to which all of the
following conditions apply: (i) neither such Person nor any of its other
Subsidiaries
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provides credit support of any Indebtedness of such Other Person (including any
undertaking, agreement or instrument evidencing such Indebtedness); (ii) such
Other Person is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness; (iii) neither such
Person nor any of its Subsidiaries has made an Investment in such Other Person
unless such Investment was permitted by Section 4.10; and (iv) the Board of
Directors of such Person, as provided below, shall have designated such Other
Person to be an Unrestricted Subsidiary on or prior to the date of organization
or acquisition of such Other Person. Any such designation by the Board of
Directors of such Person shall be evidenced to the Trustee by delivering to the
Trustee a Board Resolution giving effect to such designation and an Officers'
Certificate of the Company certifying that such designation complies with the
foregoing conditions.
"Unrestricted Subsidiary Indebtedness" means, as to any Unrestricted
Subsidiary of any Person, Indebtedness of such Unrestricted Subsidiary (i) as to
which neither such Person nor any Subsidiary of such Person is directly or
indirectly liable (by virtue of such Person or any such Subsidiary being the
primary obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), unless such liability constitutes Unrestricted Non-Recourse
Indebtedness and (ii) which, upon the occurrence of a default with respect
thereto, does not result in, or permit any holder (other than the Company or any
Subsidiary of the Company) of any Indebtedness of such Person or any Subsidiary
of such Person to declare a default on such Indebtedness of such Person or any
Subsidiary of such Person or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity Date, unless, in the case of this clause
(ii), such Indebtedness constitutes Unrestricted Non-Recourse Indebtedness.
"U.S. Government Obligations" means direct obligations of, and obligations
guaranteed by, the United States of America for the payment of which the full
faith and credit of the United States of America is pledged.
"U.S. Legal Tender" means such coin or currency of the Untied States of
America (which if paid by wire transfer, shall be in the form of immediately
available funds) as at the time of payment shall be legal tender for the payment
of public and private debts.
"Voting Stock" means Capital Stock of a Person having generally the right
to vote in the election to directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding Voting Stock owned by the Company or another Wholly
Owned Restricted Subsidiary.
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Section 1.02 Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the TIA, such provision is
incorporated by reference in, and made a part of, this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Issuer, the Company or any
other Guarantor or any other obligor on the Notes.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule and
not otherwise defined herein have the meanings assigned to them therein.
Section 1.03 Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision; and
(6) any reference to a statute, law or regulation means that statute,
law or regulation as amended and in effect from time to time and includes any
successor statute, law or regulation; provided, however, that any reference to
the Bankruptcy Law shall mean the Bankruptcy Law as applicable to the relevant
case.
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ARTICLE TWO
THE NOTES
Section 2.01 Form and Dating.
The Initial Notes and the Trustee's certificate of authentication
relating thereto shall be substantially in the form of Exhibit A hereto. The
Exchange Notes and the Trustee's certificate of authentication relating thereto
shall be substantially in the form of Exhibit B hereto. The Private Exchange
Notes, if required, and the Trustee's certificate of authentication relating
thereto shall be substantially in the form of Exhibit B hereto but shall bear
the Private Placement Legend. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or depository rule or usage.
The Issuer and the Trustee shall approve the form of the Notes and any notation,
legend or endorsement on them. Each Note shall be dated the date of its
issuance and shall show the date of its authentication.
The terms and provisions contained in the Notes, annexed hereto as
Exhibits A and B, shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Issuer and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Except for QIBs who elect to take their Notes in the form of Physical
Notes, Initial Notes offered and sold in reliance on Rule 144A, together with
any Initial Notes offered and sold in reliance on Regulation S, shall be issued
initially in the form of one or more permanent global Notes in registered form
(each a "Global Note"), substantially in the form set forth in Exhibit A,
deposited with the Trustee, as custodian for the Depository, duly executed by
the Issuer and authenticated by the Trustee as hereinafter provided and shall
bear the legends set forth in Section 2.15. Except for QIBs who elect to take
their Notes in the form of Physical Notes, Exchange Notes shall be issued
initially in the form of one or more permanent Global Notes, substantially in
the form set forth in Exhibit B, deposited with the Trustee, as custodian for
the Depository, duly executed by the Issuer and authenticated by the Trustee as
hereinafter provided and shall bear the Global Note Legend. The aggregate
principal amount of a Global Note may from time to time be increased or
decreased by adjustments made on the records of the Trustee, as custodian for
the Depository, as hereinafter provided.
Notes issued in exchange for an interest in a Global Note pursuant to
Section 2.16 may be issued in the form of permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A (the "Physical
Notes"). In addition, QIBs may elect to take their Notes in the form of
Physical Notes. Initial Notes offered and sold to Institutional Accredited
Investors and Private Exchange Notes shall be issued in the form of Physical
Notes in substantially the form set forth in Exhibits A and B, respectively, and
shall bear the Private Placement Legend.
The Initial Notes, the Exchange Notes and any Private Exchange Notes
shall be considered to be a single class of securities for all purposes of this
Indenture, including, without limitation, waivers, amendments, redemptions and
offers to repurchase.
Section 2.02 Execution and Authentication; Aggregate Principal Amount.
Two Officers, or an Officer and an Assistant Secretary of the Issuer,
shall sign, or one Officer shall sign and one Officer or an Assistant Secretary
(each of whom shall, in each case, have
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been duly authorized by all requisite corporate actions) shall attest to, the
Notes for the Issuer by manual or facsimile signature. The corporate seal of the
Issuer shall be affixed to each Note or reproduced thereon.
If any Officer or Assistant Secretary whose signature is on a Note was
an Officer or Assistant Secretary at the time of such execution but no longer
holds that office or position at the time the Trustee authenticates the Note,
the Note shall nevertheless be valid.
A Note shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Note. The signature
shall be conclusive evidence that the Notes has been authenticated under this
Indenture.
The Trustee shall authenticate (i) Initial Notes for original issue in
the aggregate principal amount not to exceed $200.0 million and (ii) Exchange
Notes or Private Exchange Notes from time to time for issue only in exchange for
a like principal amount of Initial Notes, in each case upon written order of the
Issuer in the form of an Officers' Certificate of the Issuer. Each such written
order shall specify the amount of Notes to be authenticated and the date on
which the Notes are to be authenticated, whether the Notes are to be Initial
Notes, Exchange Notes or Private Exchange Notes and whether the Notes are to be
issued as Physical Notes or Global Notes or such other information as the
Trustee may reasonably request. In addition, with respect to authentication
pursuant to clause (ii) of the first sentence of this paragraph, the first such
written order from the Issuer shall be accompanied by an Opinion of Counsel of
the Issuer in form and substance reasonably satisfactory to the Trustee stating
that the issuance of the Exchange Notes or Private Exchange Notes, as the case
may be, does not give rise to an Event of Default, complies with this Indenture
and has been duly authorized by the Issuer. The aggregate principal amount of
Notes outstanding at any time may not exceed $200.0 million, except as provided
in Sections 2.07 and 2.08.
The Trustee may appoint an authentication agent (the "Authenticating
Agent") reasonably acceptable to the Issuer to authenticate Notes. Unless
otherwise provided in the appointment, an Authenticating Agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such Authenticating
Agent. An Authenticating Agent has the same rights as an Agent to deal with the
Issuer or with any Affiliate of the Issuer.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
Section 2.03 Registrar and Paying Agent.
The Issuer shall maintain an office or agency in New York, New York,
where Notes may be presented or surrendered for payment ("Paying Agent"), and
the Issuer shall also maintain an office or agency, either in New York, New York
or elsewhere in the United States, where (a) Notes may be presented or
surrendered for registration of transfer or for exchange ("Registrar") and (b)
notices and demands to or upon the Issuer in respect of the Notes and this
Indenture may be served. The Registrar shall keep the Note Register. The
Issuer, upon prior written notice to the Trustee, may have one or more co-
Registrars and one more additional Paying Agents reasonably acceptable to the
Trustee. The term "Paying Agent" includes any additional Paying Agent. The
Issuer may act as its own Paying Agent, except that for the purposes of payments
on the Notes pursuant to
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Sections 4.15 and 4.16, neither the Issuer nor any Affiliate of the Issuer may
act as Paying Agent.
The Issuer shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which agreement shall incorporate the
provisions of the TIA and implement the provisions of this Indenture that relate
to such Agent. The Issuer shall notify the Trustee, in advance, of the name and
address of any such Agent. If the Issuer fails to maintain a Registrar or Paying
Agent, or fails to give the foregoing notice, the Trustee shall act as such.
The Issuer initially appoints the Trustee as Registrar, Paying Agent
and agent for service of demands and notices in connection with the Notes, until
such time as the Trustee has resigned or a successor has been appointed. Any of
the Registrar, the Paying Agent or any other Agent may resign upon 30 days'
notice to the Issuer.
Section 2.04 Paying Agent to Hold Assets in Trust.
The Issuer shall require each Paying Agent other than the Trustee to
agree in writing that such Paying Agent shall hold in trust for the benefit of
the Holders or the Trustee all assets held by the Paying Agent for the payment
of principal of, premium, if any, or interest on, the Notes (whether such assets
have been distributed to it by the Issuer or any other obligor on the Notes),
and the Issuer and the Paying Agent shall notify in writing the Trustee of any
Default by the Issuer in making any such payment. The Issuer at any time may
require a Paying Agent to distribute all assets held by it pursuant hereto to
the Trustee and account for any assets disbursed and the Trustee may at any time
during the continuance of any payment Default, upon written request to a Paying
Agent, require such Paying Agent to distribute all assets held by it pursuant
hereto to the Trustee and to account for any assets distributed. Upon
distribution to the Trustee of all assets that shall have been delivered by the
Issuer to the Paying Agent, the Paying Agent shall have no further liability for
such assets.
Section 2.05 Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
the Holders. If the Trustee is not the Registrar, the Issuer shall furnish or
cause the Registrar to furnish to the Trustee before each Record Date and at
such other times as the Trustee may request in writing a list as of such date
and in such form as the Trustee may reasonably require of the names and
addresses of the Holders, which list may be conclusively relied upon by the
Trustee.
Section 2.06 Transfer and Exchange.
When Notes are presented to the Registrar or a co-Registrar with a
request to register the transfer of such Notes or to exchange such Notes for an
equal principal amount of Notes of other authorized denominations, the Registrar
or co-Registrar shall register the transfer or make the exchange as requested if
its requirements for such transaction are met; provided, however, that the Notes
presented or surrendered for registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer in form satisfactory
to the Issuer, the Trustee and the Registrar or co-Registrar, duly executed by
the Holder thereof or his attorney duly authorized in writing. To permit
registration of transfers and exchanges, the Issuer shall execute and the
Trustee, upon written demand of the Issuer in the form of an Officer's
Certificate of the Issuer, shall authenticate Notes at the Registrar's or co-
Registrar's request. No service charge shall be made for
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any registration of transfer or exchange, but the Issuer may require repayment
of a sum sufficient to cover any transfer tax or similar governmental charge
payable in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchanges or transfers pursuant to Section
2.10, 4.15, 4.16 or 9.05, in which event the Issuer shall be responsible for the
payment of such tax or charge).
The Registrar or co-Registrar shall not be required to register the
transfer or exchange of any Note (i) during a period beginning at the opening of
business 15 days before the mailing of a notice of redemption of Notes and
ending at the close of business on the day of such mailing and (ii) selected for
redemption in whole or in part pursuant to Article Three, except the unredeemed
portion of any Note being redeemed in part.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such Global Note, agree that transfers of beneficial interests in
such Global Notes may be effected only through a book entry system maintained by
the Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Note shall be required to be reflected in a book
entry system.
Section 2.07 Replacement Notes.
If a mutilated Note is surrendered to the Trustee or the Holder of a
Note claims that the Note has been lost, destroyed or wrongfully taken, the
Issuer shall issue and the Trustee, upon written demand of the Issuer in the
form of an Officer's Certificate of the Issuer, shall authenticate a replacement
Note if the Trustee's requirements are met. If required by the Trustee or the
Issuer, such Holder must provide an indemnity bond or other indemnity of
reasonable tenor, sufficient in the reasonable judgment of the Issuer, to
protect the Issuer, the Trustee or any Agent from any loss which any of them may
suffer if a Note is replaced. Every replacement Note shall constitute an
additional obligation of the Issuer.
Section 2.08 Outstanding Notes.
Notes outstanding at any time are all the Notes that have been
authenticated by the Trustee except those canceled by it, those delivered to it
for cancellation and those described in this Section 2.08 as not outstanding.
Subject to the provisions of Section 2.09, a Note does not cease to be
outstanding because the Issuer or any of its Affiliates holds the Note.
If a Note is replaced pursuant to Section 2.07 (other than a mutilated
Note surrendered for replacement), it ceases to be outstanding unless the
Trustee receives proof satisfactory to it that the replaced Note is held by a
bona fide purchaser. A mutilated Note ceases to be outstanding upon surrender of
such Note and replacement thereof pursuant to Section 2.07.
If (i) by 11:00 a.m. New York City time on a Redemption Date or the
Stated Maturity Date the Paying Agent holds U.S. Legal Tender or (ii) the Issuer
has exercised either Legal Defeasance and deposited U.S. Government Obligations,
in either case, sufficient to pay all of the principal, premium, if any, and
interest due on the Notes payable on that date and is not prohibited from paying
such money to the Holders thereof pursuant to the terms of this Indenture, then
on and after that date such Notes shall be deemed not to be outstanding and
interest on them shall cease to accrue.
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Section 2.09 Treasury Notes.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver, consent or notice, Notes owned by
the Issuer or an Affiliate of the Issuer shall be considered as though they are
not outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes which a Trust Officer of the Trustee actually knows are so owned shall be
so considered. The Issuer shall notify the Trustee, in writing, when it or, to
its knowledge, any of its Affiliates repurchases or otherwise acquires Notes, of
the aggregate principal amount of such Notes so repurchased or otherwise
acquired and such other information as the Trustee may reasonably request and
the Trustee shall be entitled to rely thereon.
Section 2.09 Temporary Notes.
Until definitive Notes are ready for delivery, the Issuer may prepare
and the Trustee shall authenticate temporary Notes upon receipt of a written
order of the Issuer in the form of an Officers' Certificate. The Officers'
Certificate shall specify the amount of temporary Notes to be authenticated and
the date on which the temporary Notes are to be authenticated. Temporary Notes
shall be substantially in the form of definitive Notes but may have variations
that the Issuer considers appropriate for temporary Notes and so indicates in
the Officers' Certificate. Without unreasonable delay, the Issuer shall
prepare, and the Trustee shall authenticate upon receipt of a written order of
the Issuer pursuant to Section 2.02, definitive Notes in exchange for temporary
Notes.
Section 2.11 Cancellation.
The Issuer at any time may deliver Notes to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Notes surrendered to them for transfer, exchange or payment. The Trustee,
or at the direction of the Trustee, the Registrar or the Paying Agent, and no
one else, shall cancel and shall dispose, in its customary manner, of all Notes
surrendered for transfer, exchange, payment or cancellation. Subject to Section
2.07, the Issuer may not issue new Notes to replace Notes that have been paid or
delivered to the Trustee for cancellation. If the Issuer shall acquire any of
the Notes, such acquisition shall not operate as a redemption or satisfaction of
the Indebtedness represented by such Notes unless and until the same are
surrendered to the Trustee for cancellation pursuant to this Section 2.11.
Section 2.12 Defaulted Interest.
The Issuer shall pay interest on overdue principal from time to time
on demand at the rate of interest then borne by the Notes. The Issuer shall, to
the extent lawful, pay interest on overdue installments of interest (without
regard to any applicable grace periods) from time to time on demand at the rate
of interest then borne by the Notes. Interest will be computed 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.
If the Issuer defaults in a payment of interest on the Notes, it shall
pay the defaulted interest, plus (to the extent lawful) any interest payable on
the defaulted interest, to the Persons who are Holders on a subsequent special
record date, which special record date shall be the fifteenth day next preceding
the date fixed by the Issuer for the payment of defaulted interest or the next
succeeding Business Day if such date is not a Business Day. The Issuer shall
notify the Trustee in
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writing of the amount of defaulted interest proposed to be paid on each Note and
the date of the proposed payment (a "Default Interest Payment Date"), and at the
same time the Issuer shall deposit with the Trustee an amount of money equal to
the aggregate amount proposed to be paid in respect of such defaulted interest
or shall make arrangements satisfactory to the Trustee for such deposit on or
prior to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such defaulted interest as
provided in this Section; provided, however, that in no event shall the Issuer
deposit monies proposed to be paid in respect of defaulted interest later than
11:00 a.m. New York City time of the proposed Default Interest Payment Date. At
least 15 days before the subsequent special record date, the Issuer shall mail
(or cause to be mailed) to each Holder, as of a recent date selected by the
Issuer, with a copy to the Trustee, a notice that states the subsequent special
record date, the payment date and the amount of defaulted interest, and interest
payable on such defaulted interest, if any, to be paid. Notwithstanding the
foregoing, any interest which is paid prior to the expiration of the 30-day
period set forth in Section 6.01(a) shall be paid to Holders as of the regular
record date for the Interest Payment Date for which interest has not been paid.
Notwithstanding the foregoing, the Issuer may make payment of any defaulted
interest in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Notes may be listed, and upon such notice
as may be required by such exchange.
Section 2.13 CUSIP Numbers.
The Issuer in issuing the Notes of each series may use a "CUSIP"
number, and, if so, the Trustee shall use the appropriate CUSIP number in
notices of redemption or exchange as a convenience to Holders; provided,
however, that no representation is hereby deemed to be made by the Trustee as to
the correctness or accuracy of the CUSIP number printed in the notice or on the
notes, and that reliance may be placed only on the other identification numbers
printed on the Notes. The Issuer shall promptly notify the Trustee of any change
in a CUSIP number.
Section 2.14 Deposit of Monies.
Prior to 11:00 a.m. New York City time on each Interest Payment Date,
Stated Maturity Date, Redemption Date, Change of Control Payment Date and Excess
Cash Purchase Date, the Issuer shall have deposited with the Paying Agent in
immediately available funds U.S. Legal Tender sufficient to make the cash
payments, if any, due on such Interest Payment Date, Stated Maturity Date,
Redemption Date, Change of Control Payment Date and Excess Cash Purchase Date,
as the case may be, in a timely manner which permits the Paying Agent to remit
payment to the Holders on such Interest Payment Date, Stated Maturity Date,
Redemption Date, Change of Control Payment Date and Excess Cash Purchase Date,
as the case may be. At the option of the Issuer, payment of interest on
Physical Notes may be made by wire transfer or by check mailed to the Holders on
or before the relevant Interest Payment Date at their respective addresses as
shown in the Note Register.
Section 2.15 Restrictive Legends.
Each Global Note and Physical Note that constitutes a Restricted
Security, including, without limitation, the Private Exchange Notes, shall bear
the following legend (the "Private Placement Legend") on the face thereof until
after the second anniversary of the later of the Issue Date and the last date on
which the Issuer or any Affiliate of the Issuer was the owner of such Note (or
any predecessor security) (or such other period of time as may be permitted by
Rule 144(k) under the Securities Act or any successor provision thereunder) (or
such longer period of time as may be
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required under the Securities Act or applicable state securities laws in the
opinion of counsel for the Issuer, unless otherwise agreed by the Issuer and the
Holder thereof):
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE
BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE
HEREOF (OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY HOLDER THAT WAS AN
AFFILIATE OF THE ISSUER AT THE TIME DURING THE THREE MONTHS PRECEDING THE
DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO
LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A
PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR
OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE
OF THIS NOTE), (3) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(1), (2), (3) or (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS SECURITY FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM
ATTACHED TO THIS NOTE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE
TRUSTEE, (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES
ACT, OR (5) 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. AN INSTITUTIONAL ACCREDITED
INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE ISSUER AND THE
TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY
REQUIRED TO CONFIRM THAT THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT IS (1) A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN
INSTITUTIONAL THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) or (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING
THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION.
THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS AGREEMENT DATED AS
OF OCTOBER 14, 1997 AMONG THE COMPANY, THE ISSUER, JEFFERIES &
COMPANY, INC., BANC ONE CAPITAL CORPORATION AND
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PARIBAS CORPORATION, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE ISSUER.
Each Global Note shall also bear the following legend (the "Global
Note Legend") on the face thereof:
THIS SECURITY IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN
THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER
OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE
DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER
NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY,
A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OR 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.
Section 2.16 Book-Entry Provisions for Global Security.
(a) The Global Notes initially shall (i) be registered in the name of
the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear the Global Note Legend
as set forth in Section 2.15.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under the
Global Notes, and the Depository may be treated by the Issuer, the Trustee and
any Agent of the Issuer or the Trustee as the absolute owner of such Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Issuer, the Trustee or any Agent of the Issuer or the Trustee
from giving effect to any written certification, proxy or other authorization
furnished by the Depository or impair, as between the Depository and its Agent
Members, the operation of customary practices governing the exercise of the
rights of a Holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers in whole,
but not in part, to the Depository, its successors or their respective nominees.
Interests of beneficial owners
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in a Global Note may be transferred or exchanged for Physical Notes in
accordance with the rules and procedures of the Depository and the provisions of
Section 2.17. In addition, Physical Notes shall be transferred to all beneficial
owners in exchange for their beneficial interests in a Global Note if (i) the
Depository notifies the Issuer that it is unwilling or unable to continue as
Depository for the Global Notes and a successor depositary is not appointed by
the Issuer within 90 days of such notice; or (ii) the Issuer, in its sole
discretion, elects to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion of the
beneficial interest in a Global Note to beneficial owners pursuant to paragraph
(b), the Registrar shall (if one or more Physical Notes are to be issued)
reflect on its books and records the date and a decrease in the principal amount
of such Global Note in an amount equal to the principal amount of the beneficial
interest in the Global Note to be transferred, and the Issuer shall execute, and
the Trustee shall authenticate and deliver, one or more Physical Notes of like
tenor and amount.
(d) In connection with the transfer of an entire Global Note to
beneficial owners pursuant to paragraph (b), such Global Note shall be deemed to
be surrendered to the Trustee for cancellation, and the Issuer shall execute,
and the Trustee shall authenticate and deliver, to each beneficial owner
identified by the Depository in exchange for its beneficial interest in the
Global Note, an equal aggregate principal amount of Physical Notes of authorized
denominations.
(e) Any Physical Note constituting a Restricted Security delivered in
exchange for an interest in a Global Note pursuant to paragraph (b) or (c) shall
bear the Private Placement Legend.
(f) The Holder of a Global Note 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 Notes.
Section 2.17 Special Transfer Provisions.
(a) Transfer to Non-QIB Institutional Accredited Investors and Non-
U.S. Persons. The following provisions shall apply with respect to the
registration of any proposed transfer of a Note constituting a Restricted
Security to any Institutional Accredited Investor which is not a QIB or to any
Non-U.S. Person:
(i) the Registrar shall register the transfer of any Note
constituting a Restricted Security, whether or not such Note bears the
Private Placement Legend, if (x) the requested transfer is after the second
anniversary of the Issue Date (provided, however, that neither the Issuer
nor any Affiliate of the Issuer has held any beneficial interest in such
Note, or portion thereof, at any time on or prior to the second anniversary
of the Issue Date) or (y) (1) in the case of a transfer to an Institutional
Accredited Investor which is not a QIB (excluding Non-U.S. Persons), the
proposed transferee has delivered to the Registrar a certificate
substantially in the form of Exhibit D hereto or (2) in the case of a
transfer to a Non-U.S. Person, the proposed transferee has delivered to the
Registrar a certificate substantially in the form of Exhibit E hereto; and
(ii if the proposed transferor is an Agent Member holding a
beneficial interest in the Global Note, upon receipt by the Registrar of
(x) the certificate, if any,
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required by paragraph (i) above and (y) written instructions given in
accordance with the Depository's and the Registrar's procedures, whereupon
(A) the Registrar shall reflect on its books and records the date
and (if the transfer does not involve a transfer of outstanding
Physical Notes) a decrease in the principal amount of such Global Note
in an amount equal to the principal amount of the beneficial interest
in the Global Note to be transferred, and
(B) the Issuer shall execute, and the Trustee, upon written
demand of the Issuer in the form of an Officer's Certificate of the Issuer,
shall authenticate and deliver, one or more Physical Notes of like tenor
and amount.
(b) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of a Note constituting a
Restricted Security to a QIB (excluding transfers to Non-U.S. Persons):
(i) the Registrar shall register the transfer if such transfer is
being made by a proposed transferor who has checked the box provided for on
the form of Note stating, or has otherwise advised the Issuer and the
Registrar in writing, that the transferee is purchasing the Note 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 QIB within the
meaning of Rule 144A, and is aware that the sale to it is being made in
reliance on Rule 144A and represents that it has furnished such information
regarding the Company and the Issuer as such transferee has requested
pursuant to Rule 144A or has determined not to request such information and
that the transferee is aware that the Issuer is relying upon the
transferor's foregoing representations in order to claim the exemption from
registration provided by Rule 144A; and
(ii if the proposed transferee is an Agent Member, and the Notes
to be transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in a Global Note, upon receipt by the Registrar of
written instructions given in accordance with the Depository's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the Global Note in an amount equal to
the principal amount of the Physical Notes to be transferred, and the
Trustee shall cancel the Physical Notes so transferred.
(c) Private Placement Legend. Upon the transfer, exchange or
replacement of Notes not bearing the Private Placement Legend, the Registrar
shall deliver Notes that do not bear the Private Placement Legend. Upon the
transfer, exchange or replacement of Notes bearing the Private Placement Legend,
the Registrar shall deliver only Notes that bear the Private Placement Legend
unless (i) the requested transfer is after the second anniversary of the Issue
Date (provided, however, that neither the Issuer nor any Affiliate of the Issuer
has held any beneficial interest in such Note, or portion thereof, at any time
prior to or on the second anniversary of the Issue Date), or (ii) there is
delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the
Issuer and the Trustee to the effect that neither such legend nor the related
restrictions on transfer are required in order to maintain compliance with the
provisions of the Securities Act.
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(d) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 2.16 or this Section 2.17.
The Issuer shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time during the
Registrar's normal business hours upon the giving of reasonable written notice
to the Registrar.
(e) Transfers of Notes Held by Affiliates. Any certificate (i)
evidencing a Note that has been transferred to an Affiliate of the Issuer within
two years after the Issue Date, as evidenced by a notation on the assignment
form for such transfer or in the representation letter delivered in respect
thereof or (ii) evidencing a Note that has been acquired from an Affiliate
(other than by an Affiliate) in a transaction or a chain of transactions not
involving any public offering, shall, until two years after the last date on
which the Issuer or any Affiliate of the Issuer was an owner of such Note, in
each case, bear a Private Placement Legend in substantially the form set forth
in Section 2.15 hereof, unless otherwise agreed by the Issuer (with written
notice thereof to the Trustee).
Section 2.18 Additional Interest Under Registration Rights Agreement.
Under certain circumstances, the Issuer shall be obligated to pay
Additional Interest to the Holders, all as set forth in Section 4 of the
Registration Rights Agreement. The terms thereof are hereby incorporated herein
by reference.
ARTICLE THREE
REDEMPTION
Section 3.01 Notices to Trustee.
If the Issuer elects to redeem Notes pursuant to Paragraph 5 of the
Notes, it shall notify the Trustee and the Paying Agent in writing of the
Redemption Date and the principal amount of the Notes to be redeemed.
The Issuer shall give each notice provided for in this Section 3.01 60
days before the Redemption Date (unless a shorter notice period shall be
satisfactory to the Trustee, as evidenced in a writing signed on behalf of the
Trustee), together with an Officers' Certificate stating that such redemption
shall comply with the conditions contained herein and in the Notes.
Section 3.02 Selection of Notes to Be Redeemed.
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities exchange, on a pro rata basis, by lot
or by such other method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part, and provided, further, that if a
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partial redemption is made with the proceeds of a Public Equity Offering,
selection of the Notes or portions thereof for redemption shall be made by the
Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to the procedures of the Depository), unless such method is
otherwise prohibited.
Section 3.03 Optional Redemption.
At any time, or from time to time, on or prior to October 15, 2000,
the Issuer may, at its option, use all or a portion of the Net Proceeds of one
or more Public Equity Offerings to redeem up to $70.0 million of the aggregate
principal amount of the Notes then outstanding in cash at a Redemption Price
equal to 110.5% of the principal amount of the Notes so redeemed, plus accrued
and unpaid interest, if any, thereon to the Redemption Date; provided, however,
that at least $130.0 million aggregate principal amount of Notes remains
outstanding immediately after giving effect to any such redemption (it being
expressly agreed that for purposes of determining whether this condition is
satisfied, Notes owned by the Issuer or any of its Affiliates shall be deemed
not to be outstanding). In order to effect the foregoing redemption with the
proceeds of any Public Equity Offering, the Issuer shall make such redemption
not more than 60 days after the consummation of any such Public Equity Offering.
The Notes shall also be redeemable, at the Issuer's option, in whole
or in part from time to time, on and after October 15, 2001, at the following
Redemption Prices (expressed as percentages of the outstanding principal amount
thereof) set forth below with respect to the indicated Redemption Date, plus, in
each case, accrued and unpaid interest, if any, thereon to the Redemption Date:
If redeemed during
the 12-month period
beginning October 15 Redemption Price
-------------------- ----------------
2001............................. 105.250%
2002............................. 102.625%
2003 and thereafter.............. 100.000%
Section 3.04 Notice of Redemption.
At least 30 days but not more than 60 days before a Redemption Date,
the Issuer shall mail or cause to be mailed a notice of redemption by first
class mail to each Holder of Notes to be redeemed at its last address as then
shown on the Note Register, with a copy to the Trustee and any Paying Agent. At
the Issuer's request, the Trustee shall give the notice of redemption in the
Issuer's name and at the Issuer's expense. The Issuer shall provide such
notices of redemption to the Trustee at least five days before the intended
mailing date.
Each notice of redemption shall identify (including the CUSIP number)
the Notes to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price and the amount of accrued interest, if any,
to be paid;
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(3) the name and address of the Paying Agent;
(4) the subparagraph of the Notes pursuant to which such redemption is
being made;
(5) that any Physical Notes called for redemption must be surrendered
to the Paying Agent to collect the Redemption Price plus accrued interest, if
any;
(6) that, unless the Issuer defaults in making the redemption payment,
interest on Notes (or applicable portions thereof) called for redemption ceases
to accrue, on and after the Redemption Date, and the only remaining right of the
Holders of such Notes is to receive payment of the Redemption Price plus accrued
interest as of the Redemption Date, if any, upon surrender to the Paying Agent
of the Notes redeemed;
(7) if any Physical Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the Redemption
Date, and upon surrender of such Physical Note, a new Physical Note or Notes in
the aggregate principal amount equal to the unredeemed portion thereof will be
issued; and
(8) if fewer than all the Notes are to be redeemed, the identification
of any particular Physical Notes (or portions thereof) to be redeemed, as well
as the aggregate principal amount of Notes to be redeemed and the aggregate
principal amount of Notes to be outstanding after such partial redemption.
The Company and the Issuer shall comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the purchase of Notes.
Section 3.05 Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.04,
such notice of redemption shall be irrevocable and Notes called for redemption
become due and payable on the Redemption Date at the Redemption Price plus
accrued interest as of such date, if any. Upon surrender to the Trustee or
Paying Agent, such Notes called for redemption shall be redeemed at the
Redemption Price plus accrued interest thereon to the Redemption Date, but
installments of interest, the maturity of which is on or prior to the Redemption
Date, shall be payable to Holders of record at the close of business on the
relevant record dates referred to in the Notes. Interest shall accrue on or
after the Redemption Date and shall be payable only if the Issuer defaults in
payment of the Redemption Price.
Section 3.06 Deposit of Redemption Price.
On or before 11:00 a.m (New York time) on the Redemption Date and in
accordance with Section 2.14, the Issuer shall deposit with the Paying Agent,
U.S. Legal Tender sufficient to pay the Redemption Price plus accrued interest,
if any, on all Notes to be redeemed on that date in accordance with Section 3.03
hereof and Paragraph 5 of the Notes. The Paying Agent shall promptly return to
the Issuer any U.S. Legal Tender so deposited which is not required for that
purpose, except with respect to monies owed as obligations to the Trustee
pursuant to Article Seven.
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Unless the Issuer fails to comply with the preceding paragraph and
defaults in the payment of such Redemption Price plus accrued interest, if any,
interest on the Notes to be redeemed will cease to accrue, as the case may be,
on and after the applicable Redemption Date, whether or not such Notes are
presented for payment.
Section 3.07 Notes Redeemed in Part.
Upon surrender of a Note that is to be redeemed in part, the Trustee
shall authenticate for the Holder a new Note or Notes equal in principal amount
to the unredeemed portion of the Note surrendered.
ARTICLE FOUR
COVENANTS
Section 4.01 Payment of Notes; Authentication.
(a) The Issuer shall pay the principal of, premium, if any, and
interest on the Notes on the dates and in the manner provided in the Notes and
this Indenture.
(b) An installment of principal of, premium, if any, or interest on
the Notes shall be considered paid on the date it is due if the Trustee or
Paying Agent (other than the Issuer or any of its Affiliates) holds, prior to
11:00 a.m. New York City time on that date, U.S. Legal Tender designated for and
sufficient to pay the installment in full and is not prohibited from paying such
money to the Holders pursuant to the terms of this Indenture or the Notes.
(c) Notwithstanding anything to the contrary contained in this
Indenture, the Issuer or the Company may, to the extent it is required to do so
by law, deduct or withhold income or other similar taxes imposed by the United
States of America from principal or interest payments hereunder.
(d) The Issuer shall promptly make demand upon the Trustee, in the
form of an Officer's Certificate, to authenticate and deliver Notes as
contemplated in Sections 2.06, 2.07 and 2.16 of this Indenture.
Section 4.02 Maintenance of Office or Agency.
The Issuer shall maintain the office or agency required under Section
2.03. The Issuer shall give prior written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Issuer shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the address of the
Trustee set forth in Section 10.02.
Section 4.03 Corporate Existence.
Except as otherwise permitted by Article Five, the Company shall do or
cause to be done, at its own cost and expense, all things necessary to preserve
and keep in full force and effect its corporate existence and the corporate
existence of each of its Restricted Subsidiaries, including the Issuer, in
accordance with the organizational documents of each such Restricted Subsidiary
and the material rights (charter and statutory) and franchises of each such
Person; provided, however, that
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the Company shall not be required to preserve, with respect to itself and the
Issuer, any material right or franchise and, with respect to any of its
Restricted Subsidiaries, other than the Issuer, any such existence, material
right or franchise, if the Board of Directors of the Company shall determine in
good faith that the preservation thereof is no longer desirable in the conduct
of the business of the Company and its Restricted Subsidiaries, taken as a
whole.
Section 4.04 Payment of Taxes and Other Claims.
The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges (including withholding taxes and any penalties, interest
and additions to taxes) levied or imposed upon the Company or any of its
Subsidiaries or the properties of the Company or any of its Subsidiaries and (b)
all material lawful claims for labor, materials and supplies that, if unpaid,
might by law become a Lien upon the property of the Company or any of its
Subsidiaries; provided, however, that the Company shall not be required to pay
or discharge or cause to be paid or discharged any such tax, assessment, charge
or claim whose amount, applicability or validity is being contested in good
faith by appropriate negotiations or proceedings properly instituted and
diligently conducted for which adequate reserves, to the extent required under
GAAP, have been taken.
Section 4.05 Maintenance of Properties and Insurance.
(a) The Company shall, and shall cause each of its Restricted
Subsidiaries, including the Issuer, to, maintain all properties used or useful
in the conduct of its business in good working order and condition (subject to
ordinary wear and tear) and make all necessary repairs, renewals, replacements,
additions, betterments and improvements thereto and actively conduct and carry
on its business; provided, however, that nothing in this Section 4.05 shall
prevent the Company or any of its Restricted Subsidiaries from discontinuing the
operation and maintenance of any of its properties, if such discontinuance is
(i) in the ordinary course of business pursuant to customary business terms or
(ii) in the good faith judgment of the Board of Directors of the Company,
desirable in the conduct of its or its Restrictive Subsidiaries' businesses and
is not disadvantageous in any material respect to the Holders.
(b) The Company shall provide or cause to be provided, for itself and
each of the Restricted Subsidiaries, including the Issuer, insurance (including
appropriate self-insurance) against loss or damage of the kinds that, in the
good faith judgment of the Company, are adequate and appropriate for the conduct
of the business of the Company and its Restricted Subsidiaries in a prudent
manner, with reputable insurers or with the government of the United States of
America or an agency or instrumentality thereof, in such amounts, with such
deductibles, and by such methods as shall be customary, in the good faith
judgment of the Company, for companies similarly situated in the same industry.
Section 4.06 Compliance Certificate; Financial Statements; Notice of
Default.
(a) The Company and the Issuer shall deliver to the Trustee, within 60
days after the end of each fiscal quarter or 90 days after the end of a fiscal
quarter that is also the end of a fiscal year, an Officers' Certificate to the
effect that responsible Officers of the Company and the Issuer have conducted or
supervised a review of the activities of the Company and its Subsidiaries and of
performance under this Indenture and that, to the best of such Officers'
knowledge, based on their review, the Company and the Issuer have fulfilled all
of their obligations under this Indenture or, if
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there has been a Default, specifying each Default known to them, its nature and
its status. The Company and the Issuer shall also notify the Trustee of any
changes in the composition of the Board of Directors of the Company or any of
its Subsidiaries or of any amendment to the charter or bylaws of the Company or
any of its Subsidiaries.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the annual financial
statements delivered pursuant to Section 4.08 shall be accompanied by a written
report of the Company's independent certified public accountants (who shall be a
firm of established national reputation) stating (A) that their audit
examination has included a review of the terms of this Indenture and the form of
the Notes as they relate to accounting matters, and (B) that the calculation by
the Company of the financial ratios required to be calculated under this
Indenture are numerically accurate and that the amounts contained in such ratios
and such ratios have been calculated in accordance with the definitions
contained in this Indenture; provided, however, that, without any restriction as
to the scope of the audit examination, such independent certified public
accountants shall not be liable by reason of any failure to obtain knowledge of
any such Default or Event or Default that would not be disclosed in the course
of an audit examination conducted in accordance with generally accepted auditing
standards.
(c) (i) If any Default or Event of Default has occurred and is
continuing or (ii) if any Holder seeks to exercise any remedy hereunder with
respect to a claimed Default under this Indenture or the Notes, the Issuer shall
deliver to the Trustee, at its address set forth in Section 10.02 hereof, by
registered or certified mail, or by facsimile transmission followed by hard copy
by registered or certified mail, an Officers' Certificate specifying such event,
notice or other action within 10 days of its becoming aware of such occurrence.
Section 4.07 Compliance with Laws.
The Company shall comply, and shall cause each of its Restricted
Subsidiaries, including the Issuer, to comply, with all applicable statutes,
rules, regulations, orders and restrictions of the United States of America, all
states and municipalities thereof, and of any governmental department,
commissions, boards, regulatory authority, bureau, agency and instrumentality of
the foregoing, in respect of the conduct of their respective businesses and the
ownership of their respective properties, except for such noncompliance as could
not singly or in the aggregate reasonably be expected to have a material adverse
effect on the financial condition, business, prospects or results of operations
of the Company and its Restricted Subsidiaries taken as a whole.
Section 4.08 Reports to Holders.
The Company and each of its Subsidiaries, including the Issuer, as
applicable, shall deliver to the Trustee within 15 days after filing the same
with the Commission, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Company or such
Subsidiary is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. Notwithstanding that the Company may not be subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall file with the Commission, to the extent permitted, and provide the
Trustee and Holders with such annual reports and such information, documents and
other reports specified in Section 13 of the Exchange Act. The Company and the
Issuer shall also comply with the other provisions of (S) 314(a) of the TIA.
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Concurrently with the reports delivered pursuant to the preceding
paragraph, the Company shall deliver to the Trustee and to each Holder annual
and quarterly financial statements with appropriate footnotes of the Company and
its consolidated Subsidiaries, all prepared and presented in a manner
substantially consistent with those of the Company required by the preceding
paragraph. If, at any time, the Issuer prepares annual and quarterly financial
statements, the Issuer shall deliver to the Trustee and to each Holder such
annual and quarterly financial statements with appropriate footnotes of the
Issuer and its consolidated Subsidiaries, all prepared and presented in a manner
substantially consistent with those of the Company required by the preceding
paragraph.
For so long as any Restricted Security remains outstanding, the
Company and the Issuer shall furnish to the Holders or beneficial holders of the
Notes and prospective purchasers of the Notes designated by the Holders of the
Notes, upon their request, the information required to be delivered to Rule
144(d)(4) under the Exchange Act.
Section 4.09 Waiver of Stay, Extension or Usury Laws.
The Issuer covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law or any usury law
or other law that would prohibit or forgive the Issuer from paying all or any
portion of the principal of, premium, if any, or interest on the Notes as
contemplated herein, wherever enacted, now or at any time hereafter in force, or
which may affect the covenants or the performance of this Indenture; and (to the
extent that it may lawfully do so) the Issuer hereby expressly waives all
benefit or advantage of any such law and covenants that it shall not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
shall suffer and permit execution of every such power as though no such law had
been enacted.
Section 4.10 Limitation on Restricted Payments.
(a) The Company shall not, and shall not cause or permit any of its
Restricted Subsidiaries, including the Issuer, to, directly or indirectly,
(i) declare or pay any dividend on, or make any other
distribution to holders of, any shares of Capital Stock of the Company or
any Restricted Subsidiary (other than dividends or distributions payable
solely in shares of Qualified Capital Stock of the Company or any
Restricted Subsidiary or dividends or distributions payable to the Company
or the Issuer or any Wholly Owned Restricted Subsidiary of the Company or
the Issuer or warrants, rights or options to acquire Qualified Capital
Stock of the Company or any Restricted Subsidiary),
(ii) purchase, redeem or otherwise acquire or retire for value
any such shares of Capital Stock of the Company or any Affiliate (other
than any Capital Stock owned by the Company or any of its Wholly Owned
Restricted Subsidiaries), or any options, warrants or other rights to
acquire such Capital Stock,
(iii) make any principal payment on or repurchase, redeem,
defease or otherwise acquire or retire for value, prior to any scheduled
principal payment, scheduled sinking fund payment or maturity, any
Subordinated Indebtedness, or
(iv) make any Restricted Investment,
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(such payments or other actions described in clauses (i) through (iv) being
collectively referred to as a "Restricted Payment"), unless at the time of and
after giving effect to the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the amount determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall have
occurred and be continuing, (2) the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in accordance with Section
4.12(a), and (3) the aggregate amount of all Restricted Payments declared or
made after the Issue Date shall not exceed the sum (without duplication) of the
following:
(A) 50% of the Adjusted Consolidated Net Income of the Company accrued on a
cumulative basis during the period commencing with the first full quarter
after the Issue Date and ending on the last day of the Company's last
fiscal quarter ending prior to the date of such proposed Restricted Payment
(or if Adjusted Consolidated Net Income is a loss, minus 100% of such
loss), plus
(B) the aggregate Net Proceeds received after the Issue Date by the Company
or the Issuer from the issuance or sale (other than to any of its
Restricted Subsidiaries) of shares of Qualified Capital Stock of the
Company or the Issuer or any options, warrants or rights to purchase such
shares of Qualified Capital Stock of the Company or the Issuer, plus
(C) the aggregate Net Proceeds received after the Issue Date by the Company
or the Issuer (other than from any of its Restricted Subsidiaries) upon the
exercise of any options, warrants or rights to purchase shares of Qualified
Capital Stock of the Company or the Issuer, plus
(D) the aggregate Net Proceeds received after the Issue Date by the Company
or the Issuer from the issuance or sale (other than to any of its
Restricted Subsidiaries) of Indebtedness or shares of Disqualified Capital
Stock that have been converted into or exchanged for Qualified Capital
Stock of the Company or the Issuer, together with the aggregate cash
received by the Company or the Issuer at the time of such conversion or
exchange, minus
(E) the amount of any write-downs, writeoffs, other negative revaluations,
and other negative extraordinary charges not otherwise reflected in
Adjusted Consolidated Net Income of the Company during such period.
(b) Notwithstanding the foregoing paragraph (a) of this Section 4.10,
the Company and its Restricted Subsidiaries, including the Issuer, may take the
following actions so long as (in the case of clauses (2), (3), (4), (5) and (7)
below) no Default or Event of Default shall have occurred and be continuing:
(1) the payment of any dividend on Capital Stock of the Company or any
Restricted Subsidiary within 60 days after the date of declaration thereof,
if at such declaration date such declaration complied with the provisions
of Section 4.10(a);
(2) the repurchase, redemption or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate Net Proceeds from, a
substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company or the
Issuer;
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(3) the repurchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness in
exchange for, or out of the aggregate Net Proceeds from, a substantially
concurrent issue and sale (other than to a Restricted Subsidiary) of (i)
Subordinated Indebtedness (provided such Indebtedness is on terms no less
favorable to the Holders of the Notes than the terms of the Subordinated
Indebtedness being redeemed) or (ii) shares of Qualified Capital Stock of
the Company or the Issuer;
(4) the repurchase, redemption or other acquisition of any Capital
Stock of any Affiliate organized as a limited partnership in which the
Company or the Issuer is a general partner pursuant to a redemption which
is mandatory under the terms of such partnership's limited partnership
agreement;
(5) the repurchase or other acquisition of any Capital Stock of any
Restricted Subsidiary, whether in one or a series of substantially
contemporaneous transactions, which causes such Person to become a Wholly
Owned Restricted Subsidiary of the Company;
(6) the payment on behalf of any Subsidiary or Affiliate of its
allocated pro rata costs associated with the issuance of the Notes and any
Investment in Capital Stock of such Person taken by the Company in payment
thereof;
(7) the distribution or dividend by the Company to its stockholders of
the shares of Capital Stock of Red Oak directly owned by the Company,
provided at the time of such distribution or dividend (and after giving
effect thereto):
(i) the Consolidated Fixed Charge Coverage Ratio for the
Company's Reference Period for which internal financial statements are
available immediately preceding the date of such distribution would have
been at least 3.0 to 1.0; and
(ii) the Company's Adjusted Consolidated Net Tangible Assets are
equal to or greater than 200% of the consolidated Indebtedness of the
Company and its Restricted Subsidiaries.
(c) The actions described in clause (1) of Section 4.10(b) shall be
Restricted Payments that shall be permitted to be made in accordance with
Section 4.10(b) but shall reduce the amount that would otherwise be available
for Restricted Payments under clause (3) of Section 4.10(a), provided that any
dividend paid pursuant to clause (1) of Section 4.10(b) shall reduce the amount
that would otherwise be available under clause (3) of Section 4.10(a) when
declared, but not also when subsequently paid pursuant to clause (1) of Section
4.10(b), and provided that any Net Proceeds received under clause (2) or (3)(ii)
of Section 4.10(b) shall not be included in subclauses (B) or (C) of clause (3)
of Section 4.10(a).
Section 4.11 Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit any of its Subsidiaries
to, enter directly or indirectly into, or permit to exist, any transaction or
series of related transactions with or for the benefit of any Affiliate except
for transactions made in good faith, the terms of which are fair and reasonable
to the Company or such Subsidiary, as the case may be, and are at least as
favorable as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, in a
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comparable transaction made on an arm's length basis with Persons who are not
Affiliates and the Company delivers to the Trustee: (i) with respect to any
transaction or series of transactions with an Affiliate involving aggregate
consideration in excess of $1 million, an Officers' Certificate certifying that
such transaction or transactions comply with this Section 4.11, (ii) with
respect to any transaction or series of transactions with an Affiliate involving
aggregate consideration in excess of $2 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such transaction
or transactions comply with this Section 4.11 and that such transaction or
transactions have been approved in good faith by a majority of the members of
the Board of Directors who are independent (which resolution shall be conclusive
evidence of compliance with this provision), provided that if there is not a
majority of independent directors able to approve such transaction, the Company
shall also deliver an opinion as to the fairness to the Company or such
Subsidiary of such transaction or transactions from a financial point of view
issued by an investment banking firm of recognized national standing, which
opinion shall be conclusive evidence of compliance with this provision; and
(iii) with respect to any transaction or series of transactions with an
Affiliate involving aggregate consideration in excess of $5 million, an
Officers' Certificate as described in subclause (ii) above and an opinion as to
the fairness to the Company or such Subsidiary of such transaction or
transactions from a financial point of view issued by an investment banking firm
of recognized national standing, which resolution and opinion shall be
conclusive evidence of compliance with this provision; provided, however, that
this Section 4.11 shall not restrict: (1) transactions between the Company and
any of its Restricted Subsidiaries or transactions between Restricted
Subsidiaries of the Company, (2) transactions pursuant to the Tax Sharing
Agreement and the Security Documents, (3) Restricted Payments permitted by
Section 4.10, (4) any employee compensation arrangements by the Company or any
of its Subsidiaries which has been approved by a majority of the Company's
disinterested directors and found in good faith by such directors to be in the
best interests of the Company or such Subsidiary, as the case may be; and (5)
customary directors' fees and indemnification and similar arrangements.
Section 4.12 Limitation on Incurrence of Additional Indebtedness and
Issuances of Disqualified Capital Stock.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or
otherwise become liable for, contingently or otherwise (to "incur" or, as
appropriate, an "incurrence"), any Indebtedness or issue any Disqualified
Capital Stock, except that the Company or a Restricted Subsidiary may incur
Indebtedness and the Company or the Issuer may issue shares of Disqualified
Capital Stock if:
(a) the Consolidated Fixed Charge Coverage Ratio for the Company's
Reference Period for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such Disqualified Capital Stock is issued would have been (i)
at least 2.0 to 1.0 if such additional Indebtedness is incurred or such
Disqualified Capital Stock is issued during the period commencing on the
Issue Date and ending on December 31, 1998 or (ii) at least 2.5 to 1.0 if
such additional Indebtedness is incurred or such Disqualified Capital Stock
is issued at any time thereafter;
(b) no Default or Event of Default shall have occurred and be
continuing at the time such additional Indebtedness is incurred or such
Disqualified Capital Stock is issued or would occur as the result of such
incurrence of such additional Indebtedness or the issuance of such
Disqualified Capital Stock; and
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(c) the Company's Adjusted Consolidated Net Tangible Assets are equal
to or greater than 150% of the consolidated Indebtedness of the Company and
its Restricted Subsidiaries.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence of
such Indebtedness, the Company and any Restricted Subsidiary, including the
Issuer, may incur Permitted Indebtedness.
Any Indebtedness incurred or Disqualified Capital Stock issued by any
Person that is not a Subsidiary of the Company or any of its Restricted
Subsidiaries, as the case may be, which Indebtedness or Disqualified Capital
Stock is outstanding at the time such Person becomes a Restricted Subsidiary of,
or is merged into, or consolidated with the Company or such Restricted
Subsidiary, as the case may be, shall be deemed to have been incurred or issued,
as the case may be, at the time such Person becomes a Restricted Subsidiary of,
or is merged into, or consolidated with the Company or such Restricted
Subsidiary.
For purposes of determining any particular amount of Indebtedness
under this Section 4.12, guarantees of Indebtedness otherwise included in the
determination of such amount shall not also be included.
Section 4.13 Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries, including the Issuer, to, directly or indirectly, create, or
permit or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary of the Company to (a)
pay dividends or make other distributions on its Capital Stock to the Company or
any of its other Restricted Subsidiaries, (b) make loans or advances or pay any
Indebtedness or other obligations owed to the Company or to any other Restricted
Subsidiary, or (c) transfer any of its properties or assets to the Company or to
any other Restricted Subsidiary, except encumbrances and restrictions existing
under (i) this Indenture, any Permitted Bank Credit Facility as in effect on the
Issue Date and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect to
such dividend and other payment or transfer restrictions than those contained in
the Permitted Bank Credit Facility as in effect on the Issue Date and (ii) any
agreement of a Person acquired by the Company or a Restricted Subsidiary of the
Company, which restrictions existed at the time of acquisition, were not put in
place in anticipation of such acquisition, and are not applicable to any Person
or property, other than the Person or any property of the Person so acquired.
Section 4.14 Limitation on Designation of Unrestricted Subsidiaries;
Ownership of Restricted Subsidiaries.
The Board of Directors of the Company may designate any Restricted
Subsidiary (other than the Issuer) to be an Unrestricted Subsidiary if such
designation would not cause a Default or an Event of Default and following such
designation, the Company could incur $1.00 of additional Indebtedness pursuant
to Section 4.12(a). For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries in the Subsidiary so
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designated which have not been repaid in cash will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under clause (3) of Section 4.10(a). All such
outstanding Investments will be deemed to constitute Restricted Investments in
an amount equal to the greater of the Fair Market Value or book value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The Board of Directors of the Company or any Restricted Subsidiary may
designate any Unrestricted Subsidiary of such Person (other than Red Oak) as a
Restricted Subsidiary of such Person; provided that, (a) if the Unrestricted
Subsidiary has any Indebtedness outstanding or is otherwise liable for any
Indebtedness or has a negative Net Worth, then immediately after giving pro
forma effect to such designation, such Person could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to Section
4.12(a) (assuming, for purposes of this calculation, that each dollar of
negative Net Worth is equal to one dollar of Indebtedness), (b) all Indebtedness
of such Unrestricted Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Person on the date such Unrestricted Subsidiary becomes a
Restricted Subsidiary, and (c) no Default or Event of Default would occur or be
continuing after giving effect to such designation. Any such designation by the
Board of Directors shall be evidenced to the Trustee by the filing with the
Trustee of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and setting forth in reasonable detail the underlying
calculations. In the event that any Subsidiary Guarantor is designated an
Unrestricted Subsidiary in accordance with this Section 4.14, such Subsidiary's
Subsidiary Guarantee will be released.
Notwithstanding any provisions of this Section 4.14, all Subsidiaries
of an Unrestricted Subsidiary shall be Unrestricted Subsidiaries.
The Company agrees and covenants that all of the Capital Stock of each
Restricted Subsidiary (other than the Issuer, TPI and Southwest Software) shall
be owned, whether directly or indirectly, by the Company; and that the Issuer
shall remain a Restricted Subsidiary so long as any of the Notes remains
outstanding.
Section 4.15 Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder shall have
the right, at such Holder's option, subject to the terms and conditions of this
Indenture, to require the Issuer to repurchase all or any part of such Holder's
Notes pursuant to an irrevocable, unconditional offer (a "Change of Control
Offer") as described below at a cash purchase price equal to 101% of the
principal amount thereof (the "Change of Control Purchase Price"), plus
accrued and unpaid interest thereon to a date that is no later than 60 Business
Days after the occurrence of such Change of Control (the date on which the
repurchase is effected being referred to herein as the "Change of Control
Payment Date").
(b) The Issuer shall notify the Trustee within five Business Days
after each date upon which a Change of Control has occurred. Within 20 Business
Days after the occurrence of each Change of Control, the Issuer shall make a
Change of Control Offer to the Holders of Notes to purchase all of the Notes at
the Change of Control Purchase Price, plus accrued and unpaid interest thereon
to the Change of Control Payment Date, by sending written notice of a Change of
Control
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Offer, by first class mail, to each Holder at its registered address, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. The notice to the Holders shall contain all instructions and
materials necessary to enable such Holders to tender Notes pursuant to the
Change of Control Offer. Such notice shall state:
(i) that the Change of Control Offer is being made pursuant to
this Section 4.15, that all Notes tendered and not withdrawn will be
accepted for payment and that the Change of Control Offer shall remain open
for a period of 20 Business Days or for such longer period as may be
required by law;
(ii the Change of Control Purchase Price (including the amount
of any accrued interest) and the Change of Control Purchase Date;
(ii that any Note not tendered will continue to accrue interest;
(iv that, unless the Issuer defaults in making payment therefor,
any Note accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest, after the Change of Control Payment Date;
(v) that Holders electing to have a Physical Note purchased
pursuant to a Change of Control Offer will be required to surrender the
Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the third Business Day
prior to the Change of Control Payment Date;
(vi that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the second Business Day prior to
the Change of Control Payment Date, a telegram, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the
Notes the Holder delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased;
(vi that Holders whose Physical Notes are purchased only in part
will be issued new Physical Notes in a principal amount equal to the
unpurchased portion of the Physical Notes surrendered; provided, however,
that each Physical Note purchased and each new Physical Note issued shall
be in an original principal amount of $1,000 or integral multiples thereof;
and
(vi the circumstances and relevant facts regarding such Change
of Control.
(c) On or before the Change of Control Payment Date, the Issuer shall,
to the extent lawful, (i) accept for payment Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent in accordance with Section 2.14 U.S. Legal Tender sufficient to pay the
purchase price plus accrued interest, if any, of all Notes so tendered and (iii)
deliver to the Trustee any Physical Notes so accepted together with an Officers'
Certificate stating the Notes or portions thereof being purchased by the Issuer.
Upon receipt by the Paying Agent of the monies specified in clause (ii) above
and a copy of the Officers' Certificate specified in clause (iii) above, the
Paying Agent shall promptly mail to the Holders of Notes so accepted payment in
an amount equal to the purchase price plus accrued interest, if any; the Trustee
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shall promptly cancel all Notes so accepted by the Issuer pursuant to the Change
of Control Offer; and the Trustee, upon written demand of the Issuer in the form
of an Officer's Certificate of the Issuer, shall promptly authenticate and mail
to the Holders of any Physical Notes so accepted new Physical Notes equal in
principal amount to any unpurchased portion of the Physical Notes surrendered.
Any Physical Notes not so accepted shall be promptly mailed by the Paying Agent
to the Holder thereof. For purposes of this Section 4.15, the Trustee shall act
as the Paying Agent. The Issuer shall publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Purchase Date.
The Issuer shall not be required to make a Change of Control Offer
upon a Change of Control if a third party makes the Change of Control Offer in
the manner, at the times and otherwise in compliance with the requirements set
forth in this Indenture applicable to a Change of Control Offer made by the
Issuer and repurchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
Neither the Board of Directors of the Issuer nor the Trustee may waive
the provisions of this Section 4.15 relating to the Issuer's obligation to make
a Change of Control Offer.
To the extent applicable and if required by law, the Company and the
Issuer shall comply with Section 14 of the Exchange Act, the provisions of
Regulation 14E and any other tender offer rules under the Exchange Act and other
securities laws, rules, and regulations which may then be applicable to any
offer by the Issuer to repurchase the Notes at the option of Holders upon a
Change of Control; and, if such laws, rules, and regulations require or prohibit
any action inconsistent with the provisions of this Section 4.15, compliance by
the Company and the Issuer with such laws, rules, and regulations will not
constitute a breach of the Issuer's obligations with respect to the provisions
of this Section 4.15 by virtue thereof.
Section 4.16 Limitation on Asset Sales.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, consummate an Asset Sale unless:
(i) the Company or such Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the Fair Market Value (as determined in good faith by resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee, which determination shall be conclusive evidence of compliance
with this provision) of the assets or Capital Stock being sold or issued or
otherwise disposed of; and
(ii) at least 75% of the value of the consideration for such
Asset Sales consists of cash, Cash Equivalents or Exchange Assets or any
combination thereof; provided that the amount of any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet)
of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are Subordinated Indebtedness or otherwise
by their terms subordinated to the Notes, the Parent Guarantee or the
Subsidiary Guarantees) that are assumed by the transferee of such assets
pursuant to a customary novation agreement that releases the Company and
such Restricted Subsidiary from further liability shall also be deemed to
be cash for purposes of this provision.
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(b) Within 365 days after the receipt of any Net Cash Proceeds from an
Asset Sale, the Company or such Restricted Subsidiary may apply such Net Cash
Proceeds, at its option, in any order or combination: (a) to repay and
permanently reduce Indebtedness outstanding under any Permitted Bank Credit
Facility to which it, the Issuer or any other Restricted Subsidiary of the
Company is a party, (b) to make Capital Expenditures or (c) to make other
acquisitions of assets to be used in the Company's and its Restricted
Subsidiaries' oil and gas business. Pending the final application of any such
Net Cash Proceeds, the Company or such Restricted Subsidiary may temporarily
invest such Net Cash Proceeds in any manner that is not prohibited by the terms
of this Indenture. Any Net Cash Proceeds from Asset Sales that are not applied
as provided in clauses (a) through (c) of this clause (b) will (after expiration
of the relevant periods) be deemed to constitute "Excess Cash."
(c) When the amount of Excess Cash exceeds $10 million, the Issuer or
the Company shall make an irrevocable, unconditional offer (an "Excess Cash
Offer") to the Holders to purchase the maximum amount of Notes which could be
acquired by application of such amount of Excess Cash as described herein (the
"Excess Cash Offer Amount"), in cash at the purchase price equal to 100% of
the principal amount thereof (the "Excess Cash Offer Price"), together with
accrued and unpaid interest to the Excess Cash Purchase Date.
(d) Notice of an Excess Cash Offer will be sent at least 30 and not
more than 60 days prior to the Excess Cash Purchase Date, by first-class mail,
by the Issuer or the Company to each Holder at the address on the Note Register,
with a copy to the Trustee. Such notice will set forth a date on which the Notes
tendered shall be accepted (the "Excess Cash Purchase Date") and the Excess
Cash Offer shall remain open for at least 20 Business Days and close no later
than 30 Business Days after the date such notice is given. The notice shall
contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Excess Cash Offer and shall state the following
terms:
(i) that the Excess Cash Offer is being made pursuant to this
Section 4.16 and that all Notes or portions thereof properly tendered will
be accepted for payment; provided, however, that if the aggregate principal
amount of Notes tendered in a Excess Cash Offer plus any accrued interest
at the expiration of such offer exceeds the aggregate amount of the Excess
Cash Offer, the offeror shall select the Notes to be purchased on a pro
rata basis with such adjustments as may be deemed appropriate by the
Company (so that only Notes in denominations of $1,000 or multiples thereof
shall be purchased) and that the Excess Cash Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by law;
(ii the Excess Cash Offer Price (including the amount of any
accrued interest) and the Excess Cash Purchase Date;
(ii that any Note not tendered will continue to accrue interest;
(iv that, unless the Company or the Issuer defaults in making
payment therefor, any Note accepted for payment pursuant to the Excess Cash
Offer shall cease to accrue interest, after the Excess Cash Purchase Date;
(v) that Holders electing to have a Physical Note purchased
pursuant to a Excess Cash Offer will be required to surrender the Note,
with the form entitled "Option
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of Holder to Elect Purchase" on the reverse of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the third Business Day prior to the Excess Cash Purchase Date;
(vi that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the second Business Day prior to
the Excess Cash Purchase Date, a telegram, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Notes the
Holder delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note purchased; and
(vi that Holders whose Physical Notes are purchased only in part
will be issued new Physical Notes in a principal amount equal to the
unpurchased portion of the Physical Notes surrendered; provided, however,
that each Physical Note purchased and each new Physical Note issued shall
be in an original principal amount of $1,000 or integral multiples thereof.
(e) On or before the Excess Cash Purchase Date, the offeror shall (i)
accept for payment Notes or portions thereof tendered pursuant to the Excess
Cash Offer which are to be purchased in accordance with clause (d)(i) above,
(ii) deposit with the Paying Agent in accordance with Section 2.14 U.S. Legal
Tender sufficient to pay the purchase price plus accrued interest, if any, of
all Notes to be purchased and (iii) deliver to the Trustee any Physical Notes so
accepted together with an Officers' Certificate stating the Notes or portions
thereof being purchased by the offeror. Upon receipt by the Paying Agent of the
monies specified in clause (ii) above and a copy of the Officers' Certificate
specified in clause (iii) above, the Paying Agent shall promptly mail to the
Holders of Notes so accepted payment in an amount equal to the purchase price
plus accrued interest, if any; the Trustee shall promptly cancel all Notes
accepted by the offeror pursuant to the Excess Cash Offer; and the Trustee shall
promptly authenticate and mail to the Holders of any Physical Notes so accepted
new Physical Notes equal in principal amount to any unpurchased portion of the
Physical Notes surrendered. Any Physical Notes not so accepted shall be
promptly mailed by the Paying Agent to the Holder thereof. For purposes of this
Section 4.16, the Trustee shall act as the Paying Agent. The Issuer or the
Company shall publicly announce the results of the Excess Cash Offer on or as
soon as practicable after the Excess Cash Purchase Date.
(f) If the amount required to acquire all Notes tendered by Holders
pursuant to the Excess Cash Offer (the "Excess Cash Acceptance Amount") shall
be less than the aggregate Excess Cash Offer Amount, then the excess of the
Excess Cash Offer Amount over the Excess Cash Acceptance Amount may be used by
the Company or any Restricted Subsidiary in any manner permitted by this
Indenture. Upon consummation of any Excess Cash Offer made in accordance with
the terms of this Indenture, the amount of Excess Cash shall be reduced to zero.
(g) To the extent applicable and if required by law, the Issuer and
the Company shall comply with Section 14 of the Exchange Act, the provisions of
Regulation 14E and any other tender offer rules under the Exchange Act and other
securities laws, rules, and regulations which may then be applicable to any
Excess Cash Offer by the Issuer or the Company; and, if such laws, rules, and
regulations require or prohibit any action inconsistent with the foregoing,
compliance by the Issuer or the Company with such laws, rules, and regulations
will not constitute a breach of its obligations with respect to the foregoing.
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Section 4.17 Limitation on Sale or Issuance of Capital Stock of Restricted
Subsidiaries.
The Company shall not sell or otherwise dispose of any shares of
Capital Stock of any Restricted Subsidiary (other than the Issuer), and shall
not permit any Restricted Subsidiary (other than the Issuer), directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
except (a) to the Company or a Wholly Owned Restricted Subsidiary, or (b) if all
shares of Capital Stock of such Restricted Subsidiary are sold or otherwise
disposed of. In connection with any sale or disposition of Capital Stock of any
Restricted Subsidiary, the Company shall be required to comply with Section
4.16, and in the case of a sale of the Issuer, Section 4.15 and Article Five.
Section 4.18 Limitations on Liens.
The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, incur, or suffer to exist any Lien upon any of their
respective properties or assets, whether now owned or hereafter acquired, other
than Permitted Liens.
Section 4.19 Limitation on Lines of Business.
The Company shall not engage in any line of business other than to act
as a holding company for the Issuer, Sierra and Red Oak and such other business
activities as are reasonably related or incidental thereto. The Company shall
not permit any Restricted Subsidiaries, including the Issuer, to engage in any
line of business other than the oil and gas exploration and production business,
such other business activities as are reasonably related or incidental thereto
and any other business activities of the Company and its Restricted Subsidiaries
conducted as of the Issue Date.
Section 4.20 Subsidiary Guarantees.
The Company shall cause each Significant Subsidiary of the Company
(other than the Issuer), whether now existing or hereafter formed or acquired,
to (a) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Issuer's obligations under
the Notes and this Indenture on the terms set forth in this Indenture and (b)
deliver to the Trustee an Opinion of Counsel and an Officers' Certificate,
stating 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.
If any Restricted Subsidiary (other than the Issuer) incurs any
Indebtedness (other than to the Company or the Issuer), the Company shall cause
such Restricted Subsidiary, within 10 days following the incurrence of such
Indebtedness, to (a) execute and deliver to the Trustee a supplemental indenture
in form reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Issuer's obligations under
the Notes and this Indenture on the terms set forth in this Indenture and (b)
deliver to the Trustee an Opinion of Counsel and an Officers' Certificate,
stating 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 4.21 Payment of Existing Secured Debt.
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Concurrently with purchase of the Initial Notes by the Initial
Purchasers, the Company shall cause the Issuer to, and the Issuer shall, pay in
full the Existing Indebtedness; provided that, as of the Issue Date, the Issuer
may keep outstanding no more than $100,000 of the Existing Indebtedness owed to
Bank One, Texas, N.A.
ARTICLE FIVE
SUCCESSOR CORPORATION
Section 5.01 Merger, Consolidation and Sale of Assets.
The Company shall not consolidate with or merge with or into any other
Person or, directly or indirectly, sell, lease, assign, transfer, or convey all
or substantially all of its assets (computed on a consolidated basis), to
another Person or group of Persons acting in concert, whether in a single
transaction or through a series of related transactions, unless (i) either (a)
the Company is the continuing Person or (b) the resulting, surviving, or
transferee entity is a corporation organized under the laws of the United
States, any state thereof, or the District of Columbia, and shall expressly
assume all of the obligations of the Company under this Indenture, the Parent
Guarantee and the Security Documents by appropriate documents supplemental
hereto and thereto, executed and delivered to the Trustee on or prior to the
consummation of such transaction, in form satisfactory to the Trustee; (ii) no
Default or Event of Default shall exist or shall occur immediately after giving
effect to such transaction; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Net Worth of the resulting, surviving or
transferee entity is at least equal to the Net Worth of the Company immediately
prior to such transaction; and (iv) except for a consolidation or merger of the
Company with or into any Wholly Owned Restricted Subsidiary (including the
Issuer), the resulting, surviving or transferee entity would immediately
thereafter be permitted to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to Section 4.12(a). For purposes of
this Section 5.01, the Consolidated Fixed Charge Coverage Ratio shall be
determined on a pro forma consolidated basis (giving effect to the transaction)
for the Reference Period immediately preceding such transaction.
The Issuer shall not consolidate with or merge with or into any other
Person, or, directly or indirectly, sell, lease, assign, transfer, or convey all
or substantially all of its assets (computed on a consolidated basis), to
another Person or group of Persons acting in concert, whether in a single
transaction or through a series of related transactions, unless (i) either (a)
the Issuer is the continuing Person or (b) the resulting, surviving, or
transferee entity is a corporation organized under the laws of the United
States, any state thereof, or the District of Columbia, and shall expressly
assume all of the obligations of the Issuer under this Indenture and the Notes
by a supplemental indenture, executed and delivered to the Trustee on or prior
to the consummation of such transaction, in form satisfactory to the Trustee;
(ii) no Default or Event of Default shall exist or shall occur immediately after
giving effect to such transaction; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Net Worth of the resulting, surviving or
transferee entity is at least equal to the Net Worth of the Issuer immediately
prior to such transaction; (iv) except for a consolidation or merger of the
Issuer with or into the Company or any Wholly Owned Restricted Subsidiary, the
resulting, surviving or transferee entity would immediately thereafter be
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to Section 4.12(a); (v) the Company shall have
executed and delivered to the Trustee, in form satisfactory to the Trustee, a
supplemental indenture confirming its obligation to pay the principal of,
premium, if any, and interest on the Notes pursuant to the Parent Guarantee and
to perform all its covenants hereunder and under the Parent Guarantee; (vi) each
Subsidiary Guarantor shall have
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executed and delivered to the Trustee, in form satisfactory to the Trustee, a
supplemental indenture confirming its obligations to pay the principal of,
premium, if any, and interest on the Notes pursuant to its Subsidiary Guarantee;
(vii) the Trustee shall have received an Opinion of Counsel to the effect that
such consolidation, merger, sale, assignment, conveyance, transfer or lease will
not result in the Issuer being required to make any deduction for or on account
of taxes from payments made under or in respect of the Notes. For purposes of
this Section 5.01, the Consolidated Fixed Charge Coverage Ratio shall be
determined on a pro forma consolidated basis (giving effect to the transaction)
for the Reference Period immediately preceding such transaction.
The Company shall not permit or allow any Subsidiary Guarantor to
consolidate with or merge with or into any other Person or, directly or
indirectly, sell, lease, assign, transfer, or convey all or substantially all of
its assets (computed on a consolidated basis), to another Person or group of
Persons acting in concert, whether in a single transaction or through a series
of related transactions, unless (i) the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) or the
transferee entity (A) is a corporation organized and existing under the laws of
the United States of America, any state thereof, or the District of Columbia and
(B) expressly assumes all the obligations of such Subsidiary Guarantor pursuant
to a supplemental indenture, in a form satisfactory to the Trustee, under the
Notes and this Indenture, (ii) immediately before and after giving effect to
such transaction, no Default or Event of Default exists and immediately after
giving effect to such transaction, the resulting, surviving or transferee entity
could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to Section 4.12(a), and (iii) such Subsidiary Guarantor or the Person
formed by or surviving any such consolidation or merger or the transferee entity
on a pro forma basis will have Net Worth (immediately after the transaction)
equal to or greater than the Net Worth of such Subsidiary Guarantor immediately
preceding the transaction; provided that, the foregoing shall not apply to a
merger, consolidation, sale or other such transaction between Subsidiary
Guarantors, between the Issuer and any Subsidiary Guarantor or between the
Company and any Subsidiary Guarantor.
In connection with any consolidation, merger, sale, lease, assignment,
transfer or conveyance that is subject to the provisions of this Section 5.01,
the Company shall deliver to the Trustee, in form and substance satisfactory to
the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating
that such transaction and the supplemental indenture (or, in the case of the
Company, any other supplemental document delivered pursuant to this Section
5.01) comply with this Section 5.01 and that all conditions precedent in this
Indenture provided for in relation to such transaction have been complied with.
Section 5.02 Successor Corporation Substituted.
Upon any consolidation, combination or merger, sale, assignment,
conveyance, lease or transfer in accordance with Section 5.01, in which either
the Company or the Issuer is not the continuing corporation, the resulting,
surviving or transferee entity shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture and the
Parent Guarantee or the Issuer under this Indenture and the Notes, as
applicable, with the same effect as if such resulting, surviving or transferee
entity had been named as the Company or the Issuer herein and therein, as
applicable, and thereafter (except in the case of a lease) the predecessor
corporation shall be relieved of all further obligations and covenants under
this Indenture, the Parent Guarantee and the Notes.
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ARTICLE SIX
REMEDIES
Section 6.01 Events of Default.
An "Event of Default" means any of the following events:
(a) the failure to pay interest (including any Additional Interest) on
any Notes when the same becomes due and payable and such default continues for a
period of 30 days:
(b) the failure to pay the principal of or premium, if any, on any
Notes, when the same becomes due and payable, at maturity, upon redemption, by
acceleration or otherwise (including the failure to make a payment to purchase
Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer);
(c) a default in the performance or breach of the provisions of
Section 5.01, failure to make or consummate a Change of Control Offer in
accordance with Section 4.15, or failure to make or consummate an Excess Cash
Offer in accordance with Section 4.16;
(d) a default in the observance or performance of any covenant or
agreement contained in this Indenture, the Notes or any Guarantee which default
continues for a period of 30 days after the Issuer receives written notice
specifying the default (and demanding that such default be remedied) from the
Trustee or the Issuer and the Trustee receive such a notice from the Holders of
at least 25% of the outstanding principal amount of the Notes;
(e) a default in the observance or performance of any covenant or
agreement contained in the Security Documents which default continues for a
period of 30 days after the Issuer receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or the
Issuer and the Trustee receive such a notice from the Holders of least 25% of
the outstanding principal amount of the Notes;
(f) a default which extends beyond any stated period of grace
applicable thereto (including any extension thereof) under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness of the Company or of any Restricted
Subsidiary, including the Issuer, having a principal amount in excess of $1
million, whether such Indebtedness now exists or is created after the Issue
Date, or a failure to pay any such Indebtedness at its stated maturity;
(g) one or more judgments in an aggregate amount in excess of
$1,000,000 (unless covered by insurance by a reputable insurer as to which the
insurer has acknowledged coverage) shall have been rendered against the Company
or any of its Restricted Subsidiaries, including the Issuer, and such judgments
remain undischarged, unvacated, unpaid or unstayed for a period of 60 days after
such judgment or judgments become final and non-appealable;
(h) the Notes, this Indenture or any the Security Document shall, at
any time, cease to be in full force and effect (unless released by the Trustee
or where no material adverse effect on the Holders would result) or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by the Company or any of its Affiliates, or any of the Liens intended
to be created by the Security Documents, shall cease to be or shall not be a
valid and perfected Lien having
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the priority contemplated thereby (other than by reason of release in accordance
with the terms of this Indenture);
(i) the Company or any of its Significant Subsidiaries, including the
Issuer, pursuant to or under or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case or proceeding;
(ii consents to the entry of an order for relief against it in
an involuntary case or proceeding;
(ii consents to the appointment of a Custodian of it or for all
or substantially all of its property;
(iv makes a general assignment for the benefit of its creditors;
or
(v) shall generally not pay its debts when such debts become due
or shall admit in writing its inability to pay its debts generally; or
(j) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(i) is for relief against the Company or any Significant
Subsidiary, including the Issuer, in an involuntary case or proceeding;
(ii appoints a Custodian of the Company or any Significant
Subsidiary, including the Issuer, for all or substantially all of its
properties; or
(ii orders the liquidation of the Company or any Significant
Subsidiary, including the Issuer;
(k) any of the Guarantees ceases to be in full force and effect or any
of the Guarantees is declared to be null and void or invalid and unenforceable
or any Guarantor denies or disaffirms its liability under its Guarantee (other
than by reason of release of a Subsidiary Guarantor in accordance with the terms
of this Indenture).
Section 6.02 Acceleration.
Upon the happening of any Event of Default specified in Section 6.01
(other than an Event of Default specified in Section 6.01(i) or (j)), the
Trustee may, or the Holders of at least 25% in aggregate principal amount of
outstanding Notes may, declare the principal of, premium, if any, and accrued
and unpaid interest on all the Notes to be due and payable by notice in writing
to the Issuer (and the Trustee if given by the Holders) specifying the
respective Event of Default and that it is a "notice of acceleration," and the
same shall become immediately due and payable. If an Event of Default of the
type described in Section 6.01(i) or (j) occurs, then such amount shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
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At any time after a declaration of acceleration with respect to the
Notes as described in the preceding paragraph, the Holders of a majority in
aggregate principal amount of the Notes then outstanding by written notice to
the Issuer and the Trustee may rescind and cancel such declaration and its
consequences (a) if the rescission would not conflict with any judgment or
decree, (b) if all existing Events of Default have been cured or waived except
nonpayment of principal of, premium, if any, or interest that has become due
solely because of such acceleration, (c) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal and premium, if any, which have become due otherwise than by such
declaration of acceleration, has been paid, (d) if the Issuer has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in Section 6.01 (i) or (j), the Trustee
shall have received an Officers' Certificate and an Opinion of Counsel that such
Event of Default has been cured or waived; provided, however, that such counsel
may rely, as to matters of fact, on a certificate or certificates of Officers of
the Company or the Issuer. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
Notwithstanding the foregoing, if an Event of Default specified in
Section 6.01(f) hereof shall have occurred and be continuing, such Event of
Default and any consequential acceleration shall be automatically rescinded if
the Indebtedness that is the subject of such Event of Default has been repaid,
or if the default relating to such Indebtedness is waived or cured and if such
Indebtedness has been accelerated, then the holders thereof have rescinded their
declaration of acceleration in respect of such Indebtedness (provided, in each
case, that such repayment, waiver, cure or rescission is effected within a
period of 10 days from the continuation of such default beyond the applicable
grace period (including any extension thereof) or the occurrence of such
acceleration), and written notice of such repayment or cure or waiver and
rescission, as the case may be, shall have been given to the Trustee by the
Issuer and countersigned by the holders of such Indebtedness or a trustee,
fiduciary or agent for such holders or other evidence satisfactory to the
Trustee of such events is provided to the Trustee, within 30 days after any such
acceleration in respect of the Notes and so long as such rescission of any such
acceleration of the Notes does not conflict with any judgment or decree as
certified to the Trustee by the Issuer.
Section 6.03 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of the principal of, premium, if any, or interest on the Notes or to
enforce the performance of any provision of the Notes or this Indenture.
All rights of action and claims under this Indenture or the Notes may
be enforced by the Trustee even if it does not possess any of the Notes or does
not produce any of them in the proceeding. A delay or omission by the Trustee
or any Holder 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 to the extent permitted by law.
Section 6.04 Waiver of Past Defaults.
Prior to the declaration of acceleration of the Notes, the Holders of
not less than a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may, on behalf of the Holders of all the
Notes, waive any existing Default or Event of Default and its
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consequences under this Indenture, except a Default or Event of Default
specified in Section 6.01(a) or (b) or in respect of any provision hereof which
cannot be modified or amended without the consent of all of the Holders so
affected pursuant to Section 9.02. When a Default or Event of Default is so
waived, it shall be deemed cured and shall cease to exist. This Section 6.04
shall be in lieu of (S) 316(a)(1)(B) of the TIA and such (S) 316(a)(1)(B) of the
TIA is hereby expressly excluded from this Indenture and the Notes, as permitted
by the TIA.
Section 6.05 Control by Majority.
Holders of the Notes may not enforce this Indenture or the Notes
except as provided in this Article Six and under the TIA. The Holders of not
less than a majority in aggregate principal amount of the outstanding Notes
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust of
power conferred on the Trustee, provided, however, that the Trustee may refuse
to follow any direction (a) that conflicts with any rule of law or this
Indenture, (b) that the Trustee determines may be unduly prejudicial to the
rights of another Holder, or (c) that may expose the Trustee to personal
liability for which reasonable indemnity provided to the Trustee against such
liability shall be inadequate; provided, further, however, that the Trustee may
take any other action deemed proper by the Trustee that is not inconsistent with
such direction or this Indenture. This Section 6.05 shall be in lieu of (S)
316(a)(1)(A) of the TIA, and such (S) 316(a)(1)(A) of the TIA is hereby
expressly excluded from this Indenture and the Notes, as permitted by the TIA.
Section 6.06 Limitation on Suits.
No Holder of any Notes shall have any right to institute any
proceeding with respect to this Indenture or the Notes or any remedy hereunder,
unless (i) the Holders of at least 25% in aggregate principal amount of the
outstanding Notes have made written request, and offered reasonable indemnity,
to the Trustee to institute such proceeding as Trustee under the Notes and this
Indenture, (ii) the Trustee has failed to institute such proceeding within 30
days after receipt of such notice, request and offer of indemnity and (iii) the
Trustee, within such 30-day period, has not received directions inconsistent
with such written request by Holders of not less than a majority in aggregate
principal amount of the outstanding Notes.
The foregoing limitations shall not apply to a suit instituted by a
Holder of a Note for the enforcement of the payment of the principal of,
premium, if any, or interest on, such Notes on or after the respective due dates
expressed or provided for in such Note.
A Holder may not use this Indenture to prejudice the rights of any
other Holders or to obtain priority or preference over such other Holders.
Section 6.07 Right of Holders to Receive Payment.
Notwithstanding any other provision in this Indenture, the right of
any Holder of a Note to receive payment of the principal of, premium, if any,
and interest on such Note, on or after the respective due dates expressed or
provided for in such Note, or to bring suit for the enforcement of any such
payment on or after the respective due dates, is absolute and unconditional and
shall not be impaired or affected without the consent of the Holder.
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Section 6.08 Collection Suit by Trustee.
If an Event of Default specified in Section 6.01 (a) or (b) occurs and
is continuing, the Trustee may recover judgment in its own name and as trustee
of an express trust against the Issuer, or any other obligor on the Notes, for
the whole amount of the principal of, premium, if any, and accrued interest,
remaining unpaid, together with interest on overdue principal and, to the extent
that payment of such interest is lawful, interest on overdue installments of
interest, in each case at the rate per annum provided for by the Notes and such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
Section 6.09 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 (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents, counsel, accountants and
experts) and the Holders allowed in any judicial proceedings relative to the
Company or any of its Restricted Subsidiaries, including the Issuer, or any
other obligor upon the Notes, their creditors or their property and shall be
entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceedings is hereby authorized by each Holder
to make such 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 to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article Six it
shall pay out such money in the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on the Notes for interest, if any;
Third: to Holders for the principal amounts (including any premium)
owing under the Notes, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for the principal
thereof (including any premium); and
Fourth: the balance, if any, to the Issuer or to any other Person as
may be directed by any court of competent jurisdiction.
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The Trustee, upon prior written notice to the Issuer, may fix a record
date and payment date for any payment to Holders pursuant to this Section 6.10.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court may in its discretion 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 6.11 does not apply to any suit by the Trustee, any suit by a
Holder pursuant to Section 6.06, or a suit by a Holder or Holders of more than
10% in aggregate principal amount of the outstanding Notes.
Section 6.12 Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Note and such proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Holder, then and in every such case the Company, the
Issuer, the other Guarantors, the Trustee and the Holders shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
ARTICLE SEVEN
TRUSTEE
Section 7.01 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in its exercise thereof as a prudent man
would exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties as are specifically set
forth in this Indenture and no covenants or obligations shall be implied in
this Indenture that are adverse to the Trustee.
(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,
in the case of any such certificates or opinions that by any provision
hereof are specifically required to be furnished to the Trustee, the
Trustee shall examine the certificates and opinions to determine whether or
not they conform to the requirements of this Indenture, but need not verify
the truth or accuracy of the statements made therein.
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(c) Notwithstanding anything to the contrary herein contained, the
Trustee may not be relieved from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that:
(1) This paragraph does not limit the effect of Section 7.01(b).
(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.
(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 6.02, 6.04 or 6.05.
(d) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to Section 7.01 (a), (b), (c) and (d) and Section 7.02.
(f) The Trustee shall not be liable for interest on any money or
assets received by it except as the Trustee may agree in writing with the
Issuer. Assets held in trust by the Trustee need not be segregated from other
assets except to the extent required by law.
Section 7.02 Rights of Trustee.
Subject to Section 7.01:
(a) The Trustee may rely and shall be fully protected in acting or
refraining from acting upon any document believed by it to be genuine and to
have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may consult
with counsel of its selection and may require an Officers' Certificate or an
Opinion of Counsel, which shall conform to Sections 10.04 and 10.05. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action that it takes or
omits to take in good faith which it reasonably believes to be authorized or
within its rights or powers.
(e) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, notice, request, direction, consent, order, bond, debenture, or other
paper or document, but the Trustee, in its discretion, may
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makes 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, upon reasonable notice to the Company, to
examine the books, records, and premises of the Company and its Subsidiaries,
personally or by agent or attorney and to consult with the Officers and
representatives of the Company and its Subsidiaries, including the Company's
accountants and attorneys.
(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,
unless such Holders shall have offered to the Trustee security or indemnity
reasonably satisfactory to the Trustee against the costs, expenses and
liabilities which may be incurred by it in compliance with such request, order
or direction.
(g) The Trustee shall not be required to give any bond or surety in
respect of the performance of its powers and duties hereunder.
(h) Delivery of reports, information and documents to the Trustee
under Section 4.08 is for informational purposes only and the Trustee's receipt
of the foregoing shall not constitute constructive notice of any information
contained therein or determinable from information contained therein, including
the Company's compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on Officers' Certificates).
Section 7.03 Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company and any of its
Subsidiaries, including the Issuer, or Affiliates, with the same rights it would
have if it were not Trustee. Any 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 makes no representation as to the validity or adequacy of
this Indenture or the Notes, and it shall not be accountable for the Issuer's
use of the proceeds from the Notes, and it shall not be responsible for any
statement of the Company or the Issuer in this Indenture or the Notes other than
the Trustee's certificate of authentication.
Section 7.05 Notice of Default.
If a Default or an Event of Default occurs and is continuing and if it
is known to a Trust Officer, the Trustee shall mail to each Holder notice of the
uncured Default or Event of Default within 90 days after obtaining knowledge
thereof. Except in the case of a Default or an Event of Default in payment of
principal of, premiums, if any, or interest on, any Note, including an
accelerated payment or a Default in payment on the Change of Control Payment
Date pursuant to a Change of Control Offer or on the Excess Cash Purchase Date
pursuant to a Excess Cash Offer, the Trustee may withhold the notice if and so
long as its Board of Directors, the executive committee of its Board of
Directors or a committee of its directors and/or Trust Officers in good faith
determines that withholding the notice is in the interest of the Holders. The
foregoing sentence of this Section 7.05 shall be in lieu of the proviso to (S)
315(b) of the TIA and such proviso to (S) 315(b) of the TIA is hereby expressly
excluded from this Indenture and the Notes, as permitted by the TIA.
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Section 7.06 Reports by Trustee to Holders.
Within 60 days after May 15 of each year beginning with 1998, the
Trustee shall, to the extent that any of the events described in TIA (S) 313(a)
occurred with the previous twelve months, but not otherwise, mail to each Holder
a brief report dated as of such date that complies with TIA (S) 313(a). The
Trustee also shall comply with TIA (S)(S) 313(b), (c) and (d).
A copy of each report at the time of its mailing to Holders shall be
mailed to the Company and the Issuer and filed with the Commission and each
stock exchange, if any, on which the Notes are listed.
The Company and the Issuer shall promptly notify the Trustee if the
Notes become listed on any stock exchange and the Trustee shall comply with TIA
(S) 313(d).
Section 7.07 Compensation and Indemnity.
The Issuer shall pay to the Trustee from time to time such
compensation for its services as has been agreed to in writing signed by the
Issuer and the Trustee. The Trustee's compensation shall not be limited by any
law on compensation of a trustee of an express trust. The Issuer shall reimburse
the Trustee upon request for all reasonable out-of-pocket expenses incurred or
made by it in connection with the performance of its duties under this
Indenture. Such expenses shall include the reasonable fees and expenses of the
Trustee's agents, counsel, accountants and experts.
The Issuer shall indemnify each of the Trustee (or any predecessor
Trustee) and its agents, employees, stockholders, Affiliates and directors and
officers for, and hold them each harmless against, any and all loss, liability,
damage, claim or expense (including reasonable fees and expenses of counsel),
including taxes (other than taxes based on the income of the Trustee) incurred
by them, except for such actions to the extent caused by any negligence, bad
faith or willful misconduct on their part, arising out of or in connection with
the acceptance of administration of this trust including the reasonable costs
and expenses of defending themselves against any claim or liability in
connection with the exercise or performance of any of their rights, powers or
duties hereunder or under any Security Document. The Trustee shall notify the
Issuer promptly of any claim asserted against the Trustee for which it may seek
indemnity. At the Trustee's sole discretion, the Issuer shall defend the claim
and the Trustee shall cooperate and may participate in the defense, provided,
however, that any settlement of a claim shall be approved in writing by the
Trustee if such settlement would result in an admission of liability by the
Trustee or if such settlement would not be accompanied by a full release of the
Trustee for all liability arising out of the events giving rise to such claims.
Alternatively, the Trustee may at its option have separate counsel of its own
choosing and the Issuer shall pay the reasonable fees and expenses of such
counsel.
To secure the Issuer's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Notes on all assets or money held or
collected by the Trustee, in its capacity as Trustee, except the Collateral and
any other assets or money held in trust to pay principal of or premium, if any,
or interest on particular Notes.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(i) or (j) occurs, such expenses and the
compensation for such services are intended to constitute expenses of
administration under any Bankruptcy Law.
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The provisions of this Section 7.07 shall survive the termination of
this Indenture.
Section 7.08 Replacement of Trustee.
The Trustee may resign at any time by so notifying the Issuer. The
Holders of a majority in aggregate principal amount of the outstanding Notes may
remove the Trustee and appoint a successor Trustee with the Issuer's consent, by
so notifying the Issuer and the Trustee. The Issuer may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Issuer shall notify each Holder of such
event and shall promptly appoint a successor Trustee. Within one year after the
successor Trustee takes office, the Holders of a majority in aggregate principal
amount of the outstanding Notes may appoint a successor Trustee to replace the
successor Trustee appointed by the Issuer.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Issuer. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, subject to the Lien provided in Section 7.07, 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 Issuer shall mail notice of such successor Trustee's appointment
to each Holder.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the
Holders of at least 10% in aggregate principal amount of the outstanding Notes
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 Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding any resignation or replacement of the Trustee pursuant
to this Section 7.08, the Issuer's obligations under Section 7.07 shall continue
for the benefit of the retiring Trustee.
Section 7.09 Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee
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corporation is otherwise eligible hereunder, be the successor Trustee; provided,
however, that such corporation shall be otherwise qualified and eligible under
this Article Seven.
Section 7.10 Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the
requirement of TIA (S)(S) 310(a)(1), (2) and (5). The Trustee (or, in the case
of a Trustee that is a corporation included in a bank holding company system,
the related bank holding company) shall have a combined capital and surplus of
at least $150 million as set forth in its most recent published annual report of
condition, and have an office or agency in the City of New York sufficient to
permit payments on the Notes in such City as required by Section 2.03. In
addition, if the Trustee is a corporation included in a bank holding company
system, the Trustee, independently of such bank holding company, shall meet the
capital requirements of TIA (S) 310(a)(2). The Trustee shall comply with TIA (S)
310(b); provided, however, that there shall be excluded from the operation of
TIA (S) 310(b)(1) any indenture or indentures under which other securities, or
certificates of interest or participation in other securities, of the Issuer are
outstanding, if the requirements for such exclusion set forth in TIA (S)
310(b)(1) are met. The provisions of TIA (S) 310 shall apply to the Issuer, as
obligor of the Notes.
Section 7.11 Preferential Collection of Claims Against Company.
The Trustee shall comply with TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein. The
provisions of TIA (S) 311(a) shall apply to the Issuer, as obligor on the Notes.
ARTICLE EIGHT
DISCHARGE OF INDENTURE; DEFEASANCE
Section 8.01 Satisfaction and Discharge of the Indenture; Legal Defeasance.
This Indenture, the Parent Guarantee, any Subsidiary Guarantee and
each of the Security Documents will cease to be of further effect as to all
outstanding Notes, and the Trustee, at the Issuer's request and expense, shall
execute and deliver proper instruments acknowledging satisfaction and discharge
of this Indenture, when (a) either (i) all Notes, theretofore authenticated and
delivered (except lost, stolen or destroyed Notes which have been replaced or
paid and Notes for whose payment money has theretofore been deposited in trust
or segregated and held in trust by the Issuer and thereafter repaid to the
Issuer or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not therefore delivered to the Trustee for
cancellation have become due and payable and the Issuer has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Issuer directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Issuer has paid all other sums payable under this Indenture by the Issuer;
and (c) the Issuer has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel stating that all conditions precedent under this Indenture
relating to the satisfaction and discharge of this Indenture have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of Officers of the Issuer.
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Notwithstanding the satisfaction and discharge of this Indenture
pursuant to the preceding paragraph of this Section 8.01, the obligations of the
Issuer to the Trustee under Section 7.07 and, if funds shall have been deposited
with the Trustee pursuant to such paragraph, the obligations of the Trustee
under Section 8.02 and 8.03 shall survive.
The Issuer may, at its option and at any time, elect to have its
obligations and the corresponding obligations of each Guarantor discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Issuer shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes and satisfied all of its
obligations with respect to the Notes (except as to (i) rights of registration
of transfer, substitution, and exchange of Notes and the Issuer's right of
optional redemption, (ii) rights of Holders to receive payments of principal of,
premium, if any, and interest on the Notes (but not the Change of Control
Purchase Price or the Excess Cash Offer Price), solely from the trust fund
described in this Article Eight and as more fully set forth below, where such
payments are due (or at such time as the Notes would be subject to redemption at
the option of the Issuer in accordance with this Indenture), (iii) the rights,
obligations and immunities of the Trustee under this Indenture, and (iv) the
rights and obligations of the Issuer under this Article Eight (the foregoing
exceptions (i) through (iv) are collectively referred to as the "Reserved
Rights")).
In order to exercise Legal Defeasance:
(a) the Issuer must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders cash in United States dollars, non-callable U.S.
Government Obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants or investment bank, to pay the principal of, premium, if any, and
interest on the Notes on the stated date for payment thereof or on the
applicable Redemption Date, as the case may be, and at such time the Issuer must
specify to the Trustee whether the Notes are being defeased to the Stated
Maturity Date or to a particular Redemption Date;
(b) the Issuer shall have delivered to the Trustee an Opinion of
Counsel (who may be outside counsel to the Issuer but shall not be employed by
the Company or any Affiliate) acceptable to the Trustee confirming that (i) the
Issuer 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 Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(c) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default under
Section 6.01(i) or (j) from bankruptcy or insolvency events are concerned, at
any time in the period ending on the 91st day after the date of deposit (or one
day after such other greater period of time in which any such deposit may remain
subject to set aside or avoidance under applicable Bankruptcy Law, e.g., one
year after such deposit);
(d) such Legal Defeasance shall not result in a breach or violation
of, or constitute a default under this Indenture or any other agreement or
instrument to which the Company or any of its Restricted Subsidiaries (including
the Issuer) is a party or by which the Company or any its Restricted
Subsidiaries (including the Issuer) is bound;
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(e) the Company and the Issuer shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company or
the Issuer with the intent of preferring the Holders over any other creditors of
the Company or the Issuer or with the intent of defeating, hindering, delaying
or defrauding any other creditors of the Company, the Issuer or others;
(f) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of Officers of the Issuer; and
(g) the Issuer shall have delivered to the Trustee an Opinion of
Counsel (who may be outside counsel to the Issuer but shall not be employed by
the Company or any Affiliate) to the effect that (i) after the passage of 90
days (or any greater period of time in which any such deposit of trust funds may
remain subject to any Bankruptcy Law insofar as such law applies to the Issuer
or any Guarantor) following such deposit, such funds will not be subject to set
aside or avoidance under any Bankruptcy Law or other similar laws affecting
creditors' rights generally and (ii) such deposit will not result in the Issuer
or any Guarantor, the trust or the Trustee being subject to regulation under the
Investment Company Act of 1940, as amended.
Section 8.02 Application of Trust Money.
The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or
U.S. Government Obligations deposited with it pursuant to Section 8.01, and
shall apply the deposited U.S. Legal Tender and the money from U.S. Government
Obligations in accordance with this Indenture to the payment of the principal
of, premium, if any, and interest on the Notes. The Trustee shall be under no
obligation to invest said U.S. Legal Tender or U.S. Government Obligations
except as it may agree in writing with the Issuer.
The Issuer shall pay and indemnify the Trustee against any tax, fee or
other charge imposed or assessed against the U.S. Legal Tender or U.S.
Government Obligations deposited pursuant to Section 8.01 or the principal,
premium, if any, and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of
outstanding Notes.
Section 8.03 Repayment to the Issuer.
Subject to Section 8.01, the Trustee and the Paying Agent shall
promptly pay to the Issuer upon request any excess U.S. Legal Tender or U.S.
Government Obligations held by them at any time and thereupon shall be relieved
from all liability with respect to such money. The Trustee and the Paying Agent
shall pay to the Issuer upon request any money held by them for the payment of
principal, premium, if any, or interest that remains unclaimed for one year;
provided, however, that the Trustee or such Paying Agent, before being required
to make any payment, may at the expense of the Issuer cause to be published once
in a newspaper of general circulation in the City of New York or mail to each
Holder entitled to such money notice that such money remains unclaimed and that
after a date specified therein which shall be at least 30 days from the date of
such publication or mailing any unclaimed balance of such money then remaining
will be repaid to the Issuer. After payment to the Issuer, Holders entitled to
such money must look to the Issuer for payment as general creditors unless an
applicable law designates another Person.
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Section 8.04 Reinstatement.
If the Trustee or Paying Agent is unable to apply any U.S. Legal
Tender or U.S. Government Obligations in accordance with Section 8.01 by reason
of any legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Issuer's obligations under this Indenture and the Notes, any
Guarantor's obligations under its Guarantee and the obligations and Liens under
the Security Documents shall be revived and reinstated as though no deposit had
occurred pursuant to Section 8.01 until such time as the Trustee or Paying Agent
is permitted to apply all such U.S. Legal Tender or U.S. Government Obligations
in accordance with Section 8.01; provided, however, that if the Issuer has made
any payment of interest or premium on or principal of any Notes because of the
reinstatement of its obligations, the Issuer shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the U.S. Legal Tender
or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE NINE
MODIFICATION OF THE INDENTURE
Section 9.01 Without Consent of Holders.
Subject to the provisions of Section 9.02, the Company, the Issuer,
the Subsidiary Guarantors and the Trustee may modify or amend, waive or
supplement the provisions of this Indenture (including the Notes and any
Guarantee) without notice to or consent of any Holder: (a) to cure any
ambiguity, defect or inconsistency; (b) to comply with Section 5.01 or Section
12.04 of this Indenture; (c) to provide for uncertificated Notes in addition to
certificated Notes; (d) to comply with any requirements of the Commission in
order to effect or maintain the qualification of this Indenture under the TIA;
(e) to make any change that would provide any additional benefits or rights in
favor of the Holders; or (f) to make any other change with respect to matters or
questions arising under this Indenture, provided that such change shall not
adversely affect the interests of the Holders.
Section 9.02 With Consent of Holders.
The provisions of this Indenture (including the Notes and any
Guarantee) may be modified or amended with the consent of the Holders of not
less than a majority of the aggregate principal amount of the then outstanding
Notes, provided that no such modification or amendment may, without the consent
of the Holders of not less than 66% of the aggregate principal amount of the
Notes then outstanding, (i) prior to the date on which a Change of Control Offer
is required to be made, reduce the Change of Control Purchase Price or alter the
provisions of Section 4.15, or (ii) prior to the date upon which an Excess Cash
Offer is required to be made, reduce the Excess Cash Offer Price or alter the
provisions of Section 4.16 in a manner adverse to the Holders; provided further
that no such modification or amendment may, without the consent of the Holders
of all of the Notes then outstanding, directly or indirectly, (i) change the
Stated Maturity Date or the date any installment of principal of, or any
installment of interest on, any Note is due, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is payable or
impair the right to institute suit for the enforcement of any such payment on or
after the stated maturity date thereof (or, in the case of redemption, on or
after the Redemption Date), or, (x) after the date upon which a Change of
Control Offer is required to be
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made, reduce the Change of Control Purchase Price or alter the provisions of
Section 4.15 or (y) after the date upon which an Excess Cash Offer is required
to be made, reduce the Excess Cash Offer Price or alter the provisions of
Section 4.16 in a manner adverse to the Holders, (ii) reduce the percentage of
the outstanding Notes whose consent is required for any such amendment,
supplemental indenture, or waiver provided for in this Indenture, (iii) modify
the provisions of Section 6.04, except to increase any required percentage or to
provide that certain other provisions of this Indenture cannot be modified or
waived without the consent of all Holders of the Notes, (iv) adversely affect
the ranking of the Notes, the Parent Guarantee or the Subsidiary Guarantees; or
(v) release any Collateral from the Liens created pursuant to the Security
Documents or release the Parent Guarantee or any Subsidiary Guarantee, in any
case otherwise than in accordance with the terms of this Indenture.
Section 9.03 Compliance with TIA.
Every amendment, waiver or supplement of this Indenture shall comply
with the TIA as then in effect; provided, however, that this Section 9.03 shall
not of itself require that this Indenture or the Trustee be qualified under the
TIA or constitute any admission or acknowledgment by any party hereto that any
such qualification is required prior to the time this Indenture and the Trustee
are required by the TIA to be so qualified.
Section 9.04 Revocation and Effect of Consents.
Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if notation of the consent is not made on any
Note. Subject to the following paragraph, any such Holder or subsequent Holder
may revoke the consent as to such Holder's Note or portion of such Note by
notice to the Trustee or the Company and the Issuer received before the date on
which the Trustee receives an Officers' Certificate certifying that the Holders
of the requisite principal amount of Notes have consented (and not theretofore
revoked such consent) to the amendment, supplement or waiver. An amendment,
supplement or waiver becomes effective upon receipt by the Trustee of such
Officers' Certificate and evidence of consent by the Holders of the requisite
percentage in aggregate principal amount of outstanding Notes.
The Issuer may, but shall not be obligated to, fix a Record Date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which Record Date shall be at least 30 days prior to the
first solicitation of such consent. If a Record Date is fixed, then
notwithstanding the second sentence of the immediately preceding paragraph,
those Persons who were Holders at such Record Date (or their duly designated
proxies), and only those Persons, shall be entitled to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
Record Date. No such consent shall be valid or effective for more than 90 days
after such Record Date unless consents from Holders of the requisite percentage
in principal amount of outstanding Notes required hereunder for the
effectiveness of such consents shall have also been given and not revoked within
such 90 day period.
Section 9.05 Notation on or Exchange of Notes.
If an amendment, supplement or waiver to the provisions of this
Indenture changes the terms of a Note, the Trustee may require the Holder of
such Note to deliver it to the Trustee. The
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Trustee may place an appropriate notation on the Note about the changed terms
and return it to the Holder. Alternatively, if the Issuer or the Trustee so
determines, the Issuer in exchange for the Note shall issue and the Trustee
shall authenticate a new Note that reflects the changed terms.
Section 9.06 Trustee.
The Trustee shall execute any amendment, supplement or waiver
authorized pursuant to this Article Nine; provided, however, that the Trustee
may, but shall not be obligated to, execute any such amendment, supplement or
waiver which affects the Trustee's own rights, duties or immunities under this
Indenture. In executing such amendment, supplement or waiver, the Trustee shall
be entitled to receive indemnity reasonably satisfactory to it and shall be
fully protected in relying upon an Opinion of Counsel and an Officers'
Certificate of the Issuer, each stating that no Event of Default shall occur as
a result of such amendment, supplement or waiver and that the execution of any
amendment, supplement or waiver authorized pursuant to this Article Nine is
authorized or permitted by this Indenture, provided the legal counsel delivering
such Opinion of Counsel may rely as to matters of fact on one or more Officers'
Certificates of the Issuer. Such Opinion of Counsel shall not be an expense of
the Trustee.
ARTICLE TEN
MISCELLANEOUS
Section 10.01 TIA 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; provided, however, that this Section
10.01 shall not of itself require that this Indenture or the Trustee be
qualified under the TIA or constitute any admission or acknowledgment by any
party hereto that any such qualification is required prior to the time this
Indenture and the Trustee are required by the TIA to be so qualified.
Section 10.02 Notices.
Any notices or other communications required or permitted hereunder
shall be in writing, and shall be sufficiently given if made by hand delivery,
by telecopier or registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
if to the Company or the Issuer:
c/o Southwest Royalties Holdings, Inc.
Southwest Royalties Building
407 N. Big Spring
Midland, Texas 79701-4326
Telecopier Number: (915) 688-0191
Attn: H.H. Wommack, III
with a copy to:
Baker, Donelson, Bearman & Caldwell
633 Chestnut Street, Suite 1800
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Chattanooga, TN 37450-1800
Telecopier Number: (423) 756-3447
Attn: J. Porter Durham, Jr.
if to the Trustee:
State Street Bank and Trust Company
777 Main Street
Hartford, CT 06115
Telecopier Number: (860) 986-7920
Attn: Corporate Trust Administration
Ref: Southwest Royalties Indenture 1997
Each of the Company, the Issuer and the Trustee by written notice to
the other may designate additional or different addresses for notices to such
Person. Any notice or communication to the Company, the Issuer or the Trustee
shall be deemed to have been given or made as of the date so delivered if hand
delivered; when receipt is acknowledged, if faxed; and five (5) calendar days
after mailing, if sent by registered or certified mail, postage prepaid (except
that a notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Holder shall be mailed to him
by first class mail or other equivalent means at his address as it appears on
the registration books of the Registrar ten (10) days prior to such mailing and
shall be sufficiently given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.
Section 10.03 Communications by Holders with Other Holders.
Holders may communicate pursuant to TIA (S) 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Company,
the Issuer, the Trustee, the Registrar and any other Person shall have the
protection of TIA (S) 312(c).
Section 10.04 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company or the Issuer to the
Trustee to take any action under this Indenture, the Company or the Issuer, as
the case may be, shall furnish to the Trustee:
(1) an Officers' Certificate, in form and substance satisfactory to
the Trustee, stating that, in the opinion of the signers, all conditions
precedent to be performed by the Company or the Issuer, as the case may be,
provided for in this Indenture relating to the proposed action have been
complied with; and
(2) an Opinion of Counsel, in form and substance satisfactory to the
Trustee, stating that, in the opinion of such counsel, all such conditions
precedent to be performed by the Company or the Issuer, as the case may be,
provided for in this Indenture relating to the
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proposed action have been complied with (which counsel, as to factual
matters, may rely on an Officers' Certificate).
Section 10.05 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture, other than the Officers'
Certificate required by Section 4.06, shall include:
(1) a statement that the Person 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 Person, he has made such
examination or investigation as is reasonably 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 each such
Person, such condition or covenant has been complied with.
Section 10.06 Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules in accordance with the Trustee's
customary practices for action by or at a meeting of Holders. The Paying Agent
or Registrar may make reasonable rules for its functions.
Section 10.07 Legal Holidays.
A "Legal Holiday" used with respect to a particular place of payment
is a Saturday, a Sunday or a day on which banking institutions in New York, New
York, Hartford, Connecticut, or at such place of payment are not required to be
open. If a payment date is a Legal Holiday at such place, payment may be made
at such place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
Section 10.08 Governing Law.
THIS INDENTURE, THE GUARANTEES AND THE NOTES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK. Each of the parties
hereto agrees to submit to the non-exclusive jurisdiction of the competent
courts of the State of New York sitting in the City of New York or the Untied
States District Court for the Southern District of New York, in any action or
proceeding arising out of or relating to this Indenture or the Notes. The
Company and the Issuer each hereby irrevocably designates CT Corporation System,
located at 1633 Broadway, New York, New York 10019, as its designee, appointee
and agent to receive, for and on its behalf, service of process in the State of
New York in any legal action or proceeding with respect to this Indenture, the
Notes,
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the Parent Guarantee or the Security Documents to which either is a party. It is
understood that a copy of such process served on such agent will be promptly
forwarded by overnight courier to the Company and/or the Issuer, as the case may
be, at its respective address set forth opposite its signature below, but the
failure of such party, as the case may be, to receive such copy shall not affect
in any way the service of such process. The Company and the Issuer further
irrevocably consent to the service of process of any of the aforementioned
courts in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to it, as the case may be, at its
said address, such service to become effective 30 days after such mailing.
Nothing herein shall affect the right of the Trustee or any Holder of a Note to
serve process in any other manner permitted by law or to commence legal
proceedings or otherwise proceed against the Company or the Issuer in any other
jurisdiction.
Section 10.09 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries, including the Issuer.
Any such indenture, loan or debt agreement may not be used to interpret this
Indenture.
Section 10.10 No Personal Liability.
No director, officer, employee or stockholder, as such, of the
Company, the Issuer or any other Subsidiary of the Company, shall have any
liability for any obligations of the Company, the Issuer or any Subsidiary
Guarantor under the Notes, the Parent Guarantee, any Subsidiary Guarantee, this
Indenture, the Security Documents or the Registration Rights Agreement or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
Section 10.11 Successors.
All agreements of the Company, the Issuer and any Subsidiary
Guarantor in this Indenture or the Notes or under any Guarantee, as the case may
be, shall bind its successors. All agreements of the Trustee in this Indenture
shall bind its successors.
Section 10.12 Duplicate Originals.
All parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together shall represent the
same agreement.
Section 10.13 Severability.
In case any one or more of the provisions in this Indenture or in the
Notes shall be held invalid, illegal or unenforceable, in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions shall not in any way be affected
or impaired thereby, it being intended that all of the provisions hereof shall
be enforceable to the full extent permitted by law.
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Section 10.14 Independence of Covenants.
All covenants and agreements in this Indenture and the Notes shall be
given independent effect so that if any particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or otherwise be within the limitations of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
ARTICLE ELEVEN
SECURITY
Section 11.01 Grant of Security Interest.
In order to secure the obligations of the Company under the Parent
Guarantee, the Company hereby covenants to execute and deliver the Pledge
Agreement concurrently with this Indenture. The Pledge Agreement shall grant to
the Trustee a security interest in the shares of Sierra and Red Oak directly
owned by the Company and the other collateral therein described (collectively
referred to herein as the "Collateral") and when executed and delivered shall be
deemed hereby incorporated by 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
the Pledge Agreement for a more complete description of the terms and provisions
thereof. Each Holder, by accepting a Note, agrees to all of the terms and
provisions of the Pledge Agreement and the Trustee agrees to all of the terms
and provisions of the Pledge Agreement.
Section 11.02 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 or the Issuer shall furnish to the Trustee, at closing
and at such other time as required by (S) 314(b) of the TIA, Opinion(s) of
Counsel either (a) 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 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 (b) to the effect that, in the
opinion of such counsel, no such action is necessary to perfect such Lien.
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(c) To the extent required by the TIA, the Company shall furnish to
the Trustee on September 1 in each year, beginning with 1999, an Opinion of
Counsel, dated as of such date, either (i)(A) stating that, in the opinion of
such counsel, 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 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, or (ii) stating that, in the
opinion of such counsel, no such action is necessary to maintain such Lien.
Section 11.03 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, no release of Collateral pursuant to the provisions of this
Indenture and the Security Documents shall be effective as against the Holders
of the Notes.
(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 (S) 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 (S) 314(d) may be made by an Officer of the Company, except in cases where
TIA (S) 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 in the exercise of reasonable
care. 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, the Issuer 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 the Issuer. 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 11.04 Specified Releases of Collateral.
(a) The Company 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 8.01. 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
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by Article Eight), the Trustee shall forthwith take all necessary action (at the
request of and the expense of the Company) to release and reconvey to the
Company 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) In the event of an Equity Offering involving the sale of any of
the Capital Stock of either Red Oak or Sierra directly owned by the Company
("Transferred Collateral"), which sale is in accordance with all applicable
provisions of this Indenture, the Company shall be entitled to obtain a full
release of all of the Transferred Collateral from the Lien of this Indenture and
the Security Documents. Upon delivery by the Company to the Trustee of an
Officers' Certificate and an Opinion of Counsel, each to the effect that such
provisions of this Indenture have been complied with, the Trustee shall
forthwith take all necessary action (at the request and expense of the Issuer)
to release and reconvey to the Company or its designee all of the Transferred
Collateral, and shall deliver such Transferred Collateral in its possession to
the Company or its designee, including, without limitation, the execution and
delivery of releases and satisfactions wherever required.
(c) The Company shall be entitled to obtain a release of, and the
Trustee shall release, all other items of Collateral (the "Released Interests")
upon compliance with the condition precedent that the Company shall have
satisfied all applicable conditions precedent to any such release set forth in
the applicable Security Documents and shall have delivered to the Trustee the
following:
(i) An Officers' Certificate certifying that such release
complies with the terms and conditions of the applicable Security
Documents; and
(ii) All certificates, opinions and other documentation required
by the TIA or this Indenture, if any.
Upon compliance by the Company with the conditions precedent set forth
above, the Trustee shall cause to be released and reconveyed to the Company the
Released Interests.
Section 11.05 Form and Sufficiency of Release.
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 requests 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 (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 as
constituting a good and valid release of the property therein described from the
Lien of this Indenture or of the Security Documents.
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Section 11.06 Purchaser Protected.
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 or any property or rights permitted by this Indenture to be sold or
otherwise disposed of by the Company be under any obligation to ascertain or
inquire into the authority of the Issuer to make such sale or other disposition.
Section 11.07 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 its sole discretion 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 and/or the Issuer 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 11.08 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.
ARTICLE TWELVE
GUARANTEES
Section 12.01 Unconditional Guarantees.
(a) The Company hereby unconditionally and irrevocably guarantees, on
a senior basis (such guarantee to be referred to herein as the "Parent
Guarantee") to each Holder of a Note authenticated and delivered by the Trustee
and to the Trustee and its successors and assigns, irrespective of the validity
and enforceability of this Indenture, the Notes or the Obligations of the Issuer
or any Subsidiary Guarantors to the Holders or the Trustee hereunder or
thereunder, that:
(i) the principal of, premium, if any, and interest on the Notes
(and any Additional Interest payable thereon) shall be duly and punctually
paid in full when due, whether at maturity, upon redemption at the option
of Holders pursuant to the provisions of the Notes relating thereto, by
acceleration or otherwise, and interest (to the extent permitted by law) on
the overdue principal, premium, if any, and interest, if any, on the Notes
and all
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other Obligations of the Issuer to the Holders or the Trustee hereunder
(including amounts due the Trustee under Section 7.07 hereof) and all other
Obligations shall be promptly paid in full or performed, all in accordance
with the terms hereof and thereof; and
(ii) in case of any extension of time of payment or renewal of
any Notes or any of such other Obligations, the same shall be promptly paid
in full when due or performed in accordance with the terms of the extension
or renewal, whether at maturity, by acceleration or otherwise.
Failing payment when due of any amount so guaranteed, or failing performance of
any other Obligation of the Issuer to the Holders under this Indenture or under
the Notes, for whatever reason, the Company shall be obligated to pay, or to
perform or cause the performance of, the same immediately. An Event of Default
under this Indenture or the Notes shall constitute an event of default under
this Parent Guarantee and shall entitle the Holders of Notes to accelerate the
Obligations of the Company in the same manner and to the same extent as the
Obligations of the Issuer.
(b) Subject to the provisions of this Article Twelve, each future
Subsidiary Guarantor, if any, shall, jointly and severally, unconditionally and
irrevocably guarantee, on a senior basis (such guarantee to be referred to
herein as a "Subsidiary Guarantee") to each Holder of a Note authenticated and
delivered by the Trustee and to the Trustee and its successors and assigns,
irrespective of the validity and enforceability of this Indenture, the Notes or
the Obligations of the Issuer, the Company or any other Subsidiary Guarantors to
the Holders or the Trustee hereunder or thereunder, that:
(i) the principal of, premium, if any, and interest on the Notes
(and any Additional Interest payable thereon) shall be duly and punctually
paid in full when due, whether at maturity, upon redemption at the option
of Holders pursuant to the provisions of the Notes relating thereto, by
acceleration or otherwise, and interest (to the extent permitted by law) on
the overdue principal, premium, if any, and interest, if any, on the Notes
and all other Obligations of the Issuer to the Holders or the Trustee
hereunder (including amounts due the Trustee under Section 7.07 hereof) and
all other Obligations shall be promptly paid in full or performed, all in
accordance with the terms hereof and thereof; and
(ii) in case of any extension of time of payment or renewal of
any Notes or any of such other Obligations, the same shall be promptly paid
in full when due or performed in accordance with the terms of the extension
or renewal, whether at maturity, by acceleration or otherwise.
Failing payment when due of any amount so guaranteed, or failing performance of
any other Obligation of the Issuer to the Holders under this Indenture or under
the Notes, for whatever reason, each Subsidiary Guarantor shall be obligated to
pay, or to perform or cause the performance of, the same immediately. An Event
of Default under this Indenture or the Notes shall constitute an event of
default under each such Subsidiary Guarantee, and shall entitle the Holders of
Notes to accelerate the Obligations of the Subsidiary Guarantors in the same
manner and to the same extent as the Obligations of the Issuer.
(c) Each Guarantor agrees that its Obligations under its Guarantee are
and shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this
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Indenture, the absence of any action to enforce the same, any waiver or consent
by any Holder of the Notes with respect to any provisions thereof, any release
of any other Guarantor, the recovery of any judgment against the Issuer, any
action to enforce the same, whether or not a notation of any Guarantee is
affixed to any particular Note, or any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a guarantor. Each
Guarantor waives the benefit of diligence, presentment, demand of payment,
filing of claims with a court in the event of insolvency or bankruptcy of the
Company or the Issuer, any right to require a proceeding first against the
Issuer, protest, notice and all demands whatsoever and covenants that its
Guarantee shall not be discharged except by complete performance of the
Obligations contained in the Notes, this Indenture, the Parent Guarantee and the
Subsidiary Guarantees. Each Guarantee is and shall be a guarantee of payment and
not of collection. If any Holder or the Trustee is required by any court or
otherwise to return to the Issuer or to any Guarantor, or any Custodian acting
in relation to the Issuer or such Guarantor, any amount paid by the Issuer or
such Guarantor to the Trustee or such Holder, the Guarantee, to the extent
theretofore discharged, shall be reinstated in full force and effect. Each
Guarantor further agrees that, as between it, on the one hand, and the Holders
of Notes and the Trustee, on the other hand, (a) subject to this Article Twelve,
the maturity of the Obligations guaranteed may be accelerated as provided in
Article Six hereof for the purposes of its Guarantee, notwithstanding any stay,
injunction or other prohibition preventing such acceleration in respect of the
Obligations guaranteed thereby, and (b) in the event of any acceleration of such
Obligations as provided in Article Six hereof, such Obligations (whether or not
due and payable) shall forthwith become due and payable by each Guarantor for
the purpose of its Guarantee.
(d) Subject to the terms of Section 12.05, each Guarantor that makes a
payment or distribution under its Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount, based on the net assets of each
Guarantor, determined in accordance with GAAP.
Section 12.02 Limitations on Subsidiary Guarantees.
The obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee will be limited to the maximum amount which, after giving effect to
all other contingent and fixed liabilities of such Subsidiary Guarantor and
after giving effect to any collections from or payments made by or on behalf of
any other Subsidiary Guarantor in respect of the obligations of such Subsidiary
Guarantor under its Subsidiary Guarantee or pursuant to its contribution
obligations under this Indenture, will result in the obligations of such
Subsidiary Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law.
Section 12.03 Execution and Delivery of Guarantees.
To further evidence each Guarantee referred to in Section 12.01, each
Guarantor agrees that a notation of such Guarantee, substantially in the form of
Exhibit F herein, may be endorsed on each Note authenticated and delivered by
the Trustee. Such notation shall be executed on behalf of each Guarantor by
either manual or facsimile signature of two Officers of each Guarantor, each of
whom, in each case, shall have been duly authorized to so execute by all
requisite corporate action. The validity and enforceability of any Guarantee
shall not be affected by the fact that a notion thereof is not affixed to any
particular Note.
Each Guarantor agrees that its Guarantee set forth in Section 12.01
shall remain in full force and effect notwithstanding any failure to endorse on
each Note a notation of such Guarantee.
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If an Officer of a Guarantor whose signature is on a notation no
longer holds that office at the time the Trustee authenticates the Note on which
such notation is endorsed or at any time thereafter, such Guarantor's Guarantee
of such Note shall be valid nevertheless.
The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the applicable Guarantee set
forth in this Indenture on behalf of each Guarantor.
Section 12.04 Release of a Subsidiary Guarantor.
(a) If no Default exists or would exist under this Indenture, in the
event of (i) the designation of any Subsidiary Guarantor as an Unrestricted
Subsidiary, (ii) a sale or other disposition of all or substantially all of the
properties or assets of any Subsidiary Guarantor to a third party or an
Unrestricted Subsidiary, by way of merger, consolidation or otherwise with or
into any Person in compliance with Article Five (in each case, other than to
Company, the Issuer or a Restricted Subsidiary), or (iii) a sale or other
disposition of all of the Capital Stock of any Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of such a designation or a sale or other
disposition, by way of such a merger, consolidation or otherwise, or a
disposition of all of the Capital Stock of such Subsidiary Guarantor) or the
Person acquiring such properties or assets (in the event of a sale or other
disposition of all or substantially all of the properties or assets of such
Subsidiary Guarantor) will be released from all Obligations under this Article
Twelve and its Subsidiary Guarantee without any further action required on the
part of the Trustee or any Holder; provided that any Net Cash Proceeds of such
sale or other disposition are applied in accordance with the covenant described
under Section 4.16, and provided, further, however, that any such termination
shall occur only to the extent that all obligations of such Subsidiary Guarantor
under all of its guarantees of, and under all of its pledges of assets or other
security interests that secure, any other Indebtedness of the Company or its
Restricted Subsidiaries shall also terminate upon such release, sale or
disposition. Any Subsidiary Guarantor not so released or the entity surviving
such Subsidiary Guarantor, as applicable, shall remain or be liable under its
Subsidiary Guarantee as provided in this Article Twelve.
(b) The Trustee shall deliver an appropriate instrument evidencing the
release of a Subsidiary Guarantor upon receipt of a request by the Company or
such Subsidiary Guarantor accompanied by an Officers' Certificate and an Opinion
of Counsel certifying as to the compliance with this Section 12.04, provided the
legal counsel delivering such Opinion of Counsel may rely as to matters of fact
on one or more Officers' Certificates of the Company.
Except as set forth in Articles Four and Five and this Section 12.04,
nothing contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of a Subsidiary Guarantor with or into the Company, the
Issuer or another Subsidiary Guarantor or shall prevent any sale or conveyance
of the property of a Subsidiary Guarantor as an entirety or substantially as an
entirety to the Company, the Issuer or another Subsidiary Guarantor.
Section 12.05 Waiver of Subrogation.
Until this Indenture is discharged and all of the Notes are discharged
and paid in full, each Guarantor irrevocably waives and agrees not to exercise
any claim or other rights which it may hereafter acquire against the Issuer that
arise from the existence, payment, performance or enforcement of the Issuer's
Obligations under the Notes or this Indenture and such Guarantor's
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Obligations under its Guarantee and this Indenture, in any such instance
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution, indemnification, and any right to participate in any
claim, remedy or right arises in equity, or under contract, statute or common
law, including, without limitation, the right to take or receive from the
Issuer, directly or indirectly, in cash or other property or by set-off or in
any other manner, payment or security on account of such claim or other rights.
If any amount shall be paid to any Guarantor in violation of the preceding
sentence and any amounts owing to the Trustee or the Holders of Notes under the
Notes, this Indenture, or any other document or instrument delivered under or in
connection with such agreements or instruments, shall not have been paid in
full, such amount shall have been deemed to have been paid to such Guarantor for
the benefit of, and held in trust for the benefit of, the Trustee or the Holders
and shall forthwith be paid to the Trustee for the benefit of itself or such
Holders to be credited and applied to the obligations in favor of the Trustee or
the Holders, as the case may be whether matured or unmatured, in accordance with
the terms of this Indenture. Each Guarantor acknowledges that it will receive
direct and indirect benefits from the financing arrangements contemplated by
this Indenture and that the waiver set forth in this Section 12.05 is knowingly
made in contemplation of such benefits.
Section 12.06 Immediate Payment.
Each Guarantor agrees to make immediate payment to the Trustee on
behalf of the Holders of all Obligations owing or payable to the respective
Holders upon receipt of a demand for payment therefor by the Trustee to such
Guarantor in writing.
Section 12.07 No Set-Off.
Each payment to be made by a Guarantor hereunder in respect of the
Obligations shall be payable in the currency or currencies in which such
Obligations are denominated, and shall be made without set-off, counterclaim,
reduction or diminution of any kind or nature.
Section 12.08 Obligations Absolute.
The Obligations of each Guarantor are absolute and unconditional and
any monies or amounts expressed to be owing or payable by each Guarantor which
may not be recoverable from such Guarantor on the basis of a Guarantee shall be
recoverable from such Guarantor as a primary obligor and principal debtor in
respect thereof.
Section 12.09 Obligations Continuing.
The Obligations of each Guarantor are and shall be continuing and
shall remain in full force and effect until all the Obligations have been paid
and satisfied in full or until earlier released in accordance with Section
12.04. Each Guarantor agrees with the Trustee that it will from time to time
deliver to the Trustee suitable acknowledgments of this continued liability
hereunder and under any other instrument or instruments in such form as counsel
to the Trustee may advise and as will prevent any action brought against it in
respect of any default hereunder being barred by an statute of limitations now
or hereafter in force and, in the event of the failure of a Guarantor so to do,
it hereby irrevocably appoints the Trustee the attorney and agent of such
Guarantor to make, execute and deliver such written acknowledgment or
acknowledgments or other instruments as may from time to time become necessary
or advisable, in the judgment of the Trustee on the advice of counsel, to fully
maintain and keep in force the liability of such Guarantor under its Guarantee.
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Section 12.10 Obligations Not Reduced.
The Obligations of each Guarantor shall not be satisfied, reduced or
discharged solely by the payment of such principal, premium, if any, interest,
fees and other monies or amounts as may at any time prior to discharge of this
Indenture pursuant to Article Eight be or become owing or payable under or by
virtue of or otherwise in connection with the Notes or this Indenture.
Section 12.11 Obligations Reinstated.
The Obligations of each Guarantor shall continue to be effective or
shall be reinstated, as the case may be, if at any time any payment which would
otherwise have reduced the Obligations of any Guarantor (whether such payment
shall have been made by or on behalf of the Issuer or by or on behalf of a
Guarantor) is rescinded or reclaimed from any of the Holders upon the
insolvency, bankruptcy, liquidation or reorganization of the Company, the Issuer
or any Subsidiary Guarantor or otherwise, all as though such payment had not
been made. If demand for, or acceleration of the time for, payment by the
Issuer is stayed upon the insolvency, bankruptcy, liquidation or reorganization
of the Issuer, all such indebtedness otherwise subject to demand for payment or
acceleration shall nonetheless by payable by each Guarantor as provided herein.
Section 12.12 Obligations Not Affected.
The Obligations of each Guarantor shall not be affected, impaired or
diminished in any way by any act, omission, matter or thing whatsoever,
occurring before, upon or after any demand for payment (and whether or not known
or consented to by any Guarantor or any of the Holders) which, but for this
provision, might constitute a whole or partial defense to a claim against any
Guarantor under its Guarantee or might operate to release or otherwise exonerate
any Guarantor from any of its Obligations or otherwise affect such Obligations,
whether occasioned by default of any of the Holders or otherwise, including,
without limitation:
(a) any limitation of status or power, disability, incapacity or other
circumstance relating to the Issuer or any other Person, including any
insolvency, bankruptcy, liquidation, reorganization, readjustment, composition,
dissolution, winding-up or other proceeding involving or affecting either Issuer
or any other person;
(b) any irregularity, defect, unenforceability or invalidity in
respect of any indebtedness or other Obligation of the Issuer or any other
Person under this Indenture, the Notes or any other document or instrument;
(c) any failure of the Issuer, whether or not without fault on its
part, to perform or comply with any of the provisions of this Indenture or the
Notes, or to give notice thereof to a Guarantor;
(d) the taking or enforcing or exercising or the refusal or neglect to
take or enforce or exercise any right or remedy from or against the Issuer or
any other Person or their respective assets or the release or discharge of any
such right or remedy;
(e) the granting of time, renewals, extensions, compromises,
concessions, waivers, releases, discharges and other indulgences to the Issuer
or any other Person;
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(f) any change in the time, manner or place of payment of, or in any
other term of, any of the Notes, or any other amendment, variation, supplement,
replacement or waiver of, or any consent to departure from, any of the Notes or
this Indenture, including, without limitation, any increase or decrease in the
principal amount of or premium, if any, or interest on any of the Notes;
(g) any change in the ownership, control, name, objects, businesses,
assets, capital structure or constitution of the Issuer or a Guarantor;
(h) any merger or amalgamation of the Issuer or a Guarantor with any
Person or Persons;
(i) the occurrence of any change in the laws, rules, regulations or
ordinances of any jurisdiction by an present or future action of any
governmental authority or court amending, varying, reducing or otherwise
affecting, or purporting to amend, vary, reduce or otherwise affect, any of the
Obligations of the Issuer under this Indenture or the Notes or the Obligations
of a Guarantor under its Guarantee, and
(j) any other circumstance, including release of any Subsidiary
Guarantor pursuant to Section 12.04 (other than by complete, irrevocable
payment) that might otherwise constitute a legal or equitable discharge or
defense of the Issuer under this Indenture or the Notes or of a Guarantor in
respect of its Guarantee.
Section 12.13 Waiver.
Without in any way limiting the provisions of Section 12.01 hereof,
each Guarantor waives notice of acceptance hereof, notice of any liability of
any Guarantor under its Guarantee, notice or proof of reliance by the Holders
upon the Obligations of any Guarantor, and diligence, presentment, demand for
payment on the Issuer, protest, notice of dishonor or non-payment of any of the
Issuer's Obligations under this Indenture or the Notes, or other notice or
formalities to the Issuer or any Guarantor of any kind whatsoever.
Section 12.14 No Obligation to Take Action Against the Issuer.
Neither the Trustee nor any other Person shall have any obligation to
enforce or exhaust any rights or remedies or to take any other steps under any
security for the Issuer's Obligations under this Indenture or the Notes, or
against the Issuer or any other Person or any property of the Issuer or any
other Person before the Trustee is entitled to demand payment and performance by
any or all Guarantors of their liabilities and obligations under their
Guarantees or under this Indenture.
Section 12.15 Dealing with the Issuer and Others.
The Holders, without releasing, discharging, limiting or otherwise
affecting in whole or in part the obligations and liabilities of any Guarantor
hereunder and without the consent of or notice to any Guarantor, may
(a) grant time, renewals, extensions, compromises, concessions,
waivers, releases, discharges and other indulgences to the Issuer or any other
Person;
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(b) take or abstain from taking security or collateral from the Issuer
or from perfecting security or collateral of the Company;
(c) release, discharge, compromise, realize, enforce or otherwise deal
with or do any act or thing in respect of (with or without consideration) any
and all collateral, mortgages or other security given by the Issuer or any third
party with respect to the Issuer's Obligations under, or matters contemplated
by, this Indenture or the Notes;
(d) accept compromises or arrangements from the Issuer;
(e) apply all monies at any time received from the Issuer or from any
security upon such part of the Issuer's Obligations under this Indenture or the
Notes as the Holders may see fit or change any such application in whole or in
part from time to time as the Holders may see fit; and
(f) otherwise deal with, or waive or modify their right to deal with,
the Issuer and all other Persons and any security as the Holders or the Trustee
may see fit.
Section 12.16 Default and Enforcement.
If any Guarantor fails to pay in accordance with Section 12.06 hereof,
the Trustee may proceed in its name as trustee hereunder in the enforcement of
its Guarantee and such Guarantor's Obligations thereunder and hereunder by any
remedy provided by law, whether by legal proceedings or otherwise, and to
recover from such Guarantor the Issuer's Obligations under this Indenture and
the Notes.
Section 12.17 Amendment, Etc.
No amendment, modification or waiver of any provision of this
Indenture relating to any Guarantor or consent to any departure by any Guarantor
or any other Persons from any such provision will in any event be effective
unless it is signed by such Guarantor and the Trustee.
Section 12.18 Acknowledgment.
Each Guarantor acknowledges communication of the terms of this
Indenture and the Notes and consents to and approves of the same.
Section 12.19 Costs and Expenses.
Each Guarantor agrees to pay on demand by the Trustee any and all
costs, fees and expenses (including, without limitation, legal fees on a
solicitor and client basis) incurred by the Trustee, its agents, advisors and
counsel or any of the Holders in enforcing any of their rights under any
Guarantee.
Section 12.20 No Merger or Waiver; Cumulative Remedies.
No Guarantee shall operate by way of merger of any of the obligations
of a Guarantor under any other agreement, including, without limitation, this
Indenture. No failure to exercise and no delay in exercising, on the part of
the Trustee or the Holders, any right, remedy, power or
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privilege hereunder or under the Notes, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, remedy, power or privilege
hereunder or under this Indenture or the Notes preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges in each Guarantee and under this
Indenture, the Notes and any other document or instrument between a Guarantor
and/or the Issuer and the Trustee are cumulative and not exclusive of any
rights, remedies, powers and privilege provided by law.
Section 12.21 Survival of Obligations.
Without prejudice to the survival of any of the other obligations of
each Guarantor, the obligations of each Guarantor under Section 12.01 shall
survive the payment in full of the Issuer's Obligations under this Indenture and
the Notes and shall be enforceable against such Guarantor without regard to and
without giving effect to any defense, right of offset or counterclaim available
to or which may be asserted by the Issuer or any Guarantor.
Section 12.22 Guarantee in Addition to Other Obligations.
The obligations of each Guarantor under its Guarantee and this
Indenture are in addition to and not in substitution for any other obligations
to the Trustee or to any of the Holders in relation to this Indenture or the
Notes and any other guarantees or security at any time held by or for the
benefit of any of them.
Section 12.23 Severability.
Any provision of this Article Twelve which is prohibited or
unenforceable in any jurisdiction shall not invalidate the remaining provisions
and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any jurisdiction unless its
removal would substantially defeat the basic intent, spirit and purpose of this
Indenture and this Article Twelve.
Section 12.24 Successors and Assigns.
Each Guarantee shall be binding upon and inure to the benefit of each
Guarantor and the Trustee and the Holders and their respective successors and
permitted assigns, except that no Guarantor may assign any of its obligations
hereunder or thereunder except as expressly permitted by the terms of this
Indenture.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.
SOUTHWEST ROYALTIES HOLDINGS, INC.
By:
----------------------------------------------
Name:
Title:
SOUTHWEST ROYALTIES, INC.
By:
----------------------------------------------
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
By:
----------------------------------------------
Name:
Title:
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EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
Dated as of October 14, 1997
by and among
SOUTHWEST ROYALTIES, INC.
and
SOUTHWEST ROYALTIES HOLDINGS, INC.
and
JEFFERIES & COMPANY, INC.,
BANC ONE CAPITAL CORPORATION,
and
PARIBAS CORPORATION,
as Initial Purchasers
$200,000,000
10 1/2% SENIOR NOTES DUE 2004
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <S>
1. Definitions 1
2. Exchange Offer 4
3. Shelf Registration 7
4. Additional Interest 8
5. Registration Procedures 9
6. Registration Expenses 17
7. Indemnification 18
8. Rules 144 and 144A 21
9. Underwritten Registrations 21
10. Miscellaneous 21
(a) No Inconsistent Agreements 21
(b) Adjustments Affecting Registrable Notes 21
(c) Amendments and Waivers 21
(d) Notices 22
(e) Successors and Assigns 23
(f) Counterparts 23
(g) Headings 23
(h) Governing Law 23
(i) Severability 24
(j) Notes Held by the Issuers or Their Affiliates 24
(k) Third Party Beneficiaries 24
(1) Entire Agreement 24
</TABLE>
i
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of October 14, 1997, by and among Southwest Royalties, Inc., a Delaware
corporation (the "Company") and Southwest Royalties Holdings, Inc., a Delaware
corporation (the "Parent Guarantor") and Jefferies & Company, Inc., Banc One
Capital Corporation and Paribas Corporation (the "Initial Purchasers").
This Agreement is entered into in connection with the Purchase Agreement,
dated as of October 8, 1997, by and among the Company, the Parent Guarantor and
the Initial Purchasers (the "Purchase Agreement") which provides for, among
other things, the issuance and sale to the Initial Purchasers of an aggregate of
$200,000,000 aggregate principal amount of the Company's 10 1/2% Senior Notes
due 2004, Series A (the "Notes"). In order to induce the Initial Purchasers to
enter into the Purchase Agreement, the Company and the Parent Guarantor have
agreed to provide the registration rights set forth in this Agreement for the
benefit of the Initial Purchasers and their direct and indirect transferees and
assigns. The execution and delivery of this Agreement is a condition to the
Initial Purchasers' obligation to purchase the Notes under the Purchase
Agreement. The Company and the Parent Guarantor are collectively referred to
herein as the "Issuers."
The parties hereby agree as follows:
1. Definitions
-----------
As used in this Agreement, the following terms shall have the following
meanings:
Additional Interest: See Section 4(a).
Advice: See the last paragraph of Section 5.
Agreement: See the first introductory paragraph to this Agreement.
Applicable Period: See Section 2(b).
Business Day: A day that is not a Saturday, a Sunday, or a day on which
banking institutions in New York, New York or Hartford, Connecticut are required
to be closed.
Company: See the first introductory paragraph to this Agreement.
Effectiveness Date: The 120th day after the Issue Date.
Effectiveness Period: See Section 3(a).
Event Date: See Section 4(b).
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated thereunder.
<PAGE>
Exchange Notes: See Section 2(a).
Exchange Offer: See Section 2(a).
Exchange Registration Statement: See Section 2(a).
Filing Date: The 60th day after the Issue Date.
Holder: Any registered holder of Registrable Notes.
Indemnified Person: See Section 7(c).
Indemnifying Person: See Section 7(c).
Indenture: The Indenture, dated as of October 14, 1997, by and among the
Company, the Parent Guarantor and State Street Bank and Trust Company of
Connecticut, N.A., as trustee, pursuant to which the Notes are being issued, as
amended or supplemented from time to time in accordance with the terms thereof.
Initial Purchasers: See the first introductory paragraph to this
Agreement.
Initial Shelf Registration: See Section 3(a).
Inspectors: See Section 5(o).
Issue Date: The date on which the Notes were sold to the Initial
Purchasers pursuant to the Purchase Agreement.
Issuers: See the second introductory paragraph to this Agreement.
NASD: National Association of Securities Dealers, Inc.
Notes: See the second introductory paragraph to this Agreement.
Parent Guarantor: See the first introductory paragraph to this Agreement.
Participant: See Section 7(a).
Participating Broker-Dealer: See Section 2(b).
Person: An individual, trustee, corporation, partnership, limited
liability company, joint stock company, trust, unincorporated association,
union, business association, firm or other legal entity.
Pledge Agreement: The Pledge Agreement, dated as of October 14, 1997,
between the Parent Guarantor and the Trustee.
2
<PAGE>
Private Exchange: See Section 2(b).
Private Exchange Notes: See Section 2(b).
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), as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any portion
of the Registrable Notes covered by such Registration Statement, and all other
amendments and supplements to such 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 second introductory paragraph to this
Agreement.
Records: See Section 5(o).
Registrable Notes: Each Note upon original issuance thereof and at all
times subsequent thereto, each Exchange Note as to which Section 2(c)(iv) hereof
is applicable upon original issuance thereof and at all times subsequent thereto
and each Private Exchange Note upon original issuance thereof and at all times
subsequent thereto, until, in the case of any such Note, Exchange Note or
Private Exchange Note, as the case may be, the earliest to occur of (i) a
Registration Statement (other than, with respect to any Exchange Note as to
which Section 2(c)(iv) hereof is applicable, the Exchange Registration
Statement) covering such Note, Exchange Note or Private Exchange Note, as the
case may be, has been declared effective by the SEC and such Note, Exchange Note
or Private Exchange Note, as the case may be, has been disposed of in accordance
with such effective Registration Statement, (ii) such Note, Exchange Note or
Private Exchange Note, as the case may be, is sold in compliance with Rule 144,
(iii) in the case of any Note, such Note has been exchanged pursuant to the
Exchange Offer for an Exchange Note or Exchange Notes which may be resold
without restriction under state and federal securities laws, or (iv) such Note,
Exchange Note or Private Exchange Note, as the case may be, ceases to be
outstanding for purposes of the Indenture.
Registration Statement: Any registration statement of the Issuers (and any
then existing Subsidiary Guarantor) filed with the SEC under the Securities Act,
including, but not limited to, the Exchange Registration Statement, that covers
any of the Registrable Notes pursuant to the provisions of this Agreement,
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.
3
<PAGE>
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.
Shelf Notice: See Section 2(c).
Shelf Registration: See Section 3(b).
Subsequent Shelf Registration: See Section 3(b).
Subsidiary Guarantors: Each subsidiary of the Parent Guarantor that
guarantees the obligations of the Company under the Notes and the Indenture.
TIA: The Trust Indenture Act of 1939, as amended.
Trustee: The trustee under the Indenture and, if existent, the trustee
under any indenture governing the Exchange Notes and Private Exchange Notes (if
any).
Underwritten registration or underwritten offering: A registration in
which securities of one or more of the issuers are sold to an underwriter for
reoffering to the public.
2. Exchange Offer
--------------
(a) Each of the Issuers agrees to file (and to cause any then existing
Subsidiary Guarantor to file) with the SEC no later than the Filing Date, an
offer to exchange (the "Exchange Offer") any and all of the Registrable Notes
(other than Private Exchange Notes, if any) for a like aggregate principal
amount of debt securities of the Company, guaranteed by the Parent Guarantor and
secured by the same collateral as the Notes, which are identical in all material
respects to the Notes (the "Exchange Notes") (and which are entitled to the
benefits of the Indenture or a trust indenture which is identical in all
material respects to the Indenture (other than such changes to the Indenture or
any such identical trust indenture as are necessary to comply with any
requirements of the SEC to effect or maintain the qualification thereof under
the TIA) and which, in either case, has been qualified under the TIA), except
that the Exchange Notes shall have been registered pursuant to an effective
Registration Statement under the Securities Act, shall not provide for
Additional Interest and shall contain no restrictive legend thereon. The
Exchange Offer shall be registered under the Securities Act on the appropriate
form (the "Exchange Registration Statement") and shall comply with all
applicable tender offer rules and regulations under the Exchange Act. Each of
the Issuers agrees to use its best efforts to (x) cause the Exchange
Registration Statement to be declared effective under
4
<PAGE>
the Securities Act on or before the Effectiveness Date; (y) keep the Exchange
Offer open for at least 30 calendar 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 45th day following the date
on which the Exchange Registration Statement is declared effective. If after
such Exchange 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, such Exchange Registration
Statement shall be deemed not to have become effective for purposes of this
Agreement. Each Holder who participates in the Exchange Offer will be required
to represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that at the time of the commencement 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, if such Holder
is not a broker-dealer, that it is not engaged in, and does not intend to engage
in, the distribution of the Notes and if such Holder is a Participating Broker-
Dealer, that it will deliver a prospectus in connection with any resale of the
Exchange Notes. Upon consummation of the Exchange Offer in accordance with this
Section 2, the provisions of this Agreement shall continue to apply, mutatis
mutandis, solely with respect to Registrable Notes that are Private Exchange
Notes and Exchange Notes held by Participating Broker-Dealers, and the Issuers
shall have no further obligation to register Registrable Notes (other than
Private Exchange Notes and other than in respect of any Exchange Notes as to
which clause 2(c)(iv) hereof applies) pursuant to Section 3 of this Agreement.
(b) The Issuers shall include within the Prospectus contained in the
Exchange Registration Statement a section entitled "Plan of Distribution,"
reasonably acceptable to the Initial Purchasers, 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 the Exchange Act) of Exchange
Notes received by such broker-dealer in the Exchange Offer for its own account
in exchange for Notes that were acquired by it as a result of market-making or
other trading activity (a "Participating Broker-Dealer"), whether such positions
or policies have been publicly disseminated by the staff of the SEC or such
positions or policies, in the judgment of the Initial Purchasers, represent the
prevailing views of the staff of the SEC. Such "Plan of Distribution" section
shall also allow, 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 so
permitted, all Participating Broker-Dealers, and include a statement describing
the manner in which Participating Broker-Dealers may resell the Exchange Notes.
Each of the Issuers shall use its best efforts to keep the Exchange
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 such Persons must comply with such requirements
in order to resell the Exchange Notes (the "Applicable Period").
If, upon consummation of the Exchange Offer, any Initial Purchasers holds
any Notes acquired by it and having the status of an unsold allotment in the
initial distribution, the Company
5
<PAGE>
upon the request of such Initial Purchasers shall, simultaneously with the
delivery of the Exchange Notes in the Exchange Offer, issue and deliver to such
Initial Purchasers, in exchange (the "Private Exchange") for the Notes held by
such Initial Purchasers, a like principal amount of debt securities of the
Company, guaranteed by the Parent Guarantor and 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 U.S. (the "Private Exchange Notes")
(and which are issued pursuant to the same indenture as the Exchange Notes);
provided, however, the Issuers shall not be required to effect such exchange if,
in the written opinion of counsel for the Issuers (a copy of which shall be
delivered to the Initial Purchasers and any Holder affected thereby), such
exchange cannot be effected without registration under the Securities Act. The
Private Exchange Notes shall 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 to each Holder a copy of the Prospectus forming part of the
Exchange 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, which may be
the Trustee or an affiliate thereof;
(3) permit Holders to withdraw tendered Registrable 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.
As soon as practicable after the close of the Exchange Offer or the Private
Exchange, as the case may be, the Issuers shall:
(1) accept for exchange all Registrable Notes validly tendered and not
validly withdrawn pursuant to the Exchange Offer or the Private Exchange,
as the case may be;
(2) deliver to the Trustee for cancellation all Registrable Notes so
accepted for exchange; and
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<PAGE>
(3) cause the Trustee to authenticate and deliver promptly to each
Holder tendering such Registrable 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 be subject to the
following conditions: (i) the Exchange Offer or the 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 is 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 has occurred in any existing action
or proceeding with respect to the Issuers and (iii) all governmental approvals
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 may be issued under (i)
the Indenture or (ii) an indenture identical in all material respects to the
Indenture, which in either event will provide that the Exchange Notes will 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 Parent Guarantor pursuant to
the Pledge Agreement, in the Parent Guarantee and in any Subsidiary Guarantee
(as such terms are defined in the Indenture) on an equal and ratable basis.
(c) If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the SEC, the Issuers (and any then existing
Subsidiary Guarantor) are not permitted to effect an Exchange Offer, (ii) the
Exchange Offer is not consummated within 180 days of the Issue Date, (iii) any
holder of Private Exchange Notes so requests in writing to the Issuers within
120 days after the consummation of the Exchange Offer or (iv) in the case of any
Holder that participates in the Exchange Offer, such Holder does not receive
Exchange Notes on the date of the exchange that may be sold without restriction
under state and federal securities laws (other than due solely to the status of
such Holder as an affiliate of any of the Issuers within the meaning of the
Securities Act) and so notifies the Company within 60 days after such Holder
first becomes aware of such restrictions and providing a reasonable basis for
its conclusions, in the case of each of clauses (i)-(iv), then the Issuers (and
any then existing Subsidiary Guarantor) 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.
3. Shelf Registration
------------------
If a Shelf Notice is delivered as contemplated by Section 2(c), then:
(a) Shelf Registration. The Issuers shall as promptly as reasonably
practicable file (and shall cause any then existing Subsidiary Guarantor to
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 Registrable Notes (the
"Initial Shelf Registration"). If the Issuers (and any then existing Subsidiary
Guarantor) shall not have yet filed the Exchange Registration Statement, each of
the Issuers shall use its best efforts to file (and shall cause any then
existing Subsidiary Guarantor to file) with the SEC the Initial
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<PAGE>
Shelf Registration on or prior to the Filing Date and shall use its best efforts
to cause such Initial Shelf Registration to be declared effective under the
Securities Act on or prior to the Effectiveness Date. If the Exchange Offer is
not consummated within 180 days of the Issue Date, the Issuers shall use their
best efforts to file (and shall cause any then existing Subsidiary Guarantor to
file) with the SEC the Initial Shelf Registration on or prior to the 181st day
after the Issue Date and shall use their best efforts to cause such Initial
Shelf Registration to be declared effective under the Securities Act within 60
days after such filing. Otherwise, each of the Issuers shall use their best
efforts to file (and shall cause any then existing Subsidiary Guarantor to file)
with the SEC the Initial Shelf Registration within 30 days of the delivery of
the Shelf Notice and shall use its best efforts to cause such Shelf Registration
to be declared effective under the Securities Act within 90 days of the delivery
of the Shelf Notice. The Initial Shelf Registration shall be on Form S-l or
another appropriate form permitting registration of such Registrable Notes 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 Registrable Notes to be included in any
Shelf Registration (as defined below). The Issuers shall use their best efforts
to keep the Initial Shelf Registration continuously effective under the
Securities Act until the date which is 24 months from the effective date of such
Initial Shelf Registration (subject to extension pursuant to the last paragraph
of Section 5 hereof) (the "Effectiveness Period"), or such shorter period ending
when (i) all Registrable Notes 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 (as defined below) covering
all of the Registrable Notes has been declared effective under the Securities
Act.
(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), each of the Issuers shall use its best
efforts to obtain the prompt withdrawal of any order suspending the
effectiveness thereof, and in any event shall within 45 days of such cessation
of effectiveness amend such Shelf Registration in a manner to obtain the
withdrawal of the order suspending the effectiveness thereof, or file (and cause
any then existing Subsidiary Guarantor to file) an additional "shelf"
Registration Statement pursuant to Rule 415 covering all of the Registrable
Notes (a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration
is filed, each of the Issuers shall use its best efforts to cause the Subsequent
Shelf Registration to be declared effective 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 Registrations 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 Registrable Notes
covered by such Shelf Registration or by any underwriter of such Registrable
Notes.
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4. Additional Interest
-------------------
(a) The Issuers and the Initial Purchasers agree that the Holders of
Registrable Notes 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, jointly and severally, agree to pay, as liquidated damages,
additional interest on the Notes ("Additional Interest") under the circumstances
and to the extent set forth below (each of which shall be given independent
effect):
(i) if the Exchange Registration Statement has not been filed on or
prior to the Filing Date, then commencing on the day after the Filing Date,
Additional Interest shall accrue on the Notes over and above the stated
interest at a rate of 0.50% per annum for the first 90 days immediately
following the Filing Date, such Additional Interest rate increasing by an
additional 0.50% per annum at the beginning of each subsequent 90-day
period;
(ii) if the Exchange Registration Statement is not declared effective
on or prior to the Effectiveness Date, then commencing on the day after the
Effectiveness Date, Additional Interest shall accrue on the Notes over and
above the stated interest at a rate of 0.50% per annum for the first 90
days immediately following the day after the Effectiveness Date, such
Additional Interest rate increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period; and
(iii) if (A) the Issuers (and any then existing Subsidiary Guarantor)
have not exchanged Exchange Notes for all Notes validly tendered in
accordance with the terms of the Exchange Offer on or prior to the 30th day
after the date on which the Exchange Registration Statement is declared
effective or (B) the Initial Shelf Registration, if required to be filed
hereunder, is not declared effective on or prior to the 120th day after the
Issue Date or (C) 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 Additional Interest shall accrue on
the Notes over and above the stated interest at a rate of 0.50% per annum
for the first 90 days commencing on the (x) 30th day after the date on
which the Exchange Registration Statement is declared effective, in the
case of (A) or (B) above, or (y) the day such Shelf Registration ceases to
be effective in the case of (C) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each such
subsequent 90-day period;
provided, however, that the Additional Interest rate on the Notes may not exceed
at any one time in the aggregate 1.5% per annum; and provided further, that (1)
upon the filing of the Exchange Registration Statement (in the case of (i)
above), (2) upon the effectiveness of the Exchange Registration Statement (in
the case of (ii) above), or (3) upon the exchange of Exchange Notes for all
Notes tendered (in the case of (iii)(A) above), upon the effectiveness of the
Initial Shelf Registration (in the case of (iii)(B) above) or upon the
effectiveness of a Shelf Registration which had ceased to remain effective (in
the case of (iii)(C) above), Additional Interest on the Notes as a result of
such clause (or the relevant subclause thereof), as the case may be, shall cease
to accrue.
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<PAGE>
(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 Additional Interest
is required to be paid (an "Event Date"). Any amounts of Additional Interest
due pursuant to (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be payable
semi-annually by wire transfer of immediately available funds or by federal
funds check on each regular interest payment date specified in the Indenture (to
the Holders of record on the regular record date therefor (specified in the
Indenture) immediately preceding such dates), commencing with the first such
regular interest payment date occurring after any such Additional Interest
commences to accrue. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes, multiplied by a fraction, the numerator of which is the number of
days such Additional Interest rate was 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.
5. Registration Procedures
-----------------------
In connection with the filing of any Registration Statement pursuant to
Section 2 or 3 hereof, the Issuers shall effect such registrations to permit the
sale of such 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 Filing Date, the
Exchange Registration Statement or if the Exchange Registration Statement
is not filed because of the circumstances contemplated by Section 2(c)(i),
a Shelf Registration as prescribed by Section 2 or 3, and use their best
efforts to cause each such Registration Statement to become effective and
remain effective as provided herein; provided that, if (1) a Shelf
Registration is filed pursuant to Section 3, or (2) a Prospectus contained
in an Exchange Registration Statement filed pursuant to Section 2 is
required to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, before filing any Registration Statement or Prospectus or any
amendments or supplements thereto, the Issuers shall, if requested, furnish
to and afford the Holders of the Registrable Notes to be registered
pursuant to such Shelf Registration or each such Participating Broker-
Dealer, as the case may be, covered by such Registration Statement, 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 business days prior to such filing).
The Issuers shall not file any such Registration Statement or Prospectus or
any amendments or supplements thereto if the Holders of a majority in
aggregate principal amount of the Registrable Notes 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 or Exchange 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,
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<PAGE>
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 it 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 Company shall be deemed not to have used its best efforts to keep a
Registration Statement effective during the Applicable Period if it
voluntarily takes any action that would result in selling Holders of the
Registrable Notes covered thereby or Participating Broker-Dealers seeking
to sell Exchange Notes not being able to sell such Registrable Notes or
such Exchange Notes during that period unless such action is required by
applicable law or unless the Company complies with this Agreement,
including, without limitation, the provisions of paragraph 5(k) hereof and
the last paragraph of this Section 5.
(c) If (1) a Shelf Registration is filed pursuant to Section 3, or (2)
a Prospectus contained in an Exchange Registration Statement filed pursuant
to Section 2 is required to be delivered under the Securities Act by any
Participating Broker-Dealer who seeks to sell Exchange Notes during the
Applicable Period 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 Registrable Notes, 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 two business days), 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 posteffective amendment, when the same has
become effective (including in such notice a written statement that any
Holder may, upon request, obtain, without charge, 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 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 Registrable Notes the representations and warranties of
the Issuers contained in any agreement (including any underwriting
agreement) contemplated by Section 5(n) hereof cease to be true and
correct, (iv) of the receipt by 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 Registrable Notes
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
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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' reasonable
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, or (2)
a Prospectus contained in an Exchange Registration Statement filed pursuant
to Section 2 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 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 Registrable
Notes 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 best efforts to obtain the withdrawal of any such order at the
earliest possible date.
(e) If a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriters, if any, or the Holders of a
majority in aggregate principal amount of the Registrable Notes being sold
in connection with an underwritten offering, (i) promptly as practicable
incorporate in a prospectus supplement or post-effective amendment such
information or revisions to information therein relating to such
underwriters or selling Holders as the managing underwriters, if any, or
such Holders or their counsel reasonably request to be included or made
therein and (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.
(f) If (1) a Shelf Registration is filed pursuant to Section 3, or (2)
a Prospectus contained in an Exchange Registration Statement filed pursuant
to Section 2 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 Registrable Notes and
to each such Participating Broker-Dealer who so requests and to counsel and
each managing underwriter, if any, without charge, 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, or (2)
a Prospectus contained in an Exchange Registration Statement filed pursuant
to Section 2 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 Registrable Notes or
each such Participating Broker-Dealer, as the case may be, their respective
counsel, and the underwriters, if any, without charge, as many copies of
the 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 Issuer hereby
consents to the use of such Prospectus and each amendment or
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supplement thereto by each of the selling Holders of Registrable Notes or
each such Participating Broker-Dealer, as the case may be, and the
underwriters or agents, if any, and dealers (if any), in connection with
the offering and sale of the Registrable Notes 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 Registrable Notes or any delivery
of a Prospectus contained in the Exchange Registration Statement by any
Participating Broker-Dealer who seeks to sell Exchange Notes during the
Applicable Period, to use their best efforts to register or qualify, and to
cooperate with the selling Holders of Registrable Notes or each such
Participating Broker-Dealer, as the case may be, the underwriters, if any,
and their respective counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of
such Registrable Notes or Exchange Notes, as the case may be, 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, if any, reasonably request in
writing; provided that where Exchange Notes held by Participating Broker-
Dealers or Registrable Notes 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 Registrable Notes covered by the
applicable Registration Statement; provided 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, cooperate
with the selling Holders of Registrable Notes and the managing underwriter
or underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Notes 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
Registrable Notes to be in such denominations and registered in such names
as the managing underwriter or underwriters, if any, or Holders may
reasonably request.
(j) Use their best efforts to cause the Registrable Notes covered by
any Registration Statement to be registered with or approved by such
governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriters, if any, to consummate the
disposition of such Registrable Notes, except as may be required solely as
a consequence of the nature of such selling Holder's business, in which
case each of 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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(k) If (1) a Shelf Registration is filed pursuant to Section 3, or (2)
a Prospectus contained in an Exchange Registration Statement filed pursuant
to Section 2 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 joint and
several expense of each 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 Registrable Notes 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.
(1) Use their best efforts to cause the Registrable Notes covered by a
Registration Statement to be rated with the appropriate rating agencies, if
so requested by the Holders of a majority in aggregate principal amount of
Registrable Notes covered by such Registration Statement or the managing
underwriter or underwriters, if any.
(m) Prior to the effective date of the first Registration Statement
relating to the Registrable Notes, (i) provide the Trustee with printed
certificates for the Registrable Notes in a form eligible for deposit with
The Depository Trust Company and (ii) provide a CUSIP number for the
Registrable Notes.
(n) In connection with an underwritten offering of Registrable Notes
pursuant to a Shelf Registration, enter into an underwriting agreement as
is customary in underwritten offerings of debt securities similar to the
Notes 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 Registrable Notes and, in such
connection, (i) make such representations, warranties to, and covenants
with, the underwriters, with respect to the business of the Issuers and
their respective subsidiaries 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; (ii) obtain
the opinion of counsel to the Issuers and updates thereof in form and
substance reasonably satisfactory to the managing underwriter or
underwriters, addressed to the underwriters covering the matters
customarily covered in opinions requested in underwritten offerings of debt
securities similar to the Notes and such other matters as may be reasonably
requested by underwriters; (iii) obtain "cold comfort" letters and updates
thereof in form 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 in the Registration
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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; and (iv) if an
underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable 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
Registrable Notes covered by such Registration Statement and the managing
underwriter or underwriters or agents) with respect to all parties to be
indemnified pursuant to said Section. The above shall be done at each
closing under such underwriting agreement, or as and to the extent required
thereunder.
(o) If (1) a Shelf Registration is filed pursuant to Section 3, or (2)
a Prospectus contained in an Exchange Registration Statement filed pursuant
to Section 2 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 Registrable Notes being sold, or each such Participating Broker-
Dealer, as the case may be, any underwriter participating in any such
disposition of Registrable Notes, 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 and pertinent corporate
documents 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. Such Records shall be kept
confidential by each Inspector and shall not be disclosed by the Inspectors
unless (i) the disclosure of such Records is necessary to avoid or correct
a misstatement or omission in such Registration Statement, (ii) the release
of such Records is ordered pursuant to a subpoena or other order from a
court of competent jurisdiction, (iii) the information in such Records is
public or has been made generally available to the public other than as a
result of a disclosure or failure to safeguard by such Inspector or (iv)
disclosure of such information is, in the opinion of counsel for any
Inspector, necessary or advisable in connection with any action, claim,
suit or proceeding, directly or indirectly, involving or potentially
involving such Inspector and arising out of, based upon, related to, or
involving this Agreement, or any transactions contemplated hereby or
arising hereunder. Each selling Holder of such Registrable Notes 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 Registrable Notes 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 their expense.
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(p) Provide an indenture trustee for the Registrable Notes or the
Exchange Notes, as the case may be, and cause the Indenture or the trust
indenture provided for in Section 2(a), as the case may be, to be qualified
under the TIA not later than the effective date of the Exchange Offer or
the first Registration Statement relating to the Registrable Notes; and in
connection therewith, cooperate with the trustee under any such indenture
and the Holders of the Registrable Notes, 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 its 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.
(q) Comply with all applicable rules and regulations of the SEC and
make generally available to its 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 Registrable Notes 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 Company
after the effective date of a Registration Statement, which statements
shall cover said 12-month periods.
(r) 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 Registrable Notes participating in the Exchange Offer or the
Private Exchange, as the case may be, that the Exchange Notes or the
Private Exchange Notes, as the case may be, and the related indenture
constitute legally valid and binding obligations of each of the Issuers,
enforceable against each of the Issuers in accordance with their respective
terms subject to customary exceptions and qualifications.
(s) If the Exchange Offer or a Private Exchange is to be consummated,
upon delivery of the Registrable Notes 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 caused to be marked, on such Registrable Notes that such
Registrable Notes are being canceled in exchange for the Exchange Notes or
the Private Exchange Notes, as the case may be; in no event shall such
Registrable Notes be marked as paid or otherwise satisfied.
(t) Cooperate with each seller of Registrable Notes covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Notes and their respective counsel in
connection with any filings required to be made with the NASD.
(u) Use their best efforts to take all other steps reasonably
necessary to effect the registration of the Registrable Notes covered by a
Registration Statement contemplated hereby.
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The Issuers may require each seller of Registrable Notes as to which any
registration is being effected to furnish to the Issuers such information
regarding such seller and the distribution of such Registrable Notes as the
Issuers may, from time to time, reasonably request. The Issuers may exclude
from such registration the Registrable Notes of any seller who fails to furnish
such information within a reasonable time after receiving such request. Each
seller 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 the information previously furnished to the Issuers by such seller
not materially misleading.
Each Holder of Registrable Notes and each Participating Broker-Dealer
agrees by acquisition of such Registrable Notes or Exchange Notes to be sold by
such Participating Broker-Dealer, as the case may be, that, upon 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), such Holder will forthwith
discontinue disposition of such Registrable Notes covered by a Registration
Statement and such Participating Broker Dealer will forthwith discontinue
disposition of such Exchange Notes pursuant to any Prospectus and, in each case,
forthwith discontinue dissemination of such Prospectus until such Holder's or
Participating Broker-Dealer's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 5(k), or until it is advised in
writing (the "Advice") by the Issuers that the use of the applicable Prospectus
may be resumed, and has received copies of any amendments or supplements thereto
and, if so directed by the Issuers, such Holder or Participating Broker-Dealer,
as the case may be, will deliver to the Issuers all copies, other than permanent
file copies, then in such Holder's or Participating Broker-Dealer's possession,
of the Prospectus covering such Registrable Securities current at the time of
the receipt of such notice. In the event 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
Registrable Notes 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) or (y) the Advice.
6. Registration Expenses
---------------------
(a) 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 or a Shelf Registration is filed or
becomes effective, 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 Registrable Notes or Exchange
Notes and determination of the eligibility of the Registrable Notes or Exchange
Notes for investment under the laws of such jurisdictions (x) where the holders
of Registrable Notes are located, in the case of the Exchange Notes, or (y) as
provided in Section 5(h) hereof, in the case of Registrable Notes 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 Registrable Notes or Exchange Notes in a form eligible
for deposit with The Depository Trust Company and of printing prospectuses if
the printing of
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prospectuses is requested by the managing underwriter or underwriters, if any,
or by the Holders of a majority in aggregate principal amount of the Registrable
Notes included in any Registration Statement or by any Participating Broker-
Dealer during the Applicable Period, as the case may be, (iii) reasonable
messenger, telephone and delivery expenses incurred in connection with the
Exchange Registration Statement and any Shelf Registration, (iv) fees and
disbursements of counsel for the Issuers and reasonable fees and disbursements
of special counsel for the sellers of Registrable Notes (subject to the
provisions of Section 6(b)), (v) fees and disbursements of all independent
certified public accountants referred to in Section 5(n)(iii) (including,
without limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) rating agency fees, (vii)
Securities Act liability insurance, if the Issuers desire such insurance, (viii)
fees and expenses of all other Persons retained by the Issuers, (ix) internal
expenses of the Issuers (including, without limitation, all salaries and
expenses of officers and employees of the Issuers performing legal or accounting
duties), (x) the expense of any annual audit, (xi) the fees and expenses
incurred in connection with the listing of the securities to be registered on
any securities exchange and (xii) the expenses relating to printing, word
processing and distributing all Registration Statements, underwriting
agreements, securities sales agreements, indentures and any other documents
necessary in order to comply with this Agreement.
(b) In connection with any Shelf Registration hereunder, the Issuers,
jointly and severally, shall reimburse the Holders of the Registrable Notes
being registered in such registration for the fees and disbursements, not to
exceed $25,000, of not more than one counsel (in addition to appropriate local
counsel) chosen by the Holders of a majority in aggregate principal amount of
the Registrable Notes to be included in such Shelf Registration and other out-
of-pocket expenses of Holders of Registrable Notes incurred in connection with
the registration and sale of Registrable Notes.
7. Indemnification
---------------
(a) Each of the Issuers, jointly and severally, agrees to indemnify and
hold harmless each Holder of Registrable Notes and each Participating Broker-
Dealer selling Exchange Notes during the Applicable Period, the officers and
directors 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 and liabilities (including, without limitation, the
reasonable legal fees and other reasonable expenses actually incurred in
connection with any suit, action or proceeding or any claim asserted) caused by,
arising out of or based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement (as amended
or supplemented if the Issuers shall have furnished any amendments or
supplements thereto) 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 not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Prospectus (as amended or supplemented if the Issuers shall have furnished any
amendments or supplements thereto) 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 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 or on
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behalf of such Participant expressly for use therein; provided, however, that
the Company 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 Prospectus or any amendment or supplement thereto and the
Prospectus does not contain any other untrue statement or omission or alleged
untrue statement or omission of a material fact that was the subject matter of
the related proceeding and any such loss, liability, claim, damage or expense
suffered or incurred by the Participants resulted from any action, claim or suit
by any Person who purchased Registrable Notes 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
Prospectus (as amended or supplemented) to such Person with or prior to the
confirmation of the sale of such Registrable Notes or Exchange Notes sold to
such Person if required by applicable law, unless such failure to deliver or
provide a copy of the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5 of this Agreement.
(b) Each Participant agrees, severally and not jointly, to indemnify and
hold harmless the Issuers, their respective directors and officers and each
Person who controls any of the Issuers within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent 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 Registrable
Notes 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 Person against whom such indemnity may be sought (the "Indemnifying
Person") in writing, and the Indemnifying Person, upon request of the
Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Person may reasonably designate in such proceeding and shall pay
the reasonable fees and expenses actually incurred by such counsel related to
such proceeding; provided, however, that the failure to so notify the
Indemnifying Person shall not relieve it of any obligation or liability which it
may have hereunder or otherwise (unless and only to the extent that such failure
directly results in the loss or compromise of any material rights or defenses by
the Indemnifying Person and the Indemnifying Person was not otherwise aware of
such action or claim). 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 Person and the Indemnified Person shall have mutually agreed in
writing to the contrary, (ii) the Indemnifying Person has failed within a
reasonable 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 the Indemnifying Person and the Indemnified
Person 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 is a conflict among Indemnified Persons, the
Indemnifying Person shall not, in connection with any proceeding or related
proceeding in the same jurisdiction, be liable for the fees and expenses of
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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 after receipt of the invoice therefor 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 Registrable Notes sold by all such Participants and any such separate firm
for the Issuers, their directors, their officers and such control Persons of the
Issuers shall be designated in writing by the Company. The Indemnifying Person
shall not be liable for any settlement of any proceeding effected without its
prior written consent, but if settled with such consent or if there is a final
non-appealable judgment for the plaintiff for which the Indemnified Person is
entitled to indemnification pursuant to this Agreement, the Indemnifying Person
agrees to indemnify any Indemnified Person from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an Indemnified Person shall have requested an
Indemnifying Person to reimburse the Indemnified Person for reasonable fees and
expenses actually incurred by counsel as contemplated by the third sentence of
this paragraph, the Indemnifying Person agrees that it shall be liable for any
settlement of any proceeding effected without its prior written consent if (i)
such settlement is entered into more than 30 days after receipt by such
Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person
shall not have reimbursed the Indemnified Person in accordance with such request
prior to the date of such settlement; provided, however, that the Indemnifying
Person shall not be liable for any settlement effected without its consent
pursuant to this sentence if the Indemnifying Person is contesting, in good
faith, the request for reimbursement. No Indemnifying Person shall, without the
prior written consent of the Indemnified Person, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement (A) includes an unconditional
release of such indemnified Person, in form and substance 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 an Indemnified Person.
(d) If the indemnification provided for in the first and second paragraphs
of this Section 7 is unavailable (other than by reason of the exceptions
specifically provided therein) 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 Registrable
Notes or Exchange Notes, as the case may be or (ii) if the allocation 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 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 by the Participants or such other
Indemnified Person, as the case may be, on the other, the parties' relative
intent,
20
<PAGE>
knowledge, access to information and opportunity to correct or prevent such
statement or omission and any other equitable considerations appropriate under
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 and liabilities 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 Registrable Notes or
Exchange Notes, as the case may be, exceeds the amount of any damages that such
Participant has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
(f) 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.
8. Rules 144 and 144A
------------------
Each of the Issuers covenants that it will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder in a timely manner and, if at any time
it is not required to file such reports, it will, upon the request of any Holder
of Registrable Notes, make publicly available other information so long as
necessary to permit sales pursuant to Rule 144 and Rule 144A. Each of the
Issuers further covenants, for so long as any Registrable Notes remain
outstanding, to make available to any Holder or beneficial owner of Registrable
Notes in connection with any sale thereof and any prospective purchaser of such
Registrable Notes from such Holder or beneficial owner, the information required
by Rule 144A(d)(4) under the Securities Act in order to permit resales of such
Registrable Notes pursuant to Rule 144A.
9. Underwritten Registrations
--------------------------
If any of the Registrable Notes 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 Registrable Notes
included in such offering and reasonably acceptable to the Issuers.
No Holder of Registrable Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements
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<PAGE>
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 entered, as of
the date hereof, and none of the Issuers shall enter, after the date of this
Agreement, into any agreement with respect to any of its securities that is
inconsistent with the rights granted to the Holders of Registrable Notes in this
Agreement or otherwise conflicts with the provisions hereof. None of the
Issuers has entered and none of the Issuers will enter into any agreement with
respect to any of its securities which will grant to any Person piggy-back
rights with respect to a Registration Statement.
(b) Adjustments Affecting Registrable Notes. Neither the Company nor the
Parent Guarantor shall, directly or indirectly, take any action with respect to
the Registrable Notes as a class that would adversely affect the ability of the
Holders of Registrable Notes to include such Registrable Notes 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 (A) the Holders of not less than a majority in aggregate principal
amount of the then outstanding Registrable Notes and (B) in circumstances that
would adversely affect 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
Registrable Notes or Exchange Notes, as the case may be, disposed of pursuant to
any Registration Statement). 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 Registrable Notes whose securities are
being tendered pursuant to the Exchange Offer or sold pursuant to a Registration
Statement and that does not directly or indirectly affect, impair, limit or
compromise the rights of other Holders of Registrable Notes may be given by
Holders of at least a majority in aggregate principal amount of the Registrable
Notes being tendered or being sold by such Holders pursuant to such Registration
Statement.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, next-day air courier or telecopier:
1. if to a Holder of Registrable Notes 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, with a copy in like manner to the Initial Purchasers as
follows:
22
<PAGE>
JEFFERIES & COMPANY, INC.
909 Fannin Street, Suite 3100
Houston, TX 77010
Facsimile No.: (713) 650-8730
Attention: Corporate Finance Department
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Facsimile No.: (713) 615-5531
Attention: T. Mark Kelly
2. if to the Initial Purchasers, at the address specified in Section
10(d)(1);
3. if to an Issuer, as follows:
Southwest Royalties, Inc.
Southwest Royalties Building
407 N. Big Spring
Midland, TX 79701
Attention: President
with copies to:
Baker, Donelson, Bearman & Caldwell, P.C.
633 Chestnut St., Suite 1800
Chattanooga, TN 37450
Facsimile No.: (423) 756-3447
Attention: J. Porter Durham
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 guaranteeing overnight
delivery; and when receipt is acknowledged by the addressee, if telecopied.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee under the
Indenture at the address specified in such Indenture.
(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 and
the Holders; provided, however, that this Agreement shall not inure to the
benefit of or be binding upon a successor or assign of a Holder unless such
successor or assign holds Registrable Notes.
23
<PAGE>
(f) 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.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(H) 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 WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) 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.
(j) Notes Held by the Issuers or Their Affiliates. Whenever the consent
or approval of Holders of a specified percentage of Registrable Notes is
required hereunder, Registrable Notes held by the Issuers or their 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.
(k) Third Party Beneficiaries. Holders of Registrable Notes and
Participating Broker-Dealers are intended third party beneficiaries of this
Agreement and this Agreement may be enforced by such Persons.
(1) 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 Initial Purchasers on
the one hand and the Issuers 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.
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
SOUTHWEST ROYALTIES, INC.
By: __________________________________
Name: Bill E. Coggin
Title: Vice President
SOUTHWEST ROYALTIES HOLDINGS, INC.
By: __________________________________
Name: Bill E. Coggin
Title: Vice President
JEFFERIES & COMPANY, INC.
By: __________________________________
Name:
Title:
BANC ONE CAPITAL CORPORATION
By: __________________________________
Name:
Title:
PARIBAS CORPORATION
By: __________________________________
Name:
Title:
25
<PAGE>
EXHIBIT 4.3
[Execution Version]
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
(COLLECTIVELY, THE "ACTS") AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT PURSUANT TO THE ACTS OR
IN RELIANCE ON EXEMPTIONS THEREFROM.
WARRANT CERTIFICATE
Number of Warrants: 45,628 Warrant No. J-1
------ ---
This Warrant Certificate ("Warrant Certificate") certifies that, for value
received,
JOINT ENERGY DEVELOPMENT INVESTMENTS
LIMITED PARTNERSHIP
is the registered holder of the number of Warrants (the "Warrants") set forth
above. Each Warrant entitles the holder thereof, at any time or from time to
time on or before the Expiration Date, to purchase from the Company one fully
paid and nonassessable share of Common Stock at the Exercise Price, subject to
adjustment as provided herein. The Warrants constitute, as of the Issuance
Date, at least 4.00% of the outstanding Common Stock on a fully diluted basis
using the treasury stock method. Initially capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Securities
Purchase Agreement dated October 14, 1997, by and between the Company and Joint
Energy Development Investments Limited Partnership.
"Common Stock" means the common stock, $.10 par value per share, of the
Company, or such other class of securities as shall then represent the common
equity of the Company.
"Company" means Southwest Royalties Holdings, Inc., a Delaware corporation.
"Estimated Private Market Equity Value" has the meaning specified in the
Securities Purchase Agreement.
"Exercise Price," subject in all circumstances to adjustment in accordance
with Section 3, means $68.00 per share.
"Expiration Date" means November 5, 2001 at 5:00 p.m., Eastern Standard
Time.
"Issuance Date" means October 14, 1997.
<PAGE>
"Price" means the average of the "high" and "low" prices as reported in The
Wall Street Journal's listing for such day (corrected for obvious typographical
errors) or if such shares are not reported in such listing, the average of the
reported "high" and "low" sales prices on the largest national securities
exchange (based on the aggregate dollar value of securities listed) on which
such shares are listed or traded, or if such shares are not listed or traded on
any national securities exchange, then the average of the reported "high" and
"low" sales prices for such shares in the over-the-counter market, as reported
on the National Association of Securities Dealers Automated Quotations System,
or, if such prices shall not be reported thereon, the average of the closing bid
and asked prices so reported, or, if such prices shall not be reported, then the
average of the closing bid and asked prices reported by the National Quotations
Bureau Incorporated, or, in all other cases, the Estimated Private Market Equity
Value divided by the number of outstanding shares (on a fully diluted basis
using the treasury stock method). The "average" Price per share for any period
shall be determined by dividing the sum of the Prices determined for the
individual trading days in such period by the number of trading days in such
period.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated October 14, 1997, between the Company and the holder under which this
Warrant Certificate has been issued, as the same may be modified from time to
time.
"Shareholders Agreement" means the Shareholders Agreement dated October 14,
1997, between the Company and the holder granting certain rights to the holder,
as the same may be modified from time to time.
"Warrant Agent" means the Company's warrant agent, C T Corporation System.
Presentation and surrender of the Warrants shall be made to the Warrant Agent at
the following address: 811 Dallas Ave., Suite 1500, Houston, Texas 77002.
1. EXERCISE OF WARRANTS. (a) The Warrants may be exercised in whole or
in part by presentation and surrender at the office of the Warrant Agent
specified herein of (i) this Warrant Certificate with the Election To Exercise,
attached hereto as Exhibit A, duly completed and executed, and (ii) payment of
the Exercise Price as then in effect, by bank draft or cashier's check, for the
number of Warrants being exercised. If the holder of this Warrant Certificate at
any time exercises less than all the Warrants, the Company shall issue to such
holder a Warrant Certificate identical in form to this Warrant Certificate, but
evidencing a number of Warrants equal to the number of Warrants originally
represented by this Warrant Certificate less the number of Warrants previously
exercised. Likewise, upon the presentation and surrender of this Warrant
Certificate at the office of the Warrant Agent and at the request of the holder,
the Company will, at the option of the holder, issue to the holder in
substitution for this Warrant Certificate one or more warrant
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<PAGE>
certificates in identical form and for an aggregate number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.
(b) To the extent that the Warrants have not been exercised at or
prior to the Expiration Date, such Warrants shall expire and the rights of the
holder shall become void and of no effect.
2. RESTRICTIONS ON TRANSFER. The Warrants evidenced hereby have not
been registered under the Securities Act of 1933, as amended, or under any state
securities law (collectively, the "Acts"), in reliance on exemptions from the
registration provisions thereof. The holder hereof acknowledges that the
Warrants may not be directly or indirectly sold, transferred or otherwise
disposed of in violation of the provisions of the Acts. Any purported sale,
transfer or other disposition of the Warrants in violation of this provision
shall be void and the Company shall not be required to recognize the same.
Compliance with this provision is the responsibility of the holder. The Company
shall deem and treat the registered holder of this Warrant Certificate as the
true and lawful owner of the Warrants for all purposes, any claims of another
person to the contrary notwithstanding.
3. ANTIDILUTION ADJUSTMENTS. The shares of Common Stock purchasable on
exercise of the Warrants are shares of Common Stock as constituted as of the
Issuance Date. The number and kind of securities purchasable upon the exercise
of the Warrants, and the Exercise Price, shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
the Warrants at any time after the Issuance Date (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination to which subsection 3(b) applies),
or in case of any consolidation or merger of the Company with or into another
entity or other person (other than a merger with another entity or other person
in which the Company is the surviving corporation and which does not result in
any reclassification or change in the securities issuable upon exercise of this
Warrant), the holder of the Warrants shall have, and the Company, or such
successor corporation or other entity, shall covenant in the constituent
documents effecting any of the foregoing transactions that such holder does
have, the right to obtain upon the exercise of the Warrants, in lieu of each
share of Common Stock, other securities, money or other property theretofor
issuable upon exercise of a Warrant, the kind and amount of shares of stock,
other securities, money or other property receivable upon such reclassification,
change, consolidation or merger by a holder of the shares of Common Stock, other
securities, money or other property issuable upon exercise of a Warrant if the
Warrants had been exercised immediately prior to such reclassification, change,
consolidation or merger. The constituent documents effecting any such
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<PAGE>
reclassification, change, consolidation or merger shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided in this subsection 3(a). The provisions of this subsection 3(a) shall
similarly apply to successive reclassifications, changes, consolidations or
mergers.
(b) Subdivisions and Combinations. If the Company, at any time after
the Issuance Date, shall subdivide its shares of Common Stock into a greater
number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced, and the number of shares of Common
Stock purchasable upon exercise of the Warrants shall be proportionately
increased, as at the effective date of such subdivision, or if the Company shall
take a record of holders of its Common Stock for such purpose, as at such record
date, whichever is earlier. If the Company, at any time after the Issuance Date,
shall combine its shares of Common Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of shares of Common Stock purchasable
upon exercise of the Warrants shall be proportionately reduced, as at the
effective date of such combination, or if the Company shall take a record of
holders of its Common Stock for purposes of such combination, as at such record
date, whichever is earlier.
(c) Dividends and Distributions. If the Company at any time after the
Issuance Date shall declare a dividend on its Common Stock payable in stock or
other securities of the Company or of any other corporation or other entity, or
in property or otherwise than in cash, to the holders of its Common Stock, the
holder of a Warrant shall, without additional cost, be entitled to receive upon
any exercise of a Warrant, in addition to the Common Stock to which such holder
would otherwise be entitled upon such exercise, the number of shares of stock or
other securities or property which such holder would have been entitled to
receive if he had been a holder immediately prior to the record date for such
dividend (or, if no record date shall have been established, the payment date
for such dividend) of the number of shares of Common Stock purchasable on
exercise of such Warrant immediately prior to such record date or payment date,
as the case may be.
(d) Certain Issuances of Securities. If the Company at any time after
the Issuance Date shall issue any additional shares of Common Stock (otherwise
than as provided in paragraphs (a) through (c) of this section 3) at a price per
share less than the average Price per share of Common Stock for the 20 trading
days immediately preceding the date of the authorization of such issuance (the
"Market Price") by the Board of Directors, then the Exercise Price upon each
such issuance shall be adjusted to that price determined by multiplying the
Exercise Price by a fraction:
i. the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock multiplied by the Market Price, and
(2) the consideration, if any, received
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<PAGE>
and deemed received by the Company upon the issuance of such additional
shares of Common Stock, and
ii. the denominator of which shall be the Market Price
multiplied by the total number of shares of Common Stock outstanding
immediately after the issuance of such additional shares of Common Stock.
No adjustments of the Exercise Price shall be made under this paragraph (d)
upon the issuance of any additional shares of Common Stock that (y) are issued
pursuant to thrift plans, stock purchase plans, stock bonus plans, stock option
plans, employee stock ownership plans and other incentive or profit sharing
arrangements for the benefit of employees ("Employee Benefit Plans") that
otherwise would cause an adjustment under this paragraph (d); provided that the
aggregate number of shares of Common Stock so issued (including the shares
issued pursuant to any options, rights or warrants or convertible or
exchangeable securities issued under such Employee Benefit Plans containing the
right to purchase shares of Common Stock) pursuant to Employee Benefit Plans, as
adjusted for any stock splits, stock dividends or subdivisions or combinations
of Common Stock prior to the Expiration Date, shall not in the aggregate exceed
5% of the Company's outstanding Common Stock at the time of such issuance; or
(z) are issued pursuant to any Common Stock Equivalent (as hereinafter defined)
(i) if upon the issuance of any such Common Stock Equivalent, any such
adjustments shall previously have been made pursuant to paragraph (e) of this
section 3 or (ii) if no adjustment was required pursuant to paragraph (e) of
this section 3.
(e) Common Stock Equivalents. If the Company shall, after the
Issuance Date, issue any security or evidence of indebtedness which is
convertible into or exchangeable for Common Stock ("Convertible Security"), or
any warrant, option or other right to subscribe for or purchase Common Stock or
any Convertible Security, other than pursuant to Employee Benefit Plans
(together with Convertible Securities, "Common Stock Equivalent"), or if, after
any such issuance, the price per share for which additional shares of Common
Stock may be issuable thereunder is amended, then the Exercise Price upon each
such issuance or amendment shall be adjusted as provided in paragraph 3(d) on
the basis that (i) the maximum number of additional shares of Common Stock
issuable pursuant to all such Common Stock Equivalents shall be deemed to have
been issued as of the earlier of (a) the date on which the Company shall enter
into a firm contract for the issuance of such Common Stock Equivalent, or (b)
the date of actual issuance of such Common Stock Equivalent; and (ii) the
aggregate consideration for such maximum number of additional shares of Common
Stock shall be deemed to be the minimum consideration received and receivable
by the Company for the issuance of such additional shares of Common Stock
pursuant to such Common Stock Equivalent; provided, however, that no adjustment
shall be made pursuant to this subsection (e) unless the consideration received
and receivable by the Company per share of Common Stock for the issuance of such
additional shares of Common Stock pursuant to such
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<PAGE>
Common Stock Equivalent is less than the Market Price. No adjustment of the
Exercise Price shall be made under this subsection (e) upon the issuance of any
Convertible Security which is issued pursuant to the exercise of any warrants or
other subscription or purchase rights therefor, if any adjustment shall
previously have been made in the Exercise Price then in effect upon the issuance
of such warrants or other rights pursuant to this subsection (e).
(f) Miscellaneous. The following provisions shall be applicable to
the making of adjustments in the Exercise Price hereinbefore provided in this
section 3:
i. The consideration received by the Company shall be deemed to
be the following: (I) to the extent that any additional shares of Common
Stock or any Common Stock Equivalent shall be issued for cash
consideration, the consideration received by the Company therefor, or, if
such additional shares of Common Stock or Common Stock Equivalent are
offered by the Company for subscription, the subscription price, or, if
such additional shares of Common Stock or Common Stock Equivalent are sold
to underwriters or dealers for public offering without a subscription
offering, the initial public offering price, in any such case excluding any
amounts paid or receivable for accrued interest or accrued dividends and
without deduction of any compensation, discounts, commissions or expenses
paid or incurred by the Company for and in the underwriting of, or
otherwise in connection with, the issue thereof; (II) to the extent that
such issuance shall be for a consideration other than cash, then, except as
herein otherwise expressly provided, the fair value of such consideration
at the time of such issuance as determined in good faith by the Board of
Directors, as evidenced by a certified resolution of the Board of Directors
delivered to the holder of this Warrant Certificate setting forth such
determination. The consideration for any additional shares of Common Stock
issuable pursuant to any Common Stock Equivalent shall be the consideration
received by the Company for issuing such Common Stock Equivalent, plus the
additional consideration payable to the Company upon the exercise,
conversion or exchange of such Common Stock Equivalent. In case of the
issuance at any time of any additional shares of Common Stock or Common
Stock Equivalent in payment or satisfaction of any dividend upon any class
of stock other than Common Stock, the Company shall be deemed to have
received for such additional shares of Common Stock or Common Stock
Equivalent (which shall not be deemed to be a dividend payable in, or other
distribution of, Common Stock under Section (c) above) consideration equal
to the amount of such dividend so paid or satisfied.
ii. Upon the expiration of the right to convert, exchange or
exercise any Common Stock Equivalent the issuance of which effected an
adjustment in the Exercise Price, if any such Common Stock Equivalent shall
not have been converted, exercised or exchanged, the number of shares of
Common Stock deemed to be issued and outstanding
-6-
<PAGE>
because they were issuable upon conversion, exchange or exercise of any
such Common Stock Equivalent shall no longer be computed as set forth
above, and the Exercise Price shall forthwith be readjusted and thereafter
be the price which it would have been (but reflecting any other adjustments
in the Exercise Price made pursuant to the provisions of subsection (d)
after the issuance of such Common Stock Equivalent) had the adjustment of
the Exercise Price made upon the issuance or sale of such Common Stock
Equivalent been made on the basis of the issuance only of the number of
additional shares of Common Stock actually issued upon exercise, conversion
or exchange of such Common Stock Equivalent and thereupon only the number
of additional shares of Common Stock actually so issued shall be deemed to
have been issued and only the consideration actually received by the
Company (computed as in subparagraph (i) of this paragraph (e)) shall be
deemed to have been received by the Company.
iii. The number of shares of Common Stock at any time
outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the Company or its wholly
owned subsidiaries.
iv. For the purposes of this Section 3, the term "shares of
Common Stock" shall mean shares of (i) the class of stock designated as the
Common Stock at the date hereof or (ii) any other class of stock resulting
from successive changes or reclassifications of such shares consisting
solely of changes in par value, or from par value to no par value, or from
no par value to par value. If at any time, because of an adjustment
pursuant to subsection (a), the Warrants shall entitle the holders to
purchase any securities other than shares of Common Stock, thereafter the
number of such other securities so purchasable upon exercise of each
Warrant and the Exercise Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Common Stock contained
in this Section 3.
(g) Calculation of Exercise Price. The Exercise Price in effect from
time to time shall be calculated to four decimal places and rounded to the
nearest thousandth.
4. NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the number of
shares of Common Stock is required to be adjusted as provided in Section 3, the
Company shall forthwith compute the adjusted Exercise Price or the number of
shares of Common Stock issuable and shall prepare and mail to the holder hereof
a certificate setting forth such adjusted Exercise Price or such number of
shares of Common Stock, showing in reasonable detail the facts upon which the
adjustment is based.
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5. VOLUNTARY REDUCTION. (a) The Company may at its option, but shall not
be obligated to, at any time during the term of the Warrants, reduce the then
current Exercise Price by any amount selected by the Board of Directors;
provided that if the Company elects so to reduce the then current Exercise
Price, such reduction shall be irrevocable during its effective period and
remain in effect for a minimum of 30 days following the date of such election,
after which time the Company may, at its option, reinstate the Exercise Price in
effect prior to such reduction. Whenever the Exercise Price is reduced, the
Company shall mail to the holder a notice of the reduction at least 30 days
before the date the reduced Exercise Price takes effect, stating the reduced
Exercise Price and the period for which such reduced Exercise Price will be in
effect.
(b) The Company may make such decreases in the Exercise Price, in
addition to those required or allowed by this Section 5, as shall be determined
by it, as evidenced by a certified resolution of the Board of Directors
delivered to the holders, to be advisable to avoid or diminish any income tax to
the holder resulting from any dividend or distribution of stock or issuance of
rights or warrants to purchase or subscribe for stock or from any event treated
as such for income tax purposes.
6. NOTICES TO WARRANT HOLDERS. In the event:
(a) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of the
conveyance or sale of all or substantially all of the assets of the Company, or
of any reclassification or change of the Common Stock or other securities
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of a subdivision or combination), or a tender offer or exchange offer for shares
of Common Stock (or other securities issuable upon the exercise of the
Warrants); or
(b) the Company shall declare any dividend (or any other distribution)
on the Common Stock, other than regular cash dividends; or
(c) the Company shall authorize the granting to the holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of any class
or series of capital stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then the Company shall cause to be sent to the holder hereof, at least 30
days prior to the applicable record date hereinafter specified, or promptly in
the case of events for which there is no record date, a written notice stating
(x) the date for the determination of the holders of record of
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shares of Common Stock (or other securities issuable upon the exercise of the
Warrants) entitled to receive any such dividends or other distribution, (y) the
initial expiration date set forth in any tender offer or exchange offer for
shares of Common Stock (or other securities issuable upon the exercise of the
Warrants), or (z) the date on which any of the events specified in subsections
(a)-(e) is expected to become effective or consummated, and the date as of which
it is expected that holders of record of shares of Common Stock (or other
securities issuable upon the exercise of the Warrants) shall be entitled to
exchange such shares for securities or other property, if any, deliverable upon
any such event. Failure to give such notice or any defect therein shall not
affect the legality or validity of any such event, or the vote upon any such
action.
7. REPORTS TO WARRANT HOLDERS. The Company will cause to be delivered,
by first-class mail, postage prepaid, to the holder at such holder's address
appearing hereon, or such other address as the holder shall specify, a copy of
any reports delivered by the Company to the holders of Common Stock.
8. COVENANTS OF THE COMPANY. The Company covenants and agrees that:
(a) Until the Expiration Date, the Company shall at all times reserve
and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Stock (and other securities), for the purpose of
enabling it to satisfy any obligation to issue shares of Common Stock (and other
securities) upon the exercise of the Warrants, the number of shares of Common
Stock (and other securities) issuable upon the exercise of such Warrants.
(b) The Company shall pay all expenses, taxes (other than stock
transfer taxes or charges) and other charges payable in connection with the
preparation, issuance and delivery of new warrant certificates on transfer of
the Warrants.
(c) All Common Stock (and other securities) which may be issued upon
exercise of the Warrants shall upon issuance be validly issued, fully paid, non-
assessable and free from all preemptive rights and all taxes, liens and charges
with respect to the issuance thereof, and will not be subject to any
restrictions on voting or transfer thereof except as set forth in any
stockholders agreement.
(d) All original issue taxes payable in respect of the issuance of
shares of Common Stock to the registered holder hereof upon the exercise of the
Warrants shall be borne by the Company; provided, that the Company shall not be
required to pay any tax or charge imposed in connection with any transfer
involved in the issuance of any certificate representing shares of Common Stock
(and other securities) in any name other than that of the registered holder
hereof, and in such case the Company shall not be required to issue or deliver
any certificate representing shares
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of Common Stock (and other securities) until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no such tax
or charge is due.
9. NO RIGHTS AS STOCKHOLDER. The holder of the Warrants shall not, by
virtue of holding such Warrants, be entitled to any rights of a stockholder of
the Company either at law or in equity, and the rights of the holder of the
Warrants are limited to those expressed herein.
10. NOTICES. All notices provided for hereunder shall be in writing and
may be given by registered or certified mail, return receipt requested, telex,
telegram, telecopier, air courier guaranteeing overnight delivery of personal
delivery, if to the holder at the following address:
Joint Energy Development Investments Limited Partnership
c/o Enron Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Donna Lowry, Director - 28th Floor
Telecopier: (713) 646-3602
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and, if to the Company:
Southwest Royalties Holdings, Inc.
409 N. Big Spring, Suite 300
Midland, Texas 79701
Attention: President
Telecopier: (915) 688-0191
11. GOVERNING LAW. This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflict of laws.
12. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT CERTIFICATES. Upon
receipt by the Company of evidence reasonably satisfactory to it of the
ownership of and the loss, theft, destruction or mutilation of any Warrant
Certificate, then, in the absence of notice to the Company that such Warrant
Certificate has been acquired by a bona fide purchaser, the Company shall
execute and deliver, in exchange for or in lieu of the lost, stolen, destroyed
or mutilated Warrant Certificate, a substitute Warrant Certificate of the same
tenor and evidencing a like number of Warrants.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed this 14th day of October, 1997 by the undersigned, thereunto duly
authorized.
SOUTHWEST ROYALTIES HOLDINGS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
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EXHIBIT A
ELECTION TO EXERCISE
[To be executed on exercise of the Warrants evidenced by this Warrant
Certificate]
TO: Southwest Royalties Holdings, Inc.
The undersigned, the holder of the Warrants evidenced by the attached
Warrant Certificate, hereby irrevocably elects to exercise Warrants and herewith
makes payment of________________________________________________________________
($________) representing the aggregate Exercise Price thereof, and requests that
the certificate representing the securities issuable hereunder be issued in the
name of _____________________ and delivered to _________________________________
______________________________________________________, whose address is
___________________________________________. .
Dated:_________ ______________________________________________________
______________________________________________________
Signature(s) of Registered Holder(s)
Note: The above signature(s) must correspond with the
name as written on the face of this Warrant Certificate
in every particular, without alteration or enlargement
or any change whatsoever.
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EXHIBIT B
TRANSFER FORM
[To be executed only upon transfer of the Warrants evidenced by this Warrant
Certificate]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________________________________ the
Warrants represented by the within Warrant Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
_____________________________________ Attorney-in-Fact, to transfer same on the
books of the Company with full power of substitution in the premises.
Dated:________ ______________________________________________________
Signature(s) of Registered Holder(s)
Note: The above signature(s) must correspond with the
name as written on the face of this Warrant Certificate
in every particular, without alteration or enlargement
or any change whatsoever.
WITNESS:
_________________________
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EXHIBIT 4.4
[Execution Version]
REGISTRATION RIGHTS AGREEMENT
DATED AS OF OCTOBER 14, 1997
BY AND BETWEEN
SOUTHWEST ROYALTIES HOLDINGS, INC.
AND
JOINT ENERGY DEVELOPMENT INVESTMENTS
LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Section 1.01 Definitions 1
Section 1.02 Stock Splits, Dividends, Recapitalizations, etc. 2
Section 1.03 Registrable Securities 2
ARTICLE II
Section 2.01 Demand Registration 2
Section 2.02 Piggy-Back Registration 3
Section 2.03 Registration Procedures. 4
Section 2.04 Expenses 7
Section 2.05 Indemnification 7
ARTICLE III
MISCELLANEOUS
Section 3.01 Communications 9
Section 3.02 Successor and Assigns 10
Section 3.03 Counterparts 10
Section 3.04 Headings 10
Section 3.05 Governing Law 10
Section 3.06 Severability of Provisions 10
Section 3.07 Entire Agreement 10
Section 3.08 Attorneys' Fees 11
Section 3.09 Amendment 11
Section 3.10 Registrable Securities Held by the Company or
Its Affiliates 11
Section 3.11 Assignment of Rights 11
Section 3.12 Arbitration 11
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement ("Agreement") is made and entered
into as of October 14, 1997, by and between Southwest Royalties Holdings, Inc.,
a Delaware corporation (the "Company"), and Joint Energy Development Investments
Limited Partnership, a Delaware limited partnership (the "Purchaser").
This Agreement is made pursuant to Section 2.04 of the Securities
Purchase Agreement (the "Purchase Agreement") dated as of the date hereof
between the Company and the Purchaser. In order to induce the Purchaser to
enter into the Purchase Agreement, the Company has agreed to provide the
registration and other rights set forth in this Agreement. The execution and
delivery of this Agreement is a condition to the Closing (as defined in the
Purchase Agreement) under the Purchase Agreement.
The parties agree as follows:
ARTICLE I
Section 1.01 Definitions. Capitalized terms used and not otherwise
defined herein, which are defined in the Purchase Agreement or the Warrant
Certificate made by the Company in favor of the Purchaser are used herein as so
defined. The terms set forth below are used herein as so defined:
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" means the record holder of any Warrants or any Registrable
Security.
"IPO" shall mean the consummation of an public offering of Common
Stock pursuant to an effective registration statement filed under the Securities
Act (other than any registration statement relating to warrants, options or
shares of Capital Stock granted or to be granted or sold primarily to employees,
directors, or officers of the Company, a registration statement filed pursuant
to Rule 145 under the Securities Act or any successor rule or a registration
statement relating to employee benefit plans or interests therein) and the
listing of such Common Stock on a national securities exchange or the quotation
of prices therefor on The National Market System of the NASDAQ Stock Market.
"Registrable Securities" means the shares of Common Stock and all
other securities receivable upon exercise of the Warrants until such time as
such securities cease to be Registrable Securities pursuant to Section 1.03
hereof.
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"Selling Holder" means a Holder who is selling Registrable Securities
pursuant to a registration statement.
Section 1.02 Stock Splits, Dividends, Recapitalizations, etc. Any
shares or other securities resulting from any stock split, stock dividend,
reclassification of the Capital Stock of the Company, merger, consolidation or
reorganization of the Company which may be received by the Holder of a Warrant
upon exercise of such Warrant shall also be deemed to be Registrable Securities.
Section 1.03 Registrable Securities. Any Registrable Security will
cease to be a Registrable Security when (i) a registration statement covering
such Registrable Security has been declared effective by the Commission and such
Registrable Security has been issued, sold or disposed of pursuant to such
effective registration statement or (ii) such Registrable Security is disposed
of pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or (iii) such Registrable Security is held by the Company or one
of its Subsidiaries.
ARTICLE II
Section 2.01 Demand Registration. (a) Any time after the expiration
of lock-up agreements signed by the Company's directors or executive officers in
connection with the IPO or 180 days after the closing date of the IPO, whichever
occurs first, any Persons who collectively hold at least 66 2/3% of the
Registrable Securities outstanding at such time may request the Company to
register under the Securities Act all or any portion of the Securities held by
such Persons (collectively, the "Requesting Holder") for sale in the manner
specified in such notice.
(b) Promptly, and in any event within 10 days, following receipt of
any notice under this Section 2.01, the Company shall immediately notify any
Person who is a Holder (except the Requesting Holder) of the receipt of notice
under this Section 2.01 and shall use its best efforts to register under the
Securities Act, for public sale in accordance with the method of disposition
specified in such notice from the Requesting Holder, the Registrable Securities
specified in the Requesting Holder's notice (and in any notices received from
other Holders no later than the 10th Business Day after receipt of the notice
sent by the Company) (such other Holders and the Requesting Holder are
hereinafter referred to as the "Requesting Holders"). If such method of
disposition shall be an underwritten public offering, the Company may designate
the managing underwriter of such offering, subject to the approval of Requesting
Holders holding a majority of the Registrable Securities to be registered.
Except as specified in the following sentence, the Company shall be obligated to
register Registrable Securities pursuant to this Section 2.01 on two occasions
only. A request pursuant to this Section 2.01 shall be counted only when (i)
all the Registrable Securities requested to be included in any such registration
have been so included, (ii) the corresponding registration statement has become
effective under the Securities Act, and (iii) the
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public offering has been consummated and the Registrable Securities have been
sold on the terms and conditions specified therein. Notwithstanding anything to
the contrary contained herein, the Company may delay the filing or effectiveness
of a registration statement for up to 45 days after receipt of a request
hereunder if (i) at the time of such request the Company is engaged in a firm
commitment underwritten public offering of shares of its Capital Stock in which
Holders may include Registrable Securities or (ii) the Board of Directors of the
Company determines in its reasonable judgment and in good faith that the filing
of such a registration statement or the making of any required disclosure in
connection therewith would have a material adverse effect on the Company or
substantially interfere with a significant transaction in which the Company is
then engaged.
(c) The Company shall be entitled to include in any registration
statement filed pursuant to this Section 2.01, for sale in accordance with the
method of disposition specified by the Requesting Holders, securities of the
Company entitled generally to vote in the election of directors (or any
securities convertible into or exchangeable for or exercisable for the purchase
of securities so entitled generally to vote in the election of directors)
(collectively, "Voting Securities") to be sold by the Company for its own
account, except as and to the extent that, in the opinion of the managing
underwriter (if such method of disposition shall be an underwritten public
offering), such inclusion would materially jeopardize the successful marketing
of the Registrable Securities to be sold. Except as provided in this subsection
(c), the Company will not effect any other registration of its Voting Securities
(except with respect to registration statements on Form S-4 or S-8 for purposes
permissible under such forms as of the date hereof, or any successor forms for
comparable purposes that may be adopted by the Commission), whether for its own
account or that of any other security holder, from the date of receipt of a
notice from a Requesting Holder pursuant to this Section 2.01 until the
completion of the period of distribution contemplated thereby.
Section 2.02 Piggy-Back Registration. If the Company proposes to
register any securities under the Securities Act for sale to the public (other
than in an IPO), whether for its own account or for the account of other
security holders or both (except with respect to registration statements on
Forms S-4 or S-8 for purposes permissible under such forms as of the date
hereof, or any successor forms for comparable purposes that may be adopted by
the Commission), each such time it will give written notice to all Holders of
its intention to do so (but in any event no less than 15 Business Days before
the anticipated filing date). Upon the written request of any such Holder,
received by the Company no later than the 10th Business Day after receipt by
such Holder of the notice sent by the Company, to register, on the same terms
and conditions as the shares of securities otherwise being sold pursuant to such
registration, any of its Registrable Securities (which request shall state the
intended method of disposition thereof), the Company will use its best efforts
to cause the Registrable Securities as to which registration shall have been so
requested to be included in the securities to be covered by the registration
statement proposed to be filed by the Company on the same terms and conditions
as any similar securities included therein, all to the extent requisite to
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permit the sale or other disposition by each Holder (in accordance with its
written request) of such Registrable Securities so registered; provided,
however, that the Company may at any time prior to the effectiveness of any such
registration statement, in its sole discretion and without the consent of any
Holder, abandon the proposed offering. The number of Registrable Securities to
be included in such a registration may be reduced or eliminated if and to the
extent the managing underwriter shall render to the Company its opinion that
such inclusion would materially jeopardize the successful marketing of the
securities (including the Registrable Securities) proposed to be sold therein;
provided, however, that such number of shares of Registrable Securities shall
not be reduced unless the shares to be included in such underwriting for the
account of any Person are also reduced on a pro rata basis. Within 10 Business
Days after receipt by each Person proposing to sell Registrable Securities
pursuant to the registered offering of the opinion of such managing underwriter,
all such Selling Holders may allocate among themselves the number of shares of
such Registrable Securities which such opinion states may be distributed
without adversely affecting the distribution of the securities covered by the
registration statement (or if such registered holders are unable to agree among
themselves with respect to such allocation, such allocation shall be in
proportion to the respective numbers of shares specified in their respective
written requests). Notwithstanding anything to the contrary contained in this
Section 2.02, in the event that there is a firm underwriting commitment offer of
securities of the Company pursuant to a registration statement covering
Registrable Securities and a Person does not elect to sell its Registrable
Securities to the underwriters of the Company's securities in connection with
such offering, such Person shall not offer for sale, sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or any securities convertible into or exchangeable into or
exercisable for any shares of Common Stock during the period of distribution of
the Company's securities by such underwriters, which shall be specified in
writing by the underwriters and shall not exceed 60 days following the date of
effectiveness under the Securities Act of the registration statement relating
thereto.
Section 2.03 Registration Procedures. If and whenever the Company is
required pursuant to this Agreement to effect the registration of any of the
Registrable Securities under the Securities Act, the Company will, as
expeditiously as possible:
(a) prepare and file as promptly as possible with the Commission a
registration statement (which shall be on Form S-1 or other form of general
applicability satisfactory to the managing underwriter selected as herein
provided) with respect to such securities (which filing shall be made
within 30 days after the receipt by the Company of a notice requesting such
registration pursuant to Section 2.01) and use its best efforts to cause
such registration statement to become and remain effective for the period
of the distribution contemplated thereby (determined pursuant to
subparagraph (g) below);
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(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the period specified in subsection (g) below and as
may be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement in accordance with the sellers' intended method of disposition
set forth in such registration statement for such period;
(c) furnish to each Selling Holder and to each underwriter such
number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus and each document
incorporated by reference therein prior to the filing with the Commission)
as such Persons may reasonably request in order to review such
documentation and to facilitate the public sale or other disposition of the
Registrable Securities covered by such registration statement;
(d) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under the securities or
blue sky laws of such jurisdictions as the Selling Holders or, in the case
of an underwritten public offering, the managing underwriter, shall
reasonably request;
(e) immediately notify each Selling Holder and each underwriter, at
any time when a prospectus relating thereto is required to be delivered
under the Securities Act, of the happening of any event as a result of
which the prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(f) furnish at the request of a Selling Holder, (i) on the date that
Registrable Securities are delivered to the underwriters for sale pursuant
to such registration statement (or on the effective date in the case of an
offering that is not underwritten), an opinion of counsel for the Company
dated as of such date and addressed to the underwriters, if any, and to the
Selling Holders, stating that such registration statement has become
effective under the Securities Act and that (A) to the best knowledge of
such counsel, no stop order suspending the effectiveness thereof has been
issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, (B) the registration
statement, the related prospectus, and each amendment or supplement
thereof, comply as to form in all material respects with the requirements
of the Securities Act and the applicable rules and regulations thereunder
of the Commission (except that such counsel need express no opinion as to
the financial statements or any engineering report contained or
incorporated therein) and (C) to such other effects as may reasonably be
requested by
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counsel for the underwriters or by any such Selling Holder or its counsel,
and (ii) on the effective date of the registration statement and on the
date that Registrable Securities are delivered to the underwriters for sale
pursuant to such registration statement, a letter dated such dates from the
independent accountants retained by the Company, addressed to the
underwriters, if any, and to the Selling Holders, stating that they are
independent public accounts within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements of the
Company and the schedules thereto that are included or incorporated by
reference in the registration statement or the prospectus, or any amendment
or supplement thereof, comply as to form in all material respects with the
applicable requirements of the Securities Act and the published rules and
regulations thereunder, and such letter shall additionally address such
other financial matters (including information as to the period ending no
more than five business days prior to the date of such letter) included in
the registration statement in respect of which such letter is being given
as the underwriters or any Selling Holder may reasonably request;
(g) make available for inspection by one representative of the
Selling Holders designated by a majority thereof, any underwriter
participating in any distribution pursuant to such registration statement,
and any attorney, accountant or other agent retained by such representative
of the Selling Holders or underwriter (the "Inspectors"), all financial and
other records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such Inspector in connection with
such registration statement. For purposes of subsections (a) and (b) above
and of Section 2.01(c) of this Agreement, the period of distribution of
Registrable Securities in a firm commitment underwritten public offering
shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of
distribution of Registrable Securities in any other registration shall be
deemed to extend until the earlier of the sale of all Registerable
Securities covered thereby or the fulfillment of the Company's obligations
under the proviso set forth in subsection (h) of this Section 2.03;
(h) use its best efforts to keep effective and maintain a
registration, qualification, approval or listing obtained to cover the
Registrable Securities as may be necessary for the Selling Holders to
dispose thereof and shall from time to time amend or supplement any
prospectus used in connection therewith to the extent necessary in order to
comply with applicable law;
(i) use its best efforts to cause the Registrable Securities to be
registered with or approved by such other governmental agencies or authorities
as may be necessary by virtue of the business and operations of the Company to
enable the Selling Holders to consummate the disposition of such Registrable
Securities; and
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(j) enter into customary agreements (including, if requested, an
underwriting agreement in customary form) and take such other actions as are
reasonably requested by the Selling Holders or the underwriters, if any, in
order to expedite or facilitate the disposition of such Registrable Securities.
In connection with each registration hereunder, each Selling Holder will
furnish promptly to the Company in writing such information with respect to
itself and the proposed distribution by it as shall be reasonably necessary in
order to ensure compliance with federal and applicable state securities laws.
In connection with each registration hereunder with respect to an
underwritten public offering, each Selling Holder agrees to enter into a written
agreement with the managing underwriter or underwriters selected in the manner
herein provided in such form and containing such provisions as are customary in
the securities business for such an arrangement between underwriters and
companies of the Company's size and investment stature, provided that such
agreement shall not contain any such provision applicable to the Selling Holders
that is inconsistent with the provisions hereof; and further provided, that the
time and place of the closing under said agreement shall be as mutually agreed
upon among the Company, the Selling Holders and such managing underwriter.
Section 2.04 Expenses. (a) All expenses incident to the Company's
performance or compliance with this Agreement, including without limitation, all
registration and filing fees, blue sky fees and expenses, printing expenses,
listing fees, fees and disbursements of counsel and independent public
accountants for the Company, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, and costs
of insurance and reasonable out-of-pocket expenses of the Selling Holders, but
excluding any Selling Expenses (as defined below) , are herein called
"Registration Expenses." All underwriting, discounts and selling commissions
attributable to the sale of the Registrable Securities are herein called
"Selling Expenses."
(b) The Company will pay all Registration Expenses with each
registration statement filed pursuant to this Agreement, whether or not the
registration becomes effective, and the Selling Holders shall pay Selling
Expenses in connection with any Registrable Securities registered pursuant to
this Agreement.
Section 2.05 Indemnification. (a) In the event of a registration of any
Registrable Securities under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless each Selling Holder thereunder and each
underwriter of Registrable Securities thereunder and each Person, if any, who
controls such Selling Holder or underwriter within the meaning of the Securities
Act and the Exchange Act, against any losses, claims, damages or liabilities
(including reasonable attorneys' fees) ("Losses"), joint or several, to which
such Selling
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Holder or underwriter or controlling Person may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Losses, (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which such Registrable Securities were registered under the
Securities Act pursuant to this Agreement, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each such Selling Holder, each such
underwriter and each such controlling Person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Loss or actions; provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by such Selling Holder, such underwriter or such controlling Person in
writing specifically for use in such registration statement or prospectus.
(b) Each Selling Holder agrees to indemnify and hold harmless the
Company, its directors, officers, employees and agents and each Person, if any,
who controls the Company within the meaning of the Securities Act or of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Selling Holder, but only with respect to information with respect to such
Selling Holder furnished in writing by or on behalf of such Selling Holder
expressly for inclusion in any registration statement or prospectus relating to
the Registrable Securities, or any amendment or supplement thereto; provided,
however, that the liability of such Selling Holder shall not be greater in
amount than the dollar amount of the proceeds (net of any Selling Expenses)
received by such Selling Holder from the sale of the Registrable Securities
giving rise to such indemnification.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party other than under this Section 2.05. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel reasonably satisfactory to such
indemnified party and, after notice from the indemnifying party to such
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section 2.05 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that, (i) if the indemnifying
-8-
<PAGE>
party has failed to assume the defense and employ counsel or (ii) if the
defendants in any such action include both the indemnified party and the
indemnifying party and counsel to the indemnified party shall have concluded
that there may be reasonable defenses available to the indemnified party that
are different from or additional to those available to the indemnifying party or
if the interests of the indemnified party reasonably may be deemed to conflict
with the interests of the indemnifying party, then the indemnified party shall
have the right to select a separate counsel and to assume such legal defense and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.
(d) If the indemnification provided for in this Section 2.05 is
available to the Company or the Selling Holders or is insufficient to hold them
harmless in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then each such indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
expenses as between the Company on the one hand and each Selling Holder on the
other, in such proportion as is appropriate to reflect the relative fault of the
Company on the one hand and of each Selling Holder on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and each Selling Holder on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statements of a material fact or the omission or
alleged omission to state a material fact has been made by, or relates to,
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
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 is not guilty of such fraudulent misrepresentation.
ARTICLE III
MISCELLANEOUS
Section 3.01 Communications. All notices and other communications
provided for or permitted hereunder shall be made in writing by registered or
certified first-class mail, return receipt requested, telex, telegram, telecopy,
courier service or personal delivery:
(i) if to a Holder of Registrable Securities, at the most
current address given by such Holder of the Company in accordance with
the provisions of this Section 3.01, which address initially is, with
respect to the Purchaser, the address set forth in the Purchase
Agreement, and
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<PAGE>
(ii) if to the Company, initially at its address set forth
in the Purchase Agreement and thereafter at such other address, notice
of which is given in accordance with the provisions of this Section
3.01.
All such notices and communications shall be deemed to have been duly
given at the time delivered by hand, if personally delivered; four days after
mailed by certified mail, return receipt requested, if mailed; when answered
back, if telexed; when receipt acknowledged, if telecopied; and on the next
Business Day if timely delivered to an air courier guaranteeing overnight
delivery.
Section 3.02 Successor and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities.
Section 3.03 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which counterparts, when so executed and delivered, shall be deemed to
be an original and all of which counterparts, taken together, shall constitute
but one and the same Agreement.
Section 3.04 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
Section 3.05 Governing Law. The laws of the State of Delaware shall
govern this Agreement without regard to principles of conflict of laws.
Section 3.06 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting or impairing the validity or enforceability of such provision in any
other jurisdiction.
Section 3.07 Entire Agreement. This Agreement, together with the
Purchase Agreement, the Warrant Certificate and the Stockholders Agreement
(collectively, the "Major Documents"), is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the securities sold pursuant to the Purchase Agreement. This Agreement and the
Major Documents supersede all prior agreements and understandings between the
parties with respect to such subject matter.
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<PAGE>
Section 3.08 Attorneys' Fees. In any action or proceeding brought
to enforce any provision of this Agreement, the successful party shall be
entitled to recover reasonable attorneys' fees in addition to its costs and
expenses and any other available remedy.
Section 3.09 Amendment. This Agreement may be amended only by means
of a written amendment signed by the Company and by the Holders of a majority of
the Registrable Securities.
Section 3.10 Registrable Securities Held by the Company or Its
Affiliates. In determining whether the Holders of the required amount of
Registrable Securities have concurred in any direction, amendment, supplement,
waiver or consent, Registrable Securities owned by the Company or its Affiliates
shall be disregarded.
Section 3.11 Assignment of Rights. (a) The rights of any Holder
under this Agreement may be assigned to any Person who acquires Warrants or the
Registrable Securities issuable on exercise thereof.
(b) The rights of an assignee under Section 3.11(a) shall be the same
rights granted to the assigning Holder under this Agreement. In connection with
any such assignment, the term "Holder" as used herein shall, where appropriate
to assign the rights and obligations of the assigning Holder hereunder to such
assignee, be deemed to refer to the assignee.
Section 3.12 Arbitration.
(a) Binding Arbitration. On the request of either Company or
Purchaser, (whether made before or after the institution of any legal
proceeding,) any action, dispute, claim or controversy of any kind now existing
or hereafter arising between any of the parties hereto in any way arising out
of, pertaining to or in connection with this Agreement (a "Dispute") shall be
resolved by binding arbitration in accordance with the terms hereof. Either
Company or Purchaser may, by summary proceedings, bring an action in court to
compel arbitration of any Dispute.
(b) Governing Rules. Any arbitration shall be administered by the
American Arbitration Association (the "AAA") in accordance with the terms of
this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum
extent applicable, the Federal Arbitration Act. Judgment on any award rendered
by an arbitrator may be entered in any court having jurisdiction.
(c) Arbitrators. Arbitration hereunder shall be before a three-person
panel of neutral arbitrators, consisting of one person from each of the
following categories: (1) an attorney who has practiced in the area of
commercial law for at least 10 years or a retired judge at the Texas or United
States District Court or an appellate court level: (2) a person with at least 10
years experience in commercial lending: and (3) a person with at least 10 years
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<PAGE>
experience in the petroleum industry. The AAA shall submit a list of persons
meeting the criteria outlined above for each category of arbitrator, and the
parties shall select one person from each category in the manner established by
the AAA. If the parties cannot agree on an arbitrator from each category within
30 days after the request for an arbitration, then any party may request the AAA
to select an arbitrator from each category on which the parties are unable to
agree. The arbitrators may engage engineers, accountants, or other consultants
that the arbitrator deems necessary to render a conclusion in the arbitration
proceeding.
(d) Conduct of Arbitration. To the maximum extent practicable, an
arbitration proceeding hereunder shall be concluded within 180 days of the
filing of the Dispute with the AAA. Arbitration proceedings shall be conducted
in Houston, Texas. Arbitrators shall be empowered to impose sanctions and to
take such other actions as the arbitrators deem necessary to the same extent a
judge could impose sanctions or take such other actions pursuant to the Federal
Rules of Civil Procedure and applicable law. At the conclusion of any
arbitration proceeding, the arbitrator shall make specific written findings of
fact and conclusions of law. The arbitrators shall have the power to award
recovery of all costs and fees to the prevailing party. Company and Purchaser
agree to keep all Disputes and arbitration proceedings strictly confidential
except for disclosure of information required by applicable law.
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<PAGE>
(e) Costs of Arbitration. All fees of the arbitrators and any
engineer, accountant, or other consultant engaged by the arbitrators, shall be
paid by Company and Purchaser equally unless otherwise awarded by the
arbitrators.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SOUTHWEST ROYALTIES
HOLDINGS, INC.
By:____________________________
Name:__________________________
Title:_________________________
JOINT ENERGY DEVELOPMENT
INVESTMENTS LIMITED
PARTNERSHIP
By: Enron Capital Management Limited
Partnership, its General Partner
By: Enron Capital Corp., its General Partner
-------------------------------
Wynne M. Snoots, Jr.
Agent and Attorney-in-Fact
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<PAGE>
EXHIBIT 5.1
December 10, 1997
SouthWest Royalties Holdings, Inc.
407 North Big Spring
Midland, Texas 79702
Southwest Royalties, Inc.
407 North Big Spring
Midland, Texas 79702
Gentlemen:
We have acted as counsel to Southwest Royalties Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-4 (the "Registration Statement") to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
10 1/2% Series A Senior Notes due 2004 and the 10 1/2% Series B Senior Notes
due 2004 (collectively, the "Notes") to be issued by Southwest Royalties, Inc.
(the "Issuer") and unconditionally guaranteed by the Company (the
"Guarantee").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of (i) the Certificates of Incorporation, as amended, and
Bylaws, as amended, of the Issuer and the Company, (ii) the Indenture dated as
of October 14, 1997 (the "Indenture") by and among the Issuer, the Company and
State Street Bank and Trust Company, as Trustee (the "Trustee"), including the
forms of the Notes attached thereto as Exhibits A and B and (iii) such other
certificates, statutes and other instruments and documents as we considered
appropriate for purposes of the opinions hereafter expressed. In our
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
with authentic original documents of all documents submitted to us as copies
and the legal capacity of all individuals who have executed any of such
documents.
In rendering this opinion, we have assumed that the Registration Statement,
and any amendments thereto (including post-effective amendments), will have
become effective and the Notes will be issued and sold in compliance with
applicable Federal and state securities laws and in the manner described in
the Registration Statement and the Prospectus. We have also assumed, with
respect to all of the documents referred to in this opinion letter, that: (i)
such documents have been duly authorized by, have been duly executed and
delivered by and (except to the extent set forth below as to the Issuer and
the Company) constitute legal, validly binding and enforceable obligations of,
all of the parties to such documents; (ii) all signatories to such documents
have been duly authorized; and (iii) all of the parties to such documents are
duly authorized and validly existing and have the power and authority to
execute, deliver and perform such documents.
Based on the foregoing, we are of the opinion that when the Indenture has
been duly qualified under the Trust Indenture Act of 1939, as amended, and the
Notes have been duly executed, authenticated, issued and delivered in
accordance with the provisions of the Indenture, such Notes will constitute
valid and binding obligations of the Issuer, enforceable against the Issuer in
accordance with their terms, except as such enforcement is subject to any
applicable bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally and general principals of equity, and
will be entitled to the benefits of the Indenture and Section 12 of the
Indenture will constitute a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as such
enforcement is subject to any applicable bankruptcy, insolvency,
reorganization or other law relating to or affecting creditors' rights
generally and general principles of equity, and will be entitled to the
benefits of the Indenture.
The foregoing opinion is limited in all respects to the laws of the State of
New York and the Federal laws of the United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. By giving such consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations of the Commission issued
thereunder.
BAKER, DONELSON, BEARMAN & CALDWELL,
P.C.
<PAGE>
EXHIBIT 5.2
December 10, 1997
Southwest Royalties Holdings, Inc.
407 N. Big Spring
Midland, TX 79702
Southwest Royalties, Inc.
407 N. Big Spring
Midland, TX 79702
Re:
Gentlemen:
As you requested, we have addressed certain of the United States federal
income tax consequences to Initial Purchasers of 10 1/2% Senior Notes due 2004
(the "Old Notes") issued by Southwest Royalties, Inc. and unconditionally
guaranteed by Southwest Royalties Holdings, Inc. (collectively with Southwest
Royalties Holdings, Inc., the "Company") being offered for exchange Notes
pursuant to the Exchange Offer and described in the Registration Statement on
Form S-4 dated December 10, 1997.
Our opinion is limited to the United States federal income tax
considerations set forth in the section entitled "Certain United States Income
Tax Considerations" of the Registration Statement. Our opinion is based upon
the Internal Revenue Code of 1986, as amended, regulations promulgated
thereunder, and judicial and administrative rulings now outstanding and is
subject to challenge by the Internal Revenue Service with respect to the tax
treatment of certain matters discussed therein. Our opinion is also based,
with respect to certain factual matters, on disclosures made by the Company,
in the Registration Statement, which have not been independently verified by
us and which, if incorrect or incomplete, could change the tax consequences
described in the Registration Statement.
In our opinion, the discussion entitled "Certain United States Income Tax
Considerations" contained in the Registration Statement fairly summarizes the
material United States federal income tax consequences to Initial Purchasers
who hold Exchange Notes pursuant to the Exchange Offer.
Although subsequent legislation, administrative interpretations or judicial
decisions, correction or amplification of present factual representations by
the Company or changes in factual representations by the Company or changes in
factual circumstances may render our opinion incorrect, we assume no
responsibility for updating the opinion beyond the date of this letter.
We hereby consent to the use of our name in the Registration Statement and
to the filing of this opinion as part of the Registration Statement. This
consent does not constitute an admission that we are "experts" within the
meaning of such term as used in the Securities Act of 1933.
BAKER, DONELSON, BEARMAN & CALDWELL,
P.C.
<PAGE>
EXHIBIT 10.1
PURCHASE AND SALE AGREEMENT
BETWEEN
CONOCO INC.
AND
SOUTHWEST ROYALTIES, INC.
1997 NORTH AMERICAN PROPERTY OFFERING
PERMIAN BASIN PACKAGE
<PAGE>
PURCHASE AND SALE AGREEMENT
TABLE OF CONTENTS
INDEX OF DEFINED TERMS -iv-
RECITALS 1
ARTICLE 1. PROPERTY DESCRIPTION 1
1.1 The Property 1
1.2 Exclusions from the Property 2
1.3 Ownership of Production from the Property 4
ARTICLE 2. CONSIDERATION 5
2.1 Purchase Price 5
2.2 Adjustments at Closing 5
2.3 Adjustments after Closing 6
2.4 Payment Method 7
2.5 Principles of Accounting 7
2.6 Reporting Value of the Property 7
2.7 Section 1031 Exchange 7
ARTICLE 3. REPRESENTATIONS AND WARRANTIES 8
3.1 Reciprocal Representations and Warranties 8
3.2 ASSIGNOR's Representations and Warranties 8
3.3 ASSIGNEE's Representations and Warranties 9
3.4 Notice of Changes 10
3.5 Representations and Warranties Exclusive 10
ARTICLE 4. DISCLAIMER OF WARRANTIES 10
4.1 Title; Encumbrances 10
4.2 Condition and Fitness of the Property 10
4.3 Information About the Property 10
4.4 Subrogation of Warranties 11
ARTICLE 5. DUE DILIGENCE REVIEW OF THE PROPERTY 11
5.1 Records Review 11
5.2 Physical Inspection 11
5.3 Environmental Assessment 11
5.4 Government Approvals 13
5.5 Preferential Rights and Consents to Assign 14
5.6 Title Defects 15
5.7 Casualty Losses and Government Takings 17
5.8 Termination Due to Impairments to the Property 18
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<PAGE>
ARTICLE 6. CLOSING AND POST-CLOSING OBLIGATIONS 18
6.1 Closing Date 18
6.2 Conditions to Closing 18
6.3 Closing 19
6.4 Post-Closing Obligations 20
ARTICLE 7. ASSUMED AND RETAINED RIGHTS AND OBLIGATIONS 20
7.1 ASSIGNEE's Rights After Closing 20
7.2 ASSIGNEE's Obligations After Closing 20
7.3 ASSIGNOR's Obligations After Closing 21
7.4 Plugging and Abandonment Obligations 22
7.5 Environmental Obligations 23
ARTICLE 8. INDEMNITIES 24
8.1 Definition of Claims 24
8.2 Application of Indemnities 25
8.3 ASSIGNEE's Indemnity 25
8.4 ASSIGNOR's Indemnity 26
8.5 Notices and Defense of Indemnified Claims 26
8.6 ASSIGNOR's Indemnity Limit 26
8.7 NORM 26
8.8 Pending Litigation and Claims 26
8.9 Waiver of Consequential and Punitive Damages 27
ARTICLE 9. TAXES AND EXPENSES 27
9.1 Recording Expenses 27
9.2 Ad Valorem, Real Property and Personal Property Taxes 27
9.3 Severance Taxes 27
9.4 Tax and Financial Reporting 28
9.5 Sales and Use Taxes 28
9.6 Income Taxes 28
9.7 Incidental Expenses 28
ARTICLE 10. OPERATIONS DURING THE TRANSITION PERIOD 28
10.1 Operations by ASSIGNOR 28
10.2 ASSIGNEE's Approval 29
10.3 Compensation of ASSIGNOR 29
10.4 Operation of Certain Property After Interim Period 29
ARTICLE 11. MISCELLANEOUS 29
11.1 Production Imbalances 29
11.2 Preferential Right to Purchase and Process Production 30
11.3 Dispute Resolution 31
11.4 Survival of Representations and Warranties 33
11.5 Public Announcements 33
11.6 Notices 33
11.7 Effective Date 33
ii
<PAGE>
11.8 Assignment 33
11.9 Entire Agreement and Amendment 34
11.10 Successors and Assigns 34
11.11 Severability 34
11.12 Counterparts 34
11.13 Governing Law 34
11.14 Exhibits 34
iii
<PAGE>
PURCHASE AND SALE AGREEMENT
INDEX OF DEFINED TERMS
Agreement 1
Allocated Value 7
Allocation of Purchase Price 5
ASSIGNEE 1
Assignee's Assumed Obligations 21
Assignment Documents 19
ASSIGNOR 1
Assignor's Retained Obligations 22
Casualty Loss 17
Claims 24
Closing 18
Closing Date 18
CONOCO 1
Consents 14
Effective Date 1
Environmental Obligations 23
Fee Mineral Interests 2
Fee Surface Interests 2
Final Settlement Statement 6
Gaseous Hydrocarbons 30
Government Taking 17
Hart-Scott-Rodino Act 13
Hydrocarbons 4
Interim Period 28
Leases 1
Liquid Hydrocarbons 30
NORM 23,26
Overriding Royalty Interests 2
Performance Deposit 5
Pipeline Inventory 4
Plugging and Abandonment Obligations 22
Preferential Rights 14
Preliminary Settlement Statement 5
Property 1
Property Records 20
Property Taxes 27
Purchase Price 5
Related Contracts 2
Stock Tank Oil 4
Title Defect 15
iv
<PAGE>
PURCHASE AND SALE AGREEMENT
LIST OF EXHIBITS
A Schedule 1 - Leases
Schedule 2 - Pooled and Unitized Interests
Schedule 3 - Easements, Surface Leases and Permits
Schedule 4 - Related Contracts
Schedule 5 - Overriding Royalty Interests
Schedule 6 - Fee Mineral Interests
Schedule 7 - Fee Surface Interests
Schedule 8 - Equipment and Tangible Property
Schedule 9 - Allocation of Purchase Price
B B-1 - ASSIGNOR's Assignment Notice
B-2 - ASSIGNEE's Assignment Notice
C Pending Litigation and Claims Affecting the Property
D Assignment and Bill of Sale
E Assignment of Contracts
F Nonforeign Affidavit
G Production Imbalances
v
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (the "AGREEMENT"), executed on September 10,
1997, is between CONOCO INC. ("CONOCO"), a Delaware corporation, with offices at
600 North Dairy Ashford, Houston, Texas 77079, and SOUTHWEST ROYALTIES, INC.
("SOUTHWEST"), a Delaware corporation with offices at 407 N. Big Spring,
Midland, Texas 79701. As used in this Agreement, the term "ASSIGNOR" means
CONOCO and the term "ASSIGNEE" means SOUTHWEST.
RECITALS:
CONOCO owns certain producing oil and gas properties in West Texas and Southeast
New Mexico, together with related facilities and contractual rights, and desires
to assign its interest in this property and facilities, and transfer these
contractual rights.
SOUTHWEST desires to acquire CONOCO's interest in these properties, facilities
and contractual rights.
Therefore, CONOCO and SOUTHWEST agree to the sale of CONOCO's interest in these
properties, facilities and contractual rights to SOUTHWEST on the terms and
conditions set forth in this Agreement.
ARTICLE 1. PROPERTY DESCRIPTION
1.1 The Property. Subject to the terms of this Agreement and effective as of
the Effective Date (hereinafter defined), ASSIGNOR shall convey and assign
to ASSIGNEE and ASSIGNEE shall accept all of ASSIGNOR's right and title to,
and interest in, the following (collectively the "PROPERTY"):
1.1.1 The oil, gas and mineral lease(s) and other interests in oil and
gas described in Exhibit A, Schedule 1, and all rights, privileges
and obligations appurtenant to those interests and leases INSOFAR
AND ONLY INSOFAR AS those interests and leases cover and include
the lands, depths and rights described in Exhibit A, Schedule 1
(the "LEASES");
1.1.2 All rights and interest in any unit or pooled area in which the
Leases are included, to the extent that these rights and interests
arise from and are associated with the Leases, including without
limitation all rights derived from any unitization, pooling,
operating, communitization or other agreement or from any
declaration or order of any governmental authority described in
Exhibit A, Schedule 2;
1.1.3 All oil, gas and condensate wells (whether producing, not producing
or abandoned), water source, water injection and other injection or
disposal wells and systems located on the Leases or lands unitized
or pooled with the Leases;
1.1.4 All equipment, facilities, pipelines, gathering systems, well pads,
tank batteries, improvements, fixtures, inventory, spare parts,
tools, and other personal property on the Leases or used in
developing or operating the Leases or producing, treating, storing,
compressing, processing or transporting hydrocarbons on or from the
Leases, other than that
1
<PAGE>
specifically designated as retained property in Exhibit A, Schedule
8 or excluded from the Property in Section 1.2;
1.1.5 To the extent assignable or transferable, all easements, rights-of-
way, licenses, permits, servitudes, surface leases, and similar
interests applicable to or used solely in operating the Leases, the
lands unitized or pooled with the Leases, or the personal property
described above, including, without limitation, those described in
Exhibit A, Schedule 3;
1.1.6 To the extent assignable or transferable, all contracts and
contractual rights, obligations and interests relating to the
Leases or lands unitized or pooled with the Leases, including
without limitation unit agreements, farmout agreements, farmin
agreements, operating agreements, and hydrocarbon sales, purchase,
gathering, transportation, treating, marketing, exchange,
processing and fractionating agreements described in Exhibit A,
Schedule 4 (the "RELATED CONTRACTS");
1.1.7 All other tangibles, miscellaneous interests or other assets on or
used in connection with the Leases, including without limitation
all lease files, land files, well files, production records,
division order files, abstracts, title opinions, and contract
files, insofar as they are directly related to the Leases or lands
unitized or pooled with the Leases;
1.1.8 Any overriding royalty interests described in Exhibit A, Schedule 5
(the "OVERRIDING ROYALTY INTERESTS"), including without limitation
all rights and obligations pertaining to the overriding royalty
interests under any of the Related Contracts; and
1.1.9 Any fee mineral interests described in Exhibit A, Schedule 6 (the
"FEE MINERAL INTERESTS"), including without limitation all rights
and obligations pertaining to the Fee Mineral Interests under any
of the Related Contracts. Record title to any Fee Mineral Interests
will be transferred to ASSIGNEE by mineral deed, which will
incorporate the terms and conditions of this Agreement. Any Fee
Mineral Interests transferred under this Agreement will be
considered part of the Property for all purposes under this
Agreement.
1.1.10 Any fee surface interests described in Exhibit A, Schedule 7 (the
"FEE SURFACE INTERESTS"), including without limitation all rights
and obligations pertaining to the Fee Surface Interests under any
of the Related Contracts. Record title to any Fee Surface Interests
will be transferred to ASSIGNEE by deed, which will incorporate the
terms and conditions of this Agreement. Any Fee Surface Interests
transferred under this Agreement will be considered part of the
Property for all purposes under this Agreement.
1.1.11 All other rights, titles, and interests of ASSIGNOR in and to the
lands, depths, and rights described on Exhibit A, Schedule 1, save
and except the rights excluded or retained by ASSIGNOR under
Section 1.2.
1.2 Exclusions from the Property. The Property to be conveyed and assigned
under this Agreement does not include:
1.2.1 Unless the parties otherwise agree in writing and enter into a
separate data license agreement, (i) seismic, geological,
geochemical, or geophysical data (including cores and other
physical samples or materials from wells or tests) belonging to
ASSIGNOR or licensed
2
<PAGE>
from third parties, and (ii) interpretations of seismic,
geological, geochemical or geophysical data belonging to ASSIGNOR
or licensed from third parties;
1.2.2 ASSIGNOR's intellectual property used in developing or operating
the Property, including without limitation proprietary computer
software, computer software licensed from third parties, patents,
trade secrets, copyrights, names, marks and logos, all of which
ASSIGNOR will remove before or as soon as possible after Closing;
1.2.3 ASSIGNOR's right, title and interest in any easements, rights-of-
way, permits, licenses, surface leases and surface use agreements,
and servitudes and other surface rights appurtenant to the
Property, to the extent they are attributable and allocable to
rights and interests retained by ASSIGNOR (if any);
1.2.4 ASSIGNOR's corporate, financial and tax records, and legal files,
except that ASSIGNOR will provide ASSIGNEE with copies of any tax
records that are necessary for ASSIGNEE's ownership, administration
or operation of the Property;
1.2.5 Notwithstanding any other provision of this Agreement to the
contrary, any records or information that ASSIGNOR considers
proprietary or confidential (including without limitation employee
information and internal Property valuation data), or which
ASSIGNOR cannot legally provide to ASSIGNEE because of third-party
restrictions;
1.2.6 Trade credits and rebates from contractors and vendors, accounts
and notes receivable, and adjustments or refunds attributable to
ASSIGNOR's interest in the Property that relate to any period
before the Effective Date, including without limitation
transportation tax credits and refunds, tariff refunds, take-or-pay
claims, insurance premium adjustments, and audit adjustments under
the Related Contracts;
1.2.7 Deposits, cash, checks in process of collection, cash equivalents
and funds attributable to ASSIGNOR's interest in the Property
pertaining to any periods before the Effective Date;
1.2.8 Proceeds, benefits, income or revenues (and any security or other
deposits made) with respect to the Property attributable to periods
before the Effective Date;
1.2.9 Claims and causes of action arising from acts, omissions or events,
or damage or destruction of the Property before the Effective Date,
and all rights, titles, claims and interests of ASSIGNOR (i) under
any policy or agreement of insurance or indemnity, (ii) under any
bond or letter of credit, or (iii) to any insurance or condemnation
proceeds or awards;
1.2.10 Contracts for support services related to the Property (except for
those contracts specifically listed as part of the Related
Contracts in Exhibit A, Schedule 4), and the Related Contracts
insofar as they pertain to oil and gas interests of ASSIGNOR other
than the Leases, or lands unitized or pooled with the Leases, being
assigned and conveyed to ASSIGNEE under this Agreement;
1.2.11 Pipelines and other facilities located on the Leases or lands
unitized with the Leases that are not associated with or used in
connection with the Leases or lands unitized with the Leases,
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and any gas processing plants or their associated facilities,
pipelines or gathering lines located on the Leases or lands
unitized with the Leases; and
1.2.12 Radio towers, remote terminal units, computer equipment, vehicles,
communication equipment, and photocopy machines, located on the
Leases or lands unitized with the Leases and specifically excluded
from the Property in Exhibit A, Schedule 8; all leased vehicles and
equipment for which ASSIGNEE does not assume the applicable lease
under this Agreement; and all third party equipment and property
located on the Leases, including without limitation contractor
equipment.
1.3 Ownership of Production from the Property.
1.3.1 Production Before the Effective Date.
(i) ASSIGNOR will own all merchantable oil, gas, condensate and
distillate ("HYDROCARBONS") produced from the Property before
the Effective Date. If, on the Effective Date, Hydrocarbons
produced from the Property before the Effective Date are
stored in the Lease or unit stock tanks (the "STOCK TANK
OIL"), or in Lease or unit gathering lines or production
facilities upstream of the sale or custody transfer meters of
the purchaser or processor of Hydrocarbon production from the
Property (the "PIPELINE INVENTORY"), ASSIGNEE shall purchase
from ASSIGNOR the merchantable Stock Tank Oil above pipeline
connections in the stock tanks at a price equivalent to
ASSIGNOR'S published posted price for crude oil of like kind
and gravity in the vicinity, less any applicable
transportation charges. and the Pipeline Inventory at a price
equivalent to ASSIGNOR'S published posted price for crude oil
of like kind and gravity in the vicinity, less any applicable
transportation charges. ASSIGNEE will pay ASSIGNOR for the
Stock Tank Oil and Pipeline Inventory as an adjustment to the
Purchase Price at Closing, as provided in Section 2.2.
(ii) The Stock Tank Oil and the Pipeline Inventory will be gauged
and measured as of 7:00 a.m. local time where the Property is
located on the Effective Date. ASSIGNOR and ASSIGNEE will
accept the Lease or unit operator's tank gauge readings,
meter tickets or other inventory records of the Stock Tank
Oil and Pipeline Inventory.
1.3.2 Production After the Effective Date. ASSIGNEE will own all
Hydrocarbons produced from the Property on and after the Effective
Date. If the Effective Date precedes the Closing Date, ASSIGNOR
will sell on ASSIGNEE's behalf to a third party that is
unaffiliated with ASSIGNOR all Hydrocarbons produced from the
Property between the Effective Date and the Closing Date, and
ASSIGNOR will credit ASSIGNEE for the proceeds of these sales as an
adjustment at Closing, as provided in Section 2.2. Subject to any
continuing sale obligations under the Related Contracts, and
ASSIGNOR's preferential right to purchase Hydrocarbons from the
Property, as provided in Section 11.2, ASSIGNEE may sell
Hydrocarbons produced from the Property on and after the Closing
Date as it deems appropriate.
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ARTICLE 2. CONSIDERATION
2.1 Purchase Price.
2.1.1 Amount Due at Closing. At Closing, ASSIGNEE will pay ASSIGNOR
$75,281,000.00 for the Property (the "PURCHASE PRICE"), adjusted by
the Closing adjustments specified in Section 2.2. The Purchase
Price will be subject to the further post-Closing adjustments
specified in Section 2.3. The Purchase Price will be allocated
among the various portions of the Property and among depreciable
assets and nondepreciable assets as provided in Exhibit A, Schedule
9 (the "ALLOCATION OF PURCHASE PRICE").
2.1.2 Performance Deposit. Upon execution of this Agreement, ASSIGNEE
shall pay to ASSIGNOR five percent (5%) of the Purchase Price (U.S.
$3,764,050.00) as a performance deposit ("PERFORMANCE DEPOSIT") on
the Property to be transferred to ASSIGNEE to assure ASSIGNEE's
performance under this Agreement. The Performance Deposit is solely
to assure the performance of ASSIGNEE pursuant to the terms and
conditions of this Agreement. If ASSIGNEE refuses or is unable for
any reason (including failure to obtain financing), other than
breach or default by ASSIGNOR, to close the transaction in
accordance with the terms of this Agreement, ASSIGNOR may, at its
sole option and as its exclusive remedy therefore, retain the
Performance Deposit as agreed liquidated damages and not as a
penalty. However, if this Agreement is terminated pursuant to the
provisions of Section 5.3 (Environmental Assessment), Section 5.5
(Preferential Rights and Consents), Section 5.6 (Title Defects),
Section 5.7 (Casualty Loss), Section 5.8 (Termination Due to
Impairments to the Property), Section 6.2 (Conditions at Closing),
by failure of ASSIGNOR to obtain the requisite DuPont management
approvals, due to the failure of ASSIGNOR to perform any of the
obligations to be performed by ASSIGNOR prior to and on the Closing
Date, or due to any legal prohibition on closing the transaction
due to failure to obtain required governmental consents, the
Performance Deposit shall be returned promptly to ASSIGNEE without
interest. If Closing occurs, ASSIGNOR at its sole option may either
(i) return the Performance Deposit to ASSIGNEE, without interest,
at Closing, in which case ASSIGNEE must pay ASSIGNOR the full
amount of the Purchase Price at Closing, adjusted as provided in
Section 2.2, or (ii) retain and credit the Performance Deposit
against the Purchase Price at Closing, in which case ASSIGNEE must
pay ASSIGNOR an amount equal to the Purchase Price, adjusted as
provided in Section 2.2, less the Performance Deposit.
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2.2 Adjustments at Closing.
2.2.1 Preliminary Settlement Statement. At Closing, the Purchase Price
will be adjusted as set forth in Sections 2.2.2 and 2.2.3. No later
than five (5) days prior to Closing, ASSIGNOR will provide ASSIGNEE
a preliminary settlement statement identifying all adjustments to
the Purchase Price to be made at Closing (the "PRELIMINARY
SETTLEMENT STATEMENT"). ASSIGNOR and ASSIGNEE acknowledge that some
items in the Preliminary Settlement Statement may be estimates or
otherwise subject to change in the final settlement statement for
the Property, to be prepared pursuant to Section 2.3.
2.2.2 Upward Adjustments. The Purchase Price will be increased by the
following expenses and revenues:
(i) All actual production expenses, operating expenses, overhead
under applicable operating agreements and capital
expenditures paid or incurred by ASSIGNOR in connection with
the Property (including without limitation royalties, minimum
royalties, rentals, and prepaid charges), to the extent they
are attributable to operation of the Property on and after
the Effective Date;
(ii) Any proceeds for the sale of Hydrocarbon production and other
income from the Property received by ASSIGNEE, to the extent
they are attributable to the operation of the Property before
the Effective Date, and the value of the Stock Tank Oil and
the Pipeline Inventory;
(iii) Any other increases in the Purchase Price specified in this
Agreement.
2.2.3 Downward Adjustments. The Purchase Price will be decreased by the
following expenses and revenues:
(i) All actual production expenses, operating expenses, overhead
under applicable operating agreements and capital
expenditures paid or incurred by ASSIGNEE in connection with
the Property (including without limitation royalties, minimum
royalties, rentals, and prepaid charges), to the extent they
are attributable to operation of the Property before the
Effective Date;
(ii) Any proceeds for the sale of Hydrocarbon production and other
income received by ASSIGNOR from the Property, to the extent
they are attributable to the operation of that Property on
and after the Effective Date;
(iii) Any other decreases in the Purchase specified in this
Agreement.
2.3 Adjustments after Closing.
2.3.1 Final Settlement Statement. Within 120 days after Closing, ASSIGNOR
will prepare a final settlement statement for the Property
containing a final reconciliation of the adjustments to the
Purchase Price specified in Section 2.2 (the "FINAL SETTLEMENT
STATEMENT"). (However, failure of ASSIGNOR to complete the Final
Settlement Statement within 120 days after Closing will not
constitute a waiver of any right to an adjustment otherwise due.)
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ASSIGNEE will have 20 days after receiving the Final Settlement
Statement to provide ASSIGNOR with written exceptions to any items
in the Final Settlement Statement that ASSIGNEE believes in good
faith to be questionable. All items in the Final Settlement
Statement to which ASSIGNEE does not except within the 20-day
review period will be deemed correct.
2.3.2 Payment of Post-Closing Adjustments. Any additional adjustments to
the Purchase Price (including disputed items) will be offset
against each other so that only one payment is required. The party
owing payment will pay the other party the net post-closing
adjustment to the Purchase Price within 10 days after the
expiration of ASSIGNEE's 20-day review period for the Final
Settlement Statement. However, the payment of any disputed items
will be subject to the further rights of the parties under Section
2.3.3.
2.3.3 Resolution of Disputes Items. After the completion and delivery of
the Final Settlement Statement, the parties agree to negotiate in
good faith to attempt to reach agreement on the amount due with
respect to any disputed items in the Final Settlement Statement. If
the parties agree on the amount due with respect to any disputed
items, and a payment adjustment is required, the party owing
payment will pay the other party within 10 days after the parties
reach agreement. If the parties are unable to agree on the amount
due with respect to any disputed items within 60 days after
ASSIGNOR receives ASSIGNEE's written exceptions to the Final
Settlement Statement, then (i) the parties will attempt to resolve
their disagreement with respect to the disputed items by mediation,
as provided in Section 11.3, and (ii) if the parties are unable to
resolve their disagreement over the disputed items by mediation,
either party may seek a judicial determination of the amount
actually due in connection with the disputed items.
2.3.4 Further Revenues and Expenses. After the completion of the post-
Closing adjustments under this Section 2.3, (i) if either party
receives revenues that belong to the other party under this
Agreement, the party receiving the revenues agrees to promptly
remit those revenues to the other party, and (ii) if either party
pays expenses that are the responsibility of the other party under
this Agreement, the party on whose behalf the expenses were paid
agrees to promptly reimburse the other party for the expenses paid
on its behalf upon receiving satisfactory evidence of such payment.
However, neither party will be obligated to reimburse the other
party for any such expense in excess of $5,000 unless it has been
consulted about that expense prior to payment, unless that payment
was required by a government agency or other government entity.
2.4 Payment Method. Unless the parties otherwise agree in writing, all
payments under this Agreement will be by wire transfer in immediately
available funds to an account designated by the party receiving payment.
2.5 Principles of Accounting. The Preliminary Settlement Statement and Final
Settlement Statement will be prepared in accordance with generally accepted
accounting principles in the petroleum industry and with reasonable
supporting documentation for each item in those statements.
2.6 Reporting Value of the Property. Neither party will take any position in
preparing financial statements, tax returns, reports to shareholders or
governmental authorities, or otherwise, that is
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inconsistent with allocation of value for the Property in Exhibit A,
Schedule 9, unless the parties otherwise agree in writing. The value
assigned to each portion of the Property in Exhibit A, Schedule 9 is
hereafter referred to as the "ALLOCATED VALUE" of that portion of the
Property.
2.7 Section 1031 Exchange. ASSIGNOR and ASSIGNEE hereby agree that ASSIGNEE
shall have the right at any time prior to Closing to assign all or a portion of
its rights under this Agreement to a Qualified Intermediary (as that term is
defined in Section 1.1031(k)-1(g)(4)(v) of the Treasury Regulations) in order to
accomplish the transaction in a manner that will comply, either in whole or in
part, with the requirements of a like-kind exchange pursuant to Section 1031 of
the Internal Revenue Code of 1986, as amended, ("Code"). Likewise, ASSIGNOR
shall have the right at any time prior to Closing to assign all or a portion of
its rights under this Agreement to a Qualified Intermediary for the same
purpose. In the event either Party assigns its rights under this Agreement
pursuant to this Section 2.7, such Party agrees to notify the other Party in
writing of such assignment at or before Closing. If ASSIGNOR assigns its rights
under this Agreement for this purpose, ASSIGNEE agrees to (i) consent to
ASSIGNOR's assignment of its rights in this Agreement in form attached hereto as
Exhibit "B-1", and (ii) pay the Purchase Price into a qualified escrow or
qualified trust account at Closing as directed in writing. If ASSIGNEE assigns
its rights under this Agreement for this purpose, ASSIGNOR agrees to (i) consent
to ASSIGNEE's assignment of its rights in this Agreement in the form of Exhibit
"B-2", (ii) accept the Purchase Price from the qualified escrow or qualified
trust account at Closing, and (iii) at Closing, convey and assign directly to
ASSIGNEE the Assets which are the subject of this Agreement upon satisfaction of
the other conditions to Closing and other terms and conditions hereof. ASSIGNOR
and ASSIGNEE acknowledge and agree that any assignment of this Agreement to a
Qualified Intermediary shall not release either Party from any of their
respective liabilities and obligations to each other under this Agreement, and
that neither Party represents to the other that any particular tax treatment
will be given to either Party as a result thereof. ASSIGNOR agrees to indemnify
and hold ASSIGNEE harmless from and against any and all claims, demands, causes
of actions, liabilities, penalties, judgements, assessments, and expenses
(including reasonable attorneys' fees and costs) asserted against or incurred by
ASSIGNEE in connection with or as a consequence of its facilitation of any such
like-kind exchange.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
3.1 Reciprocal Representations and Warranties. By their execution of this
Agreement, ASSIGNOR and ASSIGNEE each represent and warrant that the
following statements are true and accurate as to itself, as of the
execution date of this Agreement, the Effective Date and the Closing Date.
3.1.1 Corporate Authority. It is a corporation duly organized and in good
standing under the laws of its state of incorporation, is duly
qualified to carry on its business in the states where the Property
is located, and has all the requisite power and authority to enter
into and perform this Agreement.
3.1.2 Requisite Approvals. By the earlier of the Closing Date or the
Effective Date, it will have taken all necessary actions pursuant
to its articles of incorporation, by-laws and other governing
documents to fully authorize (i) the execution and delivery of this
Agreement and any transaction documents related to this Agreement;
and (ii) the consummation of the transaction contemplated by this
Agreement.
3.1.3 Validity of Obligation. This Agreement and all other transaction
documents it is to execute and deliver on or before the Closing
Date (i) have been duly executed by its authorized
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representatives; (ii) constitute its valid and legally binding
obligations; and (iii) are enforceable against it in accordance
with their respective terms.
3.1.4 No Violation of Contractual Restrictions. Its execution, delivery
and performance of this Agreement does not conflict with or violate
any agreement or instrument to which it is a party or by which it
is bound, except any provision contained in agreements customary in
the oil and gas industry relating to (i) the preferential right to
purchase all or any portion of the Property; (ii) required consents
to transfer and related provisions; (iii) main tenance of uniform
interest provisions; and (iv) any other third-party approvals or
consents contemplated in this Agreement.
3.1.5 No Violation of Other Legal Restrictions. Its execution, delivery
and performance of this Agreement does not violate any law, rule,
regulation, ordinance, judgment, decree or order to which it or the
Property is subject.
3.1.6 Bankruptcy. There are no bankruptcy, reorganization or receivership
proceedings pending, being contemplated by, or to its actual
knowledge, threatened against it.
3.1.7 Broker's Fees. It has not incurred any obligation for brokers,
finders or similar fees for which the other party or parties would
be liable.
3.2 ASSIGNOR's Representations and Warranties. By its execution of this
Agreement, ASSIGNOR represents and warrants to ASSIGNEE that the following
statements are true and accurate, as of the execution date of this
Agreement, the Effective Date and the Closing Date.
3.2.1 Misrepresentations and Omissions. ASSIGNOR has not intentionally or
willfully misrepresented, omitted, or withheld any material
information about the Property.
3.2.2 Mortgages and Other Instruments. The transfer of the Property to
ASSIGNEE does not violate any covenants or restrictions imposed on
ASSIGNOR by any bank or other financial institution in connection
with a mortgage or other instrument, and will not result in the
creation or imposition of a lien on any portion of the Property.
3.2.3 Compliance with Laws. Except as disclosed by ASSIGNOR on attached
Exhibit "C", if ASSIGNOR is the operator of the Property, to the
best of ASSIGNOR's knowledge, it is in compliance with all federal
and state laws, rules, regulations and orders pertaining to the
Property. The representation in this Section 3.2.3 does not extend
to compliance with environmental laws and regulations pertaining to
the operation of the Property, which is separately addressed in
other provisions of this Agreement.
3.2.4 Permits. Except as disclosed by ASSIGNOR to ASSIGNEE in writing, if
ASSIGNOR is the operator of the Property, to the best of ASSIGNOR's
knowledge, it has all governmental permits necessary for the
operation of the Property and is not in default under any permit,
license or agreement relating to the operation and maintenance of
the Property.
3.2.5 Lawsuits and Claims. Except as disclosed in Exhibit C to this
Agreement, there is no demand or lawsuit, nor any compliance order,
notice of probable violation or similar governmental action,
pending or, to the best of ASSIGNOR's knowledge, threatened before
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any court or governmental agency that (i) would result in an
impairment or loss of title to any part of the Property, or
impairment of the value thereof, (ii) involves or relates to the
alleged non-compliance of the Property or its operation with any
applicable federal, state, or local laws, regulations, and orders
(including without limitation, those relating to pollution and
protection of the environment) (iii) would hinder or impede the
operation of the Property, or (iv) seeks to restrain or prohibit,
or to obtain substantial damages from ASSIGNOR, with respect to
this Agreement or the consummation of all or part of the
transactions contemplated in this Agreement.
3.3 ASSIGNEE's Representations and Warranties. By its execution of this
Agreement, ASSIGNEE represents and warrants to ASSIGNOR that the following
statements are true and accurate, as of the execution date of this
Agreement, the Effective Date and the Closing Date.
3.3.1 Independent Evaluation. ASSIGNEE is an experienced and
knowledgeable investor in the oil and gas business. ASSIGNEE has
been advised by and has relied solely on its own expertise and
legal, tax, reservoir engineering and other professional counsel
concerning this transaction, the Property and the value thereof.
3.3.2 Qualification. ASSIGNEE is now or at Closing will be, and
thereafter will continue to be, qualified to own and operate any
federal oil, gas and mineral leases and oil, gas and mineral leases
for the State(s) of Texas and New Mexico that constitute part of
the Property, including meeting all bonding requirements.
Consummating the transaction contemplated in this Agreement will
not cause ASSIGNEE to be disqualified or to exceed any acreage
limitation imposed by law, statute or regulation.
3.3.3 Securities Laws and ASSIGNEE's Other Dealings. ASSIGNEE has
complied with all federal and state securities laws applicable to
the sale of the Property and will comply with such laws if it
subsequently disposes of all or any part of the Property. ASSIGNEE
is acquiring the Property for its own account and not with a view
to, or for offer of resale in connection with, a distribution
thereof, within the meaning of the Securities Act of 1933, 15
U.S.C. (S) 77a et seq., and any other rules, regulations, and laws
pertaining to the distribution of securities. Except for
traditional mortgage financing from reputable financial
institutions or corporate debt securities offerings by ASSIGNEE,
ASSIGNEE has not sought or solicited, nor is ASSIGNEE participating
with, investors, partners or other third parties in order to fund
the Purchase Price or the Performance Deposit and to close this
transaction, and all funds used by ASSIGNEE in connection with this
transaction are ASSIGNEE's own funds.
3.4 Notice of Changes. ASSIGNOR and ASSIGNEE will each give the other prompt
written notice of any matter materially affecting any of their unqualified
representations or warranties under this Article 3 or rendering any such
warranty or representation untrue or inaccurate.
3.5 Representations and Warranties Exclusive. All representations and
warranties contained in this Agreement (including without limitation those
in this Article 3 are exclusive, and are given in lieu of all other
representations and warranties, express or implied.
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ARTICLE 4. DISCLAIMER OF WARRANTIES
4.1 Title; Encumbrances. ASSIGNOR CONVEYS THE PROPERTY TO ASSIGNEE SUBJECT TO
ALL ROYALTIES, OVERRIDING ROYALTIES, BURDENS, ENCUMBRANCES, NATIVE
ALLOTMENTS AND OTHER SURFACE RIGHTS OF PUBLIC RECORD IN THE APPLICABLE
JURISDICTION, AND WITHOUT WARRANTY OF TITLE, EXPRESS, STATUTORY, OR
IMPLIED.
4.2 Condition and Fitness of the Property. Except as set forth in Article 3 of
this Agreement, ASSIGNOR CONVEYS THE PROPERTY TO ASSIGNEE WITHOUT ANY
EXPRESS, STATUTORY OR IMPLIED WARRANTY OR REPRESENTATION OF ANY KIND,
INCLUDING WARRANTIES RELATING TO (i) THE CONDITION OR MER CHANTABILITY OF
THE PROPERTY, OR (ii) THE FITNESS OF THE PROPERTY FOR A PARTICULAR PURPOSE.
ASSIGNEE HAS INSPECTED, OR BEFORE CLOSING WILL INSPECT OR WILL HAVE BEEN
GIVEN THE OPPORTUNITY TO INSPECT, THE PROPERTY AND IS SATISFIED AS TO THE
PHYSICAL AND ENVIRONMENTAL CONDITION (BOTH SURFACE AND SUBSURFACE) OF THE
PROPERTY AND ACCEPTS THE PROPERTY "AS IS," "WHERE IS," AND "WITH ALL
FAULTS."
4.3 Information About the Property. EXCEPT AS EXPRESSLY SET FORTH IN ARTICLE 3
OF THIS AGREEMENT, ASSIGNOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS,
STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS, OR MATERIALITY
OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO ASSIGNEE IN CONNECTION
WITH THE PROPERTY; (ii) THE QUALITY AND QUANTITY OF HYDROCARBON RESERVES
(IF ANY) ATTRIBUTABLE TO THE PROPERTY; (iii) THE ABILITY OF THE PROPERTY
TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION RATES,
DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) GAS BALANCING
INFORMATION, ALLOWABLES OR OTHER REGULATORY MATTERS, (v) THE PRESENT OR
FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE
DERIVED FROM THE PROPERTY, OR (vi) THE ENVIRONMENTAL CONDITION OF THE
PROPERTY. ANY DATA, INFORMATION OR OTHER RECORDS FURNISHED BY ASSIGNOR ARE
PROVIDED TO ASSIGNEE AS A CONVENIENCE AND ASSIGNEE'S RELIANCE ON OR USE OF
THE SAME IS AT ASSIGNEE'S SOLE RISK, SAVE AND EXCEPT TO THE EXTENT
CONSTITUTING A BREACH OF ASSIGNOR'S REPRESENTATIONS AND WARRANTIES UNDER
ARTICLE 3 OF THIS AGREEMENT.
4.4 Subrogation of Warranties. To the extent transferrable, ASSIGNOR will give
and grant to ASSIGNEE, its successors and assigns full power and right of
substitution and subrogation in and to all covenants and warranties
(including warranties of title) by preceding owners, vendors, or others,
given or made with respect to the Property or any part thereof prior to the
Effective Date of this Agreement.
ARTICLE 5. DUE DILIGENCE REVIEW OF THE PROPERTY
5.1 Records Review. To allow ASSIGNEE to confirm ASSIGNOR's title and conduct
other due diligence with respect to the Property, ASSIGNOR shall give
ASSIGNEE, and ASSIGNEE's authorized representatives, at mutually agreeable
times before Closing, access to all contract, land
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and lease, and operational records, to the extent such data and records are
in ASSIGNOR's possession and relate to the Property. Without limiting the
foregoing, ASSIGNOR will afford ASSIGNEE and its representatives access to
all accounting and related records for the Property, including basic
accounting records and source documents which, to the extent in existence
and within the possession or control of ASSIGNOR, are sufficient for
ASSIGNEE or its representatives to complete an audit in response to Rule 3-
05 of Regulation SX of the U.S. Securities Exchange Commission. With
ASSIGNOR's permission, ASSIGNEE may photocopy such records at its sole
expense. ASSIGNEE shall keep confidential all information made available to
ASSIGNEE until the later of the Closing Date or the Effective Date. Any
confidentiality agreement previously executed by ASSIGNOR and ASSIGNEE with
respect to the Property will continue in force until the later of the
Closing Date or the Effective Date, and for as long thereafter as provided
in the confidentiality agreement. ASSIGNEE shall take all reasonable steps
necessary to ensure that ASSIGNEE's authorized representatives comply with
the provisions of this Section 5.1 and any confidentiality agreement in
effect.
5.2 Physical Inspection. Before Closing, ASSIGNOR will permit ASSIGNEE and its
representatives, at their sole risk and expense, to conduct reasonable
inspections of the Property at times approved by ASSIGNOR. ASSIGNEE shall
repair any damage to the Property resulting from its inspection and shall
indemnify, defend and hold ASSIGNOR harmless from and against any and all
Claims (as defined in Section 8.1) arising from ASSIGNEE inspecting and
observing the Property, includ ing, without limitation, (i) Claims for
personal injuries to or death of employees of the ASSIGNEE, its
contractors, agents, consultants and representatives, and damage to the
property of ASSIGNEE or others acting on behalf of ASSIGNEE, regardless of
whether such claims are caused by the concurrent negligence of ASSIGNOR or
the condition of the Property, (ii) Claims for personal injuries to or
death of employees of ASSIGNOR or third parties, and damage to the property
of ASSIGNOR or third parties, to the extent caused by the negligence, gross
negligence or willful misconduct of ASSIGNEE.
5.3 Environmental Assessment.
5.3.1 Inspection and Testing. Prior to Closing, the ASSIGNEE will have
the right, at its sole cost, to conduct a Phase I environmental
assessment of the Property. However, the Phase I environmental
assessment must be conducted by an agent or representative of
ASSIGNEE acceptable to both ASSIGNOR and ASSIGNEE. For purposes of
this Agreement, a Phase I environmental assessment means (i) a
review of ASSIGNOR's and the government's environmental records,
(ii) the submission of pre-inspection questionnaires to ASSIGNOR,
(iii) a site visit to visually inspect the Property, and (iv)
interviews with corporate and site personnel of ASSIGNOR. A Phase I
environmental assessment does not include soil or groundwater
sampling or subsurface testing of any kind.
5.3.2 Inspection and Test Results. Each party will be entitled to receive
a copy of the Phase I inspection results for the Property,
including without limitation all written reports, data and
conclusions. ASSIGNEE agrees not to disclose the Phase I inspection
results for the Property, or any ASSIGNOR information reviewed
during the Phase I environmental assessment, to third parties
without the agreement of ASSIGNOR, except as required by law or by
the order of a court or regulatory agency. This confidentiality
obligation shall be effective for five (5) years after the Closing
Date and will survive the termination of this Agreement for any
reason.
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5.3.3 Notice of Environmental Conditions. Prior to Closing, ASSIGNEE will
review the inspection and testing results for the Property and
determine based on those results if any adverse environmental
conditions exist with respect to the Property. No later than three
(3) business days before Closing, ASSIGNEE will notify ASSIGNOR in
writing of any adverse environmental condition with respect to the
Property, and the estimated value of any such environmental
condition. The value of an environmental condition for purposes of
Section 5.3.4 will be the estimated amount of all costs and Claims
(as defined in Section 8.1) associated with the existence,
remediation or correction of the environmental condition, as
determined by the mutually approved agent or representative that
conducted the Phase I environmental assessment.
5.3.4 Right and Remedies for Environmental Conditions.
(i) With respect to any environmental condition affecting the
Property, ASSIGNEE may (a) request ASSIGNOR to cure the
environmental condition, but ASSIGNOR will have no obligation
to cure the environmental condition, or (b) request an
adjustment in the Purchase Price equal to the estimated value
of the environmental condition. If ASSIGNOR and ASSIGNEE are
unable to agree before Closing on curative measures or an
adjustment the Purchase Price with respect to any such
environmental condition, the parties will have the rights and
remedies set forth in subpart (ii) of this Section 5.3.4.
(ii) The rights and remedies of the parties with respect to
environmental conditions on the Property on which the parties
cannot agree on curative measures or a Purchase Price
adjustment are as follows:
(a) If the collective value of the environmental conditions
is less than one percent (1%) of the Purchase Price, the
parties will be obligated to proceed with Closing as to
all of the Property without curative action by ASSIGNOR
with respect to such environmental conditions and
without an adjustment to the Purchase Price.
(b) If the collective value of the environmental conditions
equals or exceeds one percent (1%) of the Purchase
Price, either ASSIGNOR or ASSIGNEE may exclude the
Property affected by the environmental condition, in
which case the Purchase Price will be reduced by the
Allocated Value of the excluded Property and the parties
will be obligated to proceed with Closing, subject to
the termination rights of the parties under Section 5.8
and this subpart (c) of this Section 5.3.4.
(c) If the collective value of the environmental conditions
equals or exceeds ten percent (10%) of the Purchase
Price, either party may terminate this Agreement, and
neither party will have any further obligation to
conclude the transfer of the Property under this
Agreement. However, the right of termination under this
subpart (c) must be exercised no later than 10 business
days before Closing, after which both parties will be
deemed to have waived their termination rights under
this subpart (c) in connection with environmental
conditions.
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(iii) Notwithstanding any agreement by ASSIGNOR to a attempt to
cure an environmental condition or to reduce the Purchase
Price due to an environmental condition with respect to the
Property, or any other provision of this Agreement, ASSIGNEE
at Closing will assume all Environmental Obligations (as
defined in Section 7.5) with respect to the Property, which
is conveyed to ASSIGNEE at Closing, subject to the right of
ASSIGNEE to require and compel performance by ASSIGNOR of any
corrective or remedial actions which ASSIGNOR has agreed to
in writing to undertake pursuant to the provisions of this
Section 5.3.4.
5.4 Government Approvals.
5.4.1 Title Pending Governmental Approvals. Until ASSIGNOR and ASSIGNEE
obtain federal and state approval of the assignment of Leases or
other Property requiring such approval:
(i) ASSIGNOR shall continue to hold record title to the Property
as nominee for ASSIGNEE;
(ii) ASSIGNEE shall indemnify and hold ASSIGNOR harmless from any
and all claims, expenses of any kind or character relating to
such Property accruing after Closing;
(iii) ASSIGNOR shall act as ASSIGNEE's nominee but shall be
authorized to act only upon and in accordance with ASSIGNEE's
specific written instructions, and ASSIGNOR shall have no
authority, responsibility or discretion to perform any tasks
or functions with respect to the Property other than those
which are purely administrative or ministerial in nature,
unless otherwise specifically requested and authorized by
ASSIGNEE in writing;
(iv) If ASSIGNOR continues to operate the Property pending such
approval, ASSIGNOR and ASSIGNEE will have the rights and
obligations with respect to the operation of the Property set
forth in Section 10.4.
5.4.2 Denial of Required Government Approvals. If any required approval
is finally denied, ASSIGNOR shall pay ASSIGNEE the Allocated Value
of the affected Leases or other affected Property, and ASSIGNEE
shall immediately reassign such Leases or other Property to
ASSIGNOR.
5.4.3 Hart-Scott-Rodino. This Agreement is subject in all respects to and
conditioned upon compliance by the parties with Title II of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HART-
SCOTT-RODINO ACT"), and rules and regulations promulgated pursuant
thereto, to the extent that said act, rules and regulations are
applicable to the transaction contemplated by this Agreement.
ASSIGNEE and ASSIGNOR agree to make such filings with and provide
such information to the Federal Trade Commission and the Department
of Justice with respect to the transaction contemplated by this
Agreement as are required in connection with the Hart-Scott-Rodino
Act sufficiently in advance of the Closing Date to permit the
lapse, termination, or waiver of the initial waiting periods pre
scribed in connection with the Hart-Scott-Rodino Act before the
Closing Date.
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5.5 Preferential Rights and Consents to Assign.
5.5.1 Notices to Holders.
(i) If any of the Property is subject to third party preferential
purchase rights, rights of first refusal, or similar rights
(collectively, "PREFERENTIAL RIGHTS"), or third party
consents to assign, lessor's approvals or similar rights
(collectively, "CONSENTS"), ASSIGNOR shall use reasonable
efforts to (a) notify the holders of the Preferential Rights
and Consents that it intends to transfer the Property to
ASSIGNEE, (b) provide them with any information about the
transfer of the Property to which they are entitled, and (c)
in the case of Consents, ask the holders of the Consents to
consent to the assignment of the affected Property to
ASSIGNEE.
(ii) ASSIGNOR shall promptly notify ASSIGNEE whether (a) any
Preferential Rights are exercised, waived or deemed waived,
(b) any Consents are denied, or (c) the requisite time
periods have elapsed without any Preferential Rights being
exercised or Consents being received. ASSIGNOR will not be
liable to ASSIGNEE if any Preferential Rights are exercised,
or any Consents are denied, except as expressly provided in
this Section 5.5.
5.5.2 Remedies Before Closing. If ASSIGNOR is unable before Closing to
obtain the required Consents (other than Consents ordinarily
obtained after closing and Consents on hydrocarbon sales, purchase,
gathering, transportation, treating, marketing, exchange,
processing and fractionating agreements) and waivers of all
Preferential Rights, then:
(i) ASSIGNOR and ASSIGNEE by agreement may proceed with Closing
as to the Property affected by the unwaived Preferential
Rights or unobtained Consents, subject to the further
obligations of ASSIGNOR and ASSIGNEE set forth in Section
5.5.3 in the event that such Preferential Rights are validly
exercised or such Consents are ultimately denied after
Closing;
(ii) Either ASSIGNOR or ASSIGNEE may exclude the affected portion
of the Property from the transaction under this Agreement,
adjust the Purchase Price by the Allocated Value of the
excluded Property, and proceed with Closing as to the rest of
the Property; or
(iii) In addition to the remedies set forth in subparts (i) and
(ii) of this Section 5.5.2, ASSIGNOR or ASSIGNEE may exercise
the termination rights set forth in Section 5.8.
5.5.3 Remedies After Closing.
(i) Preferential Rights. After Closing, if (a) any holder of
Preferential Rights alleges improper notice of sale, or (b)
ASSIGNOR or ASSIGNEE discover, or any third party alleges,
the existence of additional Preferential Rights, ASSIGNOR and
ASSIGNEE will attempt to obtain waivers of those discovered
or alleged Preferential Rights. If ASSIGNOR and ASSIGNEE are
unable to obtain waivers of such Preferential Rights, or the
third party ultimately establishes and exercises
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its rights, and such exercise denies the Property to
ASSIGNEE, then ASSIGNEE shall satisfy all such Preferential
Rights obligations and shall indemnify, defend and hold
ASSIGNOR harmless from and against any and all Claims (as
defined in Section 8.1) arising from or related to ASSIGNEE's
satisfaction of any such Preferential Rights obligations.
ASSIGNEE shall be entitled to receive (and ASSIGNOR hereby
assigns to ASSIGNEE all of ASSIGNOR's rights to) all proceeds
received by ASSIGNOR in connection with the sale, due to an
exercise of Preferential Rights, of any portion of the
Property ASSIGNEE was to receive under this Agreement.
ASSIGNEE's receipt of proceeds from the sale of the affected
Property shall be ASSIGNEE's sole remedy if undiscovered or
alleged Preferential Rights are exercised after Closing.
(ii) Consents. After Closing, if ASSIGNOR or ASSIGNEE discover, or
any third party alleges, the existence of additional
Consents, ASSIGNOR and ASSIGNEE will attempt to obtain
waivers of those discovered or alleged Consents. If ASSIGNOR
and ASSIGNEE are unable to obtain waivers of such Consents
(other than Consents on hydrocarbon sales, purchase,
gathering, transportation, treating, marketing, exchange,
processing and fractionating agreements), and such unwaived
Consents deny the affected Property to ASSIGNEE, then
ASSIGNOR and ASSIGNEE will rescind the assignment of the
affected Property under this Agreement, after which ASSIGNOR
shall pay ASSIGNEE the Allocated Value of the affected
Property, and ASSIGNEE shall immediately reassign the
affected Property to the ASSIGNOR. Rescission of the
assignment of the affected Property and receipt of the
Allocated Value of the affected Property shall be ASSIGNEE's
sole remedy if undiscovered or alleged Preferential Rights
are exercised or Consents are denied after Closing.
5.6 Title Defects.
5.6.1 Definition of Title Defect. For the purposes of this Agreement, a
"TITLE DEFECT" means any impairment, encumbrance, encroachment,
irregularity, defect in, or dispute concerning ASSIGNOR's title to
the Property, and that in the opinion of ASSIGNEE would:
(i) Reduce, impair or prevent ASSIGNEE from receiving payment
from the purchasers of production from the Property;
(ii) Reduce ASSIGNEE's net revenue interest in all or a portion of
the Property;
(iii) Increase ASSIGNEE's working interest in all or a portion of
the Property without a corresponding increase in net revenue
interest; or
(iv) Restrict or extinguish ASSIGNEE's right to use the Property
as owner, lessee, licensee or permittee, as applicable.
(v) Any other encumbrance, condition or circumstance which under
customary title examination standards in the jurisdiction
where the Property is situated would be viewed as a title
defect.
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Neither the environmental condition of the Property nor any failure
to obtain Consents to the transfer of Related Contracts will be
considered a Title Defect under this Section 5.6.
5.6.2 Notice of Title Defects. ASSIGNEE will review title to the Property
prior to Closing and notify ASSIGNOR in writing of any Title Defect
it discovers as soon as reasonably practicable after its discovery,
but in no event less than three (3) business days before the
Closing Date. ASSIGNEE will be deemed to have conclusively waived
any Title Defect about which it fails to notify ASSIGNOR in writing
at least three (3) business days before the Closing Date.
5.6.3 Request to Cure Title Defects. If ASSIGNEE notifies ASSIGNOR of a
Title Defect as provided in Section 5.6.2, Assignee may request
Assignor to cure the Title Defect, but ASSIGNOR will have no
obligation to cure any Title Defect in the Property. If ASSIGNOR
agrees to attempt to cure a Title Defect, ASSIGNOR must cure the
Title Defect before Closing, unless the parties otherwise agree in
writing.
5.6.4 Remedies for Uncured Title Defects. If ASSIGNEE notifies ASSIGNOR
of any Title Defect as provided in Section 5.6.2, and ASSIGNOR
refuses or is unable to cure the Title Defect before Closing, then
ASSIGNEE and ASSIGNOR will have the following rights and remedies
with respect to the uncured Title Defect(s) in the Property, unless
the parties otherwise agree in writing.
(i) ASSIGNEE may waive the uncured Title Defect and proceed with
Closing.
(ii) If an uncured, unwaived Title Defect reduces the value of the
portion of the Property affected by the Title Defect by an
amount less than one percent (1%) of the Allocated Value of
that Property, ASSIGNOR and ASSIGNEE will be obligated to
proceed with Closing as to the affected Property without
adjustment to the Purchase Price.
(iii) If an uncured, unwaived Title Defect reduces the value of the
portion of the Property affected by the Title Defect by an
amount equal to or more than one percent (1%) of the
Allocated Value of that Property, either ASSIGNOR or ASSIGNEE
may exclude the portion of the Property affected by the Title
Defect from the transaction under this Agreement, in which
case ASSIGNOR and ASSIGNEE will adjust the Purchase Price by
the Allocated Value of the excluded Property, and proceed
with Closing as to the rest of the Property.
(iv) In addition to the rights and remedies set forth in subparts
(i) through (iii) of this Section 5.6.4, ASSIGNOR and
ASSIGNEE will have the termination rights set forth in
Section 5.8.
5.7 Casualty Losses and Government Takings.
5.7.1 Notice of Casualty Losses. If, prior to the Closing Date, all or
part of the Property is damaged or destroyed by fire, flood, storm
or other casualty ("CASUALTY LOSS"), or is taken in condemnation or
under the right of eminent domain, or if proceedings for such
purposes shall be pending or threatened ("GOVERNMENT TAKING"),
ASSIGNOR must promptly notify
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ASSIGNEE in writing of the nature and extent of the Casualty Loss
or Government Taking and ASSIGNOR's estimate of the cost required
to repair or replace that portion of the Property affected by the
Casualty Loss or value of the Property taken by the Government
Taking.
5.7.2 Remedies for Casualty Losses and Government Takings. With respect
ASSIGNOR and ASSIGNEE will have the following rights and remedies.
(i) If the agreed cost to repair or replace the portion of the
Property affected by the Casualty Loss or the agreed value of
the Property taken in any Government Taking is less than ten
percent (10%) of the Purchase Price, the Purchase Price will
be adjusted by the agreed cost of the Casualty Loss or the
agreed value of the Property taken by the Government Taking,
and the parties will proceed with Closing.
(ii) If the agreed cost to repair or replace the portion of the
Property affected by the Casualty Loss or the agreed value of
the Property taken in any Government Taking equals or exceeds
ten percent (10%) of the Purchase Price, ASSIGNOR and
ASSIGNEE by agreement may adjust the Purchase Price by the
agreed cost of the Casualty Loss or the agreed value of the
Property taken in any Government Taking, and proceed with
Closing.
(iii) In addition to the remedies set forth in subparts (i) and
(ii) of this Section 5.7.2, ASSIGNOR and ASSIGNEE will have
the termination rights in connection with Casualty Losses and
Government Takings set forth in Section 5.8.
5.7.3 Insurance Proceeds and Settlement Payments. If ASSIGNOR and
ASSIGNEE adjust the Purchase Price of the Property due to a
Casualty Loss or Government Taking, and proceed with Closing,
ASSIGNOR will be entitled to retain (i) all insurance proceeds
payable to ASSIGNOR with respect to any such Casualty Loss, (ii)
all sums paid to ASSIGNOR by third parties by reason of any such
Casualty Loss, and (iii) all compensation paid to ASSIGNOR with
respect to any such Government Taking.
5.7.4 Exclusion of Ordinary Depreciation and Depletion. ASSIGNEE will
assume all risk and loss with respect to any change, between the
Effective Date and the Closing Date, in the condition of the
Property resulting from production of Hydrocarbons through normal
depletion (including the watering-out or sand infiltration of any
well) and the depreciation of personal property through ordinary
wear and tear. None of the events or conditions set forth in this
Section 5.7.4 will be considered a Casualty Loss with respect to
the Property, nor will they be cause for any other reduction in the
Purchase Price, or give rise to any right to terminate this
Agreement.
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5.8 Termination Due to Impairments to the Property.
5.8.1 Right to Terminate.
(i) If, on the Closing Date, the Allocated Value of all Property
to be excluded from the transaction contemplated by this
Agreement due to unwaived, uncured Title Defects, unobtained
Consents or environmental conditions on the Property exceeds
ten percent (10%) of the total Allocated Value of all of the
Property, either ASSIGNOR or ASSIGNEE may terminate this
Agreement, and neither party will have any further obligation
to conclude the transfer of the Property under this
Agreement.
(ii) If, on or before the Closing Date, a Casualty Loss or
Government Taking has occurred with respect to the Property,
and (a) ASSIGNOR and ASSIGNEE have been unable to agree on
the cost of the Casualty Loss or the value of the Property
taken in any Government Taking, or (b) the agreed cost to
repair or replace the portion of the Property affected by the
Casualty Loss or the agreed value of the Property taken in
any Government Taking equals or exceeds 10% of the total
Allocated Value of all the Property, then either ASSIGNOR or
ASSIGNEE may terminate this Agreement, and neither party will
have any further obligation to conclude the transfer of the
Property under this Agreement.
5.8.2 Notice of Termination. Any party exercising a right of termination
under this Section 5.8 must notify the other party in writing no
later than three (3) business days before the Closing Date of its
election to terminate this Agreement.
ARTICLE 6. CLOSING AND POST-CLOSING OBLIGATIONS
6.1 Closing Date. Unless ASSIGNOR and ASSIGNEE otherwise agree in writing, the
closing of the transaction contemplated by this Agreement (the "CLOSING")
will occur in ASSIGNOR's offices at 10 Desta Drive, Suite 100 West,
Midland, Texas 79705 or another mutually agreed location on or before
November 1, 1997, or such earlier date subsequent to September 30, 1997 as
ASSIGNEE may unilaterally select and confer at least five (5) days notice
thereof upon ASSIGNOR (the actual date on which Closing occurs being the
"CLOSING DATE").
6.2 Conditions to Closing. ASSIGNOR and ASSIGNEE will not be obligated to
close the transaction described in this Agreement, and will have the right
to terminate this Agreement, unless each of the conditions to its
performance set forth in this Section 6.2 is satisfied as of the Closing
Date, or it waives in whole or part any such condition to its performance
that is unsatisfied as of the Closing Date. If a party elects to terminate
this Agreement because a condition to its performance is not satisfied, the
terminating party must give the other party written notice of termination
on or before the Closing Date, after which neither party will have any
further obligation to conclude the transfer of the Property under this
Agreement.
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6.2.1 Representations and Warranties.
(i) ASSIGNOR will not be obligated to close if, as of the Closing
Date, any matter represented or warranted in this Agreement
by the ASSIGNEE is untrue, inaccurate or is misleading in any
material respect.
(ii) ASSIGNEE will not be obligated to close if, as of the Closing
Date, any matter represented or warranted in this Agreement
by the ASSIGNOR is untrue, inaccurate or is misleading in any
material respect.
6.2.2 Performance of Obligations.
(i) ASSIGNOR will not be obligated to close if, as of the Closing
Date, ASSIGNEE has not performed all obligations under this
Agreement that ASSIGNEE is required to perform on or before
Closing.
(ii) ASSIGNEE will not be obligated to close if, as of the Closing
Date, ASSIGNOR has not performed all obligations under this
Agreement that ASSIGNOR is required to perform on or before
Closing.
6.2.3 Legal Proceedings. Neither party will be obligated to close if, as
of the Closing Date, any suit or other proceeding is pending or
threatened before any court or governmental agency seeking to
restrain, prohibit, or declare illegal, or seeking substantial
damages in connec tion with, the transaction that is the subject of
this Agreement, or there is reasonable basis for any such suit or
other proceeding.
6.2.4 FTC Consent. Neither party will be obligated to close if, as of the
Closing Date, any necessary consent of the Federal Trade Commission
or any other state or federal governmental authority relating to
this Agreement has not been obtained or waived, or applicable
waiting periods prescribed by the Hart-Scott-Rodino Act have not
elapsed or terminated.
6.3 Closing. At Closing, ASSIGNOR and ASSIGNEE shall execute, acknowledge (if
necessary), and exchange, as applicable:
(i) Assignment documents (in sufficient counterparts for recording) for
the assignment and conveyance of the oil and gas interests to be
transferred under this Agreement in the forms set forth in Exhibit
D (the "ASSIGNMENT DOCUMENTS");
(ii) Assignment of Contracts in the form of Exhibit E;
(iii) Nonforeign Affidavits in the form of Exhibit F;
(iv) Other appropriate instruments necessary to effect or support the
transaction contemplated in this Agreement, including, without
limitation, any lease assignment forms or other forms or filings
required by federal or state agencies to transfer ownership of the
Property and appropriate letters-in-lieu of transfer orders
prepared by ASSIGNOR;
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(v) Any ratification and joinder instruments required to transfer the
rights, obligations and interests in applicable Related Contracts
and other Property;
(vi) If ASSIGNEE is attempting to succeed ASSIGNOR as operator, fully
executed change of operator notices and evidence that ASSIGNEE has
obtained all required operational and plugging bonds for the
Property, and will be accepted as operator by the State of Texas
and any other state and federal agencies having jurisdiction;
(vii) Any applications necessary to transfer regulatory permits to which
the Property is subject, and which ASSIGNOR has agreed to transfer
under this Agreement; and
6.4 Post-Closing Obligations. ASSIGNOR and ASSIGNEE have the following post-
closing obligations:
6.4.1 Property Records. At or as soon as possible after Closing, ASSIGNOR
shall deliver to ASSIGNEE the originals or legible copies of all
property records relating to the Property, as described in Sections
1.1.7 of this Agreement (the "PROPERTY RECORDS"), at a location
designated by ASSIGNEE. If ASSIGNOR retains any original Property
Records, ASSIGNEE shall have the right to access and review those
original Property Records during normal business hours. ASSIGNEE
shall preserve and maintain all Property Records for at least seven
(7) years after the Closing Date. ASSIGNEE shall notify ASSIGNOR
before destroying any Property Records. ASSIGNOR reserves the right
to access and copy (at its own expense) all Property Records for
seven (7) years after the Closing Date, and ASSIGNEE agrees to
provide access to the Property Records to ASSIGNOR during normal
business hours.
6.4.2 Recording and Filing. ASSIGNEE, within thirty (30) days after
Closing, shall (i) record all Assignment Documents and all other
instruments that must be recorded to effectuate the transfer of the
Property; and (ii) file for approval with the applicable government
agencies all state and federal transfer and assignment documents
for the Property. ASSIGNEE shall provide ASSIGNOR a recorded copy
of each Assignment Document and other recorded instruments, and
approved copies of the state and federal transfer and assignment
documents as soon as they are available.
6.4.3 Change of Operator Requirements. If ASSIGNEE is attempting to
succeed ASSIGNOR as operator of any portion of the Property,
ASSIGNEE shall promptly file all appropriate forms, declarations or
bonds with federal and state agencies relative to its assumption of
operations.
6.4.4 Further Assurances. ASSIGNEE and ASSIGNOR agree to execute and
deliver from time to time such further instruments and do such
other acts as may be reasonably necessary to effectuate the
purposes of this Agreement.
ARTICLE 7. ASSUMED AND RETAINED RIGHTS AND OBLIGATIONS
7.1 ASSIGNEE's Rights After Closing. Upon and after Closing, ASSIGNEE will
receive and assume all of ASSIGNOR's right, title and interest in the
Property, with effect as of the Effective Date.
7.2 ASSIGNEE's Obligations After Closing.
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7.2.1 Description of Obligations. Upon and after Closing, ASSIGNEE will
assume, pay and perform all the obligations, liabilities and duties
with respect to the ownership and (if applicable) operation of the
Property that are attributable to periods on and after the
Effective Date (the "ASSIGNEE'S ASSUMED OBLIGATIONS"). The
Assignee's Assumed Obligations include without limitation:
(i) Responsibility for payment of all operating expenses and
capital expenditures related to the Property and attributable
to the period on and after the Effective Date;
(ii) Responsibility for performance of all express and implied
obligations and covenants under the terms of the Leases,
other instruments in the chain of title, the Related
Contracts and all other orders and contracts to which the
Property is subject arising on and after the Effective Date;
(iii) Responsibility for payment of all royalties, overriding
royalties, production payments, net profits obligations,
rentals, shut-in payments and other burdens or encumbrances
to which the Property is subject that are attributable to
periods on and after the Effective Date;
(iv) Responsibility for proper accounting for and disbursement of
production proceeds from the Property attributable to periods
on and after the Effective Date, including funds in any
suspense accounts received from ASSIGNOR;
(v) Responsibility for compliance with all applicable laws,
ordinances, rules and regulations pertaining to the Property,
and the procurement and maintenance of all permits required
by public authorities in connection with the Property on and
after the Effective Date;
(vi) The Plugging and Abandonment Obligations (as defined in
Section 7.4), the Environmental Obligations (as defined in
Section 7.5), and all other obligations assumed by ASSIGNEE
under this Agreement; and
(vii) Responsibility for all obligations with respect to gas
production or processing imbalances with third parties
attributable to the Property for production from and after
the Effective Date.
7.2.2 Non-Operator's Obligations. With respect to (i) any part of the
Property for which ASSIGNEE is not duly elected operator, or (ii)
any non-operating interests in the Property, ASSIGNEE shall assume
full responsibility and liability for Assignee's Assumed
Obligations with respect to the non-operating interests being
conveyed and assigned under this Agreement.
7.3 ASSIGNOR's Obligations After Closing.
7.3.1 Description of Obligations. After Closing, ASSIGNOR will retain
responsibility for all liabilities, obligations and duties with
respect to the ownership and (if applicable) operation of the
Property that are attributable to periods before the Effective
Date, except as otherwise
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specifically provided in this Agreement (the "ASSIGNOR'S RETAINED
OBLIGATIONS"). The Assignor's Retained Obligations include without
limitation:
(i) Responsibility for the payment of all operating expenses and
capital expenditures related to the Property and attributable
to the period prior to the Effective Date.
(ii) Responsibility for performance of all express and implied
obligations and covenants under the terms of the Leases,
other instruments in the chain of title, the Related
Contracts and all other orders and contracts to which the
Property is subject arising before the Effective Date;
(iii) Responsibility for payment of all royalties, overriding
royalties, production payments, net profits obligations,
rentals, shut-in payments and other burdens or encumbrances
to which the Property is subject that are attributable to
periods before the Effective Date.
(iv) Responsibility for proper accounting for and disbursement of
production proceeds from the Property attributable to periods
before the Effective Date;
(v) Responsibility for compliance with all applicable laws,
ordinances, rules and regulations pertaining to the Property,
and the procurement and maintenance of all permits required
by public authorities in connection with the Property before
the Effective Date; and
(vi) Responsibility for the exclusions from the Plugging and
Abandonment Obligations described in Section 7.4.2, and the
exclusions from the Environmental Obligations described in
Section 7.5.2.
7.3.2 Non-Operator's Obligations. With respect to (i) any periods of time
before the Effective Date during which ASSIGNOR was not operator of
the Property, or (ii) any non-operating interests in the Property,
ASSIGNOR retains full responsibility and liability for ASSIGNOR's
Retained Obligations with respect to the non-operating interests
being conveyed and assigned under this Agreement.
7.4 Plugging and Abandonment Obligations.
7.4.1 ASSIGNEE's Obligations. Upon and after Closing, ASSIGNEE assumes
full responsibility and liability for the following plugging and
abandonment obligations related to the Property (the "PLUGGING AND
ABANDONMENT OBLIGATIONS"), regardless of whether they are
attributable to the ownership or operation of the Property before
or after the Effective Date:
(i) The necessary and proper plugging, replugging and abandonment
of all wells on the Property, whether plugged and abandoned
before or after the Effective Date;
(ii) The necessary and proper removal, abandonment, and disposal
of all , structures, pipelines, equipment, abandoned property
and junk located on or comprising part of the Property;
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(iii) The necessary and proper capping and burying of all
associated flow lines located on or comprising part of the
Property;
(iv) The necessary and proper restoration of the Property, both
surface and subsurface, to the condition they were in before
commencement of oil and gas operations; as may be required by
applicable laws, regulation or contract;
(v) Any necessary clean-up or disposal of Property contaminated
by naturally occurring radioactive material ("NORM");
(vi) All obligations arising from contractual requirements and
demands made by courts, authorized regulatory bodies or
parties claiming a vested interest in the Property; and
(vii) Obtaining and maintaining all bonds, or supplemental or
additional bonds, that may be required contractually or by
governmental authorities.
7.4.2 Exclusions from ASSIGNEE's Obligations. ASSIGNEE's obligations
under this Section 7.4 do not include any civil or criminal fines
or penalties (or any settlements of such fines and penalties) that
may be levied against ASSIGNOR by any court or regulatory authority
for non-compliance with applicable laws, regulations or orders in
connection with the ownership or operation of the Property before
the Effective Date.
7.4.3 Standard of Operations. ASSIGNEE shall conduct all plugging,
replugging, abandonment, removal, disposal and restoration
operations in a good and workmanlike manner and in compliance with
all applicable laws and regulations.
7.4.4 Non-Operator's Obligations. With respect to any non-operating
interests in the Property, ASSIGNEE shall assume full
responsibility and liability, from and after the Effective Date,
for the Plugging and Abandonment Obligations with respect to the
non-operating interests being conveyed and assigned under this
Agreement.
7.4.5 ASSIGNOR's Remedies. If ASSIGNEE defaults in the performance of its
obligations pursuant to this Section 7.4, ASSIGNOR, at its option,
and after reasonable notice, may complete, or have completed, the
plugging, replugging, abandonment, removal, disposal, capping,
burying, and restoration operations at ASSIGNEE's expense. Exercise
of ASSIGNOR's rights hereunder shall in no way limit ASSIGNOR's
rights to seek recovery for any uncompensated damages resulting
from such default or to exercise any other legal rights and
remedies hereunder.
7.5 Environmental Obligations.
7.5.1 ASSIGNEE's Obligations. Except as provided in Section 7.5.2 or to
the extent consittuting a breach of ASSIGNOR's representations and
warranties under Article 3 of this Agreement, upon and after
Closing, ASSIGNEE assumes full responsibility and liability for the
following occurrences, events and activities on or related to the
Property (the "ENVIRONMENTAL OBLIGATIONS"), regardless of whether
arising from the ownership or
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operation of the Property before or after the Effective Date, and
regardless of whether resulting from any acts or omissions of
ASSIGNOR or the condition of the Property when acquired:
(i) Environmental pollution or contamination, including pollution
or contamination of the soil, groundwater or air by
Hydrocarbon, brine, NORM or otherwise;
(ii) Underground injection activities and waste disposal onsite;
(iii) Clean-up responses, and the cost of remediation, control,
assessment or compliance with respect to surface and
subsurface pollution caused by spills, pits, ponds or
lagoons;
(iv) Failure to comply with applicable land use, surface
disturbance, licensing or notification requirements;
(v) Disposal on the Property of any hazardous substances, wastes,
materials and products generated by or used in connection
with the ownership or operation of the Property before or
after the Effective Date; and
(vi) Non-compliance with environmental or land use rules,
regulations, demands or orders of appropriate state or
federal regulatory agencies.
7.5.2 Exclusions from ASSIGNEE's Obligations. ASSIGNEE's Environmental
Obligations do not include:
(i) Any civil or criminal fines or penalties (or any settlements
of such fines and penalties) that may be levied against
ASSIGNOR by any court or regulatory authority for any such
violation of any laws, rules or regulations in connection
with the ownership or operation of the Property before the
Effective Date, all of which shall remain the responsibility
of ASSIGNOR; and
(ii) Disposal offsite from the Property before the Effective Date
of any hazardous substances, wastes, NORM, materials and
products generated by or used in connection with the
ownership or operation of the Property before the Effective
Date.
7.5.3 Non-Operator's Obligations. With respect to any non-operating
interests in the Property being transferred to ASSIGNEE under this
Agreement, ASSIGNEE agrees to assume full responsibility and
liability, from and after the Effective Date, for the Environmental
Obligations with respect to the non-operating interests being
conveyed and assigned under this Agreement, save and except to the
extent constituting a breach of ASSIGNOR's representations and
warranties under Article 3 of this Agreement.
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ARTICLE 8. INDEMNITIES
8.1 Definition of Claims. As used in this Agreement, the term "CLAIMS" means
any and all losses, liabilities, damages, punitive damages, obligations,
expenses, fines, penalties, costs, claims, causes of action and judgments
for: (i) breaches of contract; (ii) loss or damage to property, injury to
or death of persons, and other tortious injury; and (iii) violations of
applicable laws, rules, regulations, orders or any other legal right or
duty actionable at law or equity. The term "CLAIMS" also includes
reasonable attorneys fees, court costs, and other reasonable costs of
litigation resulting from the defense of any claim or cause of action
within the scope of the indemnities in this Agreement.
8.2 Application of Indemnities.
8.2.1 Covered Claims and Parties. All indemnities set forth in this
Agreement extend to the officers, directors, employees and
affiliates of the party indemnified. Unless this Agreement
expressly provides to the contrary, the indemnities set forth in
this Agreement apply regardless of whether the indemnified party
(or its employees, agents, contractors, successors or assigns)
causes, in whole or part, an indemnified Claim, including
indemnified Claims arising out of or resulting, in whole or part,
from the condition of the Property or the indemnified party's (or
its employees', agents', contractors', successors' or assigns')
sole or concurrent negligence, strict liability or fault. However,
the indemnities set forth in this Agreement do not extend to any
part of an indemnified Claim that (i) is the result of the gross
negligence, willful misconduct or fraud of the indemnified party,
(ii) is the result of the imposition of punitive damages on the
indemnified party arising from the acts of the indemnified party,
or (iii) is the result of the imposition of civil or criminal fines
or penalties by any court or regulatory authority on the
indemnified party due the indemnified party's failure to comply
with applicable laws, regulations or orders (including, without
limitation, any settlements of such fines and penalties).
8.2.2 Other Limitations. The indemnities of the indemnifying party in
this Agreement do not cover or include any amounts that the
indemnified party may legally recoup from other third party owners
under applicable joint operating agreements or other agreements, or
for which the indemnified party is reimbursed by any third party.
The indemnities in this Agreement do not relieve the parties to
this Agreement from any obligations to third parties. The
indemnities of the parties in this Agreement do not relieve the
indemnified party from, or extend to cover, any obligations of the
indemnified party under the terms of any operating agreement or
other cost-sharing arrangement which is applicable to any Claim.
There will be no upward or downward adjustment in the Purchase
Price as a result of any matter for which ASSIGNEE or Seller is
indemnified under this Agreement.
8.3 ASSIGNEE's Indemnity. ASSIGNEE shall indemnify, defend and hold ASSIGNOR
harmless from and against any and all Claims caused by, resulting from or
incidental to:
8.3.1 Assignee's Assumed Obligations, including without limitation the
Plugging and Abandonment Obligations and the Environmental
Obligations;
8.3.2 If applicable, ASSIGNOR's operation of the Property under Article
10, except to the extent caused by ASSIGNOR's gross negligence or
willful misconduct;
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8.3.3 Any obligations for brokerage or finder's fee or commission
incurred by ASSIGNEE in connection with its purchase of the
Property;
8.3.4 Any violation by ASSIGNEE of state or federal securities laws, or
ASSIGNEE's dealings (including any dealings in breach of ASSIGNEE's
warranties and representations in Section 3.3.3) with its partners,
investors, financial institutions, assignees and other third
parties in connection with the transaction under this Agreement, or
any subsequent sale or other disposition of the Property (or
portion thereof) by ASSIGNEE, its affiliates or assignees;
8.3.5 Any oil and gas production imbalances associated with the Property
that ASSIGNEE assumes under Section 11.1; and
8.3.6 ASSIGNEE's ownership or operation of any portion of the Property is
reconveyed or reassigned to ASSIGNOR pursuant to Sections 5.4.2 or
5.5.3(ii) due to failure to obtain requisite Consents or government
approvals, except to the extent any such Claim is the direct result
of ASSIGNOR's ownership or operation of the Property before the
Effective Date.
8.4 ASSIGNOR's Indemnity. ASSIGNOR shall indemnify, defend and hold ASSIGNEE
harmless from and against any and all Claims caused by, resulting from or
incidental to:
8.4.1 Assignor's Retained Obligations, including the exclusions from the
Plugging and Abandonment Obligations and the exclusions from the
Environmental Obligations assumed by ASSIGNEE in the Assignee's
Assumed Obligations; and
8.4.2 If applicable, ASSIGNOR's operation of the Property under Article
10, to the extent caused by ASSIGNOR's gross negligence or willful
misconduct.
8.5 Notices and Defense of Indemnified Claims. Each party shall immediately
notify the other party of any Claim of which it becomes aware and for which
it is entitled to indemnification from the other party under this
Agreement. The indemnifying party shall be obligated to defend at the
indemnifying party's sole expense any litigation or other administrative or
adversarial proceeding against the indemnified party relating to any Claim
for which the indemnifying party has agreed to indemnify and hold the
indemnified party harmless under this Agreement. However, the indemnified
party shall have the right to participate with the indemnifying party in
the defense of any such Claim at its own expense.
8.6 ASSIGNOR's Indemnity Limit. Notwithstanding anything herein to the
contrary; (i) in no event shall ASSIGNOR be required to indemnify ASSIGNEE
for any Claim or pay any other amount in connection with or with respect to
the transactions contemplated in this Agreement in any amount exceeding in
the aggregate 35 percent of the Purchase Price as adjusted pursuant to
Section 2.2 and (ii) in no event shall ASSIGNOR be required to indemnify
ASSIGNEE for any Claim covered by ASSIGNOR's indemnity under Section 8.4,
if ASSIGNOR does not receive written notice of the Claim as provided in
Section 8.5 within 12 months after the Closing Date.
8.7 NORM. ASSIGNEE ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT OIL AND GAS
PRODUCING FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL
("NORM"). SCALE FORMATION OR SLUDGE DEPOSITS CAN
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CONCENTRATE LOW LEVELS OF NORM ON EQUIPMENT AND OTHER PROPERTY. SOME OR ALL
OF THE EQUIPMENT, MATERIALS AND OTHER PROPERTY SUBJECT TO THIS AGREEMENT
MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS. A HEALTH HAZARD MAY EXIST
IN CONNECTION WITH THIS EQUIPMENT, MATERIALS AND OTHER PROPERTY BY REASON
THEREOF. THEREFORE, ASSIGNEE MAY NEED TO FOLLOW SAFETY PROCEDURES WHEN
HANDLING THIS EQUIPMENT, AND OTHER PROPERTY.
8.8 Pending Litigation and Claims. Notwithstanding anything in this Agreement
to the contrary, SOUTHWEST shall indemnify, defend and hold CONOCO harmless
from and against any Claims resulting from the litigation and claims listed
on Exhibit C under the section entitled "SOUTHWEST Responsibility," except
as may otherwise be expressly provided in that Exhibit. CONOCO shall
indemnify, defend and hold SOUTHWEST harmless from and against any Claims
resulting from the litigation and claims listed on Exhibit C under the
section entitled "Conoco Responsibility," except as may otherwise be
expressly provided in that Exhibit.
8.9 Waiver of Consequential and Punitive Damages. Neither ASSIGNEE nor
ASSIGNOR shall be entitled to recover from the other, respectively, for any
losses, costs, expenses, or damages arising under this Agreement or in
connection with or with respect to the transactions contemplated in this
Agreement any amount in excess of the actual compensatory damages, court
costs and reasonable attorney fees, suffered by such Party. ASSIGNEE AND
ASSIGNOR BOTH WAIVE ANY RIGHT TO RECOVER PUNITIVE, SPECIAL, EXEMPLARY AND
CONSEQUENTIAL DAMAGES ARISING IN CONNECTION WITH OR WITH RESPECT TO THE
TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT.
ARTICLE 9. TAXES AND EXPENSES
9.1 Recording Expenses. ASSIGNEE shall pay all costs of recording and filing
the Assignment Documents for the Property, all state and federal transfer
and assignment documents, and all other instruments.
9.2 Ad Valorem, Real Property and Personal Property Taxes. All Ad Valorem
Taxes, Real Property Taxes, Personal Property Taxes, and similar
obligations ("PROPERTY TAXES") on the Property are ASSIGNOR's obligation
for periods before the Effective Date and ASSIGNEE's obligation for periods
after the Effective Date. If Property Taxes for the current tax year have
not been assessed and paid as of the Closing Date, the ASSIGNEE shall file
all required reports and returns incident to the Property Taxes and pay the
Property Taxes for the current tax year and subsequent periods. The
ASSIGNOR will reimburse the ASSIGNEE promptly for the ASSIGNOR's
proportionate share of these taxes, prorated as of the Effective Date, upon
receipt of evidence of the ASSIGNEE's payment of the taxes. If Property
Taxes for the current tax year have been assessed and paid as of the
Closing Date, the ASSIGNEE will reimburse the ASSIGNOR for its
proportionate share of these taxes, prorated as of the Effective Date, as a
closing adjustment to the Purchase Price, as provided in Section 2.2 of
this Agreement.
9.3 Severance Taxes. ASSIGNOR shall bear and pay all severance or other taxes
measured by Hydrocarbon production from the Property, or the receipt of
proceeds therefrom, to the extent attributable to production from the
Property before the Effective Date. ASSIGNEE shall bear and
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pay all such taxes on production from the Property on and after the
Effective Date. ASSIGNOR shall withhold and pay on behalf of ASSIGNEE all
such taxes on production from the Property between the Effective Date and
the Closing Date, if the Closing Date follows the Effective Date, and the
amount of any such payment shall be reimbursed to ASSIGNOR as a closing
adjustment to the Purchase Price pursuant to Section 2.2. If either party
pays taxes owed by the other, upon receipt of evidence of payment the
nonpaying party will reimburse the paying party promptly for its
proportionate share of such taxes.
9.4 Tax and Financial Reporting.
9.4.1 IRS Form 8594. If the parties mutually agree that a filing of Form
8594 is required, the parties will confer and cooperate in the
preparation and filing of their respective forms to reflect a
consistent reporting of the agreed upon allocation of the value of
the Property.
9.4.2 Financial Reporting. ASSIGNOR and ASSIGNEE agree to furnish to each
other at Closing or as soon thereafter as practicable any and all
information and documents reasonably required to comply with tax
and financial reporting requirements and audits.
9.4.3 Intangible Drilling Cost Recapture. ASSIGNOR and ASSIGNEE agree to
furnish to each other, at Closing or as soon as practicable
thereafter, data relative to deductions claimed, pursuant to
Section 263(c) of the Internal Revenue Code of 1986, for intangible
drilling costs related to the Property, and any other relevant data
to allow each party to calculate the carryover intangible drilling
costs associated with the Property that is subject to potential
recapture under Section 1254(a) of the Internal Revenue Code of
1986.
9.5 Sales and Use Taxes. ASSIGNEE shall be responsible for all sales, use and
similar taxes applicable to the transfer of the Property it receives under
this Agreement. If ASSIGNOR is required to pay such sales, use or similar
taxes on behalf of ASSIGNEE, ASSIGNEE will reimburse ASSIGNOR at Closing
for all sales and use taxes due and payable on the transfer of the Property
to ASSIGNEE.
9.6 Income Taxes. Each party shall be responsible for its own state and
federal income taxes, if any, as may result from this transaction.
9.7 Incidental Expenses. Each party shall bear its own respective expenses
incurred in connection with the negotiation and Closing of this
transaction, including its own consultants' fees, attorneys' fees,
accountants' fees, and other similar costs and expenses.
ARTICLE 10. OPERATIONS DURING THE TRANSITION PERIOD
10.1 Operations by ASSIGNOR. If ASSIGNOR is the operator of all or part of
the Property, and the Closing Date follows the Effective Date, ASSIGNOR
shall continue to operate that portion of the Property during the period
between the Effective Date and 7:00 a.m., local time, where the Property is
located, on the first day of the month following the month in which Closing
occurs, or such other date as ASSIGNOR and ASSIGNEE may agree in writing or
may be required by the applicable operating agreement (the "INTERIM
PERIOD"). However, ASSIGNOR will have no obligation to operate any portion
of the Property after the Interim Period. ASSIGNOR shall operate the
Property during the Interim Period in a prudent manner consistent with
generally accepted industry practices and standards, applicable laws and
regulations, and all applicable lease and operating agreements
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and other applicable agreements. ASSIGNOR makes no representation or
warranty that ASSIGNEE will become operator of any portion of the Property,
as that matter is controlled by the applicable operating agreements and
governmental regulatory requirements.
10.2 ASSIGNEE's Approval. In conducting operations during the Interim
Period after the Closing Date, ASSIGNOR shall, except for emergency action
taken in the face of serious risk of life, property or the environment, (i)
obtain ASSIGNEE's prior written approval of all expenditures and proposed
contracts and agreements, or amendments to existing contracts and
agreements relating to the Property that involve individual commitments of
more than $10,000 net to ASSIGNEE'S interest; (ii) consult with and advise
ASSIGNEE regarding all material matters concerning the operation,
management and administration of the Property; and (iii) obtain ASSIGNEE's
written approval before voting under any operating, unit, joint venture or
similar agreement. ASSIGNOR shall notify ASSIGNEE of any emergency action
taken, and to the extent reasonably practicable, obtain ASSIGNEE's prior
approval of such actions. However, except for emergency action that must
be taken in the face of serious risk of life, property or the environment,
ASSIGNOR will have no obligation to undertake any actions with respect to
the Property that are not required in the course of the normal operation of
the Property.
10.3 Compensation of ASSIGNOR. ASSIGNEE will pay ASSIGNOR, as provided
under the applicable operating agreement, for ASSIGNEE's working interest
share of all operating expenses and other expenditures paid or incurred by
ASSIGNOR in connection with the operation of the Property during the
Interim Period, including overhead charges at the rate specified in the
applicable operating agreement (unless if ASSIGNOR owns all of the working
interest in the Property subject to the applicable operating agreement.
ASSIGNOR will have no obligation to make capital expenditures or
extraordinary operating expenditures in connection with the Property during
the Interim Period. Additionally, ASSIGNOR may require ASSIGNEE to prepay
on a monthly basis any and all expenses that ASSIGNOR estimates it will pay
or incur in connection with the operation of the Property. If ASSIGNEE is
ultimately selected as operator of the Property, ASSIGNEE will additionally
reimburse ASSIGNOR for the amounts of any unpaid operating expenses and
capital expenditures of other working interest owners paid or incurred by
ASSIGNOR and attributable to operations during the Interim Period and
ASSIGNOR shall assign all claims with respect thereto to ASSIGNEE. ASSIGNOR
will be entitled to retain any overhead payments received from other
working interest owners and attributable to operations during the Interim
Period.
10.4 Operation of Certain Property After Interim Period. ASSIGNOR and ASSIGNEE
recognize that ASSIGNOR may remain the record title owner of certain
portions of the Property after the Interim Period, pending receipt of
government transfer approvals, as provided in Section 5.4. If ASSIGNOR is
required to remain the operator of the affected Property until the required
approvals are obtained, then ASSIGNOR will operate the affected Property
during the period prior to receiving such approvals, as provided in this
Sections 10.1 through 10.3.
ARTICLE 11. MISCELLANEOUS
11.1 Production Imbalances. The Purchase Price paid by ASSIGNEE is based
on the assumed oil or gas production imbalances with respect to the
Property set forth in Exhibit G. If ASSIGNOR and ASSIGNEE determine no
later than 180 days after Closing that the production imbalances stated in
Exhibit G are inaccurate, the parties agree to exchange additional
compensation, as provided in
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Exhibit G, for the difference between the imbalances set forth in Exhibit G
and the revised imbalances determined by the parties. Thereafter, ASSIGNEE
will be solely responsible for any liability and solely entitled to any
benefit that results from revision of production imbalance information
about the Property after the Closing Date.
11.2 Crude Oil Marketing Opportunity. Subject to any existing marketing
contracts, ASSIGNOR shall not further dedicate or commit the oil,
condensate or other Liquid Hydrocarbons (Liquid Hydrocarbons) produced from
the Property. After Closing, and at such future times as ASSIGNEE seeks
offers or proposals to purchase the Liquid Hydrocarbons produced from the
Property, it is further understood and agreed between the parties that
ASSIGNEE will invite ASSIGNOR to submit an offer or bid to purchase any
such production. ASSIGNEE is in no way restricted as to when or to whom it
may solicit offers, nor as to the term to which ASSIGNEE may commit or
dedicate any such production. There shall be no obligations on the part of
ASSIGNEE to give preference to ASSIGNOR, but rather it is the intent of the
parties that ASSIGNOR shall have the continuing opportunity to participate,
on a competitive and good faith basis, in ASSIGNEE'S marketing process for
the Liquid and Gaseous Hydrocarbons produced from the Property.
11.3 Dispute Resolution. Compliance with this Section 11.3 shall
constitute a condition precedent to either Party seeking judicial
enforcement of any provisions of this Agreement. Any dispute concerning
this Agreement shall be resolved under the mediation and binding
arbitration procedures of this Section 11.3. ASSIGNEE and ASSIGNOR will
first attempt in good faith to resolve all disputes by negotiations between
management level persons who have authority to settle the controversy. If
either Party believes further negotiations are futile, such Party may
initiate the mediation process by so notifying the other Party in writing.
Both Parties shall then attempt in good faith to resolve the dispute by
mediation in Midland, Texas, employing management level persons with
authority to settle the dispute, in accordance with the Center for Public
Resources Model Procedure for Mediation of Business Disputes, as such
procedure may be modified by agreement of the Parties. If the dispute has
not been resolved pursuant to mediation within sixty (60) days after
initiating the mediation process, the dispute shall be finally resolved
through binding arbitration, as follows:
(i) If any dispute or controversy shall arise between the Parties out of
this Agreement, the alleged breach thereof or any tort in connection
therewith, or out of the refusal to perform the whole or any part
thereof, and the Parties shall be unable to agree with respect to the
matter or matters in dispute or controversy, the same shall be
submitted to arbitration before a panel of arbitrators in accordance
with the Texas General Arbitration Act, V.A.C.S. art. 224, et seq.
The panel of arbitrators shall be chosen as follows: Upon the written
demand of either Party and within ten (10) working days from the date
of such demand, each Party shall name an arbitrator and these two so
named shall promptly thereafter choose a third. If either Party shall
fail to name an arbitrator within ten (10) working days from such
demand, the other Party shall name the second arbitrator as well as
the first, or if the two arbitrators shall fail within ten (10)
working days from their appointment to agree upon and appoint the
third arbitrator, then upon written application by either Party such
third arbitrator may be appointed by the senior Judge in active
service of the United States District Court for the Western District
of Texas; and if said Judge shall fail to act, then such third
arbitrator shall be appointed by the President of the Center for
Public Resources, Inc. The arbitrators
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selected to act hereunder shall be qualified by education,
experience, and training to pass upon the particular matter or
matters in dispute.
(ii) The panel of arbitrators so chosen shall proceed promptly to hear and
determine the matter or matters in dispute, after giving the Parties
due notice of hearing and a reasonable opportunity to be heard. The
procedure of the arbitration proceedings shall be in accordance with
the Center for Public Resources Rules for Non-Administered
Arbitration of Business Disputes, as may be modified by the panel of
arbitrators. Unless otherwise determined by the arbitrators, the
hearing and presentations of the Parties shall not exceed two days
cumulative. The location of all arbitration proceedings hereunder
shall be Midland, Midland County, Texas, unless the panel of
arbitrators determines that another venue is more appropriate. The
award of the panel of arbitrators or a majority thereof shall be made
within forty-five (45) days after the appointment of the third
arbitrator, subject to any reasonable delay due to unforeseen
circumstances. In the event of the panel or a majority thereof
failing to make a award within sixty (60) days after the appointment
of the third arbitrator, new arbitrators may at the election of
either Party be chosen in like manner as if none had been previously
selected.
(iii) The award of the arbitrators, or a majority thereof, shall be in
writing and shall be final and binding on the Parties as to the
question or questions submitted, and the Parties shall abide by such
award and perform the conditions thereof. The award of the
arbitrators shall be based on the applicable law and facts, the
merits of the Parties' positions in the controversy or dispute, and
the arbitrators' assessment of the fairness and reasonableness of any
settlement proposal of any Party. The award shall not provide or
create any rights or benefits in any person or entity which is not a
Party to this Agreement, as this Agreement and any arbitration
thereunder shall not be construed as a third party bene ficiary
contract. Unless otherwise determined by the arbitrators, all
expenses in connec tion with such arbitration shall be divided
equally between the Parties thereto, except that the expenses of
counsel, witnesses, and employees of each Party shall be borne solely
by the Party incurring them, and the compensation of any arbitrator
named by a Party shall be borne solely by such Party.
(iv) The arbitrators shall not be required to explain reasons for the
award. No transcript or other recording shall be made of the
arbitration proceedings. Except (a) in connection with a suit for
enforcement of the award, (b) as required by law, court order or
regulation, (c) when reasonably necessary to explain the terms and
conditions of the award to outside attorneys, auditors, and insurers,
or (d) as part of good faith compliance with disclosure obligations
under applicable law, the arbitration proceedings, the award, and the
Parties' actions in connection with the arbitration are confidential
and shall not be disclosed to third parties, and no disclosure of or
reference to the arbitration, the award, or of the par ties'
statements or actions in connection with the arbitration shall be
made to any third party. All offers, promises, conduct, statements,
and evidence, whether oral or written, made in the course of the
arbitration by any of the Parties, their agents, employees, experts,
or attorneys are confidential. Such offers, promises, conduct,
statements, and evidence shall be considered inadmissible under Rule
408 of the Federal Rules of Evidence and any similar state
provisions, and shall be inadmissible for any purpose, including
impeachment. However, evidence that is otherwise admissible shall not
be rendered inadmissible as a result of its use in the arbitration.
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(v) The award of the panel of arbitrators and the obligation to abide by
same and perform the conditions thereof shall be enforceable in the
Texas state district courts in Midland County, Texas, or in any
federal court having jurisdiction.
11.4 Survival of Representations and Warranties. All of the representations,
warranties, indemnities and agreements of or by the parties to this
Agreement will survive the execution and delivery of the closing documents
under this Agreement, and the transfer of the Property between the parties.
11.5 Public Announcements. Neither party may make press releases or other public
announcements concerning this transaction, without the other party's prior
written approval and agreement to the form of the announcement, except as
may be required by applicable laws or rules and regulation of any
governmental agency or stock exchange.
11.6 Notices. All notices under this Agreement must be in writing. Any notice
under this Agreement may be given by personal delivery, facsimile
transmission, U.S. mail (postage prepaid), or commercial delivery service,
and will be deemed duly given when received by the party charged with such
notice and addressed as follows:
If to ASSIGNOR: CONOCO INC.
1000 South Pine
P. O. Box 1267
Ponca City, Oklahoma 74603
Attention: Manager, Real Property Administration
Fax No.: (405) 767-5479
Telephone: (405) 767-2233
with copy to: CONOCO INC.
10 Desta Drive, Suite 100 West
Midland, Texas 79705
Attention: Region Manager
Fax No.: (915) 686-5422
Telephone: (915) 686-5400
If to ASSIGNEE:
SOUTHWEST ROYALTIES, INC.
407 N. Big Spring
Midland, Texas 79701
Attention: H.H. Wommack III
Title: President________________________
Fax No.: (915) 688-0191____________
Telephone: (915) 686-9927
With Copy To:
Kerr & Ward, L.L.P.
Attention: William M. Kerr, Jr.
P.O. Box 2858
Midland, Tx
Fax No: (915) 684-9997
Telephone: (915) 684-9990
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Any party, by written notice to the other, may change the address or the
individual to which or to whom notices are to be sent under this
Agreement.
11.7 Effective Date. The Effective Date of this Agreement will be 7:00
a.m., local time, where the Property is located, on OCTOBER 1, 1997.
11.8 Assignment. Prior to the later of the Closing Date or the Effective Date,
neither party may assign its rights or obligations under this Agreement
without the prior written consent of the other, unless the assignment
occurs by merger, reorganization or sale of all of a party's assets. If
ASSIGNEE sells or assigns all or a portion of the Property to a
subsequent purchaser, this Agreement and all rights and obligations under
this Agreement will remain in effect between ASSIGNEE and ASSIGNOR as to
all of the Property, notwithstanding such sale or assignment.
11.9 Entire Agreement and Amendment. This Agreement constitutes the entire
understanding between the parties, superseding all prior negotiations,
discussions, agreements and understandings between the parties regarding
the subject transaction, excepting any written agreements that may be
executed by the parties concurrently or after the execution of this
Agreement. This Agreement may be amended, modified, and supplemented only
by written agreement between duly authorized representatives of the
parties.
11.10 Successors and Assigns. This Agreement binds and inures to the benefit of
the parties hereto their respective permitted successors and assigns, and
nothing contained in this Agreement, express or implied, is intended to
confer upon any other person or entity any benefits, rights, or remedies.
11.11 Severability. If any provision of this Agreement is found by a court of
competent jurisdiction to be invalid or unenforceable, that provision
will be deemed modified to the extent necessary to make it valid and
enforceable and if it cannot be so modified, it shall be deemed deleted
and the remainder of the Agreement shall continue and remain in full
force and effect.
11.12 Counterparts. This Agreement may be executed in counterparts, each of
which shall constitute an original and all of which shall constitute one
document.
11.13 Governing Law. This Agreement is governed by and must be construed
according to the laws of the State of Texas, excluding any conflicts-of-
law rule or principle that might apply the law of another jurisdiction.
TO THE EXTENT THEY MAY BE APPLICABLE, THE PARTIES WAIVE THE PROVISIONS OF
THE "TEXAS DECEPTIVE TRADE PRACTICES ACT", OTHER THAN SECTION 17.555
THEREOF WHICH IS NOT WAIVED. The Assignment Documents, and any other
instruments of conveyance executed under this Agreement, will be governed
by and must be construed according to the laws of the state where the
Property to which they pertain is located, excluding any conflicts-of-law
rule or principle that might apply the law of another jurisdiction,
except as otherwise provided in the Assignment Documents or instruments.
11.14 Exhibits. The Exhibits attached to this Agreement are incorporated into
and made a part of this Agreement. In the event of a conflict between the
provisions of the Exhibits or the executed Assignment Documents and the
foregoing provisions of this Agreement, the provisions of this Agreement
shall take precedence. In the event of a conflict between the provisions
of the pro forma
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Assignment Documents and other transaction documents attached to this
Agreement as Exhibits and the Assignment Documents and other transaction
documents actually executed by the parties, the provisions of the
executed Assignment Documents and other executed contractual documents
shall take precedence. The omission of certain provisions of this
Agreement from the Assignment Documents does not constitute a conflict
between this Agreement and the Assignment Documents, and will not effect
a merger of the omitted provisions.
11.15 Aprroval Requirement: This Agreement shall be subject to approval by the
Office of the Chief Executive of DuPont on or before September 17, 1997,
failing which either party may terminate this Agreement (with the
Performance Deposit to be immediately refunded to ASSIGNEE in the event
of any such termination). Furthermore, ASSIGNOR shall notify ASSIGNEE
immediately of any such approval or termination of this Agreement.
11.16 Suspense Accounts. At ASSIGNOR's option and as soon as practical after
Closing, ASSIGNOR shall transfer to ASSIGNEE all funds held by ASSIGNOR
in suspense related to proceeds of production and attributable to third
parties' interests in the Leases, including funds suspended awaiting
minimum disbursement requirements, funds suspended under division orders
and funds suspended for title and other defects, together with legible
copies of all pertinent records of ASSIGNOR relating to such suspended
funds. If such funds are transferred, ASSIGNEE agrees to administer all
such accounts and assumes all payment obligations relating thereto in
accordance with all applicable laws, rules and regulations, and shall be
liable for the payment thereof to the proper parties; provided however,
ASSIGNEE shall not be responsible for any interest or penalties that may
have accrued before the Effective Date.
IN WITNESS WHEREOF, the authorized representatives of CONOCO and
SOUTHWEST execute this Agreement on the dates stated below.
CONOCO INC. SOUTHWEST ROYALITES, INC.
By:_____________________________ By:___________________________
Name: Jerry D. Hardin Name: Joel D. Talley
Title: Attorney-in-Fact Title: Vice President
Date:___________________________ Date:__________________________
Witnesses:______________________ Witnesses:_____________________
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<PAGE>
EXHIBIT 10.2
[Execution Version]
SECURITIES PURCHASE AGREEMENT
BETWEEN
SOUTHWEST ROYALTIES HOLDINGS, INC.
AND
JOINT ENERGY DEVELOPMENT
INVESTMENTS LIMITED PARTNERSHIP
DATED AS OF OCTOBER 14, 1997
WARRANTS TO PURCHASE 45,628 SHARES OF COMMON STOCK
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
Section 1.01 Definitions 1
Section 1.02 Accounting Procedures and Interpretation 8
ARTICLE II
ISSUANCE OF WARRANTS; RIGHTS OF PURCHASER
Section 2.01 Issuance of Warrants 9
Section 2.02 The Closing 9
Section 2.03 Delivery 9
Section 2.04 Rights of Purchaser 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.01 Corporate Existence 10
Section 3.02 Corporate Power and Authorization 10
Section 3.03 Binding Obligations 10
Section 3.04 No Legal Bar Or Resultant Lien 10
Section 3.05 No Consent 10
Section 3.06 Financial Condition 10
Section 3.07 Liabilities 11
Section 3.08 Litigation 11
Section 3.09 Taxes; Governmental Charges 11
Section 3.10 Titles, Etc 11
Section 3.11 Defaults 11
Section 3.12 Casualties; Taking of Properties 12
Section 3.13 Location of Business and Offices 12
Section 3.14 Compliance with the Law 12
Section 3.15 No Material Misstatements 12
Section 3.16 ERISA 13
Section 3.17 Environmental Matters 13
Section 3.18 Capitalization 15
Section 3.19 Subsidiaries; Partnerships 15
Section 3.20 Warrant Shares 15
Section 3.21 Certain Fees 15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Section 4.01 Investment 16
Section 4.02 Nature of Purchaser 16
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Section 4.03 Receipt of Information; Authorization 16
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
Section 5.01 Conditions Precedent to Obligations of the Purchaser 17
Section 5.02 Conditions Precedent to Obligations of the Company 18
ARTICLE VI
COVENANTS
Section 6.01 Financial Statements and Reports 19
Section 6.02 Compliance with Laws 20
Section 6.03 Further Assurances 20
Section 6.04 Accounts and Records 20
Section 6.05 Right of Inspection 20
Section 6.06 Transactions with Affiliates 20
ARTICLE VII
MISCELLANEOUS
Section 7.01 Interpretation and Survival of Provisions 21
Section 7.02 Costs, Expenses and Taxes 21
Section 7.03 No Waiver; Modifications in Writing 22
Section 7.04 Binding Effect; Assignment 22
Section 7.05 Replacement Securities 22
Section 7.06 Communications 23
Section 7.07 Governing Law 23
Section 7.08 Arbitration 23
Section 7.09 Execution in Counterparts 24
Exhibits:
Exhibit 6.01(a) - Consolidating Requirements
Schedules:
Schedule 3.07 - Liabilities
Schedule 3.08 - Litigation
Schedule 3.21(a) - Subsidiaries
Schedule 3.21(b) - Partnerships
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<PAGE>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT, dated as of October 14, 1997 (this
"Agreement"), between SOUTHWEST ROYALTIES HOLDINGS, INC., a Delaware corporation
(the "Company"), and JOINT ENERGY DEVELOPMENT INVESTMENTS LIMITED PARTNERSHIP, a
Delaware limited partnership (the "Purchaser").
On November 5, 1996, the Company's wholly-owned Subsidiary, Southwest
Royalties, Inc. ("Southwest"), and the Purchaser entered into a Securities
Purchase Agreement for the issuance of warrants in connection with a loan from
the Purchaser to Southwest. In order to reflect the reorganization of
Southwest, the formation of the Company, and the repayment of the loan, the
Company will cause and the Purchaser will agree to the cancellation of the
existing warrants and issuance by Company of warants for Company common stock in
favor of the Purchaser as herein described.
In consideration of the mutual covenants and agreements set forth herein
and for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.01 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Average Gas Basis Differential" means the average of the Gas Basis
Differentials for the 12 months prior to the reserve report "as of" date.
"Average Oil Basis Differential" means the average of the Oil Basis
Differentials for the 12 months prior to the reserve report "as of" date.
"Basic Documents" means, collectively, this Agreement and the Equity
Documents.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors.
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"Business Day" means any day other than Saturday, Sunday, or a day on which
banking institutions in Houston, Texas, are not required to be open for
business.
"Capitalized Lease Obligation" means the amount of the liability under any
capital lease that, in accordance with GAAP, is required to be capitalized and
reflected as a liability on the balance sheet.
"Capital Stock" of any Person means any and all shares, interests,
participations, or other equivalents (however designated) of, or rights,
warrants, or options to purchase, corporate stock or any other equity interest
(however designated) of or in such Person.
"Closing" has the meaning provided therefor in Section 2.02 of this
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations thereunder.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock par value $.10 per share of the
Company or such other Capital Stock or other securities as shall, after the date
of this Agreement, constitute the common equity of the Company.
"EBITDA" means, for any Person or group of Persons and for any period of
its determination, the net income of such Person for such period, exclusive of
extraordinary items (and to the extent any gains from the sale of oil and gas
properties are not considered extraordinary items, any gains resulting from such
sales), plus the interest expense, income tax expense, deprecation expense, and
amortization expense deducted from the net income of such Person for such
period, less any dividends, distributions, or payments made by such Person
during such period on or for the repurchase, redemption, or acquisition of any
Capital Stock of such Person, all determined in accordance with GAAP.
"Environmental Laws" means any and all laws, statutes, ordinances, rules,
regulations, orders, or determinations of any Governmental Authority pertaining
to health or the environment in effect in any and all jurisdictions in which the
Company or its Subsidiaries are conducting or at any time have conducted
business, or where any property of the Company or its Subsidiaries is located,
or where any hazardous substances generated by or disposed of by the Company or
its Subsidiaries are located, including but not limited to the Oil Pollution Act
of 1990 ("OPA"), as amended, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Superfund Amendments
and Reauthorization Act of 1986, as amended, and other environmental
conservation or protection laws. The term "oil" has the
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meaning specified in OPA; the terms "hazardous substance," "release" and
"threatened release" have the meanings specified in CERCLA, and the terms "solid
waste," "disposal" and "disposed" have the meanings specified in RCRA; provided,
however, if either CERCLA, RCRA or OPA is amended so as to broaden the meaning
of any term defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment, and provided, further, that, to the extent the
laws of the state in which any property of the Company or its Subsidiaries is
located establish a meaning for "oil," "hazardous substance," "release," "solid
waste" or "disposal" which is broader than that specified in either OPA, CERCLA
or RCRA, such broader meaning shall apply with respect to such property.
"Equity Documents" means the Warrants, the Warrant Shares, the Registration
Rights Agreement, and the Stockholders Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time and the rules and regulations thereunder.
"Estimated Private Market Equity Value" means at any time:
the sum of
----------
(a) For the oil and gas properties of the Company and any Subsidiary of the
Company, (i) the product of (A) the discounted future net cash flows from
each proved reserve category of such Persons calculated on a pre-tax basis
in accordance with Commission guidelines (except that with respect to
pricing, the oil price shall be equal to the sum of the Nymex Oil Strip
Price and the Average Oil Basis Differential, and the gas price shall be
equal to the sum of the Nymex Gas Strip Price and the Average Gas Basis
Differential), as estimated by independent petroleum engineers approved by
the Purchaser in the most recent report delivered pursuant to Section 6.01,
and (B) an ongoing concern multiplier equal to 1.10, plus (ii) the cost
basis of the Oil and Gas Properties of such Persons to which no proved
reserves are attributable less (iii) any gas balancing liabilities of such
Persons to the extent not deducted in the calculation above less (iv) the
outstanding Indebtedness of such Persons attributable to the oil and gas
properties of such Person; plus
(b) for any assets of the Company and any Subsidiary of the Company used in
the lines of business of Sierra Well Service, Inc., (i) the product of (A)
the EBITDA of such Persons attributable to such assets for the preceding
four fiscal quarters most recently ended multiplied by (B) 6.0, less (ii)
the outstanding Indebtedness of such Persons attributable to such assets;
plus
(c) for any real property owned by the Company and any Subsidiary of the
Company the sum of (i) the value of the income producing commercial real
estate properties of such Persons determined by using a 11% capitalization
rate on the net operating cash flow from such properties for the fiscal
quarter most recently ended plus (ii) 100% of the appraised value of
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non income producing real estate properties of such Persons for which
appraisals approved by the Purchaser are available and not to more than 12
months old less (iii) the outstanding Indebtedness of such Persons
attributable to the real property of such Persons; plus
(d) for Threading Products International, LLC, and any Subsidiary of the
Company engaged in the lines of business of Threading Products
International, LLC, the sum of (i) 75% of the net book value of the
property, plant, and equipment of such Persons plus (ii) the cash and cash
equivalent investments of such Persons plus (iii) the long-term certificate
of deposit reflected on the June 30, 1996, balance sheet of Threading
Products International, LLC; plus
(e) the combined Net Working Capital of the Company and its Subsidiaries;
plus
(f) the mark to market valuation of all hedging transactions of the Company
and its Subsidiaries; plus
(g) the appraised value of any other assets of the Company and any
Subsidiary of the Company (such appraisal to be conducted by an independent
appraiser appointed by the Purchaser and approved by the Company, which
approval shall not be unreasonably withheld, and based upon a going concern
market value, not a liquidation value, and without discount for any asset
being a limited interest, a minority interests, or a non liquid
investment).
To the extent that any assets and liabilities in the foregoing computation are
owned by a Subsidiary that is not wholly owned by the Company, the value
attributed to such assets and liabilities in the foregoing computation shall be
adjusted to reflect the percentage ownership of the Company in such Subsidiary.
Notwithstanding any of the foregoing, (a) in the event that the stock of any
Subsidiary of the Company becomes publicly traded, the value of the assets and
liabilities of such Subsidiary and the Company's ownership thereof shall be
determined based upon the average Price of the stock of such Subsidiary during
the 30 day period immediately preceding the applicable determination date and
(b) in the event that the stock of the Company becomes publicly traded, the
Estimated Private Market Equity Value of the Company shall be determined based
upon the average Price of the stock of the Company during the 30 day period
immediately preceding the applicable determination date.
"Financial Statements" means consolidated balance sheets, statements of
operations, and statements of cash flow, the consolidating schedules used to
prepare the same, and, on an annual basis, appropriate footnotes prepared in
accordance with GAAP.
"Gas Basis Differential" means, with respect to any month, the average unit
gas price received (Company revenues from gas sales divided by net MMBtu's sold
for such month) minus the average of the daily settlement prices on an MMBtu
basis for the last three (3) scheduled trading days of the Nymex Henry Hub
Natural Gas Futures Contract for the month of production.
"GAAP" means generally accepted accounting principles, consistently
applied.
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"Governmental Authority" means any (domestic or foreign) federal, native
American Indian, state, province, county, city, municipal, or other political
subdivision or government, department, commission, board, bureau, court, agency,
or any other instrumentality of any of them, which exercises jurisdiction over
the Company, any of its Subsidiaries, or any of their respective property.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services to be acquired by such debtor
irrespective of whether such property is received or such services are
rendered), (iv) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial condition of
the debtor, or (v) otherwise to assure a creditor against loss; provided that
the term "guarantee" shall not include endorsements for collection or deposit,
in either case in the ordinary course of business, or any obligation or
liability of such Person in respect of leasehold interests assigned by such
Person to any other Person.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade accounts payable and other
accrued current liabilities incurred in the ordinary course of business other
than payables or liabilities 60 days or more past due, (ii) all obligations of
such Person evidenced by bonds, notes, debentures, or other similar instruments,
(iii) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such Person (even
if the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade accounts payable arising in the ordinary course of business,
(iv) all Capitalized Lease Obligations of such Person, (v) all indebtedness
referred to in (but not excluded from) clause (i), (ii), (iii), or (iv) above of
other Persons, the payment of which is secured by (or for which the holder of
such indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien upon or in property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such indebtedness, (vi) all Guaranteed Debt
of such Person, (vii) all Redeemable Capital Stock issued by such Person valued
at the maximum redemption price plus all accrued and unpaid dividends thereon
plus the maximum value of any other obligations thereunder and (viii) any
amendment, supplement, modification, deferral, renewal, extension or refunding
of any liability of the types referred to in clauses (i) through (vii) above.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock that does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Capital Stock as if such Redeemable
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to this Agreement, and if such price is based upon, or
measured by, the fair market value of such
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Redeemable Capital Stock, such fair market value to be determined in good faith
by the Board of Directors of the issuer of such Redeemable Capital Stock based
on the Estimated Private Market Equity Value.
"Investment Unit" has the meaning provided therefor in Section 2.05 of this
Agreement.
"Lien" means any lien, mortgage, security interest, tax lien, pledge,
encumbrance, conditional sale or title retention arrangement or other interest
in property designed to secure repayment of a liability whether arising by
agreement or under law, or otherwise means any mortgage, charge, pledge, lien,
security interest, or encumbrance of any kind.
"Material Adverse Effect" means any circumstances or events which could (i)
have a material adverse effect on the assets or properties, liabilities,
financial condition, business, operations, affairs, or circumstances of the
Company from the facts represented or warranted in any Basic Document (other
than any representation or warranty related solely to a different point in
time), or (ii) materially impair the ability of the Company to carry out its
business as it exists on the date of this Agreement or proposed at the date of
this Agreement to be conducted or to meet its obligations under the Basic
Documents on a timely basis.
"Net Working Capital" means, for any Person or group of Persons and as of
any date of its determination, the difference (shown on the balance sheets of
such Person or group as of the end of the most recent fiscal quarter of such
Person or group for which internal financial statements are available) between
(i) all current assets of such Person or group and (ii) all current liabilities
of such Person or group, except the current portion of long-term Indebtedness.
"Nymex Gas Strip Price" means the average of the first 12 contract months
settlement prices for the NYMEX Henry Hub Natural Gas Futures Contract
calculated at the close of business on the reserve report "as of" date, or the
first trading day prior to the "as of" date if the "as of" date is not a trading
day.
"Nymex Oil Strip Price" means the average of the first 12 contract months
settlement prices for the NYMEX Light Sweet Crude Oil Futures Contract
calculated at the close of business on the reserve report "as of" date, or the
first trading day prior to the "as of" date if the "as of" date is not a trading
day.
"Oil Basis Differential" means, with respect to any month, the average unit
oil price received (Company revenues from oil sales divided by net oil barrels
sold for such month) minus the average of the daily settlement prices on a per
barrel basis for the prompt month NYMEX Light Sweet Crude Oil Futures Contract
for each NYMEX trading day during the month of production.
"Partnerships" means partnerships with the Company or any of its
Subsidiaries as general partner, including those formed by the Company to
acquire producing and non-producing oil, gas and mineral properties.
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"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, or government or any agency or political
subdivision thereof.
"Plan" means any plan subject to Title IV of ERISA and maintained by the
Company, any Subsidiary, or any Partnership, or any such plan to which the
Company, any Subsidiary, or any Partnership is required to contribute on behalf
of their employees.
"Price" means the average of the "high" and "low" prices as reported in The
Wall Street Journal's listing for such day (corrected for obvious typographical
errors) or if such shares are not reported in such listing, the average of the
reported "high" and "low" sales prices on the largest national securities
exchange (based on the aggregate dollar value of securities listed) on which
such shares are listed or traded, or if such shares are not listed or traded on
any national securities exchange, then the average of the reported "high" and
"low" sales prices for such shares in the over-the-counter market, as reported
on the National Association of Securities Dealers Automated Quotations System,
or, if such prices shall not be reported thereon, the average of the closing bid
and asked prices so reported, or, if such prices shall not be reported, then the
average of the closing bid and asked prices reported by the National Quotations
Bureau Incorporated, or, in all other cases, the Estimated Private Market Equity
Value divided by the number of outstanding shares (on a fully diluted basis
using the treasury stock method). The "average" Price per share for any period
shall be determined by dividing the sum of the Prices determined for the
individual trading days in such period by the number of trading days in such
period.
"Redeemable Capital Stock" of any Person means any Capital Stock of such
Person or any Subsidiary of such Person that, either by its terms, by the terms
of any security into which it is convertible or exchangeable or otherwise, (i),
is, or upon the happening of an event or passage of time would be, required to
be redeemed, or (ii) is redeemable at the option of the holder thereof, or (iii)
is convertible into or exchangeable for debt securities.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of October 14, 1997, made by the Company in favor of the Purchaser
relating to the Warrants and the Warrant Shares.
"Securities" means the Warrants and Warrant Shares.
"Securities Act" means the Securities Act of 1933, as amended from time to
time, and the rules and regulations of the Commission promulgated thereunder.
"Stockholders Agreement" means the Stockholders Agreement dated as of
October 14, 1997, made by the Company in favor of the Purchaser relating to the
Warrants and the Warrant Shares.
"Subsidiary" of any specified Person means (a) any other Person of which,
at the time of determination, such specified Person, directly and/or indirectly
through one or more other Persons,
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owns more than 50% of the voting interests, (b) any other Person of which, at
the time of determination, such specified Person, directly and/or indirectly
through one or more other Persons, holds the power to elect a majority of the
board of directors or other managers or holds the power to control, and (c) with
respect to the Company, in addition to (a) and (b) above, Southwest Royalties,
Inc., Sierra Well Service, Inc., and Midland Red Oak Realty, Inc., and each of
their respective Subsidiaries.
"Time of Purchase" has the meaning provided therefor in Section 2.02 of
this Agreement.
"Warrant Shares" means the shares of Common Stock and other securities,
property, or cash receivable upon exercise of the Warrants.
"Warrants" means the Warrant Certificate dated as of October 14, 1997, made
by the Company in favor of the Purchaser issued pursuant to Section 2.01 of this
Agreement, and any Warrants issued upon the transfer thereof or in substitution
therefor.
Section 1.02 Accounting Procedures and Interpretation.
(a) The Company shall not, and shall not permit any of its
Subsidiaries to, materially change any method of accounting employed in the
preparation of their financial statements from the methods employed in the
preparation of the audited consolidated Financial Statements of the Company
dated as of December 31, 1996, unless required to conform to GAAP or approved in
writing by the Purchaser.
(b) Except as expressly provided for in this Agreement, all
accounting terms, definitions, ratios, and other tests described herein shall be
construed in accordance with GAAP with the same basis applied in the Financial
Statements described in paragraph (a) above.
(c) When the financial statements or financial results of any group
of Persons are described as "combined," that reference is to the financial
statements or financial results of such Persons, but not their Subsidiaries,
taken together on a combined basis after eliminating significant interentity
balances and transactions.
(d) Whenever any Basic Document refers to a determination of the
number of outstanding shares using the "treasury stock method," such
determination shall be based upon (1) the number of common shares outstanding,
(2) plus the assumed conversion of all convertible securities into common stock,
(3) plus the net additional shares outstanding assuming the exercise of all
warrants and options. The net additional shares outstanding assuming the
exercise of all warrants and options shall be the total new shares resulting
from such exercise of the warrants and options, reduced by the number of shares
that could be repurchased by the Company with the proceeds from the exercise
thereof at a share price that is equal to a current market value. The current
market value shall be (a) the Price or (b) if the Common Stock is not listed for
trading on a national securities
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exchange or quoted by NASDAQ, the price per share as determined using the
Estimated Private Market Equity Value.
ARTICLE II
ISSUANCE OF WARRANTS; RIGHTS OF PURCHASER
-----------------------------------------
Section 2.01 Issuance of Warrants. The Company agrees that it will issue
the Warrants to the Purchaser at the Time of Purchase in accordance with the
terms and conditions set forth herein for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged.
Section 2.02 The Closing. The purchase and sale of the Warrants will
take place at a closing (the "Closing") to be held at the offices of Bracewell &
Patterson, L.L.P., 711 Louisiana, Suite 2900, Houston, Texas 77002 at 11:00
A.M. Houston, Texas time, on October 14, 1997 or on such other date on or before
the date specified in Section 5.01(a) to which the Company and the Purchaser
shall agree. The date and time at which the Closing is to be concluded is the
"Time of Purchase."
Section 2.03 Delivery. Delivery of the Warrants pursuant to this
Agreement shall be made at the Closing by the Company delivering to the
Purchaser one certificate representing the Warrants, registered in the name of
the Purchaser (or such other Person as the Purchaser may have designated in
writing to the Company at least three Business Days prior to the Time of
Purchase).
Section 2.04 Rights of Purchaser. The Purchaser shall have such rights
with respect to the registration of the Warrants or the Warrant Shares under the
Securities Act and state securities laws as are set forth in the Registration
Rights Agreement, which shall be executed by the Company and the Purchaser at
the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants to the Purchaser, which representations and
warranties shall survive the execution of any document or agreement, that as of
the date of this Agreement:
Section 3.01 Corporate Existence. The Company and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it was incorporated and is
duly qualified as a foreign corporation in all jurisdictions wherein the failure
to qualify could result in Material Adverse Effect.
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Section 3.02 Corporate Power and Authorization. The Company is duly
authorized and empowered to create and issue the Warrants; and the Company is
duly authorized and empowered to execute, deliver, and perform the Basic
Documents, and all corporate and other action on the Company's part requisite
for the due execution, delivery, and performance of the Basic Documents has been
duly and effectively taken.
Section 3.03 Binding Obligations. The Basic Documents constitute
valid and binding obligations of Company, enforceable in accordance with their
respective terms (except that enforcement may be subject to any applicable
bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect
and relating to or affecting the enforcement of creditors rights generally).
Section 3.04 No Legal Bar Or Resultant Lien. The Basic Documents do
not and will not, to the best of Company's knowledge, violate any provisions of
any contract, agreement, law, regulation, order, injunction, judgment, decree,
or writ to which the Company, any of its Subsidiaries, or any Partnership is
subject, or result in the creation or imposition of any lien or other
encumbrance upon any assets or properties of the Company, any of its
Subsidiaries, or any Partnership other than those contemplated by this
Agreement.
Section 3.05 No Consent. The execution, delivery, and performance by
the Company of the Basic Documents does not require the consent or approval of
any other person or entity, including without limitation any Governmental
Authority except for consents required for federal, state, and, in some
instances, private leases, right of ways and other conveyances or encumbrances
of oil and gas leases (all of which consents have been obtained by the Company)
and other than those the failure to obtain could cause a Material Adverse
Effect.
Section 3.06 Financial Condition. The consolidated Financial
Statements of the Company, dated December 31, 1996, which have been delivered to
Purchaser are complete and correct in all material respects, and fully and
accurately reflect in all material respects the financial condition and results
of the operations of the Company, as of the date or dates and for the period or
periods stated, and such Financial Statements have been prepared in accordance
with GAAP. The unaudited pro forma combined and consolidated Financial
Statements of the Company, dated June 30, 1997, which have been delivered to
Purchaser are complete and correct in all material respects, and fully and
accurately reflect in all material respects the financial condition and results
of the operations of the Company, as of the date or dates and for the period or
periods stated, and such Financial Statements have been prepared in accordance
with GAAP. Since the date of such June 30, 1997, Financial Statements, no change
has since occurred in the condition, financial or otherwise, of the Company
which could have a Material Adverse Effect.
Section 3.07 Liabilities. Neither the Company nor any of its
Subsidiaries nor any Partnerships have any material (individually or in the
aggregate) liability, direct or contingent, except as disclosed to the Purchaser
in the Financial Statements described in Section 3.06 and on Schedule 3.07
attached hereto. No unusual or unduly burdensome restrictions, restraint, or
hazard exists by
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contract, law or governmental regulation, or otherwise relative to the business,
assets, or properties of the Company or any of its Subsidiaries which could have
a Material Adverse Effect.
Section 3.08 Litigation. Except as described in the consolidated
Financial Statements of the Company described in Section 3.06, or as otherwise
disclosed to the Purchaser in Schedule 3.08 attached hereto, there is no
litigation, legal or administrative proceeding, investigation, or other action
of any nature pending or, to the knowledge of the officers of the Company,
threatened against or affecting the Company, any of its Subsidiaries, or the
Partnerships which involves the possibility of any judgment or liability not
fully covered by insurance, and which could have a Material Adverse Effect.
Section 3.09 Taxes; Governmental Charges. The Company, each of its
Subsidiaries, and the Partnerships have filed all tax returns and reports
required to be filed and has paid all taxes, assessments, fees, and other
governmental charges levied upon it or its assets, properties, or income which
are due and payable, including interest and penalties, the failure of which to
pay could have a Material Adverse Effect, or has provided adequate reserves, if
required, in accordance with GAAP for the payment thereof, except such as are
being contested in good faith by appropriate proceedings and for which adequate
reserves for the payment thereof as required by GAAP has been provided and levy
and execution thereon have been stayed and continue to be stayed.
Section 3.10 Titles, Etc. The Company, each of its Subsidiaries, and
the Partnerships have good and defensible title to all of their assets,
including without limitation, the Oil and Gas Properties reflected as being
owned by the Company, each of its Subsidiaries and the Partnerships in the
Financial Statements of the Company described in Section 3.06, free and clear of
all liens or other encumbrances.
Section 3.11 Defaults. Neither the Company, any of its Subsidiaries
nor any of the Partnerships are in default and no event or circumstance has
occurred which, but for the passage of time or the giving of notice, or both,
would constitute a default under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other agreement or instrument to
which the Company, any of its Subsidiaries, or any Partnership is a party in any
respect that could have a Material Adverse Effect. No Event of Default hereunder
has occurred and is continuing.
Section 3.12 Casualties; Taking of Properties. Since the date of the
Financial Statements described in Section 3.06, neither the business nor the
assets or properties of the Company, any of its Subsidiaries, or any Partnership
have been affected (to the extent it could have a Material Adverse Effect), as a
result of any fire, explosion, earthquake, flood, drought, windstorm, accident,
strike, or other labor disturbance, embargo, requisition, or taking of property
or cancellation of contracts, permits, or concessions by any domestic or foreign
government or any agency thereof, riot, activities of armed forces, or acts of
God or of any public enemy.
Section 3.13 Location of Business and Offices. The principal place
of business of the Company is located at 407 N. Big Spring, Midland, Texas
79701-4326.
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Section 3.14 Compliance with the Law. To the best of the Company's
knowledge, neither the Company, any of its Subsidiaries nor any Partnership:
(a) is in violation of any law, judgment, decree, order, ordinance, or
governmental rule or regulation to which the Company, any of its
Subsidiaries, or any Partnership, or any of their assets or properties are
subject; and
(b) has failed to obtain any license, permit, franchise or other
governmental authorization necessary to the ownership of any of its assets
or properties or the conduct of their business;
which violation or failure is reasonably expected to have a Material Adverse
Effect.
Section 3.15 No Material Misstatements.
(a) There are no material facts or conditions relating to the Basic
Documents or the financial condition, assets, or business prospects of the
Company, any of its Subsidiaries, or any Partnership that could, collectively or
individually, have a Material Adverse Effect
(b) The Financial Statements and other related financial data
(excluding all projections and pro forma financial data) and reserve reports
furnished to the Purchaser by or at the direction of the Company, any of its
Subsidiaries, or any Partnership in connection with the negotiation of this
Agreement do not contain any material misstatement of fact and, when considered
with all other written statements furnished to the Purchaser in that connection,
such Financial Statements, related financial data (excluding all projections and
pro forma financial data) and reserve reports do not omit to state a material
fact or any fact necessary to make the statement contained therein not
misleading.
Section 3.16 ERISA. The Company, each of its Subsidiaries and the
Partnerships are in compliance in all material respects with the applicable
provisions of ERISA, and no "reportable event", as such term is defined in
Section 4043 of ERISA, has occurred with respect to any Plan of the Company, any
of its Subsidiaries, or any Partnership that is reasonably likely to cause a
Material Adverse Effect.
Section 3.17 Environmental Matters.
(a) Environmental Laws, etc. Neither any property of the Company, any
of its Subsidiaries, or the Partnerships nor the operations conducted
thereon violate any applicable order of any court or Governmental Authority
or Environmental Laws, which violation could reasonably be expected to have
a Material Adverse Effect or which could reasonably be expected to result
in remedial obligations having a Material Adverse Effect assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions, and circumstances, if any, pertaining to the relevant property.
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(b) No Litigation. Without limitation of paragraph (a) above, no
property of the Company, any of its Subsidiaries, or any Partnership nor
the operations currently conducted thereon or by any prior owner or
operator of such property or operation, are in violation of or subject to
any existing, pending, or threatened action, suit, investigation, inquiry,
or proceeding by or before any Governmental Authority or to any remedial
obligations under Environmental Laws, which violation, action, suit,
investigation, inquiry, or proceeding could reasonably be expected to have
a Material Averse Effect or which could reasonably be expected to result in
remedial obligations having a Material Adverse Effect assuming disclosure
to the applicable Governmental Authority of all relevant facts, conditions,
and circumstances, if any, pertaining to the relevant property.
(c) Notices, Permits, etc. All notices, permits, licenses, or similar
authorizations, if any, required to be obtained or filed by the Company,
any of its Subsidiaries, or any Partnership in connection with the
operation or use of any and all property of the Company, any of its
Subsidiaries, or any Partnership, including but not limited to past or
present treatment, storage, disposal, or release of a hazardous substance
or solid waste into the environment, have been duly obtained or filed
except to the extent the failure to obtain or file such notices, permits,
licenses, or similar authorizations could not reasonably be expected to
have a Material Adverse Effect or which could reasonably be expected to
result in remedial obligations having a Material Adverse Effect assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions, and circumstances, if any, pertaining to the relevant property.
(d) Hazardous Substances Carriers. All hazardous substances or solid
waste generated at any and all property of the Company, any of its
Subsidiaries, or any Partnership have in the past been transported,
treated, and disposed of only by carriers maintaining valid permits under
any Environmental Law, except to the extent the failure to have such
substances or waste transported, treated, or disposed by such carriers
could not reasonably be expected to have a Material Adverse Effect, and
only at treatment, storage, and disposal facilities maintaining valid
permits under any Environmental Law, which carriers and facilities have
been and are operating in compliance with such permits, except to the
extent the failure to have such substances or waste treated, stored, or
disposed at such facilities, or the failure of such carriers or facilities
to so operate, could not reasonably be expected to have a Material Adverse
Effect or which could reasonably be expected to result in remedial
obligations having a Material Adverse Effect assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions, and
circumstances, if any, pertaining to the relevant property.
(e) Hazardous Substances Disposal. The Company, its Subsidiaries, and
the Partnerships have taken all reasonable steps necessary to determine and
have determined that no hazardous substances or solid waste have been
disposed of or otherwise released and there has been no threatened release
of any hazardous substances on or to any property of the Company, any of
its Subsidiaries, or the Partnerships, except in compliance with
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<PAGE>
Environmental Laws, except to the extent the failure to do so could not
reasonably be expected to have a Material Adverse Effect or which could
reasonably be expected to result in remedial obligations having a Material
Adverse Effect assuming disclosure to the applicable Governmental Authority
of all relevant facts, conditions, and circumstances, if any, pertaining to
the relevant property.
(f) OPA Requirements. Except to the extent the failure to so comply
would not have a Material Adverse Effect, to the extent applicable, the
Company, each of its Subsidiaries, and the Partnerships have complied with
all design, operation, and equipment requirements imposed by OPA or
scheduled to be imposed by OPA, and the Company does not have reason to
believe that either it or its Subsidiaries will not be able to maintain
such compliance with OPA requirements through the expiration of the
Warrants.
(g) No Contingent Liability. Neither the Company, any of its
Subsidiaries nor the Partnerships have any material contingent liabilities
in connection with any release or threatened release of any hazardous
substance or solid waste into the environment other than such contingent
liabilities at any one time and from time to time which could reasonably be
expected to exceed an aggregate of $500,000 in excess of applicable
insurance coverage and for which adequate reserves for the payment thereof
as required by GAAP have not been provided, or which could reasonably be
expected to result in remedial obligations having a Material Adverse Effect
assuming disclosure to the applicable Governmental Authority of all
relevant facts, conditions, and circumstances, if any, pertaining to such
release or threatened release.
Section 3.18 Capitalization. The authorized Capital Stock of the Company
consists of : (a) 5,000,000 shares of Common Stock, par value $.10 per share
and (b) 5,000,000 shares of Preferred Stock, par value $1.00 per share (the
"Preferred Stock"). As of the close of business on October 14, 1997, there were
issued and outstanding 1,075,868 shares of Common Stock and no other shares of
Capital Stock. The Warrants constitute, as of the date of their issuance
hereunder, at least 4.00% of the outstanding Common Stock on a fully diluted
basis using the treasury stock method. All outstanding shares of Common Stock
are validly issued, fully paid and nonassessable and were issued free of
preemptive rights. The Company is not a party to any voting trust or other
agreement or understanding with respect to the voting of its Capital Stock.
Except for the Warrants there are no (1) outstanding securities convertible or
exchangeable into Capital Stock of the Company or (2) contracts, commitments,
agreements, understandings, or arrangements of any kind to which the Company is
a party relating to the issuance of any Capital Stock of the Company. The
Company is not a party to or bound by any agreement with respect to any of its
securities which grants registration rights to any Person except pursuant to the
Registration Rights Agreement.
Section 3.19 Subsidiaries; Partnerships.
(a) There are no Subsidiaries of the Company other than as set forth
on Schedule 3.21(a). All of the issued and outstanding shares of Capital Stock
of the Subsidiaries of
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the Company have been duly and validly authorized and issued and are fully paid
and nonassessable and free of preemptive rights, and, such shares are owned by
the Company or one of its Subsidiaries free and clear of any Lien. Except as set
forth on Schedule 3.21(a), there are no outstanding warrants, options, or other
rights to purchase or acquire any of the shares of Capital Stock of any
Subsidiary of the Company, nor any outstanding securities convertible into such
shares or outstanding warrants, options, or other rights to acquire any such
convertible securities.
(b) There are no Partnerships involving the Company or any of its
Subsidiaries other than as set forth on Schedule 3.21(b). Except as set forth
on Schedule 3.21(b), all of the partnership interests of the Company and the
Subsidiaries in the Partnerships have been fully paid for and are not subject to
any capital calls or other requirements for investment therein.
Section 3.20 Warrant Shares. When issued and delivered against payment
therefor in accordance with the terms of the Warrants, any and all shares of
Warrant Shares initially issuable upon exercise of the Warrants will be duly and
validly issued, fully paid, nonassessable, free of preemptive rights and free
from all taxes payable by the Company and Liens (except any Liens created or
suffered to be created by the Purchaser) and will not be subject to any
restriction on the voting or transfer thereof created by the Company other than
in the Basic Documents.
Section 3.21 Certain Fees. The Company agrees that it will indemnify and
hold harmless the Purchaser from and against any and all claims, demands, or
liabilities for broker's, finders, placement Purchaser's, or other similar fees
or commissions incurred by the Company or alleged to have been incurred by the
Company in connection with the issuance or sale of the Securities or the
consummation of the transaction contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
-----------------------------------------------
The Purchaser represents and warrants to the Company, which representations and
warranties shall survive the execution of any document or agreement, that as of
the date of this Agreement:
Section 4.01 Investment. The Purchaser represents and warrants to, and
covenants and agrees with, the Company that the Securities are being acquired
for its own account and with no intention of distributing or reselling the
Warrants or the Warrant Shares in any transaction which would be in violation of
the securities laws of the United States of America or any State, without
prejudice, however, to Purchaser's right at all times to sell or otherwise
dispose of all or any part of the Warrants or the Warrant Shares under a
registration statement under the Securities Act and applicable state securities
laws or under an exemption from such registration available thereunder
(including, without limitation, if available, Rule 144A promulgated thereunder).
If the Purchaser should in the future decide to dispose of any of the Warrants
or the Warrant Shares, the Purchaser understands and agrees (i) that it may do
so only (A) in compliance with the Securities Act and
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applicable state securities law, as then in effect, and (B) in the manner
contemplated by any registration statement pursuant to which such securities are
being offered, and (ii) that stop-transfer instructions to that effect will be
in effect with respect to such securities. The Purchaser agrees to the
imprinting, so long as appropriate, of a legend on each certificate representing
Warrants or Warrant Shares, to the effect as set forth above.
Section 4.02 Nature of Purchaser. The Purchaser represents and warrants
to, and covenants and agrees with, the Company that, (i) it is an "accredited
investor" within the meaning of paragraphs (a)(3) or (8) of Rule 501 under the
Securities Act and (ii) by reason of its business and financial experience it
has such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the merits and risks of the
prospective investment in the Securities, is able to bear the economic risk of
such investment and, at the present time, would be able to afford a complete
loss of such investment.
Section 4.03 Receipt of Information; Authorization. The Purchaser
acknowledges that it has had an opportunity to ask questions of and receive
satisfactory answers from designated representatives of the Company concerning
the terms and conditions pursuant to which the purchase of the Securities are
made. The Purchaser acknowledges that it has been afforded an opportunity to
examine such documents and other information which it has requested for the
purpose of verifying the information provided to it and for the purpose of
answering any questions it may have concerning the business affairs and
financial condition of the Company, including drilling records, geologic and
engineering reports and surveys, and reserve reports. The Purchaser represents
that it alone or with its advisors has knowledge and experience in the oil and
gas business so as to be capable of evaluating the merits and risks of an
investment in the Company based upon the information furnished to it, its
knowledge of the business and affairs of the Company, the records, files, and
plans of the Company (which have been made available to it), such additional
information as it has requested and has received from the Company, and the
independent inquiries and investigations undertaken by it. The Purchaser
represents and warrants that the Purchaser of the Securities by it has been duly
and properly authorized and this Agreement has been duly executed and delivered
by it or on its behalf.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
-------------------------------
Section 5.01 Conditions Precedent to Obligations of the Purchaser. The
obligation of Purchaser to acquire the Warrants is subject, at the Time of
Purchase, to the prior or simultaneous satisfaction or waiver of the following
conditions:
(a) The representations and warranties made by the Company herein
shall be true and correct in all material respects (except for changes
expressly provided for by this Agreement) on and as of the Time of Purchase
with the same effect as though such
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representations and warranties had been made on and as of the Time of
Purchase, the Company shall have performed and complied with all agreements
and conditions set forth in or contemplated hereunder or in the Basic
Documents required to be performed or complied with by it at or prior to
the Time of Purchase, and the Basic Documents shall have been executed and
delivered by all the respective parties thereto and shall be in full force
and effect.
(b) The Purchaser shall have received duly executed and delivered
copies of this Agreement and the Equity Documents together with all other
documents reasonably requested by the Purchaser in connection with the
issuance of the Securities and the transactions contemplated by the Basic
Documents shall be reasonably satisfactory to the Purchaser and its
counsel.
(c) The Purchaser shall have received an opinion of counsel to the
Company acceptable to the Purchaser addressing the existence and good
standing of the Company, the authorization of the Basic Documents, the
enforceability of the Basic Documents and the perfection of the liens
thereunder, the absence of conflicts with law, other material agreements,
and court orders, the absence of litigation, and such other matters as the
Purchaser may request.
(d) The Purchaser shall have received a certificate, dated the Time of
Purchase, of the Secretary or an Assistant Secretary of the Company, (i)
certifying as true, complete and correct the charter and by-laws of the
Company and resolutions of the Board of Directors attached thereto, (ii) as
to the absence of proceedings or other action for dissolution, liquidation
or reorganization of the Company, (iii) as to the incumbency of the
officers of the Company and the Subsidiaries who shall have executed
instruments, agreements, and other documents in connection with the
transactions contemplated hereby or by the Basic Documents, and (iv)
covering such other matters, and with such other attachments thereto, as
the Purchaser may request, and such certificate and the attachments thereto
shall be satisfactory in form and substance to the Purchaser.
(e) The Purchaser shall have received or be satisfied with the
completion of all other items described on the current listing of closing
documents distributed by the Purchaser to the Company in connection with
the execution of this Agreement.
Section 5.02 Conditions Precedent to Obligations of the Company. The
obligations of the Company to issue and sell Warrants hereunder is subject, at
the Time of Purchase, to the prior or simultaneous satisfaction or waiver of the
following conditions:
(a) The Warrant Certificate, Registration Rights Agreement, and
Shareholders Agreement each dated November 5, 1996, between Southwest
Royalties, Inc., and the Purchaser shall have been terminated.
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(b) The representations and warranties made by the Purchaser herein
shall be true and correct in all material respects on and as of the Time of
Purchase with the same effect as though such representations and warranties
had been made on and as of the Time of Purchase.
(c) The issuance of the Warrants by the Company shall not at the Time
of Purchase be enjoined (temporarily or permanently) under the laws of any
jurisdiction to which the Company is subject.
(d) The Purchaser shall have accepted delivery of the Warrants.
(e) Each of the Basic Documents shall have been executed and delivered
by all the respective parties thereto and shall be in full force and
effect.
ARTICLE VI
COVENANTS
---------
The Company covenants to the Purchaser that so long as any Warrants are
outstanding:
Section 6.01 Financial Statements and Reports. The Company shall
promptly furnish to the Purchaser from time to time upon request such
information regarding the business and affairs and financial condition of the
Company, as the Purchaser may reasonably request, and will furnish to the
Purchaser:
(a) Annual Audited Financial Statements - as soon as available, and in
any event within ninety (90) days after the close of each fiscal year, the
annual audited Financial Statements (consolidated and consolidating) of the
Company, certified, without any qualification or limit of the scope of the
examination of matters relevant to the financial statements, by Joseph
Decosimo & Company, any nationally recognized public accounting firm, or
any other accounting firm approved by the Purchaser, such consolidating
schedules being prepared in accordance with Exhibit 6.01(a).
(b) Quarterly Financial Statements - as soon as available, and in any
event within sixty (60) days after the end of each calendar quarter of each
year (except the last calendar quarter in any fiscal year), the quarterly
unaudited Financial Statements (consolidated and consolidating) of the
Company.
(c) Lease Operating Reports - as soon as available and in any event on
or before the date when required to be provided to the lenders to Southwest
Royalties, Inc., consolidated lease operating statements for the Company
and the Subsidiaries of the Company in form and substance satisfactory to
the Purchaser.
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(d) Reserve Reports -as soon as available and in any event on or
before the date when required to be provided to the lenders to Southwest
Royalties, Inc., an annual reserve report prepared by Ryder Scott Company
or other independent petroleum engineers approved by the Purchaser and as
soon as available and in any event on or before the date when required to
be provided to the lenders to Southwest Royalties, Inc., a second mid year
reserve report prepared by the Company, in each case reflecting the
consolidated oil and gas reserves attributable to properties owned by the
Company, the Subsidiaries of the Company, and the Company's interests in
the Partnerships prepared in accordance with standard geological and
engineering methods for proved reserves as set forth by the Society of
Petroleum Engineers and otherwise acceptable to the Purchaser.
(e) Additional Information - promptly upon request of the Purchaser
from time to time any additional financial information or other information
that the Purchaser may reasonably request, including information of the
type required by paragraphs (c) and (d) above and including such
information prepared at the request of the Purchaser and reflecting the
pricing characteristics used by the Purchaser in the determination of the
Estimated Private Market Equity Value.
All such information, reports, and Financial Statements referred to in this
Section 6.01 shall be in such detail as the Purchaser may reasonably request and
shall be prepared in a manner consistent with the requirements set forth above
and in Section 1.02.
Section 6.02 Compliance with Laws. The Company shall, and shall cause
each Subsidiary of the Company and the Partnerships to, observe and comply, in
all material respects, with all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, deuces, injunctions, rules, regulations, orders,
and restrictions of applicable Governmental Authorities, including those
relating to Environmental Laws and energy regulations.
Section 6.03 Further Assurances. The Company shall, and shall cause the
Subsidiaries of the Company to, cure promptly any defects in the creation and
issuance of the Basic Documents. The Company shall, and shall cause the
Subsidiaries of the Company to at their sole expense to, promptly execute and
deliver to the Purchaser upon its reasonable request all such other and further
documents, agreements, and instruments in compliance with or accomplishment of
the covenants and agreements in the Basic Documents.
Section 6.04 Accounts and Records. The Company shall, and shall cause
each of its Subsidiaries and the Partnerships to, keep books, records, and
accounts in which full, true, and correct entries will be made of all dealings
or transactions in relation to its business and activities, prepared in a manner
consistent with the requirements of Section 1.02.
Section 6.05 Right of Inspection. The Company shall, and shall cause
each of its Subsidiaries and the Partnerships to, permit any officer, employee,
or agent of the Purchaser to examine their books, records, and accounts, and
take copies and extracts therefrom, all at such
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reasonable times and as often as the Purchaser may reasonably request. The
Purchaser will keep all such information confidential and will not without prior
written consent disclose or reveal the information or any part thereof to any
person other than the Purchaser's officers, employees, legal counsel, regulatory
authorities, or advisors to whom it is necessary to reveal such information for
the purpose of effectuating the agreements and undertakings specified herein or
as otherwise required by law or in connection with the enforcement of the
Purchaser' rights and remedies under the Basic Documents.
Section 6.06 Transactions with Affiliates. The Company shall not, and
shall not permit any of its Subsidiaries or the Partnerships to, enter into any
transaction with any of its Affiliates, except transactions upon terms no less
favorable to it than would be obtained in a transaction negotiated at arm's
length with a unrelated third party.
ARTICLE VII
MISCELLANEOUS
-------------
Section 7.01 Interpretation and Survival of Provisions. Article,
Section, Schedule, and Exhibit references are to this Agreement, unless
otherwise specified. All references to instruments, documents, contracts, and
agreements are references to such instruments, documents, contracts, and
agreements as the same may be amended, supplemented, and otherwise modified from
time to time, unless otherwise specified. The word "including" shall mean
"including but not limited to." Whenever the Company has an obligation under the
Basic Documents, the expense of complying with that obligation shall be an
expense of the Company unless otherwise specified. Whenever any determination,
consent, or approval is to be made or given by the Purchaser, such action shall
be in the Purchaser's sole discretion unless otherwise specified in this
Agreement. If any provision in the Basic Documents is held to be illegal,
invalid, not binding, or unenforceable, such provision shall be fully severable
and the Basic Documents shall be construed and enforced as if such illegal,
invalid, not binding, or unenforceable provision had never comprised a part of
the Basic Documents, and the remaining provisions shall remain in full force and
effect. The Basic Documents have been reviewed and negotiated by sophisticated
parties with access to legal counsel and shall not be construed against the
drafter. The representations, warranties, and covenants made in this Agreement
shall remain operative and in full force and effect regardless of (a) any
investigation made by or on behalf of the Company or the Purchaser or (b)
acceptance of any of the Securities and payment therefor and repayment or
repurchase thereof. The provisions of Sections 3.21 and 7.02 shall remain
operative and in full force and effect unless such Sections are expressly
terminated in a writing referencing those individual Sections, regardless of any
purported general termination of this Agreement.
Section 7.02 Costs, Expenses and Taxes. The Company agrees to pay all
costs and expenses (including reasonable, properly documented fees and expenses
of counsel to the Purchaser) reasonably incurred by the Purchaser in connection
with negotiation, preparation, printing, execution
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and delivery of the Basic Documents and the transactions contemplated hereby and
thereby. The Company shall also pay any expenses of the Purchaser reasonably
incurred in connection with any amendment or supplement to or modification of
any of the foregoing and any and all other documents furnished pursuant hereto
or thereto or in connection herewith or therewith. In addition, the Company
shall pay any and all taxes payable or determined to be payable in connection
with (a) the termination of the Warrant Certificate, Registration Rights
Agreement, and Shareholders Agreement dated as of November 5, 1996, between
Southwest Royalties, Inc., and the Purchaser and replacement of such documents
with this Agreement and the related Equity Documents and (b) the execution and
delivery of this Agreement or the original issuance of the Securities, and shall
save and hold the Purchaser harmless from and against any and all liabilities
with respect to or resulting from any delay in paying, or omission to pay, such
taxes.
Section 7.03 No Waiver; Modifications in Writing.
(a) No failure or delay on the part of the Company or the Purchaser in
exercising any right, power, or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power, or
remedy preclude any other or further exercise thereof or the exercise of any
right, power, or remedy. The remedies provided for herein are cumulative and
are not exclusive of any remedies that may be available to the Company or the
Purchaser at law or in equity or otherwise.
(b) Except as otherwise provided herein, no amendment, waiver,
consent, modification, or termination of any provision of this Agreement shall
be effective unless signed by the Company and the holder of the majority of the
Warrants. Any amendment, supplement or modification of or to any provision of
this Agreement, any waiver of any provision of this Agreement, and any consent
to any departure by the Company from the terms of any provision of this
Agreement, shall be effective only in the specific instance and for the specific
purpose for which made or given. Except where notice is specifically required
by this Agreement, no notice to or demand on the Company in any case shall
entitle the Company to any other or further notice or demand in similar or other
circumstances.
Section 7.04 Binding Effect; Assignment. This Agreement shall be binding
upon the Company and the Purchaser, and their respective successors and
permitted assigns. Except as expressly provided in this Agreement, this
Agreement shall not be construed so as to confer any right or benefit upon any
Person other than the parties to this Agreement, and their respective successors
and permitted assigns. Prior to the Time of Purchase, the rights and
obligations of the Purchaser under this Agreement may not be assigned to any
other Person except with the prior consent of the Company, which shall not be
unreasonably withheld. After the Time of Purchase, the rights and obligations
of the Purchaser under this Agreement with respect to the Warrants may be
assigned by the Purchaser by assignment of the Warrants, and upon any such
assignment, the holder of the Warrants shall succeed to all of the Purchaser's
rights and obligations under this Agreement with respect to the Warrants and the
Purchaser shall be automatically released from any obligations thereunder with
respect to the Warrants. Upon request of the Purchaser in connection with the
-21-
<PAGE>
transfer of any Warrants, the Company shall execute and deliver any amendment to
this Agreement, the Warrants, and the other Basic Documents reasonably requested
by the Purchaser to reflect the transfer.
Section 7.05 Replacement Securities. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrants or Warrant Shares and, in the case of any such loss, theft, or
destruction, upon delivery of any unsecured letter of indemnity to the Company
or, in the case of any such mutilation, upon surrender or cancellation thereof,
the Company will issue new Warrants or Warrant Shares, as applicable.
Section 7.06 Communications. All notices and demands provided for
hereunder shall be in writing, and if to the Purchaser, shall be given by
registered or certified mail, return receipt requested, telex, telegram,
telecopy, air courier guaranteeing overnight delivery or personal delivery, to
the Purchaser, to the following address:
Joint Energy Development Investments Limited Partnership
c/o Enron Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Donna Lowry, Director - 28th Floor
Telecopier: (713) 646-3602
and, if to the Company:
Southwest Royalties Holdings, Inc.
407 N. Big Spring,
Suite 300
Midland, Texas 79701
Attention: H.H. Wommack III
Telecopier: (915)-688-0191
or to such other address as the Company or Purchaser may designate in writing.
All other communications may be by regular mail. All such notices and
communications and all notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; four days
after being sent by certified mail, return receipt requested, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next Business Day if timely delivered to an air courier guaranteeing overnight
delivery.
Section 7.07 Governing Law. The laws of the State of Delaware will
govern this Agreement without regard to principles of conflicts of laws.
Section 7.08 Arbitration.
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<PAGE>
(a) Binding Arbitration. On the request of either Company or
Purchaser, (whether made before or after the institution of any legal
proceeding), any action, dispute, claim or controversy of any kind now existing
or hereafter arising between any of the parties hereto in any way arising out
of, pertaining to or in connection with this Agreement (a "Dispute") shall be
resolved by binding arbitration in accordance with the terms hereof. Either
Company or Purchaser may, by summary proceedings, bring an action in court to
compel arbitration of any Dispute.
(b) Governing Rules. Any arbitration shall be administered by the
American Arbitration Association (the "AAA") in accordance with the terms of
this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum
extent applicable, the Federal Arbitration Act. Judgment on any award rendered
by an arbitrator may be entered in any court having jurisdiction.
(c) Arbitrators. Arbitration hereunder shall be before a three-person
panel of neutral arbitrators, consisting of one person from each of the
following categories: (1) an attorney who has practiced in the area of
commercial law for at least 10 years or a retired judge at the Texas or United
States District Court or an appellate court level: (2) a person with at least 10
years experience in commercial lending: and (3) a person with at least 10 years
experience in the petroleum industry. The AAA shall submit a list of persons
meeting the criteria outlined above for each category of arbitrator, and the
parties shall select one person from each category in the manner established by
the AAA. If the parties cannot agree on an arbitrator within 30 days after the
request for an arbitration, then any party may request the AAA to select an
arbitrator. The arbitrators may engage engineers, accountants or other
consultants that the arbitrator deems necessary to render a conclusion in the
arbitration proceeding.
(d) Conduct of Arbitration. To the maximum extent practicable, an
arbitration proceeding hereunder shall be concluded within 180 days of the
filing of the Dispute with the AAA. Arbitration proceedings shall be conducted
in Houston, Texas. Arbitrators shall be empowered to impose sanctions and to
take such other actions as the arbitrators deem necessary to the same extent a
judge could impose sanctions or take such other actions pursuant to the Federal
Rules of Civil Procedure and applicable law. At the conclusion of any
arbitration proceeding, the arbitrator shall make specific written findings of
fact and conclusions of law. The arbitrators shall have the power to award
recovery of all costs and fees to the prevailing party. Company and Purchaser
each agrees to keep all Disputes and arbitration proceedings strictly
confidential except for disclosure of information required by applicable law.
(e) Costs of Arbitration. All fees of the arbitrators and any
engineer, accountant or other consultant engaged by the arbitrators, shall be
paid by Company and Purchaser equally unless otherwise awarded by the
arbitrators.
Section 7.09 Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto execute this Agreement,
effective as of the date first above written.
SOUTHWEST ROYALTIES HOLDINGS, INC.
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
JOINT ENERGY DEVELOPMENT
INVESTMENTS LIMITED
PARTNERSHIP
By: Enron Capital Management Limited
Partnership, its General Partner
By: Enron Capital Corp., its General
Partner
By:
-----------------------------------
Wynne M. Snoots, Jr.
Agent and Attorney-in-Fact
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<PAGE>
EXHIBIT 10.3
RESTATED SENIOR
SECURED LOAN AGREEMENT
AMONG
SOUTHWEST ROYALTIES, INC.,
AS BORROWER,
AND
CERTAIN SUBSIDIARIES OF BORROWER,
AS GUARANTORS,
AND
BANK ONE, TEXAS, N.A. AND BANQUE PARIBAS,
AS BANKS
AND
BANK ONE, TEXAS, N.A.
AS AGENT
OCTOBER 9, 1997
<PAGE>
SENIOR LOAN AGREEMENT
TABLE OF CONTENTS
Page
----
1. Definitions............................................................ 2
2. Commitments of the Bank................................................ 10
(a) Revolving Commitment............................................ 10
(b) Procedure for Borrowing......................................... 11
(c) Monthly Reduction of Revolving Commitment....................... 11
(d) Voluntary Reduction of Revolving Commitment..................... 11
3. Notes Evidencing Loan.................................................. 12
(a) Form of Notes................................................... 12
(b) Interest Rate on the Note or Notes.............................. 12
(c) Payment of Interest............................................. 12
(d) Payment of Principal............................................ 12
(e) General......................................................... 12
(f) Issuance of Additional Notes.................................... 12
(g) Payments by Agent to Banks...................................... 13
(h) Sharing of Payments, Etc........................................ 13
(i) Capital Adequacy................................................ 13
4. Interest Rates......................................................... 14
(a) Options......................................................... 14
(b) Interest Rate Determination..................................... 15
(c) Conversion Option............................................... 15
(d) Recoupment...................................................... 15
5. Special Provisions Relating to Eurodollar Loans........................ 15
(a) Unavailability of Funds or Inadequacy of Pricing................ 15
(b) Reserve Requirements............................................ 16
(c) Taxes........................................................... 16
(d) Change in Laws.................................................. 17
(e) Option to Fund.................................................. 17
(f) Indemnity....................................................... 17
(g) Payments Not at End of Interest Period.......................... 18
6. Collateral Security.................................................... 18
i
<PAGE>
7. Borrowing Base......................................................... 19
(a) Initial Borrowing Base.......................................... 19
(b) Subsequent Determinations of Borrowing Base..................... 19
(c) Sublimits....................................................... 20
8. Fees................................................................... 21
(a) Unused Portion Fee.............................................. 21
(b) Borrowing Base Increase Fees.................................... 21
(c) Agency Fee...................................................... 21
9. Prepayments............................................................ 21
(a) Voluntary Prepayments of Note or Notes.......................... 21
(b) Mandatory Prepayment of Note or Notes........................... 21
10. Representations and Warranties......................................... 22
(a) Corporate Existence............................................. 22
(b) Corporate Power and Authorization............................... 22
(c) Binding Obligations............................................. 22
(d) No Legal Bar or Resultant Lien.................................. 22
(e) No Consent...................................................... 22
(f) Financial Condition............................................. 23
(g) Liabilities..................................................... 23
(h) Litigation...................................................... 23
(i) Taxes; Governmental Charges..................................... 23
(j) Titles, Etc..................................................... 23
(k) Defaults........................................................ 24
(l) Casualties; Taking of Properties................................ 24
(m) Use of Proceeds; Margin Stock................................... 24
(n) Location of Business and Offices................................ 24
(o) Compliance with the Law......................................... 24
(p) No Material Misstatements....................................... 25
(q) Not A Utility................................................... 25
(r) ERISA........................................................... 25
(s) Public Utility Holding Company Act.............................. 25
(t) Subsidiaries.................................................... 25
(u) Environmental Matters........................................... 25
(v) Ownership of.................................................... 26
(w) Liens........................................................... 26
11. Conditions of Lending.................................................. 26
12. Affirmative Covenants.................................................. 28
(a) Financial Statements and Reports................................ 28
ii
<PAGE>
(b) Certificates of Compliance...................................... 29
(c) Accountants' Certificate........................................ 29
(d) Taxes and Other Liens........................................... 30
(e) Compliance with Laws............................................ 30
(f) Further Assurances.............................................. 30
(g) Performance of Obligations...................................... 30
(h) Insurance....................................................... 30
(i) Accounts and Records............................................ 31
(j) Right of Inspection............................................. 31
(k) Notice of Certain Events........................................ 32
(l) ERISA Information and Compliance................................ 32
(m) Environmental Reports and Notices............................... 32
(n) Maintenance..................................................... 32
(o) Operation of Properties......................................... 33
(p) Compliance with Leases and Other Instruments ................... 33
(q) Certain Additional Assurances Regarding Maintenance
and Operations of Properties.................................... 34
(r) Title Matters................................................... 34
(s) Curative Matters................................................ 34
(t) Change of Principal Place of Business........................... 34
13. Negative Covenants..................................................... 34
(a) Liens........................................................... 35
(b) Consolidations, Mergers and Sales of Assets..................... 35
(c) Current Ratio................................................... 35
(d) Minimum Interest Coverage Ratio................................. 35
(e) Tangible Net Worth.............................................. 35
(f) Debts, Guaranties and Other Obligations......................... 35
(g) Dividends....................................................... 36
(h) Loans and Advances.............................................. 36
(i) Investments..................................................... 37
(j) Sale or Discount of Receivables................................. 37
(k) Nature of Business.............................................. 37
(l) Hedging Transactions............................................ 37
(m) Amendment of Articles of Incorporation or Bylaws................ 37
14. Sale of Assets......................................................... 37
(a) Transactions with Affiliates.................................... 38
(b) Partnerships.................................................... 38
15. Events of Default...................................................... 38
16. Exercise of Rights..................................................... 41
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<PAGE>
17. Notices................................................................ 41
18. Expenses............................................................... 41
19. Indemnity.............................................................. 41
20. The Agent and the Banks................................................ 42
(a) Appointment and Authorization................................... 42
(b) Note Holders.................................................... 43
(c) Consultation with Counsel....................................... 43
(d) Documents....................................................... 43
(e) Resignation or Removal of Agent................................. 44
(f) Responsibility of Agent......................................... 44
(g) Independent Investigation....................................... 45
(h) Indemnification................................................. 46
(i) Benefit of Section 19........................................... 46
(j) Pro Rata Treatment.............................................. 46
(k) Interests of Banks.............................................. 46
21. Invalid Provisions..................................................... 47
22. Maximum Interest Rate.................................................. 47
23. Amendments............................................................. 47
24. Multiple Counterparts.................................................. 47
25. Conflict............................................................... 47
26. Survival............................................................... 48
27. Parties Bound.......................................................... 48
28. Participations......................................................... 48
29. Financial Terms........................................................ 48
30. Governing Law.......................................................... 48
31. Choice of Forum: Consent to Service of Process and Jurisdiction........ 48
32. Other Agreements....................................................... 49
iv
<PAGE>
33. Execution by Guarantors................................................ 49
EXHIBITS
- --------
Exhibit "A" - Note
Exhibit "B" - Notice of Borrowing
Exhibit "C" - Guaranty Agreement
Exhibit "D" - Compliance Certificate
SCHEDULES
- ---------
Schedule 1 - Partnerships
Schedule 2 - Permitted Liens
Schedule 3 - Addresses of Banks
Schedule 4 - Financial Condition
Schedule 5 - Liabilities
Schedule 6 - Litigation
Schedule 7 - Environmental Matters
Schedule 8 - Ownership of Borrower
Schedule 9 - Curative Matters
Schedule 10 - Additional Mortgages
Schedule 11 - Debts, Guarantees and other Obligations
Schedule 12 - Loans and Advances
v
<PAGE>
RESTATED SENIOR SECURED LOAN AGREEMENT
THIS RESTATED SENIOR SECURED LOAN AGREEMENT (hereinafter referred to as the
"Agreement") executed as of the 9th day of October, 1997, by and among SOUTHWEST
ROYALTIES, INC., a Delaware corporation ("SWR"), SOUTHWEST ROYALTIES HOLDINGS,
INC., a Delaware corporation ("Holdings"), ESPERO ENERGY CORPORATION, a Delaware
corporation ("Espero"), MIDLAND SOUTHWEST SOFTWARE, INC. a Delaware corporation
("Software") (Holdings, Espero and Software are hereinafter collectively
referred to as "Guarantors" and, where appropriate, as a "Guarantor"), BANK ONE,
TEXAS, N.A., a national banking association ("Bank One"), BANQUE PARIBAS
("Banque Paribas") (Bank One and Banque Paribas, together with each and every
future holder of any note or notes issued pursuant to the Loan Agreement (as
hereinafter defined) are hereinafter collectively referred to as the "Banks" and
individually as "Bank") and Bank One, as "Agent".
W I T N E S S E T H:
WHEREAS, Borrower, Guarantor, Midland Southwest Corporation ("MSC"), SW
Acquisition, Inc. ("Acquisition"), Midland Southwest Cold Lake, Inc. ("Cold
Lake"), Midland Southwest Hamilton, Inc. ("Hamilton"), SWR Leasing Company
("Leasing") (MSC, Acquisition, Cold Lake, Hamilton and Leasing are hereinafter
collectively referred to as the "Merged Subsidiaries," and, when appropriate,
singularly as a "Merged Subsidiary"), Bank One and NationsBank of Texas, N.A.
("NationsBank"), entered into a Senior Loan Agreement, dated as of April 13,
1995 (as amended, the "Loan Agreement") under the terms of which Bank One and
NationsBank agreed to provide Borrower and MSC (Borrower and MSC are sometimes
collectively referred to herein as "Borrowers") with a reducing revolving line
of credit facility in an amount of up to $75,000,000; and
WHEREAS, as of August 2, 1995, Bank One purchased the $37,500,000.00 Note
held by NationsBank, all of NationsBank's rights and obligations under the Loan
Agreement and its interests in the Liens, and the other Loan Documents; and
WHEREAS, as of August 10, 1995, Bank One and Borrowers entered into a First
Amendment to Senior Loan Agreement (the "First Amendment"); and
WHEREAS, as of August 15, 1995, Bank One and Borrowers entered into a
Second Amendment to Senior Loan Agreement (the "Second Amendment"); and
WHEREAS, as of December 4, 1995, Bank One and Borrowers entered into a
Third Amendment to Senior Loan Agreement (the "Third Amendment"); and
WHEREAS, as of November 5, 1996, Bank One and Borrowers entered into a
Fourth Amendment to Senior Loan Agreement (the "Fourth Amendment"); and
<PAGE>
WHEREAS, as of March 31, 1997, Bank One and Borrowers entered into a Fifth
Amendment to Senior Loan Agreement (the "Fifth Amendment"); and
WHEREAS, as of July 1, 1997, the Merged Subsidiaries merged with and into
Borrower, with Borrower being the surviving entity; and
WHEREAS, pursuant to that certain Assignment and Acceptance Agreement dated
as of August 22, 1997 (the "Assignment"), Banque Paribas purchased a $15,000,000
participation in the current outstanding Revolving Loans (as defined in the Loan
Agreement), and all rights appurtenant to, and associated with, such
participation (the "Assigned Interest") as provided in the Assignment; and
WHEREAS, as of August 22, 1997, Banks and Borrower entered into a Sixth
Amendment to Senior Loan Agreement (the "Sixth Amendment"); and
WHEREAS, the Borrower and Banks have agreed to further amend the Loan
Agreement to add certain provisions thereto and in connection therewith restates
the Loan Agreement in its entirety;
NOW, THEREFORE, the parties hereto agree to restate the Loan Agreement as
follows:
DEFINITIONS. When used herein the terms "Agent", "Agreement,"
"Borrower", "Bank", "Banks", "Bank One", "Espero", "Guarantor", "Guarantors",
"Holdings" and "Software" shall have the meanings indicated above. When used
herein the following terms shall have the following meanings:
(a) Advance or Advances - A loan or loans hereunder.
(b) Affiliate - Any Person which, directly or indirectly, controls,
is controlled by or is under common control with the relevant Person. For
the purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as
used with respect to any Person, shall mean a member of the board of
directors, a partner or an officer of such Person, or any other Person with
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the
ownership (of record, as trustee, or by proxy) of voting shares,
partnership interests or voting rights, through a management contract or
otherwise. Any Person owning or controlling directly or indirectly ten
percent or more of the voting shares, partnership interests or voting
rights, or other equity interest of another Person shall be deemed to be an
Affiliate of such Person.
(c) Borrowing Base - The value assigned by the Banks from time to
time to the Oil and Gas Properties and other collateral in accordance with
Section 7(b) hereof. Until the
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<PAGE>
next determination of the Borrowing Base pursuant to Section 7(b) hereof
the Borrowing Base for the Revolving Commitment shall be $40,000,000.00.
(d) Borrowing Date - The date elected by the Borrower pursuant to
Section 2(a) hereof for an Advance on the Revolving Loan.
(e) Business Day - The normal banking hours during any day (other
than Saturdays or Sundays) that banks are legally open for business in
Dallas, Texas.
(f) Change of Control - A Change of Control shall occur if H. H.
Wommack, III, ever owns less than 51% of the voting securities of Holdings,
as such ownership is shown on Schedule "8" hereto.
(g) Change of Management - A Change of Management shall occur if H.H.
Wommack, III ceases to act as chief executive officer of SWR or Holdings,
whether in the capacity of President or Chairman.
(h) Collateral - Collateral is used herein as defined in Section 6
hereof.
(i) Commitment - As to all Banks up to $75,000,000 and as to any
Bank, its obligation to make Advances on the Revolving Commitment in
amounts not exceeding in the aggregate the amounts set forth next to their
respective names on this Agreement or any amendments hereto. As of the
Effective Date, the Commitment of each Bank to make Advances on the
Revolving Loan is as follows:
Bank One $46,875,000.00
Paribas $28,125,000.00
(j) Commitment Percentage - For each Bank the percentage derived by
dividing its commitment at the time of determination by the Commitments of
all Banks at the time of determination.
(k) Current Assets - The total of Borrower's consolidated current
assets, determined in accordance with GAAP.
(l) Current Liabilities - The total of Borrower's consolidated
current liabilities as determined in accordance with GAAP, excluding
therefrom current maturities of the Revolving Loan.
(m) Determination Date - Determination Date is used herein as defined
in Section 7 hereof.
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<PAGE>
(n) EBITDA - Consolidated earnings for any period before provision for
interest expense, depreciation, depletion and amortization, income taxes,
gains or losses from the sale of capital assets, extraordinary income or
losses, earnings or losses attributable to Midland Red Oak Realty, Inc. and
earnings or losses attributable to Borrower's minority interests in Sierra
Well Service, Inc. for any period.
(o) Effective Date - The date of this Agreement.
(p) Environmental Laws - The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Super Fund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. (S)9601, et seq.,
the Resource Conservation and Recovery Act, as amended by the Hazardous
Solid Waste Amendment of 1984, 42 U.S.C.A. (S)6901, et seq., the Clean Air
Act, 42 U.S.C.A. (S)1251, et seq., the Toxic Substances Control Act, 15
U.S.C.A. (S)2601, et seq., The Oil Pollution Act of 1990, 33 U.S.G.
(S)2701, et seq., and all other laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, order and
restrictions of any federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign, relating to air
pollution, water pollution, noise control and/or the handling, discharge,
disposal or recovery of on-site or off-site asbestos or "hazardous
substances" as defined by 42 U.S.C. (S) 9601, et seq., as amended, as each
of the foregoing may be amended from time to time.
(q) Environmental Liability - Any claim, demand, obligation, cause of
action, accusation, allegation, order, violation, damage, injury, judgment,
penalty or fine, cost of enforcement, cost of remedial action or any other
costs or expense whatsoever, including reasonable attorneys' fees and
disbursements, resulting from the violation or alleged violation of any
Environmental Law or the imposition of any Environmental Lien (as
hereinafter defined).
(r) Environmental Lien - A Lien in favor of any court, governmental
agency or instrumentality or any other Person (i) for any Environmental
Liability or (ii) for damages arising from or cost incurred by such court
or governmental agency or instrumentality or other person in response to a
release or threatened release of hazardous or toxic waste, substance or
constituent into the environment.
(s) ERISA - The Employee Retirement Income Security Act of 1974, as
amended.
(t) Eurodollar Business Day - A Business Day on which dealings in
U.S. Dollar deposits are carried on in the London interbank market.
(u) Eurodollar Interest Period - With respect to any Eurodollar Loan
(i) initially, the period commencing on the date such Eurodollar Loan is
made and ending one (1),
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<PAGE>
two (2), three (3) or six (6) months thereafter and (ii) thereafter, each
period commencing on the day following the last day of the next preceding
Interest Period applicable to such Eurodollar Loan and ending one (1), two
(2), three (3) or six (6) months thereafter; provided, however, that (i) if
any Eurodollar Interest Period would otherwise expire on a day which is not
a Eurodollar Business Day, such Interest Period shall expire on the next
succeeding Eurodollar Business Day unless the result of such extension
would be to extend such Interest Period into the next calendar month, in
which case such Interest Period shall end on the immediately preceding
Eurodollar Business Day, (ii) if any Eurodollar Interest Period begins on
the last Eurodollar Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such Interest Period) such Interest Period shall end on the last
Eurodollar Business Day of a calendar month, and (iii) any Eurodollar
Interest Period which would otherwise expire after the Revolving Maturity
Date shall end on such Revolving Maturity Date. Borrower shall not be
permitted to have outstanding at any time more than three (3) Eurodollar
Tranches, only one (1) of which may be a six (6) month Tranche.
(v) Eurodollar Loan - Any loan during any period which bears interest
at the Eurodollar Rate, or which would bear interest at such rate if the
Maximum Rate ceiling was not in effect at a particular time.
(w) Eurodollar Margin - A percentage on any date determined by the
percentage of the Revolving Commitment outstanding on that date as follows:
% Revolving Commitment Outstanding Eurodollar Rate Margin
---------------------------------- ----------------------
0-50% 1.75
51-70% 2.00
71-80% 2.25
81-100% 2.50
(x) Eurodollar Rate - With respect to each Eurodollar Loan a rate per
annum equal to the following:
Interbank Offered Rate + Eurodollar Margin
------------------------------------
1.0 - Eurodollar Reserve Requirement
(y) Eurodollar Reserve Requirement. On any day, that percentage
(expressed as a decimal) which is in effect on such day, as provided by the
Board of Governors of the Federal Reserve System (or any successor
governmental body) applied for determining the maximum reserve requirements
for Banks (including without limitation, basic, supplemental, marginal and
emergency reserves) under Regulation D with respect to "Eurocurrency
liabilities" as currently defined in Regulation D, or under any similar or
successor regulation with respect to Eurocurrency liabilities or
Eurocurrency funding. Each determination by
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<PAGE>
Agent of the Eurodollar Reserve Requirement shall, in the absence of
manifest error, be conclusive and binding.
(z) Eurodollar Tranche - A Eurodollar Loan.
(aa) Financial Statements - Balance sheets, income statements,
statements of cash flow, and, on an annual basis, appropriate footnotes and
schedules, prepared in accordance with GAAP.
(bb) GAAP - Generally accepted accounting principles, consistently
applied.
(cc) Guaranty Agreements - The Guaranty Agreements of even date
herewith, executed by each of the Guarantors.
(dd) Interbank Offered Rate - With respect to each Eurodollar Interest
Period, the rate of interest per annum at which deposits in immediately
available and freely transferable funds in U.S. Dollars are offered to the
Agent (at approximately 10:00 a.m., Dallas, Texas time three Eurodollar
Business Days prior to the first day of each Eurodollar Interest Period) in
the London interbank market for delivery on the first day of such
Eurodollar Interest Period in an amount equal to or comparable to the
principal amount of the Eurodollar Loan to which such Eurodollar Interest
Period relates. Each determination of the Interbank Offered Rate by the
Agent shall, in the absence of error, be conclusive and binding.
(ee) Interest Payment Date - The earlier of (i) the last day of each
Interest Period or (ii) the first day of each calendar month.
(ff) Interest Period - Any Prime Rate Interest Period, or Eurodollar
Interest Period.
(gg) Lien - Any lien, mortgage, security interest, tax lien, pledge,
encumbrance, Environmental Lien, consolidated sale or title retention
arrangement or other interest in property designed to secure repayment of a
liability whether arising by agreement or under law, or otherwise.
(hh) Loan Documents - This Agreement, the Note or Notes, the Security
Instruments, the Guaranties and all other documents executed in connection
with the transaction described in this Agreement.
(ii) Majority Banks - Banks holding 100% of the Revolving Commitment.
(jj) Material Adverse Effect - Any circumstances or events which could
(i) have a material adverse effect on the assets or properties,
liabilities, financial condition, business, operations, affairs or
circumstances of either Borrower or from the facts represented or warranted
in this Agreement or any other Security Instrument (other than any
representation
-6-
<PAGE>
or warranty related solely to a different point in time), or (ii)
materially impair the ability of either Borrower to carry out its business
as it exists on the date of this Agreement or as proposed at the date of
this Agreement to be conducted or to meet its obligations under the Note or
Notes, this Agreement or the other Security Instruments on a timely basis.
(kk) Maximum Rate - At any particular time in question, the maximum
rate of interest which under applicable law may then be charged on the Note
or Notes. If such maximum rate changes after the date hereof, the Maximum
Rate shall be automatically increased or decreased, as the case may be,
without notice to Borrower from time to time as the effective date of each
change in such maximum rate. If the applicable law ceases to provide for a
maximum rate of interest, the Maximum Rate shall be equal to eighteen
percent (18%) per annum.
(ll) Minimum Interest Coverage Ratio - The ratio of EBITDA to Total
Interest Expense for the period being measured.
(mm) Monthly Commitment Reduction - Monthly Commitment Reduction is
used herein as defined in Section 2 hereof.
(nn) Note or Notes - One or more revolving notes of Borrower,
substantially in the form of Exhibit "A" hereto, issued or to be issued
hereunder to each Bank, respectively, to evidence indebtedness to such Bank
arising by reason of Advances on the Revolving Loan, together with all
renewals and extensions thereof or any part thereof.
(oo) Oil and Gas Properties - All oil, gas and mineral properties and
interests, and related personal properties, in which Borrower have granted
and hereinafter grants to Banks a first and prior lien and security
interest.
(pp) Partnerships - The limited partnerships identified on Schedule 1
formed by SWR as the managing or sole general partner to acquire producing
and non-producing oil, gas and mineral properties, as well as similar
entities formed in the future.
(qq) Permitted Liens - The term Permitted Lien shall mean (i)
royalties, overriding royalties, reversionary interests, production
payments and similar burdens on any of the Oil and Gas Properties that
existed at the time of, or were created in connection with, Borrower's
acquisition of such Oil and Gas Properties or otherwise may be consented to
by the Banks; (ii) sales contracts or other arrangements for the sale of
production of oil, gas or associated liquid or gaseous hydrocarbons which
would not (when considered cumulatively with the matters discussed in
clause (i) above) deprive the Borrower of any material right in respect of
any of Borrower's assets or properties (except for rights customarily
granted with respect to such contracts and arrangements); (iii) statutory
Liens for taxes or other assessments that are not yet delinquent (or that,
if delinquent, are being contested in good faith by appropriate
proceedings, levy and execution having been stayed and continue to be
stayed, and for which
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<PAGE>
the Borrower have set aside on their books adequate reserves in accordance
with GAAP); (iv) easements, rights of way, servitudes, permits, surface
leases and other rights in respect to surface operations, pipelines,
grazing, logging, canals, ditches, reservoirs or the like, conditions,
covenants and other restrictions, and easements of streets, alleys,
highways, pipelines, telephone lines, power lines, railways and other
easements and rights of way on, over or in respect of any of Borrower's
assets or properties and that do not, individually or in the aggregate,
cause a Material Adverse Effect; (v) materialmen's, mechanic's,
repairman's, employee's, warehousemen's, landlord's, carrier's, pipeline's,
contractor's, sub-contractor's, operator's, non-operators (arising under
operating or joint operating agreements), and other Liens (including any
financing statements filed in respect thereof) incidental to the
construction, maintenance, development, transportation, storage or
operation of Borrower's assets or properties to the extent not delinquent
(or which, if delinquent, are being contested in good faith by appropriate
proceedings and for which the Borrower have set aside on its books adequate
reserves in accordance with GAAP); (vi) all contracts, agreements and
instruments, and all defects and irregularities and other matters affecting
the Borrower's assets and properties which were in existence at the time
the Borrower's assets and properties were originally acquired by the
Borrower and all routine operational agreements entered into in the
ordinary course of business, which contracts, agreements, instruments,
defects, irregularities and other matters and routine operational
agreements are not such as to, individually or in the aggregate, interfere
materially with the operation, value or use of Borrower's assets and
properties, considered in the aggregate; (vii) liens in connection with
workmen's compensation, unemployment insurance or other social security,
old age pension or public liability obligations; (viii) legal or equitable
encumbrances deemed to exist by reason of the existence of any litigation
or other legal proceeding or arising out of a judgment or award with
respect to which an appeal is being prosecuted in good faith and levy and
execution thereon have been stayed and continue to be stayed; (ix) rights
reserved to or vested in any municipality, governmental, statutory or other
public authority to control or regulate any Borrower's assets and
properties in any manner, and all applicable laws, rules and orders from
any governmental authority; (x) Liens securing the Subordinated Debt; (xi)
Liens created by or pursuant to this Agreement or the Security Instruments;
(xii) Liens existing at the date of this Agreement which have been
disclosed to Banks on Schedule "2" hereto; and (xiii) any and all renewals
and extensions of all or any of the foregoing.
(rr) Person - An individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
(ss) Plan - Any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower are required to contribute on
behalf of their employees.
(tt) Prime Rate - The fluctuating rate of interest per annum
established from time to time by Agent as its Prime Rate (which rate of
interest may not be the lowest, best or most favorable rate of interest
which Bank may charge on loans to its customers). Each change
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in the Prime Rate shall become effective without prior notice to Borrower
automatically as of the opening of business on the date of such change in
the Prime Rate.
(uu) Prime Rate Interest Period - With respect to any Prime Rate Loan,
the period ending on the last day of each month, provided, however, that
(i) if any Prime Rate Interest Period would end on a day which is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day, and(ii) if any Prime Rate Interest Period would otherwise end
after the Revolving Maturity Date such Interest Period shall end on the
Revolving Maturity Date.
(vv) Prime Rate Margin - A percentage on any date determined by the
percentage of the Revolving Commitment outstanding on that date as
follows:
% Revolving Commitment Outstanding Prime Rate Margin
---------------------------------- -----------------
0-50% 0.25
51-70% 0.50
71-80% 0.75
81-100% 1.00
(ww) Pro Rata or Pro Rata Part - For each Bank, means (i) for all
purposes when no Revolving Loan is outstanding, such Bank's Commitment
Percentage, and (ii) otherwise, the proportion which the portion of the
outstanding Revolving Loan owned to such Bank bears to the aggregate
outstanding Revolving Loan owed to all Banks at the time in question.
(xx) Restricted Subsidiary - Southwest Royalties Securities, Inc.
(yy) Revolving Commitment - The commitment contained in Section 2(a) of
this Agreement.
(zz) Revolving Loan - Loan or loans made under the Revolving
Commitment pursuant to Section 2(a) hereof.
(aaa) Revolving Maturity Date - February 28, 1999.
(bbb) Security Instruments - The term Security Instruments is used
collectively herein to mean this Agreement, all Deeds of Trust, Mortgages,
Security Agreements, Assignments of Production and Financing Statements,
all Mortgages, Security Agreements, Assignments of Production and Financing
Statements, and other collateral documents covering certain of Borrower's
Oil and Gas Properties, and related personal property, equipment, oil and
gas inventory and proceeds of the foregoing, all security agreements and
pledge agreements covering proceeds of partnership interest, stock,
promissory notes and similar collateral, all such documents to be in form
and substance reasonably satisfactory to Agent.
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(ccc) Senior Unsecured Notes - The 10-1/2% Senior Notes due 2004 issued
by Borrower pursuant to that certain Indenture dated as of October __, 1997
by and among Borrower and State Street Bank and Trust Company, N.A., as
Trustee.
(ddd) Subsidiary or Subsidiaries - Any corporation or other entity of
which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by either of
the Borrower.
(eee) SWR - SWR is used herein to mean Borrower.
(fff) Tangible Net Worth - An amount equal to Borrower's consolidated
stockholder's equity, as determined in accordance with GAAP, plus
Borrower's redeemable common stock and the Borrower's $1,731,940 loan to
H.H. Wommack, III.
(ggg) Total Interest Expense - Total interest expense of Borrower on
all of its indebtedness, as determined in accordance with GAAP.
(hhh) Unscheduled Redeterminations - A redetermination of the Borrowing
Base made at any time other than on the dates set for the regular semi-
annual redetermination of the Borrowing Base which are made (A) at the
reasonable request of Borrower, (B) at any time it appears to the Banks, in
the exercise of their discretion, that either (i) there has been a material
decrease in the value of the Oil and Gas Properties, or (ii) an event has
occurred which is reasonably expected to have a Material Adverse Effect.
2. COMMITMENTS OF THE BANK.
(a) Revolving Commitment. On the terms and conditions hereinafter
set forth, each Bank agrees severally to make Advances to the Borrower from
time to time during the period beginning on the Effective Date and ending
on the Revolving Maturity Date in such amounts as Borrower may request up
to an amount not to exceed, in the aggregate principal amount outstanding
at any time, the lesser of (i) the Borrowing Base or (ii) $75,000,000.00
(the "Revolving Commitment"). The obligation of each Bank to make Advances
under the Revolving Commitment shall be limited to such Bank's Commitment
Percentage of such Advance. The obligation of the Borrower hereunder shall
be evidenced by this Agreement and any Note or Notes issued in connection
herewith, said Note or Notes to be as described in Section 3 hereof.
Within the limit of this Section 2, the Borrower may borrow, repay without
premium or penalty, and reborrow. Notwithstanding any other provision of
this Agreement, no Advance shall be required to be made hereunder if any
Event of Default (as hereinafter defined) has occurred and is continuing or
if any event or condition has occurred that may, with notice, be an Event
of Default. Each Advance under the revolving line of credit shall be an
aggregate amount of at least $100,000. Irrespective of the face amount or
amounts of any Note or Notes outstanding at any time, the Banks shall never
have the
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obligation to Advance any amount or amounts in excess of the Borrowing Base
or to increase the Borrowing Base amount.
(b) Procedure for Borrowing. Whenever Borrower desires an Advance on
the Revolving Loan, they shall give Agent telegraphic, telex, facsimile or
telephonic notice ("Notice of Borrowing") of such requested Advance, which
in the case of telephonic notice, shall be promptly confirmed in writing.
Each Notice of Borrowing shall be in the form of Exhibit "B" attached
hereto and shall be received by Agent not later than 11:00 a.m. Dallas,
Texas time, (i) one Business Day prior to the Borrowing Date in the case of
Prime Rate Loans; and (ii) three (3) Business Days prior to any proposed
Borrowing Date in the case of Eurodollar Loans. Each Notice of Borrowing
shall specify (i) the Borrowing Date (which, if a Prime Rate Loan shall be
a Business Day, and if a Eurodollar Loan, a Eurodollar Business Day), (ii)
the principal amount to be borrowed, (iii) the portion of the borrowing
constituting Prime Rate Loans and/or Eurodollar Loans, (iv) if any portion
of the proposed borrowing is to constitute Eurodollar Loans, the initial
Interest Period selected by Borrower pursuant to Section 4 hereof to be
applicable thereto, and (v) the date upon which disbursement is required.
Upon receipt of such notice, Agent shall advise each Bank thereof. Not
later than 1:00 p.m., Dallas, Texas time, on the date upon which the
Advances to be made, each Bank shall provide Agent at its offices at 1717
Main Street, Dallas, Texas 75201, in immediately available funds, its Pro
Rata Share of the requested Advance. Not later than 2:00 p.m., Dallas,
Texas time, on the date for which the Advance was requested, Agent shall
make available to Borrower at the same office, in immediately available
funds, the aggregate amount of such requested Advance. Neither Agent or
any Bank shall incur any liability to Borrower in acting upon any notice
referred to above which Agent or such Bank believes in good faith to have
been given by a duly authorized officer or other person authorized to
borrow on behalf of Borrower or for otherwise acting in good faith under
this Section 2(b). Upon funding of Advances by Banks in accordance with
this Agreement pursuant to any such notice, Borrower shall have effected
Advances hereunder.
(c) Monthly Reduction of Revolving Commitment. The Revolving
Commitment shall be reduced as of the 1st day of each month by an amount
determined by the Banks pursuant to Section 7(b) hereof (the "Monthly
Commitment Reduction"). The Monthly Commitment Reduction shall be $-0- per
month from the Effective Date until February 1, 1998, the next scheduled
redetermination of the Borrowing Base.
(d) Voluntary Reduction of Revolving Commitment. Borrower may at any
time, or from time to time, upon not less than three (3) Business Days
prior written notice to Agent, reduce or terminate the Revolving
Commitment; provided, however, that (i) each reduction in the Revolving
Commitment must be in a minimum amount of at least $100,000 and (ii) each
reduction must be accompanied by a prepayment of the Note or Notes in the
amount by which the principal balance of the Note or Notes exceeds the
Revolving Commitment as reduced pursuant to this Section 2(d).
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<PAGE>
3. NOTES EVIDENCING LOAN. The loan described above in Section 2 shall be
evidenced by promissory notes of Borrower as follows:
(a) Form of Notes - The Revolving Loan shall be evidenced by a Note
or Notes in an aggregate amount of $75,000,000.00, and shall be in the form
of Exhibit "A" hereto with appropriate insertion. Notwithstanding the
principal amount of the Note or Notes, as stated on the face thereof, the
actual principal amount due from Borrower to Bank on account of the Note or
Notes, as of any date of computation, shall be the sum of Advances then and
theretofore made on account thereof, less all principal payments actually
received by Bank in collected funds with respect thereto. Although the
Note or Notes shall be dated as of the Effective Date, interest in respect
thereof shall be payable only for the period during which the loans
evidenced thereby are outstanding and, although the stated amount of the
Note or Notes may be higher, the Note or Notes shall be enforceable, with
respect to Borrower's obligation to pay the principal amount thereof, only
to the extent of the unpaid principal amount of the loans.
(b) Interest Rate on the Note or Notes - The unpaid principal balance
of the Note or Notes shall bear interest from time to time as set forth in
Section 4(a) hereof.
(c) Payment of Interest - Interest on the Note or Notes shall be
payable on the last day of each Interest Period.
(d) Payment of Principal - Principal of the Note or Notes shall be
due on the Revolving Maturity Date, unless earlier due in whole or in part
pursuant to the mandatory prepayment requirements of Section 9(b) hereof.
(e) General - Borrower shall pay the outstanding principal amount of
each Eurodollar Loan on the last day of the Interest Period applicable
thereto, which may be done by reborrowing hereunder so long as (i) the
aggregate unpaid principal balance outstanding after any such reborrowing
does not exceed the Revolving Commitment in effect at such time, as the
same may be reduced from time to time hereunder, and (ii) no Event of
Default has occurred and is continuing.
(f) Issuance of Additional Notes. At the Effective Date there shall
be outstanding two notes in the aggregate face amount of $75,000,000 issued
under the Revolving Commitment, one in the face amount of $46,875,000,000
payable to the order of Bank One, and one in the face amount of $28,125,000
payable to the order of Paribas. From time to time during the period from
the Effective Date to the Revolving Maturity Date, additional Notes may be
issued to the Bank or to other Banks as such Banks become parties to this
Agreement. The face amount of each such new Note shall be in an amount
equal to the maximum Commitment of such Bank under the Revolving
Commitment. The aggregate face amount of all such Notes issued and
outstanding as of any date shall never exceed $75,000,000. Provided,
however, that the Banks shall never have the obligation to lend any
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amount in excess of the face amount of their respective commitments as the
same are described above. Upon request from Agent, Borrower shall execute
and deliver to Agent any such new or additional Notes. From time to time as
new Notes are issued the Agent shall require that each Bank exchange their
Notes for newly issued Notes to better reflect the extent of each Bank's
Commitment hereunder.
(g) Payments by Agent to Banks - Each Bank's Pro Rata Part of payment
or prepayment of the Revolving Loan made to Agent by Borrower shall be
directed by wire transfer by Agent to such Bank at the address set forth
for such Bank on Schedule 3 hereto for payments no later than 2:00 p.m.
Dallas time on the Business Day such payments or prepayments are deemed
hereunder to have been received by Agent. Any payment or prepayment
received by Agent at any time after 12:00 noon Dallas time on a Business
Day shall be deemed to have been received on the next Business Day.
Interest shall cease to accrue on any principal as of the end of the day
preceding the Business Day on which any such payment or prepayment is
deemed hereunder to have been received by Agent. If Agent fails to
transfer any principal amount to any Bank as provided above, then Agent
shall promptly direct such principal amount by wire transfer to such Bank.
(h) Sharing of Payments, Etc. - If any Bank shall obtain any payment
(whether voluntary, involuntary, or otherwise) on account of the Revolving
Loan which is in excess of its ratable share of payments on the Revolving
Loan obtained by all Banks, such Bank shall purchase from the other Banks
such participation as shall be necessary to cause such purchasing Bank to
share the excess payment ratably with each of them, provided that, if all
or any portion of such excess payment is thereafter recovered from such
purchasing Bank, the purchase shall be rescinded and the purchase price
restored to the extent of the recovery. The Borrower agrees that any Bank
so purchasing a participation from another Bank pursuant to this section
may to the fullest extent permitted by Law, exercise all of its rights of
payment (including the right of offset) with respect to such participation
as fully as if such Bank were the direct creditor of the Borrower in the
amount of such participation.
(i) Capital Adequacy - If either (i) the introduction or
implementation of or the compliance with or any change in or in the
interpretation of any law, rule or regulation, or (ii) the introduction or
implementation of or the compliance with any mandatory request, directive
or guideline from any central bank or other governmental authority (whether
or not having the force of law) affects or would affect the amount of
capital required or expected to be maintained by any Bank or any
corporation controlling any Bank, then upon demand by such Bank, Borrower
will pay to such Bank, from time to time as specified by such Bank, such
additional amount or amounts which such Bank shall reasonably determine to
be appropriate to compensate such Bank or any corporation controlling such
Bank in light of such circumstances, to the extent that such Bank
reasonably determines that the amount of any such capital would be
increased or the rate of return on any such capital would be reduced by or
in whole or in part based on the existence of the amount of the Revolving
Loan or such Bank's Commitment under this Agreement.
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<PAGE>
4. INTEREST RATES.
(a) Options.
(i) Prime Rate Loans. Borrower agrees to pay interest on the Note or
Notes calculated on the basis of the actual days elapsed in a year
consisting of 365 or, if appropriate, 366 days with respect to the unpaid
principal amount of each Prime Rate Loan from the date the proceeds thereof
are made available to Borrower until maturity (whether by acceleration or
otherwise), at a varying rate per annum equal to the lesser of (i) the
Maximum Rate (defined herein), or (ii) the Prime Rate plus the applicable
Prime Rate Margin. Subject to the provisions of this Agreement as to
prepayment, the principal of the Note or Notes representing Prime Rate
Loans shall be payable as specified in Section 3(d) hereof and the interest
in respect of each Prime Rate Loan shall be payable on each Interest
Payment Date. Past due principal and, to the extent permitted by law, past
due interest in respect to each Prime Rate Loan, shall bear interest,
payable on demand, at a rate per annum equal to the Maximum Rate.
(ii) Eurodollar Loans. Borrower agrees to pay interest calculated on
the basis of a year consisting of 360 days with respect to the unpaid
principal amount of each Eurodollar Loan from the date the proceeds thereof
are made available to Borrower until maturity (whether by acceleration or
otherwise), at a varying rate per annum equal to the lesser of (i) the
Maximum Rate, or (ii) the Eurodollar Rate plus the applicable Eurodollar
Margin. Subject to the provisions of this Agreement with respect to
prepayment, the principal of the Note or Notes shall be payable as
specified in Section 3(d) hereof and the interest with respect to each
Eurodollar Loan shall be payable on each Interest Payment Date. Past due
principal and, to the extent permitted by law, past due interest shall bear
interest, payable on demand, at a rate per annum equal to the Maximum Rate.
Upon three (3) Eurodollar Business Days written notice prior to the making
by the Banks of any Eurodollar Loan (in the case of the initial Interest
Period therefor) on the expiration date of each succeeding Interest Period
(in the case of subsequent Interest Period therefor), Borrower shall have
the option, subject to compliance by Borrower with all of the provisions of
this Agreement, as long as no Event of Default exists to specify whether
the Interest Period commencing on any date shall be a 30, 60, 90 or 180 day
period. If Agent shall not have received timely notice of a designation of
such Interest Period as herein provided, Borrower shall be deemed to have
elected to convert all maturing Eurodollar Loans to Prime Rate Loans.
Borrower shall not be permitted to have outstanding at any time more than
three (3) Eurodollar Tranches, only one (1) of which may be a 180 day
Tranche.
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<PAGE>
(b) Interest Rate Determination. The Agent shall determine each
interest rate applicable to the Note or Notes hereunder. The Agent shall
give prompt notice to the Borrower of each rate of interest so determined
and its determination thereof shall be conclusive absent error.
(c) Conversion Option. Borrower may elect from time to time (i) to
convert all of any part of their Eurodollar Loans to Prime Rate Loans by
giving Agent irrevocable notice of such election in writing prior to 10:00
a.m. (Dallas, Texas time) on the conversion date and such conversion shall
be made on the requested conversion date, provided that any such conversion
of Eurodollar Loan shall only be made on the last day of the Eurodollar
Interest Period with respect thereof, (ii) to convert all or any part of
their Prime Rate Loans to Eurodollar Loans by giving the Agent irrevocable
written notice of such election three (3) Eurodollar Business Days prior to
the proposed conversion and such conversion shall be made on the requested
conversion date or, if such requested conversion date is not a Eurodollar
Business Day or a Business Day, as the case may be, on the next succeeding
Eurodollar Business Day or Business Day, as the case may be. Any such
conversion shall not be deemed to be a prepayment of any of the loans for
purposes of this Agreement or the Note or Notes.
(d) Recoupment. If at any time the applicable rate of interest
selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the
Maximum Rate, thereby causing the interest on the Note to be limited to the
Maximum Rate, then any subsequent reduction in the interest rate so
selected or subsequently selected shall not reduce the rate of interest on
the Note or Notes below the Maximum Rate until the total amount of interest
accrued on the Note or Notes equals the amount of interest which would have
accrued on the Note or Notes if the rate or rates selected pursuant to
Sections 4(a)(i) or 4(a)(ii), as the case may be, had at all times been in
effect.
5. SPECIAL PROVISIONS RELATING TO EURODOLLAR LOANS.
(a) Unavailability of Funds or Inadequacy of Pricing. In the event
that, in connection with any proposed Eurodollar Loan, Agent (i) shall have
determined that U.S. Dollar deposits of the relevant amount and for the
relevant Eurodollar Interest Period for Eurodollar Loans are not available
to the Banks in the London interbank market; or (ii) in good faith
determines that the Eurodollar Interest Rate will not adequately reflect
the cost to the Banks of maintaining or funding the Eurodollar Loans for
such Interest Period, the obligations of the Banks to make the Eurodollar
Loans, as the case may be, shall be suspended until such time as Bank in
its sole discretion reasonably exercised determines that the event
resulting in such suspension has ceased to exist. If the Agent shall make
such determination it shall promptly notify Borrower in writing and
Borrower shall either repay the outstanding Eurodollar Loans, as the case
may be, owed to Bank, without penalty, on the last day of the current
Interest Period or convert the same to Prime Rate Loans in the case of
Eurodollar Loans on the last day of the then current Interest Period for
such Eurodollar Loan.
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<PAGE>
(b) Reserve Requirements. In the event of any change in any
applicable law, treaty or regulation or in the interpretation or
administration thereof, or in the event any central bank or other fiscal
monetary or other authority having jurisdiction over the Banks or the loans
contemplated by this Agreement shall impose, modify or deem applicable any
reserve requirement of the Board of Governors of the Federal Reserve System
on any Eurodollar Loan or loans, or any other reserve, special deposit, or
similar requirements against assets of deposits with or for the account of,
or credit extended by, the Banks or shall impose on the Banks or the London
interbank market, as the case may be, any other condition affecting this
Agreement or the Eurodollar Loans and the result of any of the foregoing is
to increase the cost to the Banks in making or maintaining its Eurodollar
Loans or to reduce any amount (or the effective return on any amount)
received by the Banks hereunder, then Borrower shall either (i) pay to the
Banks upon demand of the Banks as additional interest on the Note or Notes
evidencing the Eurodollar Loans such additional amount or amounts as will
reimburse the Banks for such additional cost or such reduction or (ii)
convert such Eurodollar Loans to Prime Rate Loans. The Agent shall give
notice to Borrower upon becoming aware of any such change or imposition
which may result in any such increase or reduction. A certificate of the
Agent setting forth the basis for the determination of such amount
necessary to compensate the Banks as aforesaid shall be delivered to
Borrower and shall be conclusive as to such determination and such amount,
absent error.
(c) Taxes. Both principal and interest on the Note or Notes
evidencing any Eurodollar Loan are payable without withholding or deduction
for or on account of any taxes. If any taxes are levied or imposed on or
with respect to the Note or Notes evidencing the Eurodollar Loan or on any
payment on the Note or Notes evidencing the Eurodollar Loans made to the
Banks, then, and in any such event, Borrower shall pay to the Banks upon
demand of the Banks such additional amounts as may be necessary so that
every net payment of principal and interest on the Note or Notes evidencing
the Eurodollar Loan, after withholding or deduction for or on account of
any such taxes, will not be less than any amount provided for herein. In
addition, if at any time when the Eurodollar Loan are outstanding any laws
enacted or promulgated, or any court of law or governmental agency
interprets or administers any law, which, in any such case, materially
changes the basis of taxation of payments to the Banks of principal of or
interest on the Note or Notes evidencing the Eurodollar Loan by reason of
subjecting such payments to double taxation or otherwise (except through an
increase in the rate of tax on the overall net income of the Banks) then
Borrower will pay upon demand by Banks the amount of loss to the extent
that such loss is caused by such a change. The Agent shall give notice to
Borrower upon becoming aware of the amount of any loss incurred by the
Banks through enactment or promulgation of any such law which materially
changes the basis of taxation of payments to the Banks. The Agent shall
also give notice on becoming aware of any such enactment or promulgation
which may result in such payments becoming subject to double taxation or
otherwise. A certificate of any Bank setting forth the basis for the
determination of such loss and the computation of
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<PAGE>
such amounts shall be delivered to Borrower and shall be conclusive of such
determination and such amount, absent error.
(d) Change in Laws. If at any time any new law or any change in
existing laws or in the interpretation of any new or existing laws shall
make it unlawful for the Banks to maintain or fund its Eurodollar Loan
hereunder, then the Banks shall promptly notify Borrower in writing and
Borrower shall either (i) repay the outstanding Eurodollar Loan owed to the
Banks, without penalty, on the last day of the current Interest Periods
(or, if the Banks may not lawfully continue to maintain and fund such
Eurodollar Loan, immediately), or (ii) Borrower may convert such Eurodollar
Loan at such appropriate time to Prime Rate loans.
(e) Option to Fund. The Banks shall have the option if Borrower
elect a Eurodollar Loan, to purchase one or more deposits in order to fund
or maintain its funding of the principal balance of the Note or Notes to
which such Eurodollar Loan is applicable during the Interest Period in
question; it being understood that the provisions of this Agreement
relating to such funding are included only for the purpose of determining
the rate of interest to be paid under such Eurodollar Loan and any amounts
owing hereunder and under the applicable Note or Notes. Each Bank shall be
entitled to fund and maintain its funding of all or any part of that
portion of the principal balance of the Note or Notes in any manner it sees
fit, but all such determinations hereunder shall be made as if the Banks
have actually funded and maintained that portion of the principal balance
of the Note or Notes to which a Eurodollar Loan is applicable during the
applicable Interest Period through the purchase of deposits in an amount
equal to the principal balance of the Note or Notes to which such
Eurodollar Loan is applicable and having a maturity corresponding to such
Interest Period. Each Bank may fund the outstanding principal balance of
the Note or Notes which is to be subject to any Eurodollar Loan from any
branch or office of such Bank as such Bank may designate from time to time.
(f) Indemnity. Borrower shall indemnify and hold harmless the Banks
against all reasonable and necessary out-of-pocket costs and expenses which
the Banks may sustain (i) if (other than as a result of a default by the
Banks hereunder) the making of any loan or loans as a Eurodollar Loan does
not occur on the date, if any, specified therefor in the notice given by
Borrower pursuant to Section 2(c)(ii), (ii) as a consequence of any default
by Borrower under this Agreement, or (iii) any other loss suffered by the
Banks as a result of the making of any loan or loans as a Eurodollar Loan.
(g) Payments Not at End of Interest Period. If the Borrower make any
payment of principal with respect to any Eurodollar Loan on any day other
than the last day of the Interest Period applicable to such Eurodollar
Loan, then Borrower shall reimburse the Banks on demand for any loss, cost
or expense incurred by the Banks as a result of the timing of such payment
or in redepositing such principal amount, including the sum of (i) the cost
of funds to the Banks in respect of such principal amount so paid, for the
remainder of the
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Interest Period applicable to such sum, reduced, if the Banks are able to
redeposit such principal amount so paid for the balance of the Interest
Period, by the interest earned by Banks as a result of so redepositing such
principal amount, plus (ii) any expense or penalty incurred by the Banks in
redepositing such principal amount. A certificate of any Bank setting forth
the basis for the determination of the amount owed by Borrower pursuant to
this Section 5(g) shall be delivered to the Borrower and shall be
conclusive in the absence of manifest error.
6. COLLATERAL SECURITY. To secure the performance by Borrower of their
obligations hereunder, and under the Note or Notes and Security Instruments,
whether now or hereafter incurred, matured or unmatured, direct or contingent,
joint or several, or joint and several, including extensions, modifications,
renewals and increases thereof, and substitutions therefore, Borrower has
heretofore granted and assigned to the Agent for the benefit of the Banks a
first and prior security interest and Lien on certain of its Oil and Gas
Properties, certain related equipment, oil and gas inventory and proceeds of the
foregoing, proceeds of partnership interests, stock of Subsidiaries, promissory
notes of Subsidiaries and similar collateral. Contemporaneously with the
execution and delivery of this Agreement and the Notes (i) Borrower shall grant
and assign to Agent for the benefit of the Banks a first and prior security
interest and Lien on certain additional Oil and Gas Properties, related
equipment, oil and gas inventory and the proceeds thereof including those oil
and gas properties being acquired by Borrower from Conoco, Inc. and (ii) Espero
shall grant and assign to Agent for the benefit of the Banks a first and prior
security interest and Lien on certain of their Oil and Gas Properties, related
equipment, oil and gas inventory and the proceeds thereof. All Oil and Gas
Properties and other collateral in which Borrower and Espero have herewith
granted or hereafter grants to the Banks a first and prior Lien (to the
satisfaction of the Banks) in accordance with this Section 6, as such properties
and interests are from time to time constituted, are hereinafter collectively
called the "Collateral."
The granting and assigning of such security interests and Liens by
Borrower and Espero shall be pursuant to Security Instruments in form and
substance reasonably satisfactory to the Agent. Concurrently with the delivery
of each of the Security Instruments, Borrower and Espero shall furnish to the
Agent mortgage and title opinions and other documents reasonably satisfactory to
Agent with respect to the title and Lien status of Borrower's and Espero's
interests in such of the Oil and Gas Properties covered by the Security
Instruments as Agent shall have designated. Borrower and Espero will cause to
be executed and delivered to the Agent, in the future, additional Security
Instruments if the Agent reasonably deems such are necessary to insure
perfection or maintenance of Banks' security interests and Liens in the Oil and
Gas Properties or any part thereof.
The obligations of Borrower hereunder, and under the Note or Notes and
Security Instruments, shall be additionally secured by the Guaranty Agreements,
executed by each of the Guarantors, the form of which Guaranty Agreement is
attached hereto as Exhibit "C".
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7. BORROWING BASE.
(a) Initial Borrowing Base. During the period from the date hereof
to the next Determination Date (as hereinafter defined), the total
Borrowing Base shall be $40,000,000.00; subject to the limitations on use
set forth in Section 7(c) hereof.
(b) Subsequent Determinations of Borrowing Base. Subsequent
determinations of the Borrowing Base shall be made by the Banks at least
semi-annually on April 1 and October 1 of each year, beginning April 1,
1998, or as Unscheduled Redeterminations. In connection with each such
redetermination of the Borrowing Base, the Banks shall also redetermine the
Monthly Commitment Reduction. Borrower shall furnish to the Banks as soon
as possible but in any event no later than March 1 or September 1 of each
year, beginning March 1, 1998 or September 1, 1998, as the case may be,
with an engineering report in form and substance satisfactory to Agent
prepared by an independent petroleum engineer acceptable to Agent covering
the Oil and Gas Properties utilizing pricing parameters used by Agent as
established from time to time, together with such other information
concerning the value of the Collateral as the Banks may deem necessary to
determine the value of such Collateral. By March 1 and by September 1
(being the date other than the date on which Borrower shall have provided
the engineering report prepared by the independent petroleum engineer) of
each year thereafter, beginning March 1, 1998 or September 1, 1998, as the
case may be, or within thirty (30) days after either (i) receipt of notice
from Agent that it requires an Unscheduled Redetermination, or (ii)
Borrower give notice to Agent of their desire to have an Unscheduled
Redetermination performed, Borrower shall furnish to the Banks an
engineering report in form and substance satisfactory to the Banks prepared
by Borrower's in-house engineering staff valuing the Oil and Gas Properties
using substantially the same methodology utilized by the independent
petroleum engineer who prepared the most recent independent engineering
report, together with such other information, reports and data concerning
the value of the Collateral as the Banks shall deem reasonably necessary to
determine the value of such Collateral. The engineering reports furnished
March 1 and September 1 pursuant to this Section 7 shall be prepared as of
the preceding December 31 and June 30, respectively. Agent shall notify
Borrower of the new Borrowing Base, Sublimits (as hereinafter defined) and
Monthly Commitment Reduction for the period beginning on the date of such
notice (herein called the "Determination Date") and continuing until, but
not including, the next Determination Date. If an Unscheduled
Redetermination is made by the Banks, the Agent shall notify Borrower
within a reasonable time after receipt of all requested information of the
new Borrowing Base, if any, and such new Borrowing Base shall continue
until the next Determination Date. If Borrower do not furnish all such
information, reports and data by the date specified in this Section 7(b),
unless such failure is of no fault of Borrower, the Banks may nonetheless
designate the Borrowing Base, Sublimits and Monthly Commitment Reduction at
any amounts which the Banks determine in their discretion and may
redesignate the Borrowing Base from time to time thereafter until the Banks
receive all such information, reports and data, whereupon the Banks shall
designate a new Borrowing Base, Sublimits and Monthly Commitment Reduction
as
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described above. The Banks shall determine the amount of the Borrowing Base
based upon the loan collateral value which it in its discretion (using such
methodology, assumptions and discounts rates as each Bank customarily uses
in assigning collateral value to oil and gas properties) assigns to such
Oil and Gas Properties of Borrower at the time in question and based upon
such other credit factors consistently applied (including, without
limitation, the assets, liabilities, cash flow, business, properties,
prospects, management and ownership of Borrower and its affiliates) as each
Bank customarily considers in evaluating similar oil and gas credits. If
the Banks cannot otherwise agree on the Borrowing Base, Sublimits or
Monthly Commitment Reduction, each Bank shall submit in writing to the
Agent its proposed Borrowing Base and Monthly Commitment Reduction and the
Borrowing Base and Monthly Commitment Reduction shall be set on the basis
of the lowest Borrowing Base and Sublimits, and highest Monthly Commitment
Reduction proposed by any Bank. If at any time any of the Collateral is
sold by Borrower, the Borrowing Base then in effect shall automatically be
reduced by a sum equal to the value assigned to such collateral by the
Banks as of the most recent Borrowing Base redetermination. It is expressly
understood that each Bank has no obligation to designate the Borrowing
Base, Sublimits or the Monthly Commitment Reduction at any particular
amount, except in the exercise of its discretion, whether in relation to
the Revolving Commitment or otherwise, and that the Banks' commitment to
advance funds hereunder is determined by reference to the Borrowing Base
from time to time in effect. Provided, however, that the Banks shall never
have the obligation to designate a Borrowing Base in excess of its legal or
internal lending limits. If Borrower is ever required to purchase and
redeem any of the Senior Unsecured Notes or if any portion of the Senior
Unsecured Notes become due for any reason, the Borrowing Base shall
immediately and automatically be reduced to $0.
(c) Sublimits. The Borrowing Base shall be divided as of each
Determination Date into two categories: (i) Sublimit A to be used by
Borrower for general corporate purposes and/or drilling expenditures, and
(ii) Sublimit B to be used by Borrower for the acquisition of producing oil
and gas properties (Sublimit A and Sublimit B are hereinafter referred to
as the "Sublimits"). At each Determination Date the Banks shall notify
Borrower of the amount of the Borrowing Base allocation to each Sublimit
and such Sublimits shall continue in effect until the next Determination
Date. Until redetermined the Sublimits shall be as follows:
Sublimit A - $25,000,000
Sublimit B - $15,000,000
8. FEES.
(a) Unused Portion Fee. For and in consideration of the Revolving
Commitment, Borrower shall pay to Agent for the ratable benefit of the
Banks an Unused Portion Fee (hereinafter referred to as the "Unused Portion
Fee") equivalent to three-eighths of one percent (3/8%) per annum on the
daily average of the unadvanced amount of the Borrowing
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Base. The Unused Portion Fee shall be payable in arrears on the first
Business Day of each calendar quarter beginning June 1, 1995, with the
final fee payment due on the Revolving Maturity Date for any period then
ending for which the Unused Portion Fee shall not have been theretofore
paid. In the event the Revolving Commitment terminates on any date prior to
the end of any such quarterly period, Borrower shall pay to Agent for the
ratable benefit of the Banks, on the date of such termination, the total
Unused Portion Fee due for the period in which such termination occurs.
(b) Borrowing Base Increase Fees. Borrower agrees to pay to the
Agent for the ratable benefit of the Banks, from time to time, a Borrowing
Base increase fee equal to one-half of one percent (0.50%) of the amount of
any increase in the Borrowing Base. The Borrowing Base increase fee shall
be payable immediately upon notice to Borrower of any such increase.
(c) Agency Fee. Borrower agrees to pay to the Agent an Agency Fee
for its services as Agent hereunder in an amount to be negotiated between
Borrower and Agent.
9. PREPAYMENTS.
(a) Voluntary Prepayments of Note or Notes. The Borrower may at any
time and from time to time, without penalty or premium, prepay the Note or
Notes, in whole or in part. Each such prepayment shall be made on at least
one (1) Business Day's notice to Agent and shall be in a minimum amount of
$100,000 or the unpaid balance on the Note or Notes, whichever is less.
Provided, however, that if Borrower shall prepay the principal of any
Eurodollar Loan on any date other than the last day of the Interest Period
applicable thereto, Borrower shall make the additional payments, if any,
required by Section 5(g) hereof.
(b) Mandatory Prepayment of Note or Notes. In the event the
aggregate principal amount outstanding on the Note or Notes ever exceeds
the Borrowing Base as determined by Agent pursuant to Section 6(b) hereof,
Borrower shall, within thirty (30) days after notification from the Agent,
either (A) by instruments reasonably satisfactory in form and substance to
the Agent, provide the Banks with additional collateral with value and
quality in amounts satisfactory to the Banks in their sole discretion in
order to increase the Borrowing Base by an amount at least equal to such
excess, (B) prepay, without premium or penalty, the principal amount of the
Note or Notes in an amount at least equal to such excess plus interest
thereon to the date of such prepayment or (C) by notice to Agent, pay (in
addition to the Monthly Commitment Reduction then in effect) the deficiency
in six (6) equal monthly installments equal to one-sixth (1/6) of the
amount of the deficiency, with the first such payment thereof to be payable
on the date on which Borrower notify Agent of its election to amortize the
deficiency over a six (6) month period, and continuing on the same day of
each month thereafter until the deficiency is paid in full.
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10. REPRESENTATIONS AND WARRANTIES. In order to induce the Banks to enter
into this Agreement, Borrower hereby represent and warrant to the Banks (which
representations and warranties will survive the delivery of the Note or Notes)
that:
(a) Corporate Existence. Each Borrower, each Guarantor and the
Restricted Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it was
incorporated and is duly qualified as a foreign corporation in all
jurisdictions wherein the failure to qualify could result in Material
Adverse Effect.
(b) Corporate Power and Authorization. Each Borrower is duly
authorized and empowered to create and issue the Note or Notes; and each
Borrower is duly authorized and empowered to execute, deliver and perform
the Security Instruments, including this Agreement; and each Guarantor is
duly authorized and empowered to execute, deliver and perform this
Agreement and its Guaranty; and all corporate and other action on
Borrower's part requisite for the due creation and issuance of the Note or
Notes and on the Borrower's and Guarantors' part requisite for the due
execution, delivery and performance of the Security Instruments, including
this Agreement, and the Guaranties, respectively, has been duly and
effectively taken.
(c) Binding Obligations. This Agreement does, and the Note or Notes,
Guaranties and other Security Instruments upon their creation, issuance,
execution and delivery will, constitute valid and binding obligations of
Borrower and Guarantors, respectively, enforceable in accordance with their
respective terms (except that enforcement may be subject to any applicable
bankruptcy, insolvency, or similar debtor relief laws now or hereafter in
effect and relating to or affecting the enforcement of creditors rights
generally).
(d) No Legal Bar or Resultant Lien. The Note or Notes, the Security
Instruments, including this Agreement, and the Guaranties do not and will
not, to the best of Borrower's or Guarantors' knowledge, violate any
provisions of any contract, agreement, law, regulation, order, injunction,
judgment, decree or writ to which either Borrower, any Guarantor or any
Restricted Subsidiary is subject, or result in the creation or imposition
of any lien or other encumbrance upon any assets or properties of Borrower
or Guarantors, other than those contemplated by this Agreement.
(e) No Consent. The execution, delivery and performance by Borrower
and Guarantors of the Note or Notes and the Security Instruments, including
this Agreement and the Guaranties, as the case may be, does not require the
consent or approval of any other person or entity, including without
limitation any regulatory authority or governmental body of the United
States or any state thereof or any political subdivision of the United
States or any state thereof except for consents required for federal, state
and, in some instances, private leases, right of ways and other conveyances
or encumbrances of oil and gas leases (all of
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which consents have been obtained by Borrower) and other than those the
failure to obtain could cause a Material Adverse Effect.
(f) Financial Condition. The Financial Statements of Borrower dated
June 30, 1997, which have been delivered to Agent are complete and correct
in all material respects, and fully and accurately reflect in all material
respects the financial condition and results of the operations of the
Borrower as of the date or dates and for the period or periods stated, and
such Financial Statements have been prepared in accordance with GAAP. No
change has since occurred in the condition, financial or otherwise, of
Borrower which could have a Material Adverse Effect, except as disclosed to
the Banks in Schedule "4" attached hereto.
(g) Liabilities. Neither Borrower nor Guarantors have any material
(individually or in the aggregate) liability, direct or contingent, except
as disclosed to the Banks in the Financial Statements and on Schedule "5"
attached hereto. No unusual or unduly burdensome restrictions, restraint,
or hazard exists by contract, law or governmental regulation or otherwise
relative to the business, assets or properties of Borrower or Guarantors
which could have a Material Adverse Effect.
(h) Litigation. Except as described in the Financial Statements, or
as otherwise disclosed to the Banks in Schedule "6" attached hereto, there
is no litigation, legal or administrative proceeding, investigation or
other action of any nature pending or, to the knowledge of the officers of
Borrower, threatened against or affecting Borrower, Guarantors, the
Partnerships or the Restricted Subsidiary which involves the possibility of
any judgment or liability not fully covered by insurance, and which could
have a Material Adverse Effect.
(i) Taxes; Governmental Charges. Borrower, Guarantors and the
Restricted Subsidiary have filed all tax returns and reports required to be
filed and has paid all taxes, assessments, fees and other governmental
charges levied upon it or its assets, properties or income which are due
and payable, including interest and penalties, the failure of which to pay
could have a Material Adverse Effect, or has provided adequate reserves, if
required, in accordance with GAAP for the payment thereof, except such as
are being contested in good faith by appropriate proceedings and for which
adequate reserves for the payment thereof as required by GAAP has been
provided and levy and execution thereon have been stayed and continue to be
stayed.
(j) Titles, Etc. Borrower and Guarantors have good and defensible
title to all of their assets, including without limitation, the Oil and Gas
Properties, free and clear of all liens or other encumbrances except
Permitted Liens.
(k) Defaults. Neither the Borrower, the Guarantors nor the
Restricted Subsidiary are in default and no event or circumstance has
occurred which, but for the passage of time or the giving of notice, or
both, would constitute a default under any loan or credit agreement,
indenture, mortgage, deed of trust, security agreement or other agreement
or
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instrument to which either Borrower, any Guarantor or any Restricted
Subsidiary is a party in any respect that could have a Material Adverse
Effect. No Event of Default hereunder has occurred and is continuing.
(l) Casualties; Taking of Properties. Since the dates of the latest
Financial Statements of Borrower delivered to Banks, neither the business
nor the assets or properties of Borrower or Guarantors have been affected
(to the extent it could have a Material Adverse Effect), as a result of any
fire, explosion, earthquake, flood, drought, windstorm, accident, strike or
other labor disturbance, embargo, requisition or taking of property or
cancellation of contracts, permits or concessions by any domestic or
foreign government or any agency thereof, riot, activities of armed forces
or acts of God or of any public enemy.
(m) Use of Proceeds; Margin Stock. The proceeds of the loans
hereunder will be used by Borrower for the purposes of refinancing of
existing debt, working capital and general corporate purposes. Neither
Borrower is engaged principally or as one of its important activities in
the business of extending credit for the purpose of purchasing or carrying
any "margin stock" as defined in Regulation U of the Board of Governors of
the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of
reducing or retiring any indebtedness which was originally incurred to
purchase or carry a margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of said
Regulation U.
Neither of the Borrower nor any person or entity acting on behalf of
Borrower have taken or will take any action which might cause the loans
hereunder or any of the Security Instruments, including this Agreement, to
violate Regulation U or any other regulation of the Board of Governors of
the Federal Reserve System or to violate the Securities Exchange Act of
1934 or any rule or regulation thereunder, in each case as now in effect or
as the same may hereafter be in effect.
(n) Location of Business and Offices. The principal place of
business of Borrower is located at 407 N. Big Spring, Midland, Texas
79701-4326.
(o) Compliance with the Law. To the best of Borrower's knowledge,
neither Borrower nor Guarantors:
(i) are in violation of any law, judgment, decree, order,
ordinance, or governmental rule or regulation to which Borrower, or any
of their assets or properties are subject; and
(ii) have failed to obtain any license, permit, franchise or
other governmental authorization necessary to the ownership of any of
its assets or properties or the conduct of their business;
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which violation or failure is reasonably expected to have a Material
Adverse Effect.
(p) No Material Misstatements. To the best of the knowledge of the
Borrower and the Guarantors, there are no significant material facts or
conditions relating to the Loan Documents, any of the Collateral, or the
financial condition, assets, or business prospects of the Borrower,
Guarantors, any Subsidiary or any Partnership that could, collectively or
individually, have a Material Adverse Effect and that have not been
related, in writing, to the Banks as an attachment to this Agreement.
(q) Not A Utility. Neither Borrower is an entity engaged in the
State of Texas in the (i) generation, transmission, or distribution and
sale of electric power; (ii) transportation, distribution and sale through
a local distribution system of natural or other gas for domestic,
commercial, industrial, or other use; (iii) ownership or operation of a
pipeline for the transmission or sale of natural or other gas, crude oil or
petroleum products to other pipeline companies, refineries, local
distribution systems, municipalities, or industrial consumers; (iv)
provision of telephone or telegraph service to others; (v) production,
transmission, or distribution and sale of steam or water; (vi) operation of
a railroad; or (vii) provision of sewer service to others.
(r) ERISA. Borrower and Guarantors are in compliance in all material
respects with the applicable provisions of ERISA, and no "reportable
event", as such term is defined in Section 4043 of ERISA, has occurred with
respect to any Plan of either Borrower is reasonably likely to cause a
Material Adverse Effect.
(s) Public Utility Holding Company Act. Neither Borrower is a
"holding company", or "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company", or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(t) Subsidiaries. SWR's only Subsidiaries are Southwest Royalties
Securities, Inc., Threading Products International, LLC, Midland Red Oak
Realty, Inc., Midland Southwest Software, Inc. and Espero Energy
Corporation.
(u) Environmental Matters. Except as disclosed on Schedule "7",
neither of the Borrower, any Guarantor, any Partnership, nor the Restricted
Subsidiary has received notice or otherwise learned of (i) any
Environmental Liability which could individually or in the aggregate have a
Material Adverse Effect arising in connection with (A) any non-compliance
with or violation of the requirements of any Environmental Law or (B) the
release or threatened release of any toxic or hazardous waste into the
environment, (ii) has no threatened or actual liability in connection with
the release or threatened release of any toxic or hazardous waste into the
environment which could individually or in the aggregate have a Material
Adverse Effect or (iii) any federal or state investigation evaluating
whether any remedial action is needed to respond to a release or threatened
release of any toxic or
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hazardous waste into the environment for which either Borrower, any
Guarantor, any Partnership or any Restricted Subsidiary is or may be liable
which could result in a Material Adverse Effect.
(v) Ownership of Borrower. The equity securities of the Borrower are
owned by the individuals and entities listed on Schedule "8".
(w) Liens. Except for Permitted Liens, the assets and properties of
Borrower are free and clear of all liens and encumbrances.
11. CONDITIONS OF LENDING.
(a) The obligation of the Banks to make the initial Advance under the
Revolving Commitment shall be subject to the following conditions
precedent:
(i) Execution and Delivery. Borrower shall have executed and
delivered to the Agent the Note or Notes, the Security Instruments and
other required documents, all in form and substance satisfactory to the
Agent;
(ii) Guaranty Agreements. Agent shall have received the Guaranty
Agreements duly executed by the Guarantors;
(iii) Legal Opinion. The Agent shall have received from
Borrower's legal counsel a favorable legal opinion in form and substance
satisfactory to Bank (i) as to the matters set forth in Subsections
10(a), (b), (c), (d), (e) and (h) hereof, and (ii) as to such other
matters as Bank or its counsel may reasonably request;
(iv) Corporate Resolutions. The Agent shall have received
appropriate certified corporate resolutions of Borrower and Guarantors;
(v) Good Standing and Existence. The Agent shall have received
evidence of existence and good standing for the Borrower and Guarantors;
(vi) Incumbency. The Agent shall have received a signed
certificate of the officers of Borrower and Guarantors, certifying the
names of each of the officers of Borrower and Guarantors authorized to
sign loan documents on behalf of the Borrower and Guarantors, together
with the true signatures of each such officer. The Banks may
conclusively rely on such certificate until the Agent receives a further
certificate of the authorized officers of Borrower canceling or amending
the prior certificate and submitting signatures of the officers named in
such further certificate;
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(vii) Articles of Incorporation and Bylaws. The Agent shall have
received copies of the Articles of Incorporation of Borrower and
Guarantors and all amendments thereto, certified by the Secretary of
State of the state of the Borrower's and Guarantors' incorporation and a
copy of the bylaws of the Borrower and Guarantors and all amendments
thereto, certified by one or more officers of Borrower and Guarantors as
being true, correct and complete;
(viii) Engineering Review. The Banks shall have completed their
engineering evaluation of the oil and gas properties being acquired by
Borrower from Conoco, Inc.; and
(ix) Mortgaging. The Agent shall have received Security
Instruments in form and substance satisfactory to it covering certain of
Espero's Oil and Gas Properties, as well as certain of the oil and gas
properties being acquired from Conoco, Inc.; and
(x) Title. The Agent shall have received satisfactory evidence of
the state of the title to the newly mortgaged Oil and Gas Properties
referred to above in Section 11(a)(ix); and
(xi) Senior Unsecured Notes. The Agent shall have received
satisfactory evidence that the Senior Unsecured Note transaction shall
have closed, and that the interest rate on the Senior Unsecured Notes is
no greater than twelve percent (12%); and
(xii) Other Documents. The Agent shall have received such other
instruments and documents incidental and appropriate to the transaction
provided for herein as the Agent or its counsel may reasonably request,
and all such documents shall be in form and substance reasonably
satisfactory to the Agent; and
(xiii) Legal Matters Satisfactory. All legal matters incident to
the consummation of the transactions contemplated hereby shall be
reasonably satisfactory to special counsel for the Agent retained at the
expense of Borrower.
(b) The obligation of the Banks to make any Advance (including the
initial Advance) on the Revolving Commitment shall be subject to the
following additional conditions precedent that, at the date of making each
such Advance and after giving effect thereto:
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(i) Representation and Warranties. With respect to any Advance, the
representations and warranties of Borrower under this Agreement are true
and correct in all material respects as of such date, as if then made
(except to the extent that such representations and warranties related
solely to an earlier date);
(ii) No Event of Default. No Event of Default shall have occurred
and be continuing nor shall any event have occurred or failed to occur
which, with the passage of time or service of notice, or both, would
constitute an Event of Default;
(iii) Other Documents. The Agent shall have received such other
instruments and documents incidental and appropriate to the transaction
provided for herein as the Agent or its counsel may reasonably request, and
all such documents shall be in form and substance reasonably satisfactory
to the Agent; and
(iv) Legal Matters Satisfactory. All legal matters incident to the
consummation of the transactions contemplated hereby shall be reasonably
satisfactory to special counsel for the Agent retained at the expense of
Borrower.
12. AFFIRMATIVE COVENANTS. A deviation from the provisions of this
Section 12 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by the Banks. Without the prior written
consent of the Banks, Borrower will at all times comply with the covenants
contained in this Section 12 from the date hereof and for so long as any part of
the Revolving Commitment is in existence.
(a) Financial Statements and Reports. Borrower shall promptly
furnish to the Banks from time to time upon request such information
regarding the business and affairs and financial condition of the Borrower,
as the Banks may reasonably request, and will furnish to the Banks:
(i) Annual Audited Financial Statements - as soon as available,
and in any event within one hundred twenty (120) days after the close of
each fiscal year, the annual audited Financial Statements (consolidated and
consolidating) of the Borrower, prepared by an independent accounting firm
reasonably acceptable to the Agent;
(ii) Quarterly Financial Statements - as soon as available, and
in any event within sixty (60) days after the end of each calendar quarter
of each year (except the last calendar quarter in any fiscal year), the
quarterly
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unaudited Financial Statements (consolidated and consolidating) of the
Borrower;
(iii) Report on Properties - as soon as available and in any
event on or before March 1, and September 1 of each calendar year, and at
such other times as any Bank, in accordance will Section 7 hereof, may
request, the engineering reports required to be furnished to the Banks
under such Section 6 on the Oil and Gas Properties; and
(iv) Additional Information - promptly upon request of the Agent
from time to time any additional financial information or other information
that any Bank may reasonably request.
All such information, reports, balance sheets and Financial Statements
referred to in Subsection 12(a) above shall be in such detail as the Agent
may reasonably request and shall be prepared in a manner consistent with
the Financial Statements.
(b) Certificates of Compliance. Concurrently with the furnishing of
the annual audited Financial Statements pursuant to Subsection 12(a)(i)
hereof and each of the quarterly unaudited Financial Statements pursuant to
Subsection 12(a)(ii) hereof, Borrower will furnish or cause to be furnished
to the Agent a certificate in the form of Exhibit "D" attached hereto,
signed by the President, Chief Executive Officer or chief financial officer
of the Borrower (i) stating that the Borrower have fulfilled in all
material respects its obligations under the Note or Notes and the Security
Instruments, including this Agreement, and that all representations and
warranties made herein and therein continue (except to the extent they
relate solely to an earlier date) to be true and correct in all material
respects (or specifying the nature of any change), or if an Event of
Default has occurred, specifying the Event of Default and the nature and
status thereof; (ii) to the extent requested from time to time by the
Agent, specifically affirming compliance of the Borrower in all material
respects with any of its representations (except to the extent they relate
solely to an earlier date) or obligations under said instruments; (iii)
setting forth the computation, in reasonable detail as of the end of each
period covered by such certificate, of compliance with Sections 13(c), (d),
(e) and (f); and (iv) containing or accompanied by such financial or other
details, information and material as the Agent may reasonably request to
evidence such compliance.
(c) Accountants' Certificate. Concurrently with the furnishing of
the annual audited Financial Statement pursuant to Section 12(a)(i) hereof,
Borrower will furnish a statement from the firm of independent public
accountants which prepared such statements to the effect that nothing has
come to their attention to cause them to believe that there existed on the
date of such statements any Event of Default.
(d) Taxes and Other Liens. The Borrower and the Guarantors will (and
SWR and MSC will cause each Partnership and each Restricted Subsidiary to)
pay and discharge
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promptly all taxes, assessments and governmental charges or levies imposed
upon Borrower or upon the income or any assets or property of the Borrower
as well as all claims of any kind (including claims for labor, materials,
supplies and rent) which, if unpaid, might become a Lien or other
encumbrance upon any or all of the assets or property of Borrower and which
could reasonably be expected to result in a Material Adverse Effect;
provided, however, that Borrower, the Guarantors and the Partnerships shall
not be required to pay any such tax, assessment, charge, levy or claim if
the amount, applicability or validity thereof shall currently be contested
in good faith by appropriate proceedings diligently conducted, levy and
execution thereon have been stayed and continue to be stayed, and Borrower,
the Guarantors or the Partnerships, or any of them, as the case may be,
shall have set up adequate reserves therefor, if required, under GAAP.
(e) Compliance with Laws. The Borrower and the Guarantors will (and
SWR and MSC will cause each Partnership and each Restricted Subsidiary to)
observe and comply, in all material respects, with all applicable laws,
statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions,
rules, regulations, orders and restrictions relating to environmental
standards or controls or to energy regulations of all federal, state,
county, municipal and other governments, departments, commissions, boards,
agencies, courts, authorities, officials and officers, domestic or foreign.
(f) Further Assurances. Borrower and Guarantors will cure promptly
any defects in the creation and issuance of the Note or Notes and the
execution and delivery of the Note or Notes and the Security Instrument,
including this Agreement. Borrower and Guarantors at their sole expense
will promptly execute and deliver to Agent upon its reasonable request all
such other and further documents, agreements and instruments in compliance
with or accomplishment of the covenants and agreements in this Agreement
and the Guaranties, or to correct any omissions in the Note or Notes or
more fully to state the obligations set out herein.
(g) Performance of Obligations. Borrower will pay the Note or Notes
and other obligations incurred by it hereunder according to the reading,
tenor and effect thereof and hereof; and Borrower and Guarantors will do
and perform every act and discharge all of the obligations provided to be
performed and discharged by Borrower or the Guarantors under the Security
Instruments, including this Agreement, at the time or times and in the
manner specified.
(h) Insurance. Borrower and Guarantors now maintain and will
continue to maintain insurance with financially sound and reputable
insurers with respect to their assets against such liabilities, fires,
casualties, risks and contingencies and in such types and amounts as is
customary in the case of persons engaged in the same or similar businesses
and similarly situated. Upon request of the Agent, Borrower and Guarantors
will furnish or cause to be furnished to the Agent from time to time a
summary of the respective insurance coverage of Borrower and Guarantors in
form and substance satisfactory to the Agent, and,
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if requested, will furnish the Agent copies of the applicable policies.
Upon demand by Agent any insurance policies covering any such property
shall be endorsed (i) to provide that such policies may not be canceled,
reduced or affected in any manner for any reason without fifteen (15) days
prior notice to Agent, (ii) to provide for insurance against fire, casualty
and other hazards normally insured against, in the amount of the full value
(less a reasonable deductible not to exceed amounts customary in the
industry for similarly situated business and properties) of the property
insured, and (iii) to provide for such other matters as the Agent may
reasonably require. Borrower and Guarantors shall at all times maintain
adequate insurance with respect to the Collateral against their liability
for injury to persons or property, which insurance shall be by financially
sound and reputable insurers and shall without limitation provide the
following coverages: comprehensive general liability (including coverage
for damage to underground resources and equipment, damage caused by
blowouts or cratering, damage caused by explosion, damage to underground
minerals or resources caused by saline substances, broad form property
damage coverage, broad form coverage for contractually assumed liabilities
and broad form coverage for acts of independent contractors), worker's
compensation and automobile liability. Borrower and Guarantors shall at all
times maintain cost of control of well insurance with respect to the
Collateral which shall insure Borrower and Guarantors against seepage and
pollution expense if deemed economical in the reasonable discretion of
Borrower and Guarantors; redrilling expense; and cost of control of well;
fires, blowouts, etc. Additionally, Borrower and Guarantors shall at all
times maintain adequate insurance with respect to all of their other assets
and wells in accordance with prudent business practices.
(i) Accounts and Records. Borrower and Guarantors will (and Borrower
will cause the Restricted Subsidiary to) keep books, records and accounts
in which full, true and correct entries will be made of all dealings or
transactions in relation to its business and activities, prepared in a
manner consistent with prior years, subject to changes required by GAAP or
suggested by Borrower's auditors.
(j) Right of Inspection. Borrower and Guarantors will permit any
officer, employee or agent of the Banks to examine Borrower's and
Guarantors' books, records and accounts, and take copies and extracts
therefrom, all at such reasonable times and as often as the Banks may
reasonably request. The Banks will keep all such information confidential
and will not without prior written consent disclose or reveal the
information or any part thereof to any person other than the Banks'
officers, employees, legal counsel, regulatory authorities or advisors to
whom it is necessary to reveal such information for the purpose of
effectuating the agreements and undertakings specified herein or as
otherwise required by law or in connection with the enforcement of the
Banks' rights and remedies and this Agreement, the Guaranties, the Note or
Notes and the Security Instruments.
(k) Notice of Certain Events. The Borrower and the Guarantors shall
promptly notify the Agent if Borrower or Guarantors learn of the occurrence
of (i) any event which constitutes an Event of Default (including but not
limited to, a Change of Control) together
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with a detailed statement by Borrower of the steps being taken to cure the
Event of Default; or (ii) any legal, judicial or regulatory proceedings
affecting the Borrower, the Guarantors or any of the Partnerships or any of
the assets or properties of the Borrower which, if adversely determined,
could have a Material Adverse Effect; or (iii) any dispute between the
Borrower, the Guarantors or any of the Partnerships and any governmental or
regulatory body or any other person or entity which, if adversely
determined, could cause a Material Adverse Effect; or (iv) any event or
circumstance which requires the prepayment, purchase or redemption of any
of the Senior Unsecured Notes, or (v) any other matter which in Banks'
opinion could have a Material Adverse Effect.
(l) ERISA Information and Compliance. The Borrower and the
Guarantors will promptly furnish to the Agent immediately upon becoming
aware of the occurrence of any "reportable event", as such term is defined
in Section 4043 of ERISA, or of any "prohibited transaction", as such term
is defined in Section 4975 of the Internal Revenue Code of 1954, as
amended, in connection with any Plan or any trust created thereunder, a
written notice signed by the President or the chief financial officer of
the Borrower or the Guarantors be, specifying the nature thereof, what
action Borrower or the Guarantors are taking or proposes to take with
respect thereto, and, when known, any action taken by the Internal Revenue
Service with respect thereto.
(m) Environmental Reports and Notices. The Borrower will deliver to
the Agent (i) promptly upon its becoming available, one copy of each report
sent by the Borrower, the Guarantors and each Partnership to any court,
governmental agency or instrumentality pursuant to any Environmental Law,
(ii) notice, in writing, promptly upon Borrower', Guarantors' or any
Partnership's learning that they have received notice or otherwise learned
of any claim, demand, action, event, condition, report or investigation
indicating any potential or actual liability arising in connection with (x)
the non-compliance with or violation of the requirements of any
Environmental Law which could have a Material Adverse Effect; (y) the
release or threatened release of any toxic or hazardous waste into the
environment which could have a Material Adverse Effect or which release
Borrower, the Guarantors or any of the Partnerships would have a duty to
report to any court or government agency or instrumentality, or (iii) the
existence of any Environmental Lien on any properties or assets of the
Borrower, the Guarantors or any of the Partnerships and Borrower, the
Guarantors or any Partnerships, as the case may be, shall immediately
deliver a copy of any such notice to Agent.
(n) Maintenance. The Borrower and the Guarantors will (and SWR and
MSC will cause each Partnership and the Restricted Subsidiary to) (i)
observe and comply in all material respects with all Environmental Laws;
(ii) except as provided in Subsections 12(o) and 12(p) below, maintain the
Oil and Gas Properties and other assets and properties in good and workable
condition at all times and make all repairs, replacements, additions,
betterments and improvements to the Oil and Gas Properties and other assets
and properties as are needed and proper so that the business carried on in
connection therewith may be
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conducted properly and efficiently at all times in the opinion of the
Borrower, Guarantors or each Partnership exercised in good faith; (iii)
take or cause to be taken whatever actions are necessary or desirable to
prevent an event or condition of default by Borrower, Guarantors or any
Partnerships under the provisions of any gas purchase or sales contract or
any other contract, agreement or lease comprising a part of the Oil and Gas
Properties or other collateral security hereunder which default could
result in a Material Adverse Effect; and (iv) furnish Agent upon request
evidence satisfactory to Agent that there are no Liens, claims or
encumbrances superior to the Lien of Banks on the Oil and Gas Properties,
except laborers', vendors', repairmen's, mechanics', worker's, or
materialmen's liens arising by operation of law or incident to the
construction or improvement of property if the obligations secured thereby
are not yet due or are being contested in good faith by appropriate legal
proceedings or Permitted Liens.
(o) Operation of Properties. Except as provided in Subsection 12(p)
and (q) below, Borrower and Guarantors will (and SWR will cause each
Partnership to) operate, or use reasonable efforts to cause to be operated,
all Oil and Gas Properties in a careful and efficient manner in accordance
with the practice of the industry and in compliance in all material
respects with all applicable laws, rules, and regulations, and in
compliance in all material respects with all applicable proration and
conservation laws of the jurisdiction in which the properties are situated,
and all applicable laws, rules, and regulations, of every other agency and
authority from time to time constituted to regulate the development and
operation of the properties and the production and sale of hydrocarbons and
other minerals therefrom; provided, however, that Borrower, Guarantors and
each Partnership shall have the right to contest in good faith by
appropriate proceedings, the applicability or lawfulness of any such law,
rule or regulation and pending such contest may defer compliance therewith,
as long as such deferment shall not subject the properties or any part
thereof to foreclosure or loss.
(p) Compliance with Leases and Other Instruments. Borrower and
Guarantors will (and SWR will cause each Partnership to) pay or cause to be
paid and discharge all rentals, delay rentals, royalties, production
payments and indebtedness required to be paid by the Borrower, Guarantors
or any Partnership (or required to keep unimpaired in all material respects
the rights of Borrower, the Guarantors and such Partnership in the Oil and
Gas Properties) accruing under, and perform or cause to be performed in all
material respects each and every act, matter, or thing required of the
Borrower, Guarantors or any Partnership by each and all of the assignments,
deeds, leases, subleases, contracts, and agreements in any way relating to
the Borrower, Guarantors or any Partnership or any of the Oil and Gas
Properties and do all other things necessary of the Borrower, Guarantors or
any Partnership to keep unimpaired in all material respects the rights of
the Borrower, Guarantors and each Partnership thereunder and to prevent the
forfeiture thereof or default thereunder; provided, however, that nothing
in this Agreement shall be deemed to require the Borrower, Guarantors and
each Partnership to perpetuate or renew any oil and gas lease or other
lease by payment of rental or delay rental or by commencement or
continuation of operations nor to prevent
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the Borrower, Guarantors or any Partnership from abandoning or releasing
any oil and gas lease or other lease or well thereon when, in any of such
events, in the opinion of Borrower, Guarantors or any Partnership exercised
in good faith, it is not in the best interest of the Borrower, Guarantors
or any Partnership to perpetuate the same .
(q) Certain Additional Assurances Regarding Maintenance and Operations
of Properties. With respect to those Oil and Gas Properties which are being
operated by operators other than Borrower, Borrower, Guarantors and the
Partnerships shall not be obligated to perform any undertakings
contemplated by the covenants and agreement contained in Subsections 12(o)
or 12(p) hereof which are performable only by such operators and are beyond
the control of Borrower, Guarantors and the Partnerships; however,
Borrower, Guarantors and each Partnership agree to promptly take all
actions available under any operating agreements or otherwise to bring
about the performance of any such undertakings required to be performed
thereunder.
(r) Title Matters. Within sixty (60) days after the Effective Date
with respect to the matters listed on Schedule 9, Borrower will provide
title opinions and/or acceptable title information to Agent. As to any Oil
and Gas Properties hereafter mortgaged to the Banks, Borrower will promptly
(but in no event more than sixty (60) days following such mortgaging),
furnish Agent with title opinions and/or title information reasonably
satisfactory to Agent showing good and defensible title of Borrower to such
Oil and Gas Properties subject only to Permitted Liens.
(s) Curative Matters. Within ninety (90) days after the date hereof
with respect to matters listed on Schedule "10" and, thereafter, within
ninety (90) days after receipt by Borrower from Agent or its counsel of
written notice of title defects the Agent reasonably requires to be cured,
Borrower shall either (i) provide such curative information, in form and
substance satisfactory to Agent, or (ii) substitute Oil and Gas Properties
of value and quality satisfactory to the Banks for all of Oil and Gas
Properties for which such title curative was requested but upon which
Borrower elected not to provide such title curative information, and,
within ninety (90) days of such substitution, provide title opinions or
title information satisfactory to the Agent covering the Oil and Gas
Properties so substituted.
(t) Change of Principal Place of Business. Borrower and Guarantors
shall give Agent at least thirty (30) days prior written notice of its
intention to move its principal place of business from the address set
forth in Section 12(n) hereof.
13. NEGATIVE COVENANTS. A deviation from the provisions of this Section
13 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by the Banks. Without the prior written
consent of the Banks, Borrower will at all times comply with the covenants
contained in this Section 13 from the date hereof and for so long as any part of
the Revolving Commitment is in existence.
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(a) Liens. Neither Borrower nor Guarantors will, nor will Borrower
permit the Restricted Subsidiary to, (and SWR will use its best efforts to
not allow any Partnership, unless in SWR's good faith judgment the use of
its best efforts would breach a duty owed by SWR to any Partnership under
applicable laws, regulations or agreements, to) create, incur, assume or
permit to exist any lien, security interest or other encumbrance on any of
its assets or properties except Permitted Liens.
(b) Consolidations, Mergers and Sales of Assets. Neither Borrower nor
Guarantors will consolidate or merge with or into any other Person, except
that the Borrower and Guarantors may merge with another Person if the
Borrower party or Guarantor party to the merger is the corporation
surviving such merger and if, after giving effect thereto, no Event of
Default shall have occurred and be continuing .
(c) Current Ratio. Borrower will not allow their ratio of
consolidated Current Assets to consolidated Current Liabilities to ever be
less than 1.0 to 1.0.
(d) Minimum Interest Coverage Ratio. Borrower will not allow its
Minimum Interest Coverage ratio to be less than (i) 1.40 to 1.0 during the
period beginning January 1, 1998 and continuing through December 31, 1998,
and (ii) 1.75 to 1.0 thereafter; said ratio to be tested as of the end of
each calendar quarter beginning with the calendar quarter ending March 31,
1998.
(e) Tangible Net Worth. Borrower will not allow their consolidated
Tangible Net Worth to ever be less than an amount equal to $2,000,000.00
(adjusted for any future offering of Borrower's common or preferred stock)
from the date hereof through the Revolving Maturity Date.
(f) Debts, Guaranties and Other Obligations. Neither Borrower nor
any of the Guarantors will nor will Borrower permit any Restricted
Subsidiary to (and SWR will use its best efforts to not allow any
Partnership, unless in SWR's good faith judgment the use of its best
efforts would breach a duty owed by SWR to any Partnership under applicable
laws, regulations or agreements, to) incur, create, assume or in any manner
become or be liable in respect of any indebtedness, liabilities or other
obligations, nor will the Borrower, Guarantors or any Partnership guarantee
or otherwise in any manner become or be liable in respect of any
indebtedness, liabilities or other obligations of any other person or
entity, whether by agreement to purchase the indebtedness of any other
person or entity or agreement for the furnishing of funds to any other
person or entity through the purchase or lease of goods, supplies or
services (or by way of stock purchase, capital contribution, advance or
loan) for the purpose of paying or discharging the indebtedness of any
other person or entity, or otherwise, except that the foregoing
restrictions shall not apply to:
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(i) the Note or Notes, or other indebtedness heretofore
disclosed to Agent in Borrower's or Guarantors' Financial Statements or
on Schedule "11" hereto;
(ii) obligations incurred in connection with the issuance of
preferred stock to which Banks consent in writing prior to such
issuance;
(iii) taxes, assessments or other government charges which are
not yet due or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, if such reserve as shall be
required by GAAP shall have been made therefor and levy and execution
thereon have been stayed and continue to be stayed;
(iv) indebtedness incurred in the ordinary course of business as
conducted on the Effective Date;
(v) the Senior Unsecured Notes; or
(vi) renewals and extensions of any or all of the foregoing.
(g) Dividends. SWR will not declare or pay any cash dividend,
purchase, redeem or otherwise acquire for value any of its stock now or
hereafter outstanding, return any capital to stockholders, or make any
distribution of its assets to its stockholders as such; provided, however,
that in event Borrower successfully concludes an issue of its preferred
stock to which Banks have previously consented in writing, then the
foregoing restriction shall not apply to cash dividends paid on such
preferred stock so long as no Event of Default has occurred and is
continuing or would occur as the result of payment of any such cash
dividends.
(h) Loans and Advances. Neither Borrower, any Guarantor nor any
Restricted Subsidiary shall (and SWR will use its best efforts to not allow
any Partnership, unless in SWR's good faith judgment the use of its best
efforts would breach a duty owed by SWR to any Partnership under applicable
laws, regulations or agreements, to) make or permit to remain outstanding
any loans or advances to any person or entity, except that the foregoing
restriction shall not apply to:
(i) loans, advances or investments the material details of which
have been set forth in the Financial Statements of Borrower heretofore
furnished to the Banks or have otherwise heretofore been disclosed to
the Banks on Schedule "12" hereto;
(ii) so long as no Event of Default exists and is continuing,
loans and advances to and among Guarantors;
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(iii) loans and advances not exceeding in the aggregate
outstanding at any time the sum of $2,500,000;
(iv) the $1,731,940 loan previously made to H. H. Wommack, III;
and
(v) advances made in the ordinary course of Borrower's or the
Guarantors' oil and gas business.
(i) Investments. From and after the Effective Date, the Borrower
shall not make investments in any Person or entity except the foregoing
restriction shall not apply to:
(i) investments of up to $1,700,000 in the aggregate in Sierra
Well Service, Inc.;
(ii) investments of up to $10,000,000 in the aggregate in
Midland Red Oak Realty, Inc.;
(iii) investments of up to $500,000 in the aggregate after the
Effective Date in Threading Products International, LLC; and
(iv) investments in the Guarantors.
(j) Sale or Discount of Receivables. Neither Borrower nor Guarantors
will discount or sell with recourse, or sell for less than the greater of
the face or market value thereof, any of their notes receivable or accounts
receivable.
(k) Nature of Business. Neither Borrower nor Guarantors will permit
any material change to be made in the character of their business as
carried on at the date hereof.
(l) Hedging Transactions. Neither Borrower nor Guarantors will enter
into any transaction or transactions providing for the hedging, forward
sale or swap of crude oil or natural gas of more than fifty percent (50%)
of the discounted present worth of the Oil and Gas Properties in the
aggregate.
(m) Amendment of Articles of Incorporation or Bylaws. Neither
Borrower nor Guarantors will permit any material amendment to, or other
alteration of, their Articles of Incorporation or Bylaws.
14. Sale of Assets. Neither Borrower nor Guarantors shall sell, transfer
or otherwise dispose of any of its assets except for (i) Oil and Gas Properties
sold or transferred by Borrower for fair market value not exceeding $250,000 in
the aggregate between each Determination Date; and
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(ii) production from oil, gas and mineral property and other assets sold in the
ordinary course of Borrower's or Guarantors' business.
(a) Transactions with Affiliates. Neither Borrower nor Guarantors
will enter into any transaction with any of its Affiliates, except
transactions upon terms no less favorable to it than would be obtained in a
transaction negotiated at arm's length with a unrelated third party.
(b) Partnerships. SWR will not take any action seeking to cause any
agreement governing any of the Partnerships to be amended (or otherwise
seek or cause any Partnership to take any action), if the effect of such
amendment or action would:
(i) remove the prohibition against a Partnership incurring
indebtedness to third parties, except in accordance with the governing
agreement prior to such amendment or action;
(ii) permit a partnership to sell or otherwise dispose of assets
outside the authorities of SWR to permit such action as managing general
partnerships of a Partnership; or
(iii) remove SWR as managing general partner of any Partnership.
(c) New Partnerships. Borrower will not, without the prior written
consent of the Agent, form any new Partnerships after the Effective Date
that have the ability to incur recourse indebtedness.
(r) Subsidiaries. Borrower will not, without the prior written
consent of the Agent, sell or otherwise dispose of any of the equity
securities of the Guarantors or the Restricted Subsidiary that they own as
of the Effective Date.
15. EVENTS OF DEFAULT. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) Borrower shall fail to pay when due or declared due the principal
of, and the interest on, the Note or Notes or any fee or any other
indebtedness of Borrower incurred pursuant to this Agreement or any other
Security Instrument; or
(b) Any representation or warranty made by Borrower under this
Agreement, or in any certificate or statement furnished or made to Banks
pursuant hereto, or in connection herewith, or in connection with any
document furnished hereunder, shall prove to be untrue in any material
respect as of the date on which such representation or warranty is made (or
deemed made), or any representation, statement (including Financial
Statements), certificate, report or other data furnished or to be furnished
or made by Borrower under any Security
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Instrument, including this Agreement, proves to have been untrue in any
material respect, as of the date as of which the facts therein set forth
were stated or certified; or
(c) Default shall be made in the due observance or performance of any
of the covenants or agreements of the Borrower contained in the Security
Instruments, including this Agreement (excluding covenants contained in
Section 13 of the Agreement for which there is no cure period), and such
default shall continue for more than thirty (30) days after notice thereof
from Agent to Borrower; or
(d) Default shall be made in the due observance or performance of any
of the covenants of the Borrower contained in Section 13 of this Agreement;
or
(e) Default shall be made in respect of any obligation for borrowed
money, other than the Note or Notes, for which Borrower is liable
(directly, by assumption, as guarantor or otherwise), including, without
limitation, the Senior Unsecured Debt or any obligations secured by any
mortgage, pledge or other security interest, lien, charge or encumbrance
with respect thereto, on any asset or property of Borrower or in respect of
any agreement relating to any such obligations, and such default shall
continue beyond the applicable grace period, if any; or
(f) Borrower shall commence a voluntary case or other proceedings
seeking liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking an appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary
case or other proceeding commenced against it, or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate action or authorizing
the foregoing; or
(g) An involuntary case or other proceeding, shall be commenced
against Borrower seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or similar law
now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of sixty (60)
days; or an order for relief shall be entered against Borrower under the
federal bankruptcy laws as now or hereinafter in effect; or
(h) A final judgment or order for the payment of money in excess of
$500,000.00 (or judgments or orders aggregating in excess of $500,000.00)
shall be rendered against the Borrower and such judgments or orders shall
continue unsatisfied and unstayed for a period of thirty (30) days; or
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(i) The aggregate principal amount outstanding under the Note or
Notes shall exceed the Borrowing Base established for the Note or Notes and
Borrower shall fail to either provide additional Collateral or prepay the
principal of the Note or Notes, in compliance with the provisions of
Section 9(b) hereof; or
(j) Borrower shall fail to make the mandatory prepayment required by
Section 8(c) hereof;
(k) A Change of Control shall occur; or
(l) A Change of Management shall occur.
Upon occurrence of any Event of Default specified in Subsections 14(f)
and (g) hereof, the Revolving Commitment shall terminate and the entire
principal amount due under the Note or Notes and all interest then accrued
thereon, and any other liabilities of Borrower hereunder, shall become
immediately due and payable all without notice and without presentment, demand,
protest, notice of protest or dishonor or any other notice of default of any
kind, all of which are hereby expressly waived by Borrower. In any other Event
of Default, the Agent, upon request of the Majority Banks, shall by notice to
Borrower terminate the Revolving Commitment and declare the principal of, and
all interest then accrued on, the Note or Notes and any other liabilities
hereunder to be forthwith due and payable, whereupon the same shall forthwith
become due and payable without presentment, demand, protest or other notice of
any kind, all of which Borrower hereby expressly waive, anything contained
herein or in the Note or Notes to the contrary notwithstanding. Nothing
contained in this Section shall be construed to limit or amend in any way the
Events of Default enumerated in the Note or Notes, or any other document
executed in connection with the transaction contemplated herein.
Upon the occurrence and during the continuance of any Event of
Default, the Banks are hereby authorized at any time and from time to time,
without notice to Borrower (any such notice being expressly waived by Borrower),
to set-off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by any Bank to or for the credit or the account of the Borrower against any and
all of the indebtedness of the Borrower under the Note or Notes and the Security
Instrument, including this Agreement, irrespective of whether or not the Banks
shall have made any demand under the Security Instrument, including this
Agreement or the Note or Notes and although such indebtedness may be unmatured.
Any amount set-off by either of the Banks shall be applied against the
indebtedness owed the Banks by Borrower pursuant to this Agreement and the Note
or Notes. The Banks agree promptly to notify Borrower after any such setoff and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Banks under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Banks may have. Within five (5)
Business Days after any such set-off or appropriation by the Banks, the Banks
shall give Borrower written notice thereof. However, a failure to give such
notice will not affect the validity of the set-off or appropriation.
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16. EXERCISE OF RIGHTS. No failure to exercise, and no delay in
exercising, on the part of the Banks, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right. The
rights of the Bank hereunder shall be in addition to all other rights provided
by law. No modification or waiver of any provision of the Security Agreement,
including this Agreement, or the Note or Notes nor consent to departure
therefrom, shall be effective unless in writing, and no such consent or waiver
shall extend beyond the particular case and purpose involved. No notice or
demand given in any case shall constitute a waiver of the right to take other
action in the same, similar or other circumstances without such notice or
demand.
17. NOTICES. Any notices or other communications required or permitted to be
given by this Agreement or any other documents and instruments referred to
herein must be given in writing (which may be by facsimile transmission) and
must be personally delivered or mailed by prepaid certified or registered mail
to the party to whom such notice or communication is directed at the address of
such party as follows: (a) BORROWER: SOUTHWEST ROYALTIES, INC., 407 N. Big
Spring, Midland, Texas 79701-4326, Facsimile No. (915) 688-0191, Attention: H.H.
Wommack, III, President; (b) BANKS C/O AGENT: BANK ONE, TEXAS, N.A., 1717 Main
Street, Dallas, Texas 75201, Facsimile No. 214-290-2627, Attention: Wm. Mark
Cranmer, Assistant Vice President, and (c) any Bank at its address shown on any
Schedule or Amendment hereto. Any such notice or other communication shall be
deemed to have been given (whether actually received or not) on the day it is
personally delivered as aforesaid or, if mailed, on the fifth day after it is
mailed as aforesaid. Any party may change its address for purposes of this
Agreement by giving notice of such change to the other party pursuant to this
Section.
18. EXPENSES. The Borrower shall pay (i) all reasonable and necessary
out-of-pocket expenses of the Agent, including reasonable fees and disbursements
of special counsel for the Bank, in connection with any waiver or consent
hereunder or any amendment hereof or any default or Event of Default or alleged
default or Event of Default hereunder, (ii) all reasonable and necessary out-of-
pocket expenses of the Agent, including reasonable fees and disbursements of
special counsel for the Agent in connection with the preparation of any
participation agreement for a participant or participants requested by Borrower
or any amendment thereof and (iii) if a default or an Event of Default occurs,
all reasonable and necessary out-of-pocket expenses incurred by the Agent,
including fees and disbursements of counsel, in connection with such default and
Event of Default and collection and other enforcement proceedings resulting
therefrom. The Borrower shall indemnify the Banks against any transfer taxes,
document taxes, assessments or charges made by any governmental authority by
reason of the execution and delivery of this Agreement or the Note or Notes.
19. INDEMNITY. The Borrower agrees to indemnify and hold harmless the
Banks and its respective officers, employees, agents, attorneys and
representatives (singularly, an "Indemnified Party", and collectively, the
"Indemnified Parties") from and against any loss, cost, liability, damage or
expense (including the reasonable fees and out-of-pocket expenses of counsel to
the Banks, including all local counsel hired by such counsel) ("Claim") incurred
by the Banks in investigating
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or preparing for, defending against, or providing evidence, producing documents
or taking any other action in respect of any commenced or threatened litigation,
administrative proceeding or investigation under any federal securities law,
federal or state environmental law, or any other statute of any jurisdiction, or
any regulation, or at common law or otherwise, which is alleged to arise out of
or is based upon any acts, practices or omissions or alleged acts, practices or
omissions of the Borrower or their agents or arises in connection with the
duties, obligations or performance of the Indemnified Parties in negotiating,
preparing, executing, accepting, keeping, completing, countersigning, issuing,
selling, delivering, releasing, assigning, handling, certifying, processing or
receiving or taking any other action with respect to the Loan Documents and all
documents, items and materials contemplated thereby even if any of the foregoing
arises out of an Indemnified Party's ordinary negligence. The indemnity set
forth herein shall be in addition to any other obligations or liabilities of the
Borrower to the Banks hereunder or at common law or otherwise, and shall survive
any termination of this Agreement, the expiration of the Revolving Loan and the
payment of all indebtedness of the Borrower to the Banks hereunder and under the
Note or Notes, provided that the Borrower shall have no obligation under this
Section to the Banks with respect to any of the foregoing arising out of the
gross negligence or willful misconduct of the Banks. If any Claim is asserted
against any Indemnified Party, the Indemnified Party shall endeavor to notify
the Borrower of such Claim (but failure to do so shall not affect the
indemnification herein made except to the extent of the actual harm caused by
such failure). The Indemnified Party shall have the right to employ, at the
Borrower's expense, counsel of the Indemnified Parties' choosing and to control
the defense of the Claim. The Borrower may at their own expense also participate
in the defense of any Claim. Each Indemnified Party may employ separate counsel
in connection with any Claim to the extent such Indemnified Party believes it
reasonably prudent to protect such Indemnified Party. THE PARTIES INTEND FOR THE
PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON ANY
SUCH INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE,
WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF
ANY CLAIM.
20. THE AGENT AND THE BANKS.
(a) Appointment and Authorization. Each Bank hereby appoints Agent
as its nominee and agent, in its name and on its behalf: (i) to act as
nominee for and on behalf of such Bank in and under all Loan Documents;
(ii) to arrange the means whereby the funds of Banks are to be made
available to Borrower under the Loan Documents; (iii) to take such action
as may be requested by any Bank under the Loan Documents (when such Bank is
entitled to make such request under the Loan Documents); (iv) to receive
all documents and items to be furnished to Banks under the Loan Documents;
(v) to be the secured party, mortgagee, beneficiary, and similar party in
respect of, and to receive, as the case may be, the Collateral for the
benefit of Banks; (vi) to promptly distribute to each Bank all material
information, requests, documents and items received from Borrower under the
Loan Documents; (vii) to promptly distribute to each Bank such Bank's Pro
Rata Part of each payment or prepayment (whether voluntary, as proceeds of
Collateral upon or after foreclosure, as proceeds of insurance thereon, or
otherwise) in accordance with the terms of
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the Loan Documents; and (viii) to deliver to the appropriate Persons
requests, demands, approvals and consents received from Banks. With respect
to its commitments hereunder and the Notes issued to it, Bank One and any
successor Agent shall have the same rights under the Loan Documents as any
other Bank and may exercise the same as though it were not the Agent; and
the term "Bank" or "Banks" shall, unless otherwise expressly indicated,
include Bank One and any successor Agent in its capacity as a Bank. Bank
One and any successor Agent and its affiliates may accept deposits from,
lend money to, act as trustee under indentures of and generally engage in
any kind of business with Borrower, and any person which may do business
with Borrower, all as if Bank One and any successor Agent were not Agent
hereunder and without any duty to account therefor to the Banks; provided
that, if any payments in respect of any property (or the proceeds thereof)
now or hereafter in the possession or control of Agent which may be or
become security for the obligations of Borrower arising under the Loan
Documents by reason of the general description of indebtedness secured or
of property contained in any other agreements, documents or instruments
related to any such other business shall be applied to reduction of the
obligations of Borrower arising under the Loan Documents, then each Bank
shall be entitled to share in such application according to its Pro Rata
Part thereof. Each Bank, upon request of any other Bank, shall disclose to
all other Banks all indebtedness and liabilities, direct and contingent, of
Borrower to such Bank as of the time of such request.
(b) Note Holders. As of the Effective Date there are two Notes in
the aggregate amount of $75,000,000, one in the face amount of $46,875,000
payable to the order of Bank One and one in the face amount of $28,125,000
payable to the order of NationsBank both Notes being issued under the
Commitment. Hereafter as other Banks become a party to this Agreement the
Agent shall obtain execution by Borrower of additional Notes in amounts
representing the Commitment of each such new Bank, up to an aggregate face
amount of all such Notes not exceeding $75,000,000. The obligation of such
Bank shall be governed by the provisions of this Agreement, including but
not limited to, the obligations specified in Section 2 hereof. From time
to time, the Agent may require that the Banks exchange their Notes for
newly issued Notes to better reflect the Commitments of the Banks. Agent
may treat the payee of any Note or Notes as the holder thereof until
written notice of transfer has been filed with it, signed by such payee and
in form satisfactory to Agent.
(c) Consultation with Counsel. Banks agree that Agent may consult
with legal counsel selected by it and shall not be liable for any action
taken or suffered in good faith by it in accordance with the advice of such
counsel.
(d) Documents. Agent shall not be under a duty to examine or pass
upon the validity, effectiveness, enforceability, genuineness or value of
any of the Collateral or any of the Loan Documents or any other instrument
or document furnished pursuant thereto or in connection therewith, and
Agent shall be entitled to assume that the same are valid, effective,
enforceable and genuine and what they purport to be.
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(e) Resignation or Removal of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, Agent may resign at any
time by giving written notice thereof to Banks and Borrower, and Agent may
be removed at any time with or without cause by all Banks. If no successor
Agent has been so appointed by all Banks (and approved by Borrower) and has
accepted such appointment within 30 days after the retiring Agent's giving
of notice of resignation or removal of the retiring Agent, then the
retiring Agent may, on behalf of Banks, appoint a successor Agent, which
appointment shall require the approval of Borrower. Upon the acceptance of
any appointment as Agent hereunder by a successor Agent, such successor
Agent shall thereupon succeed to and become vested with all the rights and
duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder. After any retiring Agent's
resignation or removal hereunder as Agent, (i) the provisions of this
Section 19 shall continue in effect for its benefit in respect to any
actions taken or omitted to be taken by it while it was acting as Agent,
and (ii) any Collateral held in possession of the retiring Agent shall be
delivered to the successor Agent.
(f) Responsibility of Agent. It is expressly understood and agreed
that the obligations of Agent under the Loan Documents are only those
expressly set forth in the Loan Documents and that Agent shall be entitled
to assume that no default or Event of Default has occurred and is
continuing, unless Agent has actual knowledge of such fact or has received
notice from a Bank or the Borrower that such Bank or Borrower considers
that a default or an Event of Default has occurred and is continuing and
specifying the nature thereof. Neither Agent nor any of its directors,
officers, attorneys or employees shall be liable for any action taken or
omitted to be taken by it under or in connection with the Loan Documents,
except for its or their own gross negligence or willful misconduct.
Subject to the immediately preceding sentence, Agent shall incur no
liability under or in respect of any of the Loan Documents by acting upon
any notice, consent, certificate, warranty or other paper or instrument
believed by it to be genuine or authentic or to be signed by the proper
party or parties, or with respect to anything which it may do or refrain
from doing in the reasonable exercise of its judgment, or which may seem to
it to be necessary or desirable.
Agent shall not be responsible to Banks for any of Borrower's
recitals, statements, representations or warranties contained in any of the
Loan Documents, or in any certificate or other document referred to or
provided for in, or received by any Bank under, the Loan Documents, or for
the value, validity, effectiveness, genuineness, enforceability or
sufficiency of any of the Collateral or any of the Loan Documents or for
any failure by Borrower to perform any of its obligations hereunder or
thereunder. Agent may employ agents and attorneys-in-fact and shall not be
answerable, except as to money or securities received (or any Collateral
possessed) by it or its authorized agents, for the negligence or misconduct
of any such agents or attorneys-in-fact selected by it with reasonable
care.
The relationship between Agent and each Bank is only that of agent and
principal and has no fiduciary aspects. Nothing in the Loan Documents or
elsewhere shall be construed
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to impose on Agent any duties or responsibilities other than those for
which express provision is therein made. In performing its duties and
functions hereunder, Agent does not assume and shall not be deemed to have
assumed, and hereby expressly disclaims, any obligation or responsibility
toward or any relationship of agency or trust with or for Borrower or any
of its beneficiaries or other creditors. As to any matters not expressly
provided for by the Loan Documents (including, without limitation,
enforcement or collection of the Notes), Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or
to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of all Banks and such
instructions shall be binding upon all Banks and all holders of the Notes;
provided, however, that Agent shall not be required to take any action
which is contrary to the Loan Documents or applicable law.
Agent shall have the right to exercise or refrain from
exercising, without notice or liability to the Banks, any and all rights
afforded to Agent by the Loan Documents or which Agent may have as a matter
of law; provided, however, Agent shall not without the consent of Majority
Banks take any other action with regard to amending the Loan Documents,
waive any default under the Loan Documents or take any other action with
respect to the Loan Documents, except as set forth in Section 14 hereof.
Agent shall have the right and authority without necessity of notice or
liability to the Banks to release Collateral, if proceeds from such sale
equal to 100% of the value for Borrowing Base purposes of such Collateral
is paid to Agent for the ratable benefit of the Banks as a prepayment of
the Notes. For purposes of this paragraph, a Bank shall be deemed to have
consented to any such action by the Agent upon the passage of ten (10)
Business Days after written notice thereof is given to such Bank in
accordance with Section 16 hereof, unless such Bank shall have previously
given Agent notice, complying with the provision of Section 16 hereof, to
the contrary. Agent shall have no liability to Banks for failure or delay
in exercising any right or power possessed by Agent pursuant to the Loan
Documents or otherwise unless such failure or delay is caused by the gross
negligence or willful misconduct of the Agent.
(g) Independent Investigation. Each Bank severally represents and
warrants to Agent that it has made its own independent investigation and
assessment of the financial condition and affairs of Borrower in connection
with the making and continuation of its participation hereunder and has not
relied exclusively on any information provided to such Bank by Agent in
connection herewith, and each Bank represents, warrants and undertakes to
Agent that it shall continue to make its own independent appraisal of the
credit worthiness of Borrower while the Notes are outstanding or its
commitments hereunder are in force. Agent shall not be required to keep
itself informed as to the performance or observance by Borrower of this
Agreement or any other document referred to or provided for herein or to
inspect the properties or books of Borrower. Other than as provided in
this Agreement, Agent shall have no duty, responsibility or liability to
provide any Bank with any credit or other information concerning the
affairs, financial condition or business of Borrower which may come into
the possession of Agent.
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(h) Indemnification. Banks agree to indemnify Agent (to the extent
not reimbursed by Borrower), ratably according to their Commitment
Percentage, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any proper and reasonable kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in any way
relating to or arising out of the Loan Documents or any action taken or
omitted by Agent under the Loan Documents, provided that no Bank shall be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from Agent's gross negligence or willful misconduct. Each Bank
shall be entitled to be reimbursed by the Agent for any amount such Bank
paid to the Agent under this Section 19(h) to the extent the Agent has been
reimbursed for such payments by the Borrower or any other Person. THE BANKS
INTEND FOR THE PROVISIONS OF THIS SECTION 19(H) TO APPLY TO AND PROTECT THE
AGENT FROM THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR THREATENED TO BE
IMPOSED ON THE AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN
NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR
CONCURRING CAUSE OF SUCH LIABILITY, OBLIGATION, LOSS, DAMAGES, PENALTY,
ACTION, JUDGMENT, SUIT, COST, EXPENSE OR DISBURSEMENT.
(i) Benefit of Section 19. The agreements contained in this Section
19 are solely for the benefit of Agent and the Banks and are not for the
benefit of, or to be relied upon by, Borrower, any affiliate of Borrower or
any other person.
(j) Pro Rata Treatment. Subject to the provisions of this Agreement,
each payment (including each prepayment) by Borrower and collections by
Banks (including offsets) on account of the principal of and interest on
the Notes and fees payable by Borrower shall be made pro rata to Banks
according to the then ownership interest of each Bank in the Revolving Loan
outstanding at the date of determination thereof.
(k) Interests of Banks. Nothing in this Agreement shall be construed
to create a partnership or joint venture between Banks for any purpose.
Agent, Banks and Borrower each recognize that the respective obligations of
Banks under the Commitment shall be several and not joint and that neither
Agent nor any of Banks shall be responsible or liable to perform any of the
obligations of the other under this Agreement. Each Bank is deemed to be
the owner of an undivided interest in and to all rights, titles, benefits
and interests belonging and accruing to Agent under this Agreement,
including, without limitation, the Notes, liens and security interests in
the Collateral, fees and payments of principal and interest by Borrower
under the Commitment in the proportion that each Banks' Commitment
Percentage bears to the total of all of such loan commitments of all Banks
taken in the aggregate. Each Bank shall perform all duties and obligations
of Banks under this Agreement in the same proportion as its ownership
interest in the Revolving Loan outstanding at the date of determination
thereof.
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21. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provisions shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
22. MAXIMUM INTEREST RATE. Regardless of any provisions contained in this
Agreement or in any other documents and instruments referred to herein, the
Banks shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on the Note or Notes any amount in excess of the
maximum rate of interest permitted to be charged by applicable law, and in the
event the Banks ever receive, collect or apply as interest any such excess, or
if acceleration of the maturities of the Note or Notes or if any prepayment by
Borrower results in Borrower having paid any interest in excess of the maximum
rate, such amount which would be excessive interest shall be applied to the
reduction of the unpaid principal balance of the Note or Notes for which such
excess was received, collected or applied, and, if the principal balance of the
Note or Notes is paid in full, any remaining excess shall forthwith be paid to
Borrower. All sums paid or agreed to be paid to the Banks for the use,
forbearance or detention of the indebtedness evidenced by the Note or Notes
and/or this Agreement shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of such
indebtedness until payment in full so that the rate or amount of interest on
account of such indebtedness does not exceed the maximum lawful rate permitted
under applicable law. In determining whether or not the interest paid or payable
under any specific contingency exceeds the maximum rate of interest permitted by
law, Borrower and the Banks shall, to the maximum extent permitted under
applicable law, (i) characterize any non-principal payment as an expense, fee or
premium, rather than as interest; and (ii) exclude voluntary prepayments and the
effect thereof; and (iii) compare the total amount of interest contracted for,
charged or received with the total amount of interest which could be contracted
for, charged or received throughout the entire contemplated term of the Note at
the maximum lawful rate under applicable law.
23. AMENDMENTS. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
24. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by ail parties hereto.
25. CONFLICT. In the event any term or provision hereof is inconsistent
with or conflicts with any provision of the Security Instruments, the terms or
provisions contained in this Agreement shall be controlling.
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26. SURVIVAL. All covenants, agreements, undertakings, representations
and warranties made in the Security Instrument, including this Agreement, the
Note or Notes or other documents and instruments referred to herein shall
survive all closings hereunder and shall not be affected by any investigation
made by any party.
27. PARTIES BOUND. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates, provided, however, that Borrower may not,
without the prior written consent of the Banks, assign any rights, powers,
duties or obligations hereunder.
28. PARTICIPATIONS. The Banks shall have the right at any time and from
time, to time, with the prior consent of the Agent and the Borrower, to sell one
or more participations in the Note or Notes or any Advance thereunder. To the
extent of any such participation the provisions of this Agreement shall inure to
the benefit of, and be binding on, each participant, including, but not limited
to, any indemnity from Borrower to the Banks. The Borrower shall have no
obligation or liability to and no obligation to negotiate or confer with, any
participant, and Borrower shall be entitled to treat the Banks as the sole owner
of the Note or Notes without regard to notice or actual knowledge of any such
participation. Upon the occurrence of a default or an Event of Default, each
participant will have and is hereby granted the right to setoff against and to
appropriate and apply from time to time, without prior notice to the Borrower or
any other party, any such notice being hereby expressly waived, any and all
deposits (general or special or other indebtedness or claims, direct or
indirect, contingent or otherwise), at any time held or owing by the participant
to or for the credit or account of Borrower against the payment of the note and
any other obligations of the Borrower hereunder, provided, however, none of the
rights granted in this Section shall apply to any deposits held by any
participant constituting trust funds and so identified to such participant at
the time the applicable deposit account is created. Within five (5) Business
Days after such setoff or appropriation by a participant, that participant shall
give Borrower and Banks written notice thereof. However, a failure to give such
notice will not affect the validity of this setoff or appropriation.
29. FINANCIAL TERMS. All accounting terms used in the Agreement which are
not specifically defined herein shall be construed in accordance with GAAP.
30. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS REFERRED TO HEREIN, UNLESS
OTHERWISE SPECIFIED THEREIN.
31. CHOICE OF FORUM: CONSENT TO SERVICE OF PROCESS AND JURISDICTION. THE
OBLIGATIONS OF Borrower UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS
COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST Borrower WITH RESPECT TO
THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF, MAY
BE BROUGHT IN THE COURTS OF THE STATE OF
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TEXAS, COUNTY OF DALLAS, OR IN THE UNITED STATES COURTS LOCATED IN DALLAS, TEXAS
AND Borrower HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR
THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. Borrower HEREBY IRREVOCABLY
CONSENTS TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT
BY THE MAILING THEREOF BY BANKS BY REGISTERED OR CERTIFIED MAIL, POSTAGE
PREPAID, TO Borrower, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN
SECTION 16. Borrower HEREBY IRREVOCABLY WAIVE ANY OBJECTION WHICH THEY MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN
THE STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY FURTHER IRREVOCABLY WAIVE ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
32. OTHER AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
33. EXECUTION BY GUARANTORS. The Guarantors are executing this Agreement
solely for the purpose of agreeing to be bound by the representations,
warranties and covenants contained in Sections 10, 12 and 13 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
BORROWER:
SOUTHWEST ROYALTIES, INC.
a Delaware corporation
By:
----------------------------------
H.H. Wommack, III, President
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BANKS:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
----------------------------------
Wm. Mark Cranmer, Vice President
BANQUE PARIBAS
a national banking association
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
AGENT:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
----------------------------------
Wm. Mark Cranmer, Vice President
GUARANTORS:
ESPERO ENERGY CORPORATION
a Delaware corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
MIDLAND SOUTHWEST SOFTWARE, INC.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
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SOUTHWEST ROYALTIES HOLDINGS, INC.,
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
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EXHIBIT "A"
NOTE
$_____________ Dallas, Texas ________, 199__
FOR VALUE RECEIVED, the undersigned SOUTHWEST ROYALTIES, INC., a Delaware
corporation (referred to herein as "Borrower"), hereby unconditionally promises
to pay to the order of _______________, ______________________________, (the
"Payee") at the office of BANK ONE, TEXAS, N.A., as Agent for the Payee and the
other Banks that are parties to the Loan Agreement (as defined below) (the
"Agent") in Dallas County, Texas, the principal sum of __________ _______ AND
No/100 DOLLARS ($_____________), or if less, so much thereof as may be advanced
pursuant to the Loan Agreement (as hereinafter defined), in lawful money of the
United States of America together with interest from the date hereof until paid
at the rates specified in the Loan Agreement. All payments of principal and
interest due hereunder are payable at the offices of Agent at 1717 Main Street,
4th Floor, Bank One Center, P.O. Box 655415, Dallas, Texas 75265-5415,
attention: Energy Department, or at such other address as Bank shall designate
in writing to Borrower.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Restated Senior Secured Loan
Agreement dated of even date herewith between Borrower, Banks and Agent (the
"Loan Agreement"), and is one of the Notes referred to therein. This Note is
secured by certain Security Instruments (as such term is defined in the Loan
Agreement) of even date herewith between Borrower and Agent. Reference is made
to the Loan Agreement and the Security Instruments for a statement of
prepayment, rights and obligations of Borrower, description of the properties
mortgaged and assigned, the nature and extent of such security and the rights of
the parties under the Security Instruments in respect to such security, for a
statement of the terms and conditions under which the due date of this Note may
be accelerated and for statements regarding other matters affecting this Note
(including without limitation the obligations of the holder hereof to advance
funds hereunder, principal and interest payment due dates, voluntary and
mandatory prepayments, exercise of rights and remedies, payment of attorneys'
fees, court costs and other costs of collection and certain waivers by Borrower
and others now or hereafter obligated for payment of any sums due hereunder).
Upon the occurrence of an Event of Default, as that term is defined in the Loan
Agreement and Security Instruments, the holder hereof shall have all rights and
remedies of the Bank under the Loan Agreement and Security Instruments. This
Note may be prepaid in accordance with the terms and provisions of the Loan
Agreement.
Regardless of any provision contained in this Note, the holder hereof shall
never be entitled to receive, collect or apply, as interest on this Note, any
amount in excess of the Maximum Rate, and, if the holder hereof ever receives,
collects, or applies as interest, any such amount which would
<PAGE>
be excessive interest, it shall be deemed a partial prepayment of principal and
treated hereunder as such; and, if the indebtedness evidenced hereby is paid in
full, any remaining excess shall forthwith be paid to Borrower. In determining
whether or not the interest paid or payable, under any specific contingency,
exceeds the Maximum Rate, Borrower and the holder hereof shall, to the maximum
extent permitted under applicable law (i) characterize any non-principal payment
as an expense, fee or premium rather than as interest, (ii) exclude voluntary
prepayments and the effects thereof, and (iii) spread the total amount of
interest throughout the entire contemplated term of the obligations evidenced by
this Note and/or referred to in the Loan Agreement so that the interest rate is
uniform throughout the entire term of this Note; provided that, if this Note is
paid and performed in full prior to the end of the full contemplated term
thereof; and if the interest received for the actual period of existence thereof
exceeds the Maximum Rate, the holder hereof shall refund to Borrower the amount
of such excess or credit the amount of such excess against the indebtedness
evidenced hereby, and, in such event, the holder hereof shall not be subject to
any penalties provided by any laws for contracting for, charging, taking,
reserving or receiving interest in excess of the Maximum Rate.
If any payment of principal or interest on this Note shall become due on a
day other than a Business Day (as such term is defined in the Loan Agreement),
such payment shall be made on the next succeeding Business Day and such
extension of time shall in such case be included in computing interest in
connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Borrower agree to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.
Borrower and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, notice of intention to accelerate the
maturity, protest, notice of protest and nonpayment, as to this Note and as to
each and all installments hereof, and agree that their liability under this Note
shall not be affected by any renewal or extension in the time of payment hereof,
or in any indulgences, or by any release or change in any security for the
payment of this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases or changes.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas, except that Tex. Rev. Civ. Stat. Ann. art. 5069, Chapter 15 (which
regulates certain revolving credit loan accounts and revolving tri-party
accounts) shall not apply to this Note.
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
<PAGE>
EXECUTED as of the ____ day of _______, 199___.
BORROWER:
--------
SOUTHWEST ROYALTIES, INC.,
a Delaware corporation
By:
------------------------------
H.H. Wommack, III, President
<PAGE>
EXHIBIT "B"
NOTICE OF BORROWING
The undersigned hereby certifies that he is the ____________________ of
_________________, a ________________ corporation ("Borrower"), and that as such
he is authorized to executed this Notice of Borrowing on behalf of Borrower.
With reference to that certain Restated Senior Secured Loan Agreement, dated
October ___, 1997, (as same may be amended, modified, increased, supplemented
and/or restated from time to time, the "Agreement") entered into among Borrower,
Bank One, Texas, N.A., Banque Paribas and any other future holder of any Note
issued pursuant to the Agreement ("Banks"), and Bank One, Texas, N.A. as Agent
("Agent"), the undersigned further certifies, represents and warrants on behalf
of Borrower all of the following statements are true and correct (each
capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) Borrower request that the Banks advance Borrower the aggregate sum
of $_____________________ by no later than _______________________, 19___.
Immediately following such Advance, the aggregate outstanding balance of
Advances shall equal $_________________________________.
(b) Type of Advance: [Base Rate or Eurodollar Loan].
(c) Eurodollar Loan - Interest Period of _________ days.
(d) As of the date hereof, and as a result of the making of the
requested Advance, there does not and will not exist any Event of Default.
(e) Borrower have performed and complied with all agreements and
conditions contained in the Loan Documents which are required to be
performed or complied with by Borrower before or on the date hereof.
(f) The representations and warranties contained in the Agreement and
in the other Loan Documents are true and correct in all material respects
as of the date hereof and shall be true and correct upon the making of the
Advance, with the same force and effect as though made on and as of the
date hereof and thereof.
(g) No charge that would cause a Material Adverse Effect to the
condition, financial or otherwise, of the Borrower has occurred since the
most recent Financial Statements provided to the Banks.
<PAGE>
EXECUTED AND DELIVERED this _______ day of ______________________, 19____.
[Borrower]
----------
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
<PAGE>
EXHIBIT "C"
UNLIMITED GUARANTY
THIS UNLIMITED GUARANTY ("Guaranty") is made as of the ____ day of October,
1997, by Guarantor (as hereinafter defined) for the benefit of Bank (as
hereinafter defined).
1. Definitions. As used in this Guaranty, the following terms shall have
the meanings indicated below:
(a) The term "Bank" shall mean:
________________________
________________________
________________________
Attn:___________________
________________________
(b) The term "Borrower" (whether one or more shall mean the following:
SOUTHWEST ROYALTIES, INC.
407 N. Big Spring
Midland, Texas 79701-4326
(c) The term "Guarantor" shall mean _____________________, whose
address for notice purposes is the following:
407 N. Big Spring
Midland, Texas 79701-4326
(d) The term "Guaranteed Indebtedness" shall mean (i) all
indebtedness, obligations and liabilities of Borrower to Bank of any kind
or character now existing or hereafter arising, whether direct, indirect,
related, unrelated, fixed, contingent, liquidated, unliquidated, joint,
several or joint and several, and regardless of whether such indebtedness,
obligations and liabilities may, prior to their acquisition by Bank, be or
have been payable to or in favor of a third party and subsequently acquired
by Bank (it being contemplated that Bank may make such acquisitions from
third parties), including without limitation all indebtedness, obligations
and liabilities of Borrower to Bank now existing or hereafter arising by
note, draft, acceptance, guaranty, endorsement, letter of credit,
assignment, purchase, overdraft, discount, indemnity agreement or
otherwise, (ii) all accrued but unpaid interest on any of the indebtedness
described in (i) above, (iii) all obligations of Borrower to Bank under any
documents evidencing, securing, governing and/or pertaining to all or any
part
<PAGE>
of the indebtedness described in (i) and (ii) above, (iv) all costs and
expenses incurred by Bank in connection with the collection and
administration of all or any part of the indebtedness and obligations
described in (i), (ii) and (iii) above or the protection or preservation
of, or realization upon, the collateral securing all or any part of such
indebtedness and obligations, including without limitation all reasonable
attorneys' fees, and (v) all renewals, extensions, modifications and
rearrangements of the indebtedness and obligations described in (i), (ii),
(iii) and (iv) above.
2. Obligations. As an inducement to Bank to extend or continue to extend
credit and other financial accommodations to Borrower, Guarantor, for value
received, does hereby unconditionally and absolutely guarantee the prompt and
full payment and performance of the Guaranteed Indebtedness when due or declared
to be due and at all times thereafter.
3. Character of Obligations. This is an absolute, continuing and
unconditional Guaranty of payment and not of collection and if at any time or
from time to time there is no outstanding Guaranteed Indebtedness, the
obligations of the Guarantor with respect to any and all Guaranteed Indebtedness
of Borrower to Bank incurred thereafter shall not be affected. All Guaranteed
Indebtedness heretofore, concurrently herewith or hereafter made by Bank to
Borrower shall be conclusively presumed to have been made or acquired in
acceptance hereof. Guarantor shall be primarily liable, jointly and severally,
with Borrower and any other guarantor of all or any part of the Guaranteed
Indebtedness.
4. Representations and Warranties. Guarantor hereby represents and
warrants the following to Bank:
(a) This Guaranty may reasonably be expected to benefit, directly or
indirectly, Guarantor, and (i) if Guarantor is a corporation, the Board of
Directors of Guarantor has determined that this Guaranty may reasonably be
expected to benefit, directly or indirectly, Guarantor, or (ii) if
Guarantor is a partnership, the requisite number of Guarantor's partners
have determined that this Guaranty may reasonably be expected to benefit,
directly or indirectly, Guarantor;
(b) Guarantor is familiar with, and has independently reviewed the
books and records regarding, the financial condition of Borrower and is
familiar with the value of any and all collateral intended to be security
for the payment of all or any part of the Guaranteed Indebtedness;
provided, however, Guarantor is not relying on such financial condition or
collateral as an inducement to enter into this Guaranty;
(c) Guarantor has adequate means to obtain from Borrower on a
continuing basis information concerning the financial condition of Borrower
and Guarantor is not relying on Bank to provide such information to
Guarantor either now or in the future;
(d) Guarantor has the power and authority to execute, deliver and
perform this Guaranty and any other agreements executed by Guarantor
contemporaneously
<PAGE>
herewith, and the execution, delivery and performance of this Guaranty and
any other agreements executed by Guarantor contemporaneously herewith does
not and will not violate (i) any agreement or instrument to which Guarantor
is a party, (ii) any law, rule, regulation or order of any governmental
authority to which Guarantor is subject, or (iii) Guarantor's Articles of
Incorporation or Bylaws if Guarantor is a corporation, or Guarantor's
Partnership Agreement if Guarantor is a partnership;
(e) Neither Bank nor any other party has made any representation,
warranty or statement to Guarantor in order to induce Guarantor to execute
this Guaranty;
(f) The financial statements and other financial information regarding
Guarantor heretofore and hereafter delivered to Bank are and shall be true
and correct in all material respects and fairly present the financial
position of Guarantor as of the dates thereof, and no material adverse
change has occurred in the financial condition of Guarantor reflected in
the financial statements and other financial information regarding
Guarantor heretofore delivered to Bank since the date of the last statement
thereof; and
(g) As of the date hereof, and after giving effect to this Guaranty
and the obligations evidenced hereby, (i) Guarantor is and will be solvent,
(ii) the fair saleable value of Guarantor's assets exceeds and will
continue to exceed Guarantor's liabilities (both fixed and contingent),
(iii) Guarantor is and will continue to be able to pay Guarantor's debts as
they mature, and (iv) if Guarantor is not an individual, Guarantor has and
will continue to have sufficient capital to carry on its business and all
businesses in which it is about to engage.
5. Covenants. Guarantor hereby covenants and agrees with Bank as
follows:
(a) Guarantor shall not, so long as Guarantor's obligations under this
Guaranty continue, transfer or pledge any material portion of Guarantor's
assets for less than full and adequate consideration;
(b) Guarantor shall promptly furnish to Bank at any time and from time
to time such financial statements and other financial information of
Guarantor as the Bank may require, in form and substance satisfactory to
Bank;
(c) Guarantor shall comply with all terms and provisions of the
instruments and agreements evidencing, governing and securing all or any
part of the Guaranteed Indebtedness that apply to Guarantor; and
(d) Guarantor shall promptly inform Bank of (i) any litigation or
governmental investigation against Guarantor or affecting any security for
all or any part of the Guaranteed Indebtedness or this Guaranty which, if
determined adversely, might have a material adverse effect upon the
financial condition of Guarantor or
<PAGE>
upon such security or might cause a default under any of the instruments or
agreements evidencing, governing or securing all or any part of the
Guaranteed Indebtedness, (ii) any claim or controversy which might become
the subject of such litigation or governmental investigation, and (iii) any
material adverse change in the financial condition of Guarantor.
6. Consent and Waiver.
(a) Guarantor waives (i) promptness, diligence and notice of
acceptance of this Guaranty and notice of the incurring of any obligation,
indebtedness or liability to which this Guaranty applies or may apply and
waives presentment for payment, notice of nonpayment, protest, demand,
notice of protest, notice of intent to accelerate, notice of acceleration,
notice of dishonor, diligence in enforcement and indulgences of every kind,
and (ii) the taking of any other action of Bank, including without
limitation giving any notice of default or any other notice to, or making
any demand on, Borrower, any other guarantor of all or any part of the
Guaranteed Indebtedness or any other party.
(b) Guarantor waives any rights Guarantor has under, or any
requirements imposed by, Chapter 34 of the Texas Business and Commerce
Code, as in effect on the date of this Guaranty or as it may be amended
from time to time.
(c) Bank may at any time, without the consent of or notice to
Guarantor, without incurring responsibility to Guarantor and without
impairing, releasing, reducing or affecting the obligations of Guarantor
hereunder: (i) change the manner, place or terms of payment of all or any
part of the Guaranteed Indebtedness, or renew, extend, modify, rearrange or
alter all or any part of the Guaranteed Indebtedness; (ii) sell, exchange,
release, surrender, subordinate, realize upon or otherwise deal with in any
manner and in any order any collateral for all or any part of the
Guaranteed Indebtedness or this Guaranty or setoff against all or any part
of the Guaranteed Indebtedness; (iii) neglect, delay, omit, fail or refuse
to take or prosecute any action for the collection of all or any part of
the Guaranteed Indebtedness or this Guaranty or to take or prosecute any
action in connection with any instrument or agreement evidencing, governing
or securing all or any part of the Guaranteed Indebtedness or this
Guaranty; (iv) exercise or refrain from exercising any rights against
Borrower or others, or otherwise act or refrain from acting; (v) settle or
compromise all or any part of the Guaranteed Indebtedness and subordinate
the payment of all or any part of the Guaranteed Indebtedness to the
payment of any obligations, indebtedness or liabilities which may be due or
become due to Bank or others; (vi) apply any deposit balance, fund,
payment, collections through process of law or otherwise or other
collateral of Borrower to the satisfaction and liquidation of the
indebtedness or obligations of Borrower to Bank not guaranteed under this
Guaranty pursuant to paragraph 4 herein; and (vii) apply any sums paid to
Bank by Guarantor, Borrower or others to the Guaranteed Indebtedness in
such order and manner as Bank, in its sole discretion, may determine.
<PAGE>
(d) Notwithstanding any provision in this Guaranty to the contrary,
Guarantor hereby waives and releases (i) any and all rights of subrogation,
reimbursement, indemnification or contribution which Guarantor may have,
after payment in full or in part of the Guaranteed Indebtedness, against
others liable on all or any part of the Guaranteed Indebtedness, (ii) any
and all rights to be subrogated to the rights of Bank in any collateral or
security for all or any part of the Guaranteed Indebtedness after payment
in full or in part of the Guaranteed Indebtedness, and (iii) any and all
other rights and claims of such Guarantor against Borrower or any third
party as a result of such Guarantor's payment of all or any part of the
Guaranteed Indebtedness.
(e) Should Bank seek to enforce the obligations of Guarantor hereunder
by action in any court or otherwise, Guarantor waives any requirement,
substantive or procedural, that (i) Bank first enforce any rights or
remedies against Borrower or any other person or entity liable to Bank for
all or any part of the Guaranteed Indebtedness, including without
limitation that a judgment first be rendered against Borrower or any other
person or entity, or that Borrower or any other person or entity should be
joined in such cause, or (ii) Bank shall first enforce rights against any
collateral which shall ever have been given to secure all or any part of
the Guaranteed Indebtedness or this Guaranty. Such waiver shall be without
prejudice to Bank's right, at its option, to proceed against Borrower or
any other person or entity, whether by separate action or by joinder.
(f) In addition to any other waivers, agreements and covenants of
Guarantor set forth herein, Guarantor hereby further waives and releases
all claims, causes of action, defenses and offsets for any act or omission
of Bank, its directors, officers, employees, representatives or agents in
connection with Bank's administration of the Guaranteed Indebtedness,
except for Bank's willful misconduct and gross negligence.
7. Obligations Not Impaired.
(a) Guarantor agrees that Guarantor's obligations hereunder shall not
be released, diminished, impaired, reduced or affected by the occurrence of
any one or more of the following events: (i) the death, disability or lack
of corporate power of Borrower, Guarantor or any other guarantor of all or
any part of the Guaranteed Indebtedness, (ii) any receivership, insolvency,
bankruptcy or other proceedings affecting Borrower, Guarantor or any other
guarantor of all or any part of the Guaranteed Indebtedness, or any of
their respective property; (iii) the partial or total release or discharge
of Borrower or any other guarantor of all or any part of the Guaranteed
Indebtedness, or any other person or entity from the performance of any
obligation contained in any instrument or agreement evidencing, governing
or securing all or any part of the Guaranteed Indebtedness, whether
occurring by reason of law or otherwise; (iv) the taking or accepting of
any collateral for all or any part of the Guaranteed Indebtedness or this
Guaranty; (v) the taking or accepting of any
<PAGE>
other guaranty for all or any part of the Guaranteed Indebtedness; (vi) any
failure by Bank to acquire, perfect or continue any lien or security
interest on collateral securing all or any part of the Guaranteed
Indebtedness or this Guaranty; (vii) the impairment of any collateral
securing all or any part of the Guaranteed Indebtedness or this Guaranty;
(viii) any failure by Bank to sell any collateral securing all or any part
of the Guaranteed Indebtedness or this Guaranty in a commercially
reasonable manner or as otherwise required by law; (ix) any invalidity or
unenforceability of or defect or deficiency in any instrument or agreement
evidencing, governing or securing all or any part of the Guaranteed
Indebtedness or this Guaranty; or (x) any other circumstances which might
otherwise constitute a defense available to, or discharge of, Borrower or
any other guarantor of all or any part of the Guaranteed Indebtedness.
(b) This Guaranty shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of all or any part of the
Guaranteed Indebtedness is rescinded or must otherwise be returned by Bank
upon the insolvency, bankruptcy or reorganization of Borrower, Guarantor,
any other guarantor of all or any part of the Guaranteed Indebtedness, or
otherwise, all as though such payment had not been made.
(c) In the event Borrower is a corporation, joint stock association or
partnership, or is hereafter incorporated, none of the following shall
affect Guarantor's liability hereunder: (i) the unenforceability of all or
any part of the Guaranteed Indebtedness against Borrower by reason of the
fact that the Guaranteed Indebtedness exceeds the amount permitted by law;
(ii) the act of creating all or any part of the Guaranteed Indebtedness is
ultra vires; or (iii) the officers or partners creating all or any part of
the Guaranteed Indebtedness acted in excess of their authority. Guarantor
hereby acknowledges that withdrawal from, or termination of, any ownership
interest in Borrower now or hereafter owned or held by Guarantor shall not
alter, affect or in any way limit the obligations of Guarantor hereunder.
8. Actions against Guarantor. In the event of a default in the payment
or performance of all or any part of the Guaranteed Indebtedness when such
Guaranteed Indebtedness becomes due, whether by its terms, by acceleration or
otherwise, Guarantor shall, without notice or demand, promptly pay the amount
due thereon to Bank, in lawful money of the United States, at Bank's address set
forth hereinabove. One or more successive or concurrent actions may be brought
against Guarantor, either in the same action in which Borrower is sued or in
separate actions, as often as Bank deems advisable. The exercise by Bank of any
right or remedy under this Guaranty or under any other agreement or instrument,
at law, in equity or otherwise, shall not preclude concurrent or subsequent
exercise of any other right or remedy. The books and records of Bank shall be
admissible in evidence in any action or proceeding involving this Guaranty and
shall be prima facie evidence of the payments made on, and the outstanding
balance of, the Guaranteed Indebtedness.
9. Payment by Guarantor. Whenever Guarantor pays any sum which is or may
become due under this Guaranty, written notice must be delivered to Bank
contemporaneously with such payment. Such notice shall be effective for
purposes of this paragraph when contemporaneously
<PAGE>
with such payment Bank receives such notice either by: (a) personal delivery to
the address and designated department of Bank identified in subparagraph 1(a)
above, or (b) United States mail, certified or registered, return receipt
requested, postage prepaid, addressed to Bank at the address shown in
subparagraph 1(a) above. In the absence of such notice to Bank by Guarantor in
compliance with the provisions hereof, any sum received by Bank on account of
the Guaranteed Indebtedness shall be conclusively deemed paid by Borrower.
10. Notice of Sale. In the event that Guarantor is entitled to receive
any notice under the Uniform Commercial Code, as it exists in the state
governing any such notice, of the sale or other disposition of any collateral
securing all or any part of the Guaranteed Indebtedness or this Guaranty,
reasonable notice shall be deemed given when such notice is deposited in the
United States mail, postage prepaid, at the address for Guarantor set forth in
subparagraph 1(c) above, five (5) days prior to the date any public sale, or
after which any private sale, of any such collateral is to be held; provided,
however, that notice given in any other reasonable manner or at any other
reasonable time shall be sufficient.
11. Waiver of Bank. No delay on the part of Bank in exercising any right
hereunder or failure to exercise the same shall operate as a waiver of such
right. In no event shall any waiver of the provisions of this Guaranty be
effective unless the same be in writing and signed by an officer of Bank, and
then only in the specific instance and for the purpose given.
12. Successors and Assigns. This Guaranty is for the benefit of Bank, its
successors and assigns. This Guaranty is binding upon Guarantor's heirs,
executors, administrators, personal representatives and successors, including
without limitation any person or entity obligated by operation of law upon the
reorganization, merger, consolidation or other change in the organizational
structure of Guarantor.
13. Costs and Expenses. Guarantor shall pay on demand by Bank all costs
and expenses (including without limitation all reasonable attorneys' fees)
incurred by Bank in connection with the preparation, administration, enforcement
and/or collection of this Guaranty. This covenant shall survive the payment of
the Guaranteed Indebtedness.
14. Severability. If any provision of this Guaranty is held by a court of
competent jurisdiction to be illegal, invalid or enforceable under present or
future laws, such provision shall be fully severable, shall not impair or
invalidate the remainder of this Guaranty and the effect thereof shall be
confined to the provision held to be illegal, invalid or unenforceable.
15. No Obligation. Nothing contained herein shall be construed as an
obligation on the part of Bank to extend or continue to extend credit to
Borrower.
16. Amendment. No modification or amendment of any provision of this
Guaranty, nor consent to any departure by Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by an officer of Bank,
and then shall be effective only in the specific instance and for the purpose
for which given.
<PAGE>
17. Cumulative Rights. All rights and remedies of Bank hereunder are
cumulative of each other and of every other right or remedy which Bank may
otherwise have at law or in equity or under any instrument or agreement, and the
exercise of one or more of such rights or remedies shall not prejudice or impair
the concurrent or subsequent exercise of any other rights or remedies.
18. Governing Law. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS.
19. Venue. This Guaranty has been entered into in the county in Texas
where Bank's address for notice purposes is located, and it shall be performable
for all purposes in such county. Courts within the State of Texas shall have
jurisdiction over any and all disputes arising under or pertaining to this
Guaranty and venue for any such disputes shall be in the county or judicial
district where the Bank's address for notice purposes is located.
20. Compliance with Applicable Usury Laws. Notwithstanding any other
provision of this Guaranty or of any instrument or agreement evidencing,
governing or securing all or any part of the Guaranteed Indebtedness, Guarantor
and Bank by its acceptance hereof agree that Guarantor shall never be required
or obligated to pay interest in excess of the maximum nonusurious interest rate
as may be authorized by applicable law for the written contracts which
constitute the Guaranteed Indebtedness. It is the intention of Guarantor and
Bank to conform strictly to the applicable laws which limit interest rates, and
any of the aforesaid contracts for interest, if and to the extent payable by
Guarantor, shall be held to be subject to reduction to the maximum nonusurious
interest rate allowed under said law.
21. Descriptive Headings. The captions in this Guaranty are for
convenience only and shall not define or limit the provisions hereof.
22. Gender. Within this Guaranty, words of any gender shall be held and
construed to include the other gender.
23. Guarantor's Liability. The liability of Guarantor with respect to its
obligations hereunder shall be limited to the maximum amount of liability that
can be incurred without rendering this Unlimited Guaranty, as it relates to any
Guarantor, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer, and not for any greater amount.
24. Entire Agreement. This Guaranty contains the entire agreement between
Guarantor and Bank regarding the subject matter hereof and supersedes all prior
written and oral agreements and understandings, if any, regarding same;
provided, however, this Guaranty is in addition to and does not replace, cancel,
modify or affect any other guaranty of Guarantor now or hereafter held by Bank
that relates to Borrower or any other person or entity.
<PAGE>
EXECUTED as of the date first above written.
GUARANTOR:
---------
_____________________________________
_____________________________________
_____________________________________
_____________________________________
<PAGE>
EXHIBIT "D"
CERTIFICATE OF COMPLIANCE
The undersigned hereby certifies that he is the _______ of
______________________ ("________")(______________ together with
________________ are hereinafter called the "Borrower"), and that as such he is
authorized to execute this Certificate of Compliance on behalf of the Borrower.
With reference to that certain Restated Senior Secured Loan Agreement, dated as
of October ___, 1997 (as same may be amended, modified, increased, supplemented
and/or restated from time to time, the "Loan Agreement"), entered into between
the Borrower, BANK ONE, TEXAS, N.A., a national banking association ("Bank One")
and BANQUE PARIBAS ("Paribas") (Bank One and Paribas in their capacities as
lenders are hereinafter referred to as "Banks") and Bank One as "Agent" and
Paribas, as "Co-Agent", the undersigned further certifies, represents and
warrants on behalf of the Trust that all of the following statements are true
and correct (each capitalized term used herein having the same meaning given to
it in the Agreement unless otherwise specified):
(a) The Borrower have fulfilled in all material respects their
obligations under the Note and Security Instruments, including the Loan
Agreement, and all representations and warranties made herein and therein
continue (except to the extent they relate solely to an earlier date) to be
true and correct in all material respects [if the representations and
warranties are not true and correct, the party signing this certificate
shall except from the foregoing statement the matters for which such
representations and warranties are no longer true specifying the nature of
any such change.]
(b) No Event of Default has occurred under the Security Instruments,
including the Loan Agreement [if an Event of Default has occurred, the
party certifying hereto shall specify the facts constituting the Event of
Default and the nature and status thereof].
(c) To the extent requested from time to time by the Agent, the
certifying party shall specifically affirm compliance of the Borrower in
all material respects with any of its representations and warranties
(except to the extent they relate solely to an earlier date) or obligations
under said instruments.
(d) Financial Computations (provide calculation) as of __________,
199___:
(i) Current Ratio;
(ii) Minimum Interest Coverage Ratio; and
(iii) Tangible Net Worth.
<PAGE>
EXECUTED, DELIVERED AND CERTIFIED TO this ______ day of __________, 19__.
______________________________
By:
---------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE>
EXHIBIT 16
[JOSEPH DECOSIMO AND COMPANY LETTERHEAD APPEARS HERE]
December 8, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Dear Sir:
We have read and agree with the comments related to the termination of the
client-auditor relationship between SOUTHWEST ROYALTIES, INC. and Joseph
Decosimo and Company, LLP included under the caption "Experts" in the
Registration Statement on Form S-4.
JOSEPH DECOSIMO AND COMPANY
A Tennessee Registered Limited Liability Partnership
<PAGE>
EXHIBIT 21
Exhibit 21
List of Subsidiaries
Southwest Royalties Holdings, Inc. (Delaware)
- ----------------------------------------------
Midland Red Oak Realty, Inc. (Delaware)
Sierra Well Service, Inc. (Delaware)
Southwest Royalties, Inc. (Delaware)
- -------------------------------------
Midland Southwest Software, Inc. (Delaware)
Espero Energy Corporation (Delaware)
Threading Products International, LLC (Texas)
<PAGE>
[INCLUDED IN EXHIBITS 5.1 AND 5.2]
<PAGE>
CONSENT ON INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Southwest Royalties, Inc. of our report
dated October 7, 1997 relating to the Historical Statement of Revenues and
Direct Operating Expenses of the Oil and Gas Properties Acquisition, which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Houston, Texas
December 8, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Southwest Royalties Holdings, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Midland, Texas
December 9, 1997
<PAGE>
EXHIBIT 23.4
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the reference to our firm under the caption "Experts" in this
Registration Statement on Form S-4 and the use therein of our report dated March
27, 1996, except for note 14, as to which the date is August 11, 1997, with
respect to the consolidated financial statements of SOUTHWEST ROYALTIES, INC.
JOSEPH DECOSIMO AND COMPANY
A Tennessee Registered Limited Liability Partnership
Chattanooga, Tennessee
December 8, 1997
<PAGE>
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
We consent to the references made to us in the Registration Statement of
Southwest Royalties Holdings, Inc. relating to the offering to $200,000,000 of
Senior Notes due 2004 pursuant to Rule 144A including the reference to us under
the caption "Reserve Engineers" in the Registration Statement.
/s/RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
November 26, 1997
<PAGE>
ENGINEER'S CONSENT
I consent to the references made to me in the registration statement of
Southwest Royalties Holdings, Inc.
/s/ DONALD R. CREAMER
Donald R. Creamer
<PAGE>
EXHIBIT 25
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) __
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
John R. Towers, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617)654-3253
(Name, address and telephone number of agent for service)
_____________________
SOUTHWEST ROYALITIES INC.
(Exact name of obligor as specified in its charter)
DELAWARE 75-1917432
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. BIG SPRING
MIDLAND, TX 79701-4326
(Address of principal executive offices) (Zip Code)
10 1/2% SENIOR NOTES DUE 2004 SERIES A
(Title of indenture securities)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington, D.C., Federal
Deposit Insurance Corporation, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
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.
The obligor is not an affiliate of the trustee or of its parent, State
Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee to
commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No. 1
to the Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Morse Shoe, Inc. (File
No. 22-17940) and is incorporated herein by reference thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST
POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED
IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange Commission
as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on file
with the Securities and Exchange Commission as Exhibit 4 to the
Statement of Eligibility and Qualification of Trustee (Form T-1)
filed with the Registration Statement of Eastern Edison Company
(File No. 33-37823) and is incorporated herein by reference thereto.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN
DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act is
annexed hereto as Exhibit 6 and made a part hereof.
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.
A copy of the latest report of condition of the trustee published pursuant
to law or the requirements of its supervising or examining authority is
annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Hartford and The
State of Connecticut, on the 18th of November 1997.
STATE STREET BANK AND TRUST COMPANY
By: ______________________________________
NAME: DENNIS FISHER
TITLE: ASSISTANT VICE PRESIDENT
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by SOUTHWEST
ROYALTIES INC.. of its 10 1/2% SENIOR NOTES DUE 2004 SERIES A, we hereby consent
that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Dennis Fisher
-----------------------------------
NAME: DENNIS FISHER
TITLE: ASSISTANT VICE PRESIDENT
DATED: NOVEMBER 18, 1997
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business March 31, 1997,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act and in accordance
with a call made by the Commissioner of Banks under General Laws, Chapter 172,
Section 22(a).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin................... 1,665,142
Interest-bearing balances............................................ 8,193,292
Securities.................................................................... 10,238,113
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary.................................. 5,853,144
Loans and lease financing receivables:
Loans and leases, net of unearned income...... 4,936,454
Allowance for loan and lease losses........... 70,307
Allocated transfer risk reserve............... 0
Loans and leases, net of unearned income and allowances.............. 4,866,147
Assets held in trading accounts............................................... 957,478
Premises and fixed assets..................................................... 380,117
Other real estate owned....................................................... 884
Investments in unconsolidated subsidiaries.................................... 25,835
Customers' liability to this bank on acceptances outstanding.................. 45,548
Intangible assets............................................................. 158,080
Other assets.................................................................. 1,066,957
----------
Total assets.................................................................. 33,450,737
==========
LIABILITIES
Deposits:
In domestic offices.................................................. 8,270,845
Noninterest-bearing.................... 6,318,360
Interest-bearing....................... 1,952,485
In foreign offices and Edge subsidiary............................... 12,760,086
Noninterest-bearing.................... 53,052
Interest-bearing...................... 12,707,034
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary.................................. 8,216,641
Demand notes issued to the U.S. Treasury and Trading Liabilities.............. 926,821
Other borrowed money.......................................................... 671,164
Subordinated notes and debentures............................................. 0
Bank's liability on acceptances executed and outstanding...................... 46,137
Other liabilities............................................................. 745,529
Total liabilities............................................................. 31,637,223
----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................. 0
Common stock.................................................................. 29,931
Surplus....................................................................... 360,717
Undivided profits and capital reserves/Net unrealized holding gains (losses).. 1,426,881
Cumulative foreign currency translation adjustments........................... (4,015)
Total equity capital.......................................................... 1,813,514
----------
Total liabilities and equity capital.......................................... 33,450,737
==========
</TABLE>
4
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Charles F. Kaye
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at September 30, 1997 (Unaudited) and the Statement of Operations for the
Nine Months Ended September 30, 1997 (Unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001051111
<NAME> Southwest Royalties Holdings, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,152,000
<SECURITIES> 0
<RECEIVABLES> 10,489,000
<ALLOWANCES> 123,000
<INVENTORY> 0
<CURRENT-ASSETS> 23,558,000
<PP&E> 181,756,000
<DEPRECIATION> (40,306,000)
<TOTAL-ASSETS> 180,825,000
<CURRENT-LIABILITIES> 23,192,000
<BONDS> 138,805,000
10,921,000
0
<COMMON> 116,000
<OTHER-SE> (3,543,000)
<TOTAL-LIABILITY-AND-EQUITY> 180,825,000
<SALES> 26,068,000
<TOTAL-REVENUES> 39,834,000
<CGS> 12,166,000
<TOTAL-COSTS> 20,676,000
<OTHER-EXPENSES> 8,093,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,950,000
<INCOME-PRETAX> (4,465,000)
<INCOME-TAX> (1,526,000)
<INCOME-CONTINUING> (2,617,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (490,000)
<CHANGES> 0
<NET-INCOME> (3,107,000)
<EPS-PRIMARY> (2.88)
<EPS-DILUTED> (2.88)
</TABLE>
<PAGE>
EXHIBIT 99
SOUTHWEST ROYALTIES, INC.
SOUTHWEST ROYALTIES HOLDINGS, INC.
LETTER OF TRANSMITTAL
FOR TENDER OF ALL OUTSTANDING
10 1/2% SERIES A SENIOR NOTES DUE 2004
IN EXCHANGE FOR
10 1/2% SERIES B SENIOR NOTES DUE 2004 REGISTERED UNDER THE SECURITIES ACT OF
1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
Deliver to the Exchange Agent:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
By Hand/Overnight Courier: By Mail:
<S> <C>
Corporate Trust Department Corporate Trust Department
4th Floor P. O. Box 778
Two International Plaza Boston, Massachusetts 02102-0078
Boston, Massachusetts 02110 Attn: Ms. Sandra Szozsponik
Attn: Ms. Sandra Szozsponik
</TABLE>
(registered or certified mail recommended)
By Facsimile Transmission:
(For Eligible Institutions Only)
(617) 664-5393
Confirm by Telephone:
(617) 664-5587
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS LISTED ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
<PAGE>
INSTRUCTIONS
THESE INSTRUCTIONS FORM PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE
OFFER.
1. General Instructions. By signing this Letter of Transmittal (the "Letter
of Transmittal") the undersigned acknowledges receipt and review of the
Prospectus dated , 1997 (the "Prospectus") of Southwest Royalties,
Inc. (the "Issuer") and Southwest Royalties Holdings, Inc. ("SRH"), and this
Letter of Transmittal. The Prospectus and the Letter of Transmittal, together,
describe the offer of the Issuer and SRH (the "Exchange Offer") to exchange
the Issuer's 10 1/2% Series B Senior Notes due 2004 (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the
Prospectus is a part, for a like principal amount of the Issuer's issued and
outstanding 10 1/2% Series A Senior Notes due 2004 (the"Old Notes").
Capitalized terms used but not defined herein have the meaning given to them
in the Prospectus.
The Issuer and SRH reserve the right, at any time or from time to time, to
extend the Exchange Offer at their discretion, in which event the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. The Issuer and SRH shall notify the holders of the Old Notes of any
extension by oral or written notice and will mail to the record holders of Old
Notes an announcement thereof, prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. The term
"business day" shall mean any day which is not a Saturday, Sunday or day on
which banks are authorized by law to close in the State of New York.
A holder of Old Notes should use this Letter of Transmittal, if original Old
Notes are to be forwarded herewith pursuant to the procedures set forth in the
Prospectus under the caption "Exchange Offer-- Procedures for Tendering." This
Letter of Transmittal and an Agent's Message is to be used if delivery of Old
Notes is to be made by book-entry transfer to the account maintained by the
Exchange Agent at the Depository Trust Company ("DTC") pursuant to the
procedures set forth in the Prospectus under the caption "The Exchange Offer--
Procedures for Tendering" and "Book-Entry Transfer." Holders of Old Notes
whose Old Notes are not immediately available, who are unable to deliver their
Old Notes and all other documents required by this Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date, or who are unable to
complete the procedure for book-entry transfer on a timely basis, must tender
their Old Notes according to the guaranteed delivery procedures set forth in
the Prospectus under the caption "Exchange Offer--Guaranteed Delivery
Procedures." See Instruction 2. Delivery of documents to DTC does not
constitute delivery to the Exchange Agent.
The term "holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Issuer or any other
person who has obtained a properly completed bond power from the registered
holder. Holders who wish to tender their Old Notes must complete this Letter
of Transmittal in its entirety.
2. Delivery of This Letter of Transmittal and Old Notes or Book-Entry
Confirmations. All physically delivered Old Notes or any confirmation of a
book-entry transfer to the Exchange Agent's account at DTC of Old Notes
tendered by book-entry transfer (a "Book-Entry Confirmation"), a properly
completed and duly executed copy of this Letter of Transmittal or Agent's
Message or facsimile hereof, and any other documents required by this Letter
of Transmittal, must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the Expiration Date.
The method of delivery of the tendered Old Notes, this Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the holder. Except as otherwise provided below, the delivery will not
be deemed made until actually received or confirmed by the Exchange Agent.
Instead of delivery by mail, it is recommended that the holder use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Notes should be sent to SRH or the Issuer.
<PAGE>
3. Guaranteed Delivery Procedures. Holders whose Old Notes are not
immediately available, who cannot deliver their Old Notes, Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date, or who cannot complete the procedure for book-entry
transfer and deliver an Agent's Message on a timely basis, must tender their
Old Notes according to the guaranteed delivery procedures set forth in the
Prospectus. Pursuant to such procedures: (1) tender must be made by or through
a firm which is a member of a registered national securities exchange or of
the National Association of Securities Dealers Inc., a commercial bank or a
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution"); (ii) prior to the Expiration Date,
the Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of the Old Notes, the registration number(s) of such Old Notes and the
total principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within five business days after the
Expiration Date, this Letter of Transmittal (or facsimile hereof) together
with the Old Notes in proper form for transfer (or a Book-Entry Confirmation)
and any other documents required hereby, will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) the certificates for all
physically tendered shares of Old Notes, in proper form for transfer (or Book-
Entry Confirmation, as the case may be) and all other documents required
hereby are received by the Exchange Agent within five business days after the
Expiration Date.
Any holder of Old Notes who wishes to tender Old Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York
City time, on the Expiration Date. See "Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus.
4. Tender by Holder. Only a holder of Old Notes may tender such Old Notes in
the Exchange Offer. Any beneficial holder of Old Notes who is not the
registered holder and who wishes to tender should arrange with the registered
holder to execute and deliver this Letter of Transmittal on his behalf or
prior to the registered holder completing and executing this Letter of
Transmittal and delivering his Old Notes, the beneficial owner should make
appropriate arrangements to register ownership of the Old Notes in the
beneficial owner's name or obtain a properly completed bond power from the
registered holder.
5. Partial Tenders. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering holder should fill in the principal amount tendered
in the third column of the chart entitled "Description of Old Notes Tendered"
below. The entire principal amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. If the
entire principal amount of all Old Notes is not tendered, then Old Notes for
the principal amount of Old Notes not tendered and Exchange Notes issued in
exchange for any Old Notes accepted will be sent to the holder at his or her
registered address, unless a different address is provided in the appropriate
box on this Letter of Transmittal, promptly after the Old Notes are accepted
for exchange.
6. Signatures on This Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal (or facsimile hereof)
is signed by the record holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever. If this Letter
of Transmittal (or facsimile hereof) is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the Old Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes listed and tendered hereby and the
Exchange Notes issued in exchange therefor are to be issued (or any untendered
principal amount of Old Notes are to be reissued) to the registered holder,
the said holder need not and should not endorse any tendered Old Notes, nor
provide a separate bond power. In any other case, such holder must either
properly endorse the Old Notes tendered or transmit a properly completed
separate bond power with this Letter of Transmittal, with the signatures on
the endorsement or bond power guaranteed by an Eligible Institution.
<PAGE>
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers, in each case
signed as the name of the registered holder or holders appears on the Old
Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old 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, such persons should so indicate when signing, and,
unless waived by the Company or the Issuer, submit evidence satisfactory to
the Issuer and SRH of their authority to act.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 6 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal (or
facsimile hereof) is signed by the registered holder(s) of the Old Notes
tendered herein (or by a participant in DTC whose name appears on a security
position listing as the owner of the tendered Old Notes) and the Exchange
Notes are to be issued directly to such registered holder(s) (or, if signed by
a participant in DTC, deposited to such participant's account at DTC) and
neither the box entitled "Special Delivery Instructions" nor the box entitled
"Special Registration Instructions" has been completed, or (ii) such Old Notes
are tendered for the account of an Eligible Institution. In all other cases,
all signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution.
7. Special Registration Delivery Instructions. Tendering holders should
indicate, in the applicable box or boxes, the name and address (or account at
DTC) to which Exchange Notes or substitute Old Notes for principal amounts not
tendered or not accepted for exchange are to be issued or sent, if different
from the name and address of the person signing this Letter of Transmittal. In
the case of issuance in a different name, the taxpayer identification or
social security number of the person named must also be indicated.
8. Transfer Taxes. The Issuer and SRH will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Notes tendered hereby, or if tendered Old Notes are registered in the name of
any person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 9, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES LISTED IN THIS LETTER OF
TRANSMITTAL.
9. Tax Identification Number. Federal income tax law requires that a holder
of any Old Notes which are accepted for exchange provide the Issuer (as payor)
with its correct taxpayer identification number ("TIN"). If the Issuer is not
provided with the correct TIN, the holder may be subject to a $50 penalty
imposed by Internal Revenue Service. (If withholding results in an over-
payment of taxes, a refund may be obtained). Certain holders (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and reporting requirements. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of
failure to report all interest or dividends or that (ii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to
backup withholding. If the holder is an individual his or her TIN is his or
her social security number. If the Old Notes are registered in more than one
name or are not in the name of the actual owner, see the enclosed "Guidelines
for Certification of Taxpayer Identification Number of Substitute Form W-9"
for information on which TIN to report.
<PAGE>
The Issuer reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Issuer's obligations regarding backup
withholding.
10. Validity of Tenders. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of tendered Old Notes
will be determined by the Issuer and SRH in their sole discretion. The
Issuer's and SRH's determination will be final and binding. The Issuer and SRH
reserve the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes their acceptance of which would, in the opinion of
the Issuer and SRH or their counsel, be unlawful. The Issuer and SRH also
reserve the absolute right to waive any conditions of the Exchange Offer or
defects or irregularities in tenders as to particular Old Notes. The Issuer's
and SRH's interpretation of the terms and conditions of the Exchange Offer
(which includes this Letter of Transmittal and the instructions hereto) shall
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within
such time as the Issuer and SRH shall determine. Neither the Issuer, SRH, the
Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with regard to tenders of Old Notes
nor shall any of them incur any liability for failure to give such
notification.
11. Waiver of Conditions. The Issuer and SRH reserve the absolute right to
waive, in whole or part, any of the conditions to the Exchange Offer set forth
in the Prospectus.
12. No Conditional Tender. No alternative, conditional, irregular or
contingent tender of Old Notes will be accepted.
13. Mutilated, Lost, Stolen or Destroyed Old Notes. Any holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated above for further instructions.
14. Requests for Assistance or Additional Copies. Requests for assistance or
for additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
15. Withdrawal. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "Exchange
Offer--Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE OLD NOTES DELIVERED BY BOOK-ENTRY TRANSFER OR IN ORIGINAL
HARD COPY FORM) MUST BE RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE OF
GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE
EXPIRATION DATE.
<PAGE>
SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby acknowledges receipt and review of the Prospectus
dated , 1997 (the "Prospectus") of Southwest Royalties, Inc., a
Delaware corporation (the "Issuer") and Southwest Royalties Holdings, Inc.
("SRH"), and this Letter of Transmittal (the "Letter of Transmittal"), which
together describe the offer of the Issuer and SRH (the "Exchange Offer") to
exchange the Issuer's 10 1/2% Senior Notes due 2004 (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the
Prospectus is a part, for a like principal amount of the Issuer's issued and
outstanding 10 1/2% Senior Notes due 2004 (the"Old Notes").
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with
respect to the Exchange Offer.
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Issuer and SRH for exchange the principal amount of Old
Notes indicated below. Subject to and effective upon the acceptance for
exchange of the principal amount of Old Notes tendered in accordance with this
Letter of Transmittal, the undersigned hereby exchanges, assigns and transfers
to the Issuer all right, title and interest in and to the Old Notes tendered
for exchange hereby. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent, as the agent and attorney-in-fact of the
undersigned (with full knowledge that the Exchange Agent also acts as the
agent of the Issuer and SRH in connection with the Exchange Offer) with
respect to the tendered Old Notes with full power of substitution to (i)
deliver such Old Notes, or transfer ownership of such Old Notes on the account
books maintained by DTC, to the Issuer and deliver all accompanying evidences
of transfer and authenticity, and (ii) present such Old Notes for transfer on
the books of the Issuer and receive all benefits and otherwise exercise all
rights of beneficial ownership of such Old Notes, all in accordance with the
terms of the Exchange Offer. The power of attorney granted in this paragraph
shall be deemed to be irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign and transfer the Old Notes
tendered hereby and to acquire the Exchange Notes issuable upon the exchange
of such tendered Old Notes, and that the Issuer will acquire good and
unencumbered title thereto, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claim, when the same are
accepted for exchange by the Issuer and the Company.
The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the "SEC"),
including Exxon Capital Holdings Corporation, SEC No-action Letter (available
April 13, 1989), Morgan Stanley & Co. Inc., SEC No-action Letter (available
June 5, 1991) (the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC
No-action Letter (available June 5, 1991), that the Exchange Notes issued in
exchange for the Old Notes pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by holders thereof (other than a
broker-dealer who purchased Old Notes exchanged for such Exchange Notes
directly from the Company and the Issuer to resell pursuant to Rule 144A or
any other available exemption under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holders' business and such holders are not participating in, and have no
arrangement with any person to participate in, the distribution of such
Exchange Notes.
The undersigned specifically represent(s) to the Company and the Issuer that
(i) any Exchange Notes acquired in exchange for Old Notes tendered hereby are
being acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not the undersigned, (ii) the undersigned is not
participating in, and has no arrangement with any person to participate in,
the distribution of Exchange Notes, and (iii) neither
<PAGE>
the undersigned nor any such other person is an "affiliate" (as defined in
Rule 405 under the Securities Act) of the Company or the Issuer or a broker-
dealer tendering Old Notes acquired directly from the Issuer or SRH.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive
Exchange Securities for its own account in exchange for Securities that were
acquired as a result of market-making activities or other trading activities,
it acknowledges that it will deliver a prospectus in connection with any
resale of such Exchange Securities; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The undersigned
acknowledges that if the undersigned is participating in the Exchange Offer
for the purpose of distributing the Exchange Notes (i) the undersigned cannot
rely on the position of the staff of the SEC in the Morgan Stanley Letter and
similar SEC no-action letters, and, in the absence of an exemption therefrom,
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the
Exchange Notes, in which case the registration statement must contain the
selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the SEC, and (ii) a broker-dealer that
delivers such a prospectus to purchasers in connection with such resales will
be subject to certain of the civil liability provisions under the Securities
Act and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent, the Issuer or SRH to be necessary or
desirable to complete the exchange, assignment and transfer of the Old Notes
tendered hereby, including the transfer of such Old Notes on the account books
maintained by DTC.
For purposes of the Exchange Offer, the Issuer and SRH shall be deemed to
have accepted for exchange validly tendered Old Notes when, as and if the
Issuer or SRH gives oral or written notice thereof to the Exchange Agent. Any
tendered Old Notes that are not accepted for exchange pursuant to the Exchange
Offer for any reason will be returned, without expense, to the undersigned at
the address shown below or at a different address as may be indicated herein
under "Special Delivery Instructions" as promptly as practicable after the
Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the acceptance of properly tendered Old
Notes by the Issuer and SRH pursuant to the procedures described under the
caption "Exchange Offer--Procedures for Tendering" in the Prospectus and in
the instructions hereto will constitute a binding agreement between the
undersigned and the Issuer and SRH upon the terms and subject to the
conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the Exchange Notes issued in exchange for the Old Notes accepted for
exchange and return any Old Notes not tendered or not exchanged, in the
name(s) of the undersigned. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please mail or deliver the Exchange Notes
issued in exchange for the Old Notes accepted for exchange and any Old Notes
not tendered or not exchanged (and accompanying documents, as appropriate) to
the undersigned at the address shown below the undersigned's signature(s). In
the event that both "Special Issuance Instructions" and "Special Delivery
Instructions" are completed, please issue the Exchange Notes issued in
exchange for the Old Notes accepted for exchange in the name(s) of, and return
any Old Notes not tendered or not exchanged to, the person(s) so indicated.
The undersigned recognizes that SRH and the Issuer have no obligation pursuant
to the "Special Issuance Instructions" and "Special Delivery Instructions" to
transfer any Old Notes from the name of the registered holder(s) thereof if
SRH and the Issuer do not accept for exchange any of the Old Notes so tendered
for exchange.
<PAGE>
IMPORTANT: PLEASE SIGN HERE WHETHER OR NOT OLD NOTES ARE BEING PHYSICALLY
TENDERED HEREBY.
(Complete Accompanying Substitute Form W-9)
- -------------------------------------
- -------------------------------------
(SIGNATURE(S) OF REGISTERED HOLDERS
OR OLD NOTES)
Dated: ________________________, 199
(The above lines must be signed by the registered holder(s) of Old Notes as
name(s) appear(s) on the Old Notes or on a security position listing, or by
person(s) authorized to become registered holder(s) by a properly completed
bond power from the registered holder(s), a copy of which must be transmitted
with this Letter of Transmittal. If Old Notes to which this Letter of
Transmittal relate are held of record by two or more joint holders, then all
such holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
then such person must (i) set forth his or her full title below and (ii)
unless waived by the Issuer and SRH, submit evidence satisfactory to the
issuer and SRH of such person's authority so to act. See Instruction 6
regarding the completion of this Letter of Transmittal, printed below.)
Name(s): ____________________________
(PLEASE TYPE OR PRINT)
Capacity: ___________________________
Address: ____________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number:
- -------------------------------------
<PAGE>
** PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF
TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR
ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE
DIRECTED TO THE EXCHANGE AGENT. **
List below the Old Notes to which this Letter of Transmittal relates. If the
space below is inadequate, list the registered numbers and principal amounts
on a separate signed schedule and affix the list to this Letter of
Transmittal.
DESCRIPTION OF OLD NOTES TENDERED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME(S) AND ADDRESS(ES) OF
REGISTERED HOLDER(S) EXACTLY AS AGGREGATE PRINCIPAL PRINCIPAL
NAME(S) APPEAR(S) ON OLD NOTES REGISTERED AMOUNT REPRESENTED AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* BY NOTE(S) TENDERED**
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Unless otherwise indicated, any tendering holder of Old Notes will be
deemed to have tendered the entire aggregate principal amount represented
by such Old Notes. All tenders must be in integral multiples of $1,000.
[_]CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DTC AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Tendering Institution: ________________________________________________
Account Number: _______________________________________________________________
Transaction Code Number: ______________________________________________________
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered holder(s) of Old Notes: _________________________________
Date of Execution of Notice of Guaranteed Delivery: ___________________________
Window Ticket Number (if available): __________________________________________
Name of Eligible Institution that Guaranteed Delivery: ________________________
Account Number (if delivered by book-entry transfer): _________________________
<PAGE>
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name: _________________________________________________________________________
Address: ______________________________________________________________________
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 5 and 6) (See Instructions 5 and 6)
To be completed ONLY (i) if Old
Notes in a principal amount not To be completed ONLY if Old Notes
tendered, or Exchange Notes issued in a principal amount not tendered,
in exchange for Old Notes accepted or Exchange Notes issued in
for exchange, are to be issued in exchange for Old Notes accepted for
the name of someone other than the exchange, are to be mailed or
undersigned, or (ii) if Old Notes delivered to someone other than the
tendered by book-entry transfer undersigned, or to the undersigned
which are not exchanged are to be at an address other than that shown
returned by credit to an account below the undersigned's signature.
maintained at the DTC other than
the account indicated above.
Mail or deliver Exchange Notes
Issue Exchange Notes and/or Old and/or Old Notes to:
Notes to:
-----------------------------------
Name
------------------------------- Name
(Please Type or Print)
------------------------------
(Please Type or Print)
Address
------------------------------
Address
------------------------------
-----------------------------
(Include Zip Code)
-----------------------------
Taxpayer Identification or Social
Security Number (Include Zip Code)
-----------------------------------
------------------------------------
(Tax Identification or Social
(Complete Substitute Form W-9) Security Number)
[_]Credit unexchanged Old Notes
delivered by book-entry transfer
to DTC:
DTC Account Number: ________________
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible
Institution.
Signature(s) Guaranteed by an Eligible Institution:
Authorized Signature ___________________________________________
Name ___________________________________________________________
(Please Print)
Title __________________________________________________________
Name of Firm ___________________________________________________
Address ________________________________________________________
Zip Code
------------------------------
Area Code and Telephone No.
Dated: _______________________
<PAGE>
PAYER'S NAME: SOUTHWEST ROYALTIES, AS EXCHANGE AGENT
- -------------------------------------------------------------------------------
Social security number or
Part 1--PLEASE PROVIDE / /
YOUR TIN IN THE BOX AT ---------------------------
RIGHT AND CERTIFY BY Employer identification
SIGNING AND DATING BELOW number
-----------------------------------------------------------
SUBSTITUTE Part 2--Certification--Under penalties of perjury, I
FORM W-9 certify that: (1) The number shown on this form is my
DEPARTMENT OF THE correct Taxpayer Identification Number (or I am waiting
TREASURY for a number to be issued to me) and (2) I am not
INTERNAL REVENUE subject to backup withholding either because I have not
SERVICE been notified by the Internal Revenue Service ("IRS")
that I am subject to backup withholding as a result of
failure to report all interests or dividends, or the IRS
has notified me that I am no longer subject to backup
withholding.
PAYER'S REQUEST
FOR
TAXPAYER
IDENTIFICATION ----------------------------------------- Part 3--
NUMBER (TIN)
Awaiting
SIGNATURE ______________ DATE _________ TIN [_]
Please complete the Certificate of
Awaiting Taxpayer Identification Number
below.
Certificate Instructions -- You must cross out item (2) in Part 2 above if
you have been notified by the IRS that you are subject to backup
withholding because of under reporting interest or dividends on your tax
return. However, if after being notified by the IRS that you were subject
to backup withholding you received another notification from the IRS
stating that you are no longer subject to backup withholding, do not cross
out item (2).
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3
OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER.
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number to the
payor within 60 days, 31% of all reportable payments made to me thereafter
will be withheld until I provide a number.
------------------------------------- ------------------------------------
Signature Date
