<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1997
REGISTRATION NO. 333-26603
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CROSS TIMBERS OIL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311 75-2347769
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
810 HOUSTON STREET, SUITE 2000
FORT WORTH, TEXAS 76102
(817) 870-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
BOB R. SIMPSON
810 HOUSTON STREET, SUITE 2000
FORT WORTH, TEXAS 76102
(817) 870-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE OF PROCESS)
----------------
COPIES OF ALL COMMUNICATIONS TO:
F. RICHARD BERNASEK, ESQ. JAMES M. PRINCE, ESQ.
KELLY, HART & HALLMAN, P.C. ANDREWS & KURTH, L.L.P.
201 MAIN STREET, SUITE 2500 4200 TEXAS COMMERCE TOWER
FORT WORTH, TEXAS 76102 HOUSTON, TEXAS 77002
(817) 332-2500 (713) 220-4300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared 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>
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- ----------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE(1) FEE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 1/4% Series B Senior
Subordinated Notes due
2007.................. $125,000,000 100% $125,000,000 $37,878.79(2)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
OFFER FOR ALL OUTSTANDING
9 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2007 IN EXCHANGE FOR
9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007, WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OF
[LOGO OF CROSS CROSS TIMBERS OIL COMPANY
TIMBERS OIL COMPANY
APPEARS HERE]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 16,
1997, UNLESS EXTENDED.
---------------
Cross Timbers Oil Company, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount of
up to $125,000,000 of its 9 1/4% Series B Senior Subordinated Notes due 2007
(the "New Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), for a like principal amount of its
issued and outstanding 9 1/4% Series A Senior Subordinated Notes due 2007 (the
"Old Notes" and, together with the New Notes, the "Notes") from the holders
(the "Holders") thereof. The terms of the New Notes are identical in all
material respects to the Old Notes, except for certain transfer restrictions
and registration rights relating to the Old Notes and except for certain
provisions providing for an increase in the interest rate on the Old Notes
under certain circumstances relating to the timing of the Exchange Offer.
On April 2, 1997, the Company issued $125,000,000 principal amount of Old
Notes. The Old Notes were issued pursuant to an offering exempt from
registration under the Securities Act and applicable state securities laws.
Interest on the Notes will be payable semi-annually on April 1 and October 1
of each year, commencing October 1, 1997. The Notes will mature on April 1,
2007. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after April 1, 2002, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time on or prior to April 1, 2000, the
Company may, subject to certain requirements, redeem up to 33 1/3% of the
Notes with the net cash proceeds from one or more Public Equity Offerings (as
defined herein) by the Company at a price equal to 109.25% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of redemption, provided that at least $83.3 million of the aggregate principal
amount of the Notes remains outstanding after giving effect to such
redemption. Upon a Change of Control (as defined herein), each Holder (as
defined herein) of the Notes will have the right to require the Company to
purchase all or a portion of such Holder's Notes at 101% of the aggregate
principal amount thereof, together with accrued and unpaid interest, if any,
to the date of purchase. See "Description of the Notes."
The Notes are general unsecured senior subordinated obligations of the
Company that are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined herein) of the Company including indebtedness
under the Credit Agreement (as defined herein), pari passu in right of payment
with all existing and future senior subordinated indebtedness of the Company
and senior in right of payment to all future subordinated indebtedness of the
Company. As of December 31, 1996, on a pro forma basis, after giving effect to
the offering of the Old Notes and the application of the proceeds therefrom as
described in "Use of Proceeds," the Company would have had approximately
$166.9 million of indebtedness that effectively would rank senior to the
Notes, and no indebtedness that would be subordinated to the Notes.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from April 2, 1997. Old Notes accepted for exchange will cease
to accrue interest from and after the date of consummation of the Exchange
Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not
receive any payment of accrued interest on such Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). Based on existing interpretations by the staff of the
Securities and Exchange Commission (the "Commission") set forth in several no-
action letters to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by a Holder thereof without further compliance with the
registration and prospectus delivery provisions of the Securities Act. Any
purchaser of Notes, however, who is an "affiliate" of the Company, who is not
acquiring the New Notes in the ordinary course of its business, or who intends
to participate in the Exchange Offer for the purpose of distributing the New
Notes (1) will not be able to rely on the interpretations of the staff of the
Commission, (2) will not be able to tender its Old Notes in the Exchange Offer
and (3) must comply with the registration and prospectus delivery provisions
of the Securities Act in connection with any sale or transfer of the Old Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. However, the staff of the Commission has not rendered a no-
action letter with respect to the Exchange Offer, and there can be no
assurance that the staff would make a similar determination for the Exchange
Offer as in such other circumstances. Each Holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in,
a distribution of New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. Each broker-dealer that receives
New 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 New
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 New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has
agreed that, for a period of up to 180 days after the Expiration Date (as
defined herein), it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date. In the event the Company terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the Holders thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes, or
the ability of Holders of New Notes to sell their New Notes or the price at
which such Holders may be able to sell their New Notes. Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Bear, Stearns & Co., Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation (the "Initial Purchasers") have advised the
Company that they currently intend to make a market in the New Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
with respect to the New Notes may be discontinued at any time without notice.
The Company does not intend to apply for listing or quotation of the New Notes
on any securities exchange or stock market.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
---------------
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 MAY 14, 1997.
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "PROSPECTUS SUMMARY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS AND PROPERTIES," IN ADDITION TO CERTAIN STATEMENTS
CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS" AND
ARE THUS PROSPECTIVE. SUCH STATEMENTS INCLUDE, AMONG OTHERS, (A) STATEMENTS
REGARDING THE COMPANY'S FUTURE ACQUISITION AND DEVELOPMENT PLANS AND
OBJECTIVES AND RELATED EXPENDITURES, REVENUES AND CASH FLOWS, INCLUDING
WITHOUT LIMITATION STATEMENTS REGARDING (1) PRODUCTION AND CASH FLOWS, (2)
NUMBER AND LOCATION OF PLANNED WELLS, (3) ANTICIPATED COMPLETION OF THE
COMPANY'S PLAN REGARDING EXPENDITURES FOR PROPERTY ACQUISITIONS AND
REPURCHASES OF THE COMPANY'S COMMON STOCK, AND THE ANTICIPATED SOURCE OF THE
FUNDS NECESSARY TO COMPLETE THE PLAN AND (4) THE COMPANY'S CAPITAL EXPENDITURE
BUDGETS FOR ACQUISITION AND DEVELOPMENT, RESPECTIVELY, AND (B) STATEMENTS
REGARDING THE COMPANY'S ANTICIPATED AGGREGATE ANNUAL DIVIDENDS TO BE PAID ON
ITS COMMON STOCK. STATEMENTS OF ASSUMPTIONS RELATED TO OR UNDERLYING SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS REGARDING
(I) THE QUALITY OF THE COMPANY'S PROPERTIES WITH REGARD TO, AMONG OTHER
THINGS, ANTICIPATED RESERVE AND PRODUCTION ENHANCEMENT OPPORTUNITIES AND
QUANTITY OF PROVED RESERVES, (II) THE COMPANY'S ABILITY TO PRUDENTLY ADD
GROWTH POTENTIAL THROUGH EXPLORATION, (III) ANTICIPATED DOMESTIC HYDROCARBON
DEMAND DURING 1997, (IV) THE ADEQUACY OF THE COMPANY'S SOURCES OF LIQUIDITY
DURING 1997, (V) THE EXPECTED INSIGNIFICANT IMPACT ON THE COMPANY'S 1997
EXPENDITURES FROM REGULATORY COMPLIANCE, (VI) THE EXPECTED INSIGNIFICANT
IMPACT ON THE COMPANY'S LIQUIDITY DURING 1997 FROM PRODUCTION IMBALANCES,
(VII) THE EXPECTED IMMATERIAL ADVERSE IMPACT OF A LOSS OF ANY CURRENT OIL OR
GAS PURCHASER FROM THE COMPANY, (VIII) REGULATORY APPROVAL AND THE ENACTMENT
OF NEW LEGISLATION IN OKLAHOMA TO REALIZE INFILL DRILLING POTENTIAL AND (IX)
SIMILARITY OF THE IMPACT ON THE COMPANY TO THE IMPACT ON OTHER OIL AND GAS
PRODUCERS OF RULES PROMULGATED BY THE FEDERAL ENERGY REGULATORY COMMISSION.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE
RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST
SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER
"RISK FACTORS," BEGINNING ON PAGE 14 OF THIS PROSPECTUS, AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
BEGINNING ON PAGE 32 OF THIS PROSPECTUS, AND HOLDERS ARE URGED TO CAREFULLY
CONSIDER SUCH FACTORS.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (together with all amendments, exhibits, and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the New
Notes offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the New Notes offered hereby, reference is made to
the Registration Statement. Any statements made in this Prospectus concerning
the provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such documents filed as an exhibit
to the Registration Statement or otherwise filed with the Commission.
2
<PAGE>
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Suite 1400, Northwestern Atrium Center, 14th Floor,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material may
also be obtained at prescribed rates by writing to the Commission, Public
Reference Section, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and such information may also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Such reports, proxy and information statements and other
information may be found on the Commission's Web site address,
http://www.sec.gov.
The Company is a Delaware corporation. Its principal executive offices are
located at 810 Houston Street, Suite 2000, Fort Worth, Texas 76102 and its
telephone number is (817) 870-2800.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference the following documents:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(b) Current Reports on Form 8-K filed on January 3, 1997, February 4,
1997, March 26, 1997 and April 9, 1997; and
(c) All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to termination of the offering made hereby.
Any statement contained herein or in a document all or a portion of which is
incorporated by or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document,
copies of which are included as Exhibits to the Registration Statement, each
such statement being qualified in all respects by such reference.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
detailed information and financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Holders of Old Notes should carefully
consider the matters discussed under the caption "Risk Factors" before deciding
to tender Old Notes in the Exchange Offer. References in this Prospectus to the
"Company" refer to Cross Timbers Oil Company and its predecessors. Certain
terms relating to the oil and gas business are defined in "Glossary of Certain
Oil and Gas Terms." Unless otherwise stated herein, (i) all reserve, production
and similar information provided in this Prospectus is as of December 31, 1996
or for the fiscal year ended December 31 of the year indicated and (ii) share
and per share amounts relating to common stock of the Company give effect to a
three-for-two stock split effected March 19, 1997.
THE COMPANY
Cross Timbers Oil Company is a leading United States independent energy
company engaged in the acquisition, development, exploitation and exploration
of oil and natural gas properties, and in the production, processing, marketing
and transportation of oil and natural gas. The Company has consistently
increased proved reserves, production and cash flow since its inception in
1986, and believes it is one of the most efficient domestic onshore operators
in the industry. The Company has grown primarily through acquisitions of
reserves, followed by aggressive development and exploitation activities and
strategic acquisitions of additional interests in or near such reserves. The
Company's oil and gas reserves are principally located in relatively long-lived
fields with well-established production histories concentrated in western
Oklahoma, the Permian Basin of West Texas and New Mexico, the Hugoton Field of
Oklahoma and Kansas and the Green River Basin of Wyoming.
The Company has achieved substantial growth in proved reserves, production,
revenues and EBITDA over the last five years. The Company increased proved
reserves by 192% from 45.4 million BOE as of December 31, 1992 to 132.5 million
BOE as of December 31, 1996 at an average finding cost of $3.90 per BOE.
Production increased from 4.9 million BOE in 1992 to 9.7 million BOE in 1996,
and oil and gas revenues and EBITDA increased from $63.9 million and $30.2
million, respectively, in 1992 to $148.4 million and $85.5 million,
respectively, in 1996.
As of December 31, 1996, the Company's estimated proved oil and gas reserves
totaled 42.4 million Bbls of oil and 540.5 Bcf of natural gas, or a total of
132.5 million BOE. Approximately 83% of these reserves, on a BOE basis, were
proved developed reserves. The average reserve-to-production index for the
Company's oil and gas proved reserves at December 31, 1996 was 12.4 years. As
of December 31, 1996, the Company owned interests in 5,309 gross (1,695 net)
wells and was the operator of wells representing 81% of the present value of
cash flows before income taxes (discounted at 10%) from estimated proved
reserves. The discounted present value of cash flows before income taxes from
the Company's estimated proved reserves was $946.2 million at December 31,
1996, based on then current oil and gas prices of $24.25 per barrel and $3.02
per Mcf, respectively. Based on an oil price of $20.00 per barrel and a gas
price of $2.00 per Mcf, the discounted present value of cash flows before
income taxes of the Company's proved reserves as of December 31, 1996 would
have been $599.9 million. The Company has established a successful development
record and from 1992 to 1996 drilled 462 gross (189 net) development wells, of
which 449 gross (181.9 net) were commercially successful. The Company believes
that production and cash flow in 1997 and 1998 will increase significantly as a
result of acquisitions completed in 1996 and early 1997, the continued
development of existing properties and the drilling of certain higher-risk
prospects.
From inception in 1986 through December 31, 1996, the Company produced a
total of 55.4 million BOE. During this period, total proved reserves added due
to extensions, discoveries and revisions were approximately 135% of production.
Total development and exploitation costs incurred during this period were
approximately
4
<PAGE>
54% of cash provided by operating activities. Over the last three years, the
Company increased, on a BOE basis, proved reserves per share from 2.10 at year
end 1993 to 4.80 at year end 1996 while maintaining debt at approximately $2.20
per BOE of proved reserves. No assurance can be given that this trend will
continue in the future.
The following table sets forth the total amount spent by the Company to
acquire, exploit and develop its proved reserves, and the amount of such
reserves on a BOE basis, from inception in 1986 to December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE COST
COSTS BOE (A) PER BOE
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition of properties..................... $637,979 127,862 $4.99
Exploitation and development of properties.... 153,357 74,846 2.05
-------- -------
Total......................................... $791,336 202,708 3.90
======== =======
</TABLE>
- --------
(a) Amounts set forth include proved reserves, on a BOE basis, acquired or
added through development since inception of the Company in 1986, and
therefore include proved reserves acquired, exploited or developed and
subsequently produced, distributed or sold.
COMPANY STRENGTHS
The Company believes that its historical success and future prospects are
directly related to its unique combination of strengths, including the
following:
QUALITY OF EXISTING PROPERTIES. The Company's properties are characterized by
relatively long reserve lives and highly predictable well production profiles.
Based on current production from 1,695 net producing wells, the average
reserve-to-production index for the Company's proved reserves at December 31,
1996 was 12.4 years. In general, these properties have extensive production
histories and contain significant reserves and production enhancement
opportunities. While the Company's properties are geographically diversified,
the producing fields are concentrated within each core area, allowing for
substantial economies of scale in production and cost-effective application of
reservoir management techniques gained from prior operations. Since the
Company's inception, approximately 54% of cash provided by operating activities
has been invested in exploitation and development opportunities.
INVENTORY OF DRILLING PROJECTS. The Company has generated a substantial
inventory of approximately 630 potential development drilling locations within
its existing properties (of which 156 have been attributed proved undeveloped
reserves), which should continue to support future net reserve additions. The
Company has increased its inventory of drilling projects consistently since its
inception and added more than 200 potential development drilling locations (of
which 54 have been attributed proved undeveloped reserves) through acquisitions
in 1996.
PROVEN ACQUISITION PROGRAM. The Company employs a disciplined acquisition
program refined by senior management over more than 20 years to augment its
core properties and expand its reserve base. The Company's 40 engineering and
geoscience professionals use their expertise and experience gained through the
management of existing core properties to target properties with similar
geological and reservoir characteristics for acquisition. Following an
acquisition, these professionals implement development programs based on such
expertise and experience to enhance production and reduce costs. Since its
inception, the Company has completed acquisitions for an aggregate purchase
price of $638 million, representing 127.9 million BOE of proved reserves.
Additionally, since its inception the Company has added through its
exploitation and development activities 74.8 million BOE, or 59%, of the proved
reserves that it has acquired. In 1995 and 1996 alone, the Company acquired 59
million BOE of proved reserves for an aggregate purchase price of $237 million.
The Company believes that its average acquisition cost of $4.04 per BOE of
proved reserves during 1995 and 1996 ranks it in the top quartile of
independent oil and gas producers over this period.
5
<PAGE>
EFFICIENT OPERATIONS. The Company believes that the nature of its properties,
along with the operating expertise and experience of its personnel in its
principal geographic regions, have allowed the Company to lower its average
lease operating expense ratios per BOE produced. The Company is the operator of
properties representing 81% of the present value of cash flows before income
taxes (discounted at 10%) from estimated proved reserves, allowing it to
control expenses, capital allocation and the timing of development and
exploitation activities in its fields. This control and the Company's operating
expertise have allowed it to reduce substantially production costs of acquired
properties. For example, in its Prentice Northeast Unit, the Company has
reduced direct lease operating expenses by 35%, from $8.44 per BOE produced for
the period from the Company's initial acquisition in the Unit in April 1993
through December 1993, to $5.50 per BOE produced for the year ended December
31, 1996.
EXPERIENCED MANAGEMENT AND TECHNICAL STAFF. Senior management of the Company
has worked together for over 20 years. They were co-founders of the Company in
1986 and previously served as executive officers of Southland Royalty Company,
one of the largest U.S. independent oil and gas producers prior to its
acquisition by Burlington Northern, Inc. in 1985. In addition, the Company has
40 engineering and geoscience professionals dedicated to its properties with an
average of 15 years of experience.
BUSINESS STRATEGY
ACQUIRING LONG-LIVED, OPERATED PROPERTIES. The Company seeks to acquire long-
lived, onshore operated producing properties that (i) contain complex multiple-
producing horizons with the potential for increases in reserves and production,
(ii) are in the Company's core operating areas or in areas with similar
geological and reservoir characteristics and (iii) present opportunities to
reduce expenses through more efficient operations. The Company believes that
the properties it acquires provide opportunities to increase production and
reserves through the implementation of mechanical and operational improvements,
workovers, behind-pipe completions, secondary-recovery operations, new
development wells and other exploitation activities. The Company also seeks to
acquire facilities related to gathering, processing, marketing and transporting
oil and gas in areas where it owns reserves. Such facilities can enhance
profitability, reduce gathering, processing, marketing and transportation
costs, provide marketing flexibility and give the Company access to additional
markets.
INCREASING PRODUCTION AND RESERVES. A principal component of the Company's
strategy is to increase production and reserves through aggressive management
of operations and exploitation and development drilling. The Company believes
that its principal properties possess geological and reservoir characteristics
that make them well suited for production increases through low-risk
exploitation and drilling programs. The Company has generated an inventory of
approximately 630 potential drilling locations for this program. Additionally,
the Company reviews operations and mechanical data on operated properties to
determine if actions can be taken to reduce operating costs or increase
production. Such actions include installing, repairing and upgrading lifting
equipment, redesigning downhole equipment to improve production from different
zones, modifying surface facilities and conducting restimulations and
recompletions. The Company may also initiate, upgrade or revise existing
secondary-recovery operations and drill development wells. As a result of its
efforts, reserves added by the Company through revisions, extensions and
discoveries have exceeded production by 135% since 1986.
EXPLORATION ACTIVITIES. The Company's strategy has evolved to include
allocation of 10% to 20% of its annual capital budget (excluding acquisitions)
to higher-risk projects, including step-out development drilling, trend
extensions and exploration. The Company attempts to select projects that it
believes will have the potential to add substantially to proved reserves and
cash flow. Although it has not historically engaged in significant exploratory
activities, the Company believes that it can prudently and successfully add
growth potential through exploratory activities given improved technology, its
experienced technical staff and its expanded base of operations.
6
<PAGE>
THE EXCHANGE OFFER
Securities Offered........ Up to $125,000,000 aggregate principal amount of
Series B 9 1/4% Senior Subordinated Notes due 2007,
which have been registered under the Securities
Act. The terms of the New Notes and the Old Notes
are identical in all material respects, except for
certain transfer restrictions and registration
rights relating to the Old Notes and except for
certain interest provisions relating to the Old
Notes described below under "--Summary Description
of the New Notes."
The Exchange Offer........ The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance of
the New Notes is intended to satisfy obligations of
the Company contained in the Registration Rights
Agreement, dated April 2, 1997, among the Company
and the Initial Purchasers (the "Registration
Rights Agreement").
Expiration Date;
Withdrawal Rights......... The Exchange Offer will expire at 5:00 p.m., New
York City time, on June 16, 1997, or such later
date and time to which it is extended. The tender
of Old Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
Any Old Note not accepted for exchange for any
reason will be returned without expense to the
tendering Holder thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer. See "The Exchange Offer--Terms of the
Exchange Offer; Period for Tendering Old Notes" and
"--Withdrawal Rights."
Procedures for Tendering Each Holder of Old Notes wishing to accept the
Old Notes................. Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with either certificates for such Old Notes, or a
Book-Entry Confirmation (as defined herein) of such
Old Notes into the Book-Entry Transfer Facility (as
defined herein) if such procedure is available, and
any other required documentation to the exchange
agent (the "Exchange Agent") at the address set
forth herein. By executing the Letter of
Transmittal, each Holder will represent to the
Company, among other things, that (i) the New Notes
acquired pursuant to the Exchange Offer by the
Holder and any other person are being obtained in
the ordinary course of business of the person
receiving such New Notes, (ii) neither the Holder
nor such other person is participating in, intends
to participate in or has an arrangement or
understanding with any person to participate in the
distribution of such New Notes and (iii) neither
the Holder nor such other person is an "affiliate,"
as defined in Rule 405 under the Securities Act, of
the Company. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, if such Old Notes were acquired by such
broker or dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker or dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--Procedures
for Tendering Old Notes" and "Plan of
Distribution."
7
<PAGE>
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering
Old Notes."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures................ Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes or
any other documents required by the Letter of
Transmittal to the Exchange Agent must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Federal Income Tax The exchange pursuant to the Exchange Offer should
Consequences.............. not result in gain or loss to the Holders or the
Company for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
Use of Proceeds........... There will be no proceeds to the Company from the
Exchange Offer.
Exchange Agent............ The Bank of New York is serving as Exchange Agent
in connection with the Exchange Offer. See "The
Exchange Offer--Exchange Agent."
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register Old Notes under the Securities Act. Based on existing
interpretations by the staff of the Commission set forth in several no-action
letters to third parties, the Company believes that New Notes issued pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by a Holder thereof without further compliance with the
registration and prospectus delivery provisions of the Securities Act. Any
purchaser of Notes, however, who is an "affiliate" of the Company, who is not
acquiring the New Notes in the ordinary course of its business, or who intends
to participate in the Exchange Offer for the purpose of distributing the New
Notes (1) will not be able to rely on the interpretations of the staff of the
Commission, (2) will not be able to tender its Old Notes in the Exchange Offer
and (3) must comply with the registration and prospectus delivery provisions of
the Securities Act in connection with any sale or transfer of the Old Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. However, the staff of the Commission has not rendered a no-action
letter with respect to the Exchange Offer, and there can be no assurance that
the staff would make a similar determination for the Exchange Offer as in such
other circumstances. Each Holder, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes and has no arrangement or understanding to participate in a
distribution of New
8
<PAGE>
Notes. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a Prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except for certain provisions providing for an
increase in the interest rates on the Old Notes under certain circumstances
relating to timing of the Exchange Offer, which rights will terminate upon
consummation of the Exchange Offer. The New Notes will bear interest from the
most recent date to which interest has been paid on the Old Notes or, if no
interest has been paid on the Old Notes, from April 2, 1997. Accordingly,
registered Holders of New Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid, from April 2, 1997. Old Notes accepted
for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment of interest on such Old
Notes otherwise payable on any interest payment date the record date for which
occurs on or after the date of consummation of the Exchange Offer, and rights
to receive interest on such Old Notes will terminate upon consummation of the
Exchange Offer.
Notes Offered............. $125,000,000 aggregate principal amount of 9 1/4%
Series B Senior Subordinated Notes due 2007, which
have been registered under the Securities Act.
Maturity Date............. April 1, 2007.
Interest Payment Dates.... Interest on the Notes will be payable semi-annually
in arrears on April 1 and October 1 of each year,
commencing October 1, 1997.
Optional Redemption....... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after April 1, 2002, at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time on or prior to April 1, 2000,
the Company may redeem up to 33 1/3% of the Notes
with the net cash proceeds of one or more Public
Equity Offerings by the Company, at a redemption
price equal to 109.25% of the principal amount to
be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption,
provided that at least $83.3 million of the
aggregate principal amount of the Notes remains
outstanding after each such redemption. See
"Description of the Notes--Optional Redemption."
Guarantee................. Under certain circumstances, the Company's payment
obligations under the Notes will be jointly and
severally guaranteed on a senior subordinated basis
(the "Subsidiary Guarantees") by certain of the
Company's existing or future Restricted
Subsidiaries (the "Subsidiary Guarantors"). The
Subsidiary Guarantees, if given, may be released
under certain circumstances. See "Description of
the Notes--Subsidiary Guarantees of the Notes." Any
Subsidiary Guarantees will be limited to the extent
of any payment that would constitute a fraudulent
transfer or conveyance under federal or state law.
See "Risk
9
<PAGE>
Factors--Fraudulent Conveyance Considerations
Relating to Subsidiary Guarantees" and "Description
of the Notes--Subsidiary Guarantees of the Notes."
Change of Control......... Upon the occurrence of a Change of Control, each
Holder may require the Company to purchase all or a
portion of such Holder's Notes at a purchase price
equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any,
to the date of purchase. See "Description of the
Notes--Certain Covenants--Change of Control."
Ranking................... The Notes are general unsecured senior subordinated
obligations of the Company that are subordinated in
right of payment to all existing or future senior
indebtedness of the Company, pari passu with all
existing and future senior subordinated
indebtedness of the Company and senior in right of
payment to all future subordinated indebtedness of
the Company. As of December 31, 1996, on a pro
forma basis after giving effect to the offering of
the Old Notes, the Company would have had
approximately $166.9 million of indebtedness that
effectively would rank senior to the Notes. Subject
to certain limitations set forth in the Indenture,
the Company and its subsidiaries may incur
additional indebtedness. See "Capitalization,"
"Description of the Notes" and "Management's
Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital
Resources."
Certain Covenants......... The Indenture pursuant to which the Old Notes were,
and the New Notes will be, issued (the "Indenture")
contains certain covenants, including, without
limitation, covenants with respect to the following
matters: (i) limitation on indebtedness; (ii)
limitation on restricted payments; (iii) limitation
on issuances and sales of restricted subsidiary
stock; (iv) limitation on transactions with
affiliates; (v) limitation on liens; (vi)
limitation on disposition of proceeds of asset
sales; (vii) limitation on guarantees of
indebtedness by subsidiaries; (viii) limitation on
dividends and other payment restrictions affecting
subsidiaries; and (ix) limitation on mergers,
consolidations and transfers of assets. See
"Description of the Notes--Certain Covenants."
Use of Proceeds........... The Company will not receive any proceeds from the
Exchange Offer. The proceeds from the offering of
the Old Notes, which were approximately $121.1
million, were used to reduce indebtedness under the
Credit Agreement. See "Use of Proceeds."
Exchange Offer; Holders of New Notes (other than as set forth
Registration Rights....... below) are not entitled to any registration rights
with respect to the New Notes. Pursuant to the
Registration Rights Agreement, the Company agreed
to use its best efforts to (1) file with the
Commission a registration statement (the "Exchange
Offer Registration Statement") with respect to the
Exchange Offer. The Registration Statement of which
this Prospectus is a part constitutes the Exchange
Offer Registration Statement. See "--Consequences
of Exchanging Old Notes."
10
<PAGE>
In the event that the Exchange Offer is
consummated, any Old Notes that remain outstanding
after consummation of the Exchange Offer and the
New Notes issued in the Exchange Offer will vote
together as a single class for purposes of
determining whether Holders of the requisite
percentage in outstanding principal amount thereof
have taken certain actions or exercised certain
rights under the Indenture. See "Description of the
Notes."
RISK FACTORS
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered by Holders of Old Notes before deciding to tender
such Old Notes in the Exchange Offer.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary financial information for each of the
years, and as of year-end, in the five-year period ended December 31, 1996,
which has been derived from the Company's audited consolidated financial
statements. This financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1992 1993 1994 1995 (A) 1996
-------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (B):
Revenues:
Oil.................... $ 31,921 $ 39,747 $ 53,324 $ 60,349 $ 75,013
Gas.................... 31,994 34,649 38,389 40,543 73,402
Gas gathering,
processing and
marketing............. 3,943 3,717 4,274 7,091 12,032
Other.................. (502) (c) 69 288 4,922 944
-------- --------- --------- --------- ---------
Total revenues......... 67,356 78,182 96,275 112,905 161,391
-------- --------- --------- --------- ---------
Expenses:
Production............. 21,744 29,223 32,368 35,338 39,365
Taxes on production and
property.............. 5,767 6,706 8,586 8,646 11,944
Depreciation, depletion
and amortization...... 19,979 25,108 31,709 36,892 37,858
Impairment (a)......... -- -- -- 20,280 --
General and
administrative........ 8,150 9,863 8,532 13,156 16,420
Gas gathering and
processing............ 1,316 1,492 1,646 2,528 6,905
Interest, net.......... 4,975 5,464 8,034 12,523 17,072
Trust development
costs................. 527 695 622 561 854
-------- --------- --------- --------- ---------
Total expenses......... 62,458 78,551 91,497 129,924 130,418
-------- --------- --------- --------- ---------
Income (loss) before
income tax and
extraordinary item.... 4,898 (369) 4,778 (17,019) 30,973
Income tax expense..... 154 3,643 1,730 (5,825) 10,669
-------- --------- --------- --------- ---------
Net income (loss)
before extraordinary
item.................. 4,744 (4,012) 3,048 (11,194) 20,304
Extraordinary item..... -- -- -- 656 --
-------- --------- --------- --------- ---------
Net income (loss)...... 4,744 (4,012) 3,048 (10,538) 20,304
Preferred stock
dividends............. -- -- -- -- 514
-------- --------- --------- --------- ---------
Earnings (loss)
available to common
stock................. $ 4,744 $ (4,012) (d) $ 3,048 $ (10,538) $ 19,790
======== ========= ========= ========= =========
CONSOLIDATED BALANCE
SHEET DATA (B):
Property and equipment,
net................... $149,484 $ 228,551 $ 244,555 $ 364,474 $ 450,561
Total assets........... 176,831 258,019 292,451 402,675 523,070
Long-term debt......... 79,000 111,750 142,750 238,475 314,757
Owners' equity......... 76,056 115,168 113,333 130,700 142,668
OTHER FINANCIAL DATA
(B):
EBITDA (e)............. $ 30,150 $ 30,351 $ 44,777 $ 54,068 $ 85,541
Capital expenditures... 12,131 105,228 49,608 190,311 146,568
Ratio of EBITDA to
interest expense...... 5.7x 5.4x 5.4x 4.2x 5.0x
Ratio of total debt to
EBITDA................ 2.6x 3.7x 3.2x 4.4x 3.7x
</TABLE>
- --------
(a) Includes effect of a $20.3 million pre-tax, non-cash impairment charge
recorded upon adoption of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
(b) Significant producing property acquisitions in 1993, 1994, 1995 and 1996
affect the comparability of year-to-year financial, operating and other
data.
(c) Includes a $2.4 million loss on sale of Units in the initial public
offering for the Cross Timbers Royalty Trust.
(d) Includes effect of a one-time, non-cash accounting charge of $4 million for
net deferred income tax liabilities recorded upon the merger between the
Company and the predecessor partnership effective on May 18, 1993 (the
"Merger").
(e) Earnings before interest, income tax and depreciation, depletion,
amortization and impairment. EBITDA is not intended to represent cash flow
in accordance with generally accepted accounting principles and does not
represent the measure of cash available for distribution. EBITDA is not
intended as an alternative to earnings available to common stock or net
income.
12
<PAGE>
SUMMARY RESERVE AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PRODUCTION AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
PROVED RESERVES (A):
Oil (Bbls)............. 16,666 21,082 33,581 39,988 42,440
Gas (Mcf).............. 172,199 169,119 177,061 358,070 540,538
Barrels of oil
equivalent (BOE)...... 45,366 49,269 63,091 99,666 132,530
Estimated future net
cash flows, before
income tax............ $ 339,433 $ 309,244 $ 406,128 $ 712,907 $1,737,024
Present value of
estimated future net
cash flows, discounted
at 10%:
Before income tax...... $ 207,415 $ 189,968 $ 247,946 $ 405,706 $ 946,150 (b)
After income tax....... 207,415 (c) 173,294 213,146 335,156 706,481
AVERAGE DAILY
PRODUCTION:
Oil (Bbls)............. 4,749 6,968 9,497 9,677 9,584
Gas (Mcf).............. 51,205 51,260 58,182 78,408 101,845
Barrels of oil
equivalent (BOE)...... 13,283 15,511 19,194 22,745 26,558
AVERAGE SALES PRICE (D):
Oil (per Bbl).......... $18.37 $15.63 $15.38 $17.09 $21.38
Gas (per Mcf).......... 1.71 1.85 1.81 1.42 1.97
Production costs (per
BOE)................... $4.47 $5.16 $4.62 $4.26 $4.05
Production and property
taxes (per BOE)........ 1.19 1.19 1.23 1.04 1.23
RESERVE ADDITIONS (BOE):
Acquisitions........... 434 12,351 4,486 31,508 27,118
Extensions, discoveries
and revisions......... 7,956 (2,744) 16,840 15,426 15,725
---------- ---------- ---------- ---------- ----------
Total additions........ 8,390 9,607 21,326 46,934 42,843
========== ========== ========== ========== ==========
COSTS INCURRED:
Acquisitions........... $ 1,475 $ 87,064 $ 28,100 $ 131,342 $ 105,815
Development and
exploitation.......... 10,730 19,462 21,826 21,061 45,038
---------- ---------- ---------- ---------- ----------
Total costs incurred... $ 12,205 $ 106,526 $ 49,926 $ 152,403 $ 150,853
========== ========== ========== ========== ==========
</TABLE>
- --------
(a) Proved reserves were estimated using oil and gas prices and production and
development costs as of December 31 of each such year, without escalation.
(b) Based on an oil price of $20.00 per barrel and a gas price of $2.00 per Mcf
at December 31, 1996, the discounted present value of cash flows before
income taxes of the Company's proved reserves as of December 31, 1996 would
have been $599.9 million.
(c) Since proved reserves were held by non-taxable predecessor entities before
May 18, 1993, no provision is included for federal income tax before that
date.
(d) Average sales price data includes the effects of hedging activities which
have not been significant.
13
<PAGE>
RISK FACTORS
Holders of Old Notes should carefully review the information contained
elsewhere in this Prospectus and should particularly consider the following
matters before deciding to tender Old Notes in the Exchange Offer. The risk
factors set forth below generally are applicable to the Old Notes as well as
the New Notes:
REPLACEMENT OF RESERVES
The Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable. The
proved reserves of the Company will generally decline as reserves are
depleted, except to the extent that the Company conducts successful
exploration or development activities or acquires properties containing proved
reserves, or both. In order to increase reserves and production, the Company
must continue its development drilling and recompletion programs, pursue its
exploration drilling program or undertake other replacement activities. The
Company's current strategy includes increasing its reserve base through
acquisitions of producing properties, by continuing to exploit its existing
properties and, to a lesser extent, by pursuing exploration opportunities.
There can be no assurance, however, that the Company's planned development and
exploration projects and acquisition activities will result in significant
additional reserves or that the Company will have continuing success drilling
productive wells at low finding costs.
PRICE FLUCTUATIONS AND MARKETS
The Company's results of operations are highly dependent upon the prices
received for the Company's oil and natural gas. Substantially all of the
Company's sales of oil and natural gas are made in the spot market, or
pursuant to contracts based on spot market prices, and not pursuant to long-
term, fixed-price contracts. Accordingly, the prices received by the Company
for its oil and natural gas production are dependent upon numerous factors
beyond the control of the Company. These factors include, but are not limited
to, the level of consumer product demand, governmental regulations and taxes,
the price and availability of alternative fuels, the level of foreign imports
of oil and natural gas, and the overall economic environment. Any significant
decline in prices for oil and natural gas could have a material adverse effect
on the Company's financial condition, results of operations and quantities of
reserves recoverable on an economic basis. Should the industry experience
significant price declines from current levels or other adverse market
conditions, the Company may not be able to generate sufficient cash flow from
operations to meet its obligations and make planned capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Business and Properties--
Competition and Markets" and "--Federal and State Regulation."
The availability of a ready market for the Company's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to, and the
capacity of, oil and gas gathering systems, pipelines or trucking and terminal
facilities. Wells may be shut-in for lack of a market or due to inadequacy or
unavailability of pipeline or gathering system capacity.
SUBSTANTIAL INDEBTEDNESS
At December 31, 1996, on a pro forma basis, after giving effect to the
January 1997 conversion of the Company's convertible subordinated notes, the
March 19, 1997 three-for-two stock split and the offering of the Old Notes,
the Company would have had approximately $291.9 million of indebtedness
(including current maturities of long-term indebtedness) as compared to the
Company's stockholders' equity of $172 million. See "Use of Proceeds" and
"Capitalization." The Company may incur additional indebtedness under its
Credit Agreement (as defined herein). See "Description of the Credit
Agreement."
This level of indebtedness may pose substantial risks to holders of Notes,
including the possibility that the Company might not generate sufficient cash
flow to pay the principal of and interest on the Notes. If the Company is
unsuccessful in increasing its proved reserves or realizing production from
its proved undeveloped
14
<PAGE>
reserves, the future net revenue from existing proved reserves may not be
sufficient to pay the principal of and interest on the Notes in accordance
with their terms. Such indebtedness may also adversely affect the Company's
ability to finance its future operations and capital needs, and may limit its
ability to pursue other business opportunities.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the acquisition, development, production, exploration and
abandonment of its oil and natural gas reserves. The Company intends to
finance such capital expenditures primarily with funds provided by operations
and borrowings under the Credit Agreement. The Company increased direct
capital expenditures from approximately $21 million in 1995 (excluding
acquisitions) to approximately $45 million in 1996. The Company has budgeted
$70 million for direct capital expenditures in 1997.
The Company believes that, after debt service, it will have sufficient cash
provided by operating activities and availability under the Credit Agreement
to fund planned capital expenditures through 1997. If revenues decrease as a
result of lower oil or gas prices or otherwise, the Company may have limited
ability to expend the capital necessary to replace its reserves or to maintain
production at current levels, resulting in a decrease in production over time.
If the Company's cash flow from operations is not sufficient to satisfy its
capital expenditure requirements, there can be no assurance that additional
debt or equity financing will be available to meet these requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
The oil and natural gas industry is highly competitive. The Company will
compete in the acquisition, development, production and marketing of oil and
natural gas with major oil companies, other independent oil and natural gas
concerns and individual producers and operators. Many of these competitors
have substantially greater financial and other resources than the Company.
Furthermore, the oil and natural gas industry competes with other industries
in supplying the energy and fuel needs of industrial, commercial and other
consumers. See "Business and Properties--Competition and Markets."
ACQUISITION RISKS
The Company constantly evaluates acquisition opportunities and frequently
engages in bidding and negotiation for acquisitions, many of which are
substantial. If successful in this process, the Company may be required to
alter or increase its capitalization substantially to finance these
acquisitions through the issuance of additional debt or equity securities, the
sale of production payments or otherwise; however, the Credit Agreement
includes, and the Indenture will include, covenants that limit the Company's
ability to incur additional indebtedness. See "--Substantial Indebtedness."
These changes in capitalization may significantly affect the risk profile of
the Company. Additionally, significant acquisitions can change the nature of
the operations and business of the Company depending upon the character of the
acquired properties, which may be substantially different in operating or
geologic characteristics or geographic location than existing properties.
While it is the Company's current intent to concentrate on acquiring producing
properties with development and exploration potential located in its current
areas of operation, there can be no assurance that the Company will not pursue
acquisitions of properties located in other geographic regions. Moreover,
there can be no assurance that the Company will be successful in the
acquisition of any material property interests. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DRILLING RISKS
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 natural gas may involve
15
<PAGE>
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 and 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, compliance with governmental requirements and shortages or delays
in the delivery of equipment and services.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in
drilling for, producing and transporting oil and natural gas, such as fires,
natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures and spills, any of which can
result in loss of hydrocarbons, environmental pollution, personal injury
claims and other damage to properties of the Company and others. As protection
against operating hazards, the Company maintains insurance coverage against
some, but not all, potential losses. The Company's coverages include, but are
not limited to, operator's extra expense, physical damage on certain assets,
employer's liability, comprehensive general liability, automobile and workers'
compensation insurance. The Company believes that its insurance is adequate
and customary for companies of a similar size engaged in operations similar to
those of the Company, but losses could occur for uninsurable or uninsured
risks or in amounts in excess of existing insurance coverage. The occurrence
of an event that is not fully covered by insurance could have an adverse
impact on the Company's financial condition and results of operations.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties inherent in estimating quantities of proved
reserves, including many factors beyond the control of the Company. The
reserve information set forth in this Prospectus represents estimates based on
reports prepared by the Company's independent petroleum engineers, as well as
internally generated reports. Petroleum engineering is not an exact science.
Information relating to the Company's proved oil and natural gas reserves is
based upon engineering estimates. 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 regulation by governmental agencies and assumptions concerning
future oil and natural gas prices, future operating costs, severance and
excise taxes, capital expenditures and workover and remedial costs, all of
which may in fact vary considerably from actual results. For these reasons,
estimates of classifications of such reserves based on risk of recovery and
estimates of expected future net cash flows prepared by different engineers or
by the same engineers at different times may vary substantially. Actual
production, revenues and expenditures with respect to the Company's reserves
will likely vary from estimates, and such variances may be material.
SUBORDINATION OF NOTES
The Indenture governing the Notes limits, but does not prohibit, the
incurrence by the Company of additional indebtedness that is senior in right
of payment to the Notes (including by reason of structural subordination of
the Notes to the indebtedness and other liabilities of the Company's
subsidiaries). In the event of bankruptcy, liquidation, reorganization or
other winding up of the Company, the assets of the Company will be available
to pay the Company's obligations on the Notes only after all Senior
Indebtedness (as defined herein) has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the Notes. In addition,
under certain circumstances, no payments may be made with respect to principal
of, premium, if any, or interest on the Notes if a default exists with respect
to any Senior Indebtedness. See "Description of the Notes--Subordination."
As of December 31, 1996, on a pro forma basis after giving effect to the
offering of the Old Notes and the application of the proceeds therefrom as
described in "Use of Proceeds," the Company would have had approximately
$166.9 million of indebtedness that effectively would rank senior to the
Notes.
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In addition, all indebtedness and liabilities (including trade payables) of
the Company's Subsidiaries that are not Subsidiary Guarantors will be
effectively senior in right of payment to the Notes. Initially, it is not
expected that any Subsidiary will become a Subsidiary Guarantor. At December
31, 1996, Subsidiaries of the Company had total combined assets of $28.4
million and liabilities of $26.1 million (exclusive of net receivables from
the Company and assets and liabilities associated with sale/leaseback
transactions treated as operating leases in the consolidated financial
statements of the Company).
The Indenture imposes limits on the ability of the Company and its
Subsidiaries (as defined herein) to incur additional indebtedness and liens
and to enter into agreements that would restrict the ability of such
Subsidiaries to make distributions, loans or other payments to the Company.
The Indenture also imposes limits on the ability of the Company to transfer
assets to Restricted Subsidiaries or acquire Restricted Subsidiaries. However,
these limitations are subject to various qualifications. Subject to certain
limitations, the Company and its Subsidiaries may incur additional secured
indebtedness. For additional details of these provisions and the applicable
qualifications, see "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of the Notes--Subordination" and "--Certain Covenants."
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO FUTURE SUBSIDIARY GUARANTEES
The Company's obligations under the Notes may under certain circumstances be
guaranteed on an unsecured senior subordinated basis by existing and future
Restricted Subsidiaries. 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 avoid 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 the Subsidiary Guarantee.
To the extent that a court were to find that at the time a Subsidiary
Guarantor entered into a Subsidiary Guarantee either (x) the Subsidiary
Guarantee was incurred by a Subsidiary Guarantor with the intent to hinder,
delay or defraud any present or future creditor or that a Subsidiary Guarantor
contemplated insolvency with a design to favor one or more creditors to the
exclusion in whole or in part of others or (y) 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 avoid or subordinate the Subsidiary Guarantee in
favor of the Subsidiary Guarantor's other credits. 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 Company of the
Notes. To the extent a Subsidiary Guarantee is avoided as a fraudulent
conveyance or held unenforceable for any other reason, the Holders of the
Notes would cease to have any claim in respect of such Subsidiary Guarantor
and would be creditors solely of the Company.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company has been and will continue to be highly dependent
on the Company's Chairman of the Board of Directors and Chief Executive
Officer, Bob R. Simpson, its Vice Chairman of the Board and President, Steffen
E. Palko and a limited number of other senior management personnel. Loss of
the services of Mr. Simpson or Mr. Palko or any of such other individuals
could have a material adverse effect on the Company's operations. The Company
can make no assurance regarding the future affiliation of any of such persons
with the Company. See "Board of Directors and Management."
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REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must offer to repurchase the Notes upon the occurrence of
certain events. In the event of a Change of Control (as defined in the
Indenture), the Company must offer to repurchase all Notes then outstanding at
a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase. See "Description of the Notes--
Certain Covenants--Change of Control."
Prior to repurchasing such Notes, the Company may be required to (i) repay
all or a portion of indebtedness under the Credit Agreement or (ii) obtain any
requisite consent to permit the repurchase. If the Company is unable to repay
all of such indebtedness or is unable to obtain the necessary consents, then
the Company will be unable to offer to repurchase the Notes and such failure
will constitute an Event of Default under the Indenture. There can be no
assurance that the Company will have sufficient funds available at the time of
any Change of Control to make any debt payment (including repurchases of
Notes) as described above.
The events that constitute a Change of Control under the Indenture may also
be events of default under the Credit Agreement or other senior indebtedness
of the Company and the Restricted Subsidiaries. Such events may permit the
lenders under such debt instruments to reduce the borrowing base thereunder or
accelerate the debt and, if the debt is not paid, to enforce security
interests on, or commence litigation that could ultimately result in a sale
of, substantially all the assets of the Company, thereby limiting the
Company's ability to raise cash to repurchase the Notes and receive the
special benefit of the offer-to-purchase provisions to the Holders of the
Notes. See "Description of the Credit Agreement."
GOVERNMENTAL REGULATION
The Company's operations are affected by extensive regulation pursuant to
various federal, state and local laws and regulations relating to the
exploration for, and the development, production, gathering and marketing of,
oil and natural gas and the release of material into the environment or
otherwise relating to protection of the environment. In particular, the
Company's oil and natural gas exploration, development and production, and its
activities in connection with the storage and transportation of liquid
hydrocarbons, are subject to stringent environmental regulations by
governmental authorities. Such regulations have increased the costs of
planning, designing, drilling, installing, operating and abandoning oil and
natural gas wells and other related facilities.
The Company may be required to expend significant resources, both financial
and managerial, to comply with environmental regulations and permitting
requirements. Although the Company believes that its operations are in general
compliance with all such laws and regulations, including applicable
environmental laws and regulations, risks of substantial costs and liabilities
are inherent in oil and natural gas operations, and there can be no assurance
that significant costs and liabilities will not be incurred in the future.
Moreover, it is possible that other developments, such as increasingly strict
environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from the Company's operations, could result in substantial costs and
liabilities in the future.
The Company expects to maintain customary insurance coverage for its
operations, including coverage for sudden environmental damages, but does not
believe that insurance coverage for environmental damages that occur over time
will be available at a reasonable cost. Moreover, the Company does not believe
that insurance coverage against the full potential liability that could be
caused by sudden environmental damages is available at a reasonable cost.
Accordingly, the Company might be subject to liability because of the
prohibitive premium costs of insuring against certain hazards. See "Business
and Properties--Federal and State Regulation" and "--Environmental
Regulation."
RESTRICTIONS ON RESALE OF OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and, unless so registered, may not be offered or sold except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state
securities laws.
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ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the Holders of the Old Notes. The Old
Notes were issued on April 2, 1997 to a small number of institutional
investors and are eligible for trading in the Private Offerings, Resale and
Trading through Automated Linkages ("PORTAL") market. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
the remaining untendered Old Notes could be adversely affected. There is no
existing trading market for the New Notes, and there can be no assurance
regarding the future development of a market for the New Notes, or the ability
of Holders of New Notes to sell their New Notes or the price at which such
Holders may be able to sell their New Notes. If such a market were to develop,
the New Notes could trade at prices that may be higher or lower than the
initial offering price of the Old Notes depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Company does not intend to apply for listing of the
Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System. Although the
Initial Purchasers have informed the Company that they currently intend to
make a market in the Notes the Initial Purchasers are not obligated to do so,
and any such market making may be discontinued at any time without notice. The
liquidity of any market for the Notes will depend upon the number of Holders
of the Notes, the interest of securities dealers in making a market in the
Notes and other factors. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of
securities similar to the Notes. There can be no assurance that the market, if
any, for the Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the Holders of the Notes.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes that are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on June 16, 1997; provided, however, that if the Company,
in its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer has been extended.
As of the date of this Prospectus, $125 million aggregate principal amount
of Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about May 15, 1997, to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth under "--Certain Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Certain Conditions to the Exchange Offer." The
Company will give oral or written notice of any extension, amendment, non-
acceptance or termination to the Holders of the Old Notes as promptly as
practicable, such notice in the case of any extension to be issued by means of
a press release or other public announcement no later than 9:00 a.m., New York
City time, on the next business day following the previously scheduled
Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to
tender Old Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all
other documents required by such Letter of Transmittal, to The Bank of New
York (the "Exchange Agent") at the address set forth below under "Exchange
Agent" on or prior to the Expiration Date, accompanied by either (i)
certificates for such Old Notes 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 "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below. A Holder who is unable to timely comply with the
above-described procedure prior to the Expiration Date may effect a tender of
Old Notes by complying with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY.
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Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on his own behalf, such beneficial owner
must, prior to completing and executing the Letter of Transmittal and
delivering Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered Holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange are
tendered (i) by a registered Holder of the Old Notes who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in a Securities Transfer Association
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Old
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Note which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, and that neither the Holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. In the case of a Holder that
is not a broker-dealer, each such Holder, by tendering, will also represent to
the Company
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that such Holder is not engaged in and does not intend to engage in, a
distribution of the New Notes. If any Holder or any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company,
or is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such New
Notes to be acquired pursuant to the Exchange Offer, such Holder or any such
other person (i) could not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. See "Plan
of Distribution." The Letter of Transmittal states that by so acknowledging
and by delivering such a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all conditions to the Exchange Offer, the
Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent, with written
confirmation of any oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the Holder will receive a New Note
having a principal amount equal to that of the surrendered Old Note. The New
Notes will bear interest from the most recent date to which interest has been
paid on the Old Notes or, if no interest has been paid on the Old Notes, from
April 2, 1997. Accordingly, Holders of New Notes on the relevant record date
for the first interest payment date following the consummation of the Exchange
Offer will receive interest accruing from the most recent date to which
interest has been paid or, if no interest has been paid, from April 2, 1997.
Old Notes accepted for exchange will cease to accrue interest from and after
the date of consummation of the Exchange Offer. Holders of Old Notes whose Old
Notes are accepted for exchange will not receive any payment in respect of
accrued interest on such Old Notes otherwise payable on any interest payment
date the record date for which occurs on or after the date of consummation of
the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes (or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering Holder (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through
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book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under "--
Exchange Agent" on or prior to the Expiration Date or in accordance with the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a Holder of the Old Notes desires to tender such Old Notes and the Old
Notes are not immediately available, or time will not permit such Holder's Old
Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed
on a timely basis, a tender may be effected if (i) the tender is made through
an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent
has received from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery, substantially in the form provided by
the Company (by facsimile transmission, mail or hand delivery), setting forth
the name and address of the Holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the execution
of the Notice of Guaranteed Delivery the certificates for all physically
tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation,
as the case may be, the Letter of Transmittal and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent, and (iii) the certificates for all physically
tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation,
as the case may be, the Letter of Transmittal and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent within five
NYSE trading days after the execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address or, in the case of Eligible
Institutions, at the facsimile number, set forth below under "--Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
tendered the Old Notes to be withdrawn (the "Depositor"), (ii) identify the
Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) contain a statement that such
person is withdrawing his election to have such Old Notes exchanged, (iv) be
signed by the person 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 to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes in the name of the person withdrawing the tender and (v) specify the
name in which such Old Notes are registered, if different from that of the
Depositor. If Old Notes have been tendered pursuant to the procedure for book-
entry transfer described above, any notice of withdrawal must specify the name
and number of the account at the Book-Entry Transfer Facility to be credited
with the withdrawn Old Notes and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly re-tendered. Any Old
Notes that have been tendered for exchange but that are not exchanged for any
reason will be returned to the tendering Holder without cost to such Holder
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with the Book-Entry Transfer Facility for
the Old Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be re-
tendered by following the procedures described under "--Procedures for
Tendering Old Notes" above at any time on or prior to 5:00 p.m., New York City
time, on the Expiration Date.
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CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the
New Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes that are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by a governmental agency or authority that may adversely affect the ability
of the Company to complete the transactions contemplated by the Exchange
Offer, (iii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by any
governmental agency or authority that adversely affects the extension of
credit or (iv) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United States,
or, in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
sole judgment of the Company, is or may be adverse to the Company, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have adverse significance with respect to the value of
the Old Notes or the New Notes; that in the sole judgment of the Company in
any case, and regardless of the circumstances (including any action by the
Company) giving rise to any such condition, makes it inadvisable to proceed
with the Exchange Offer and/or with such acceptance for exchange or with
such exchange.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The Company's failure at any
time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right that may
be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939.
24
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
The Bank of New York, Exchange Agent
By Mail or Hand Delivery: By Facsimile Transmission:
The Bank of New York (for Eligible Institutions only):
Reorganization Section (212) 571-3080
101 Barclay Street--7E Attention: Mr. George Johnson
New York, New York 10286 Confirm by Telephone:
Attention: Mr. George Johnson (212) 815-3687
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The estimated cash expenses to
be incurred in connection with the Exchange Offer will be paid by the Company
and are estimated in the aggregate to be $115,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that Holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering Holder will be responsible for the payment
of any applicable transfer tax.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold unless registered under, pursuant to an exemption
from or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Old Notes under the Securities Act. Based on interpretations by the
staff of the Commission, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes were acquired
in the ordinary course of such Holders' business and such Holders have no
arrangement or understanding with any person to participate in the
distribution of such New Notes. However, the staff of the Commission has not
rendered a no-action letter with respect to the Exchange Offer, and there can
be no assurance that the staff would make a similar determination for the
Exchange Offer as in such other circumstances. Each Holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of New Notes and has no arrangement or
understanding to participate in a
25
<PAGE>
distribution of New Notes. If any Holder who is an affiliate of the Company is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes must acknowledge that such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus
in connection with any resale of such New Notes. See "Plan of Distribution."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences associated with the exchange of Old Notes for New Notes and the
ownership and disposition of the New Notes by holders who acquired the New
Notes pursuant to the Exchange Offer. The summary is based upon current laws,
regulations, rulings and judicial decisions, all of which are subject to
change. The discussion below does not address all aspects of United States
federal income taxation that may be relevant to particular holders in the
context of their specific investment circumstances or certain types of holders
subject to special treatment under such laws (for example, financial
institutions, banks, tax-exempt organizations and insurance companies). In
addition, the discussion does not address any aspect of state, local or
foreign taxation and assumes that a holder of the New Notes (i) will hold them
as "capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code"), and (ii) will not own, directly or indirectly, 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote.
For purposes of the discussion, a "United States holder" is an individual
who is a citizen or resident of the United States, a corporation, partnership
or other entity created under the laws of the United States or any political
subdivision thereof, or an estate or trust that is subject to United States
federal income taxation without regard to the source of income and a "Non-
United States holder" is any holder who is not a United States holder.
PROSPECTIVE PURCHASERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE NEW NOTES AS WELL AS THE APPLICATION OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Exchange Offer
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an exchange or other taxable event for U.S. federal
income tax purposes because under Treasury regulations, the New Notes should
not be considered to differ materially in kind or extent from the Old Notes.
Rather, the New Notes received by a holder should be treated as a continuation
of the Old Notes in the hands of such holder. As a result, there should be no
U.S. federal income tax consequences to holders who exchange Old Notes for New
Notes pursuant to the Exchange Offer and any such holder should have the same
tax basis and holding period in the New Notes as it had in the Old Notes
immediately before the exchange.
United States Holders
Interest payable on the New Notes will be includible in the income of a
United States holder in accordance with such holder's regular method of
accounting. If a New Note is redeemed, sold or otherwise disposed of, a United
States holder generally will recognize gain or loss equal to the difference
between the amount realized on the sale or other disposition of such New Note
(to the extent such amount does not represent accrued but unpaid interest) and
such holder's tax basis in the New Note. Subject to the market discount rules
discussed below, such gain or loss will be capital gain or loss, assuming that
the holder has held the New Note as a capital asset, and will be long-term if
the holder has held the New Note for more than one year at the time of
disposition.
26
<PAGE>
Under the market discount rules of the Code, a holder (other than a holder
who made the election described below) who purchased an Old Note with "market
discount" (generally defined as the amount by which the stated redemption
price at maturity exceeds the holder's purchase price) will be required to
treat any gain recognized on the redemption, sale or other disposition of the
New Note received in the disposition as ordinary income to the extent of the
market discount that accrued during the holding period of such New Note (which
would include the holding period of the Old Note). A holder who has elected
under applicable Code provisions to include market discount in income annually
as such discount accrues will not, however, be required to treat any gain
recognized as ordinary income under these rules. Holders should consult their
tax advisors as to the portion of any gain that would be taxable as ordinary
income under these provisions.
Non-United States Holders
An investment in the New Notes by a Non-United States holder generally will
not give rise to any United States federal income tax consequences if the
interest received or any gain recognized on the sale, redemption or other
disposition of the New Notes by such holder is not treated as effectively
connected with the conduct by such holder of a trade or business in the United
States, and in the case of gains derived by an individual, such individual is
not present in the United States for 183 days or more and certain other
requirements are met. Under current Treasury regulations, in order to avoid
back-up withholding of 31% on payments of interest (i) a Non-United States
holder of the New Notes generally must certify to the issuer or its agent,
under penalties of perjury, that it is not a United States person and complete
and provide the payor with a U.S. Treasury Form W-8 (or a suitable substitute
form), which includes its name and address, or (ii) a securities clearing
organization, bank or other financial organization that holds customers'
securities in the ordinary course of business (a "financial institution") and
holds the New Note, must certify under penalties of perjury that such a Form
W-8 (or suitable substitute form) has been received from the beneficial owner
of the New Notes by it or by a financial institution between it and the
beneficial owner, and must furnish the payor with a copy thereof.
On April 22, 1996, the Internal Revenue Service proposed regulations (the
"Proposed Regulations") that, if enacted in their current form, could affect
the procedures to be followed by a Non-United States holder in establishing
such holder's status as a Non-United States holder for purposes of the backup
withholding rules discussed above. The Proposed Regulations, if adopted in
their current form, generally would be effective for payments made after
December 31, 1997. Prospective investors should consult their tax advisors
concerning the potential adoption of the Proposed Regulations and the
potential effect of such regulations on an investment in the New Notes.
27
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds from the sale of the Old Notes, of approximately $121.1 million, were
applied to reduce indebtedness under the Credit Agreement. Borrowings under
the Credit Agreement, which were incurred primarily to fund oil and gas
property acquisitions, bear interest at a fluctuating rate per annum selected
by the Company from (i) the agent bank's prime rate plus a spread, (ii) bid
rates for certificates of deposit plus a spread and (iii) LIBOR plus a spread.
See "Description of the Credit Agreement." The interest rate borne by such
borrowings at December 31, 1996 was 7.0% per annum.
CAPITALIZATION
The following table sets forth, as of December 31, 1996, (i) the actual
capitalization of the Company at that date (as restated for the March 19, 1997
three-for-two common stock split), (ii) the pro forma capitalization of the
Company giving effect to the January 1997 conversion of $29.7 million
principal amount of convertible subordinated notes into common stock and (iii)
the adjusted pro forma capitalization of the Company, giving effect to the
adjustments in (ii), the offering of the Old Notes and the application of the
net proceeds from such offering as described in "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------
PRO FORMA,
ACTUAL (A) PRO FORMA (B) AS ADJUSTED (C)
---------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt...................... $ 3,000 $ 3,000 $ --
======== ======== ========
Long-term debt (excluding current ma-
turities):
Credit Agreement.................... $285,000 $285,000 $166,900
Convertible subordinated notes...... 29,757 -- --
Notes offered hereby................ -- -- 125,000
-------- -------- --------
Total long-term debt............... 314,757 285,000 291,900
-------- -------- --------
Stockholders' equity:
Series A convertible preferred
stock, $.01 par value, 1,138,729
shares issued and outstanding...... 28,468 28,468 28,468
Common Stock, $.01 par value,
28,209,976 shares issued before the
note conversion and 30,138,218
shares issued after the note
conversion......................... 282 301 301
Additional paid-in capital.......... 164,577 193,877 193,877
Treasury stock (2,578,781 shares)... (40,219) (40,219) (40,219)
Unrealized gain on investment in eq-
uity securities.................... 638 638 638
Retained earnings (deficit)......... (11,078) (11,078) (11,078)
-------- -------- --------
Total stockholders' equity......... 142,668 171,987 171,987
-------- -------- --------
Total capitalization............... $457,425 $456,987 $463,887
======== ======== ========
</TABLE>
- --------
(a) Includes the effect of the March 19, 1997 three-for-two common stock
split.
(b) Includes pro forma adjustments for the effects of the January 1997
conversion of convertible subordinated notes and the March 19, 1997 three-
for-two stock split, but does not include the effects of the offering of
the Old Notes.
(c) Includes pro forma adjustments described in footnote (b), adjusted for the
effects of the offering of the Old Notes and application of the net
proceeds as discussed under "Use of Proceeds."
28
<PAGE>
RECENT DEVELOPMENTS
The following are results of operations for the three months ended March 31,
1997, compared with results for the three months ended March 31, 1996,
announced on April 24, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1997
--------- ---------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PRODUCTION
AND PER UNIT DATA)
<S> <C> <C>
Revenues:
Oil................................................... $16,303 $ 19,914
Gas................................................... 15,610 29,524
Total revenues........................................ 36,081 53,494
Earnings available to common stock...................... 4,671 10,650
Earnings per share:
Primary............................................... $ 0.17 $ 0.40
Fully diluted......................................... 0.17 0.38
Average sale prices:
Oil (per Bbl)......................................... $ 18.67 $ 21.36
Gas (per Mcf)......................................... 1.84 2.62
Average daily production:
Oil (Bbls)............................................ 9,593 10,359
Gas (Mcf)............................................. 93,217 125,245
</TABLE>
First quarter 1997 earnings of $10.7 million, or 40 cents per primary share
were more than double first quarter 1996 net income of $4.7 million or 17
cents per share. The increased quarterly earnings are the result of higher oil
and gas production and prices. Total revenues for the quarter were $53.5
million, a 48% increase from first quarter 1996 revenues of $36.1 million.
Revenues for the 1997 quarter include gains on sale of property and equity
securities of $0.2 million and $1.2 million, respectively.
On March 24, 1997, the Company announced an agreement, effective April 1,
1997, to acquire producing properties and undeveloped acreage in Oklahoma,
Kansas and Texas for $39.5 million from a subsidiary of Burlington Resources
Inc. The transaction is scheduled to close in May 1997. The properties are
primarily operated interests. The Company's internal engineers estimate
related proved reserves to be 36.5 billion cubic feet equivalent of natural
gas, of which more than 97% is gas. Approximately 30% of the purchase price is
attributable to 124 square miles (79,500 net acres) of undeveloped acreage
primarily located in Texas County, Oklahoma.
On March 24, 1997, the Company also announced entering into definitive
agreements to sell non-strategic producing properties for approximately $15
million. Closings of the sales are expected during the second quarter of 1997.
On April 10, 1997, the Company announced the authorization by its Board of
Directors to repurchase up to two million shares of its Common Stock, or about
7% of the shares outstanding. This repurchase program is in addition to the
three million share program (adjusted for the March 1997 three-for-two stock
split) announced in May 1996, and completed in April 1997.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected financial information for each of the
years, and as of year-end, in the five-year period ended December 31, 1996,
which has been derived from the Company's audited consolidated financial
statements. This financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 (A) 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (B):
Revenues:
Oil.................... $31,921 $39,747 $53,324 $60,349 $75,013
Gas.................... 31,994 34,649 38,389 40,543 73,402
Gas gathering,
processing and
marketing............. 3,943 3,717 4,274 7,091 12,032
Other.................. (502)(c) 69 288 4,922 944
-------- -------- -------- -------- --------
Total revenues......... 67,356 78,182 96,275 112,905 161,391
-------- -------- -------- -------- --------
Expenses:
Production............. 21,744 29,223 32,368 35,338 39,365
Taxes on production and
property.............. 5,767 6,706 8,586 8,646 11,944
Depreciation, depletion
and amortization...... 19,979 25,108 31,709 36,892 37,858
Impairment (a)......... -- -- -- 20,280 --
General and
administrative........ 8,150 9,863 8,532 13,156 16,420
Gas gathering and
processing............ 1,316 1,492 1,646 2,528 6,905
Interest, net.......... 4,975 5,464 8,034 12,523 17,072
Trust development
costs................. 527 695 622 561 854
-------- -------- -------- -------- --------
Total expenses......... 62,458 78,551 91,497 129,924 130,418
-------- -------- -------- -------- --------
Income (loss) before
income tax and
extraordinary item.... 4,898 (369) 4,778 (17,019) 30,973
Income tax expense..... 154 3,643 1,730 (5,825) 10,669
-------- -------- -------- -------- --------
Net income (loss)
before extraordinary
item.................. 4,744 (4,012) 3,048 (11,194) 20,304
Extraordinary item..... -- -- -- 656 --
-------- -------- -------- -------- --------
Net income (loss)...... 4,744 (4,012) 3,048 (10,538) 20,304
Preferred stock
dividends............. -- -- -- -- 514
-------- -------- -------- -------- --------
Earnings (loss)
available to common
stock................. $4,744 $(4,012) (d) $3,048 $(10,538) $19,790
======== ======== ======== ======== ========
CONSOLIDATED BALANCE
SHEET DATA (B):
Property and equipment,
net................... $149,484 $228,551 $244,555 $364,474 $450,561
Total assets........... 176,831 258,019 292,451 402,675 523,070
Long-term debt......... 79,000 111,750 142,750 238,475 314,757
Owners' equity......... 76,056 115,168 113,333 130,700 142,668
OTHER FINANCIAL DATA
(B):
EBITDA (e)............. $30,150 $30,351 $44,777 $54,068 $85,541
Capital expenditures... 12,131 105,228 49,608 190,311 146,568
Ratio of earnings to
fixed charges (f)..... 1.8x 0.9x 1.5x -- 2.6x
Ratio of EBITDA to
interest expense...... 5.7x 5.4x 5.4x 4.2x 5.0x
Ratio of total debt to
EBITDA................ 2.6x 3.7x 3.2x 4.4x 3.7x
</TABLE>
- --------
(a) Includes effect of a $20.3 million pre-tax, non-cash impairment charge
recorded upon adoption of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
(b) Significant producing property acquisitions in 1993, 1994, 1995 and 1996
affect the comparability of year-to-year financial, operating and other
data.
(c) Includes a $2.4 million loss on sale of Units in the initial public
offering for the Cross Timbers Royalty Trust.
(d) Includes effect of a one-time, non-cash accounting charge of $4 million
for net deferred income tax liabilities recorded upon the Merger.
(e) Earnings before interest, income tax and depreciation, depletion,
amortization and impairment. EBITDA is not intended to represent cash flow
in accordance with generally accepted accounting principles and does not
represent the measure of cash available for distribution. EBITDA is not
intended as an alternative to earnings available to common stock or net
income.
(f) For purposes of calculating this ratio, earnings include income (loss)
from continuing operations before income tax and fixed charges. Fixed
charges include interest expense, preferred stock dividends and an imputed
interest expense on operating lease rentals (assumed as one-third) of
rentals. Excluding the effect of the charge in (a) above in 1995, the
ratio of earnings to fixed charges would have been 1.3x.
30
<PAGE>
SELECTED RESERVE AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- -------------------- -----------
(IN THOUSANDS EXCEPT PRODUCTION AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
PROVED RESERVES (A):
Oil (Bbls)............. 16,666 21,082 33,581 39,988 42,440
Gas (Mcf).............. 172,199 169,119 177,061 358,070 540,538
Barrels of oil
equivalent (BOE)...... 45,366 49,269 63,091 99,666 132,530
Estimated future net
cash flows, before
income tax............ $339,433 $309,244 $406,128 $ 712,907 $1,737,024
Present value of
estimated future net
cash flows, discounted
at 10%:
Before income tax...... $ 207,415 $ 189,968 $ 247,946 $ 405,706 $ 946,150 (b)
After income tax....... 207,415 (c) 173,294 213,146 335,156 706,481
AVERAGE DAILY
PRODUCTION:
Oil (Bbls)............. 4,749 6,968 9,497 9,677 9,584
Gas (Mcf).............. 51,205 51,260 58,182 78,408 101,845
Barrels of oil
equivalent (BOE)...... 13,283 15,511 19,194 22,745 26,558
AVERAGE SALES PRICE (D):
Oil (per Bbl).......... $ 18.37 $ 15.63 $ 15.38 $ 17.09 $ 21.38
Gas (per Mcf).......... 1.71 1.85 1.81 1.42 1.97
Production costs (per
BOE)................... $ 4.47 $ 5.16 $ 4.62 $ 4.26 $ 4.05
Production and property
taxes (per BOE)........ 1.19 1.19 1.23 1.04 1.23
RESERVE ADDITIONS (BOE):
Acquisitions........... 434 12,351 4,486 31,508 27,118
Extensions, discoveries
and revisions......... 7,956 (2,744) 16,840 15,426 15,725
--------- --------- --------- ---------- -----------
Total additions........ 8,390 9,607 21,326 46,934 42,843
========= ========= ========= ========== ===========
COSTS INCURRED:
Acquisitions........... $ 1,475 $ 87,064 $ 28,100 $ 131,342 $ 105,815
Development and
exploitation.......... 10,730 19,462 21,826 21,061 45,038
--------- --------- --------- ---------- -----------
Total costs incurred... $ 12,205 $ 106,526 $ 49,926 $ 152,403 $ 150,853
========= ========= ========= ========== ===========
</TABLE>
- --------
(a) Proved reserves were estimated using oil and gas prices and production and
development costs as of December 31 of each such year, without escalation.
(b) Based on an oil price of $20.00 per barrel and a gas price of $2.00 per
Mcf at December 31, 1996, the discounted present value of cash flows
before income taxes of the Company's proved reserves as of December 31,
1996 would have been $599.9 million.
(c) Since proved reserves were held by non-taxable predecessor entities before
May 18, 1993, no provision is included for federal income tax before that
date.
(d) Average sales price data includes the effects of hedging activities which
have not been significant.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Cross Timbers Oil Company (the "Company") was organized in October 1990 to
ultimately acquire the business and properties of predecessor entities that
were created from 1986 through 1989. The Company completed its initial public
offering of common stock in May 1993.
The Company follows the successful efforts method of accounting. As of
October 1, 1995, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
recording a pre-tax, non-cash impairment charge of $20.3 million. The Company
has implemented the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, but continues to record compensation of stock-based
awards using Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees.
In addition to the adoption of accounting principles described above, the
following events affect the comparative results of operations and/or financial
condition for the years ended December 31, 1994, 1995 and 1996, and/or may
impact future operations and financial condition. Throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations,
references to barrels of oil equivalent ("BOE") refer to quantities of
production for the indicated period (with gas quantities converted to barrels
on an energy equivalent ratio of six Mcf to one barrel).
Three-for-Two Stock Split. On March 19, 1997, the Company effected a three-
for-two stock split for common stockholders of record on March 12, 1997. All
per share amounts have been restated to reflect the stock split on a
retroactive basis.
January 1994 Acquisitions. In January 1994, the Company acquired an
additional interest in the Prentice Northeast Unit and certain other West
Texas oil-producing properties for $22.9 million. These acquisitions were
primarily financed by bank borrowings.
1995 Acquisitions. During 1995, the Company acquired predominantly gas-
producing properties for a total cost of $131 million, and a gas processing
plant and gathering facility for $29 million. The Santa Fe Acquisition, the
largest of these acquisitions, closed on August 1, 1995 and consisted of
mostly operated properties and related facilities in the Hugoton Field of
Kansas and Oklahoma. The 1995 acquisitions were primarily funded by bank
borrowings and proceeds from the 1995 common stock offering and asset sales.
1996 Acquisitions. During 1996, the Company acquired predominantly gas-
producing properties for a total cost of $110 million. The Enserch
Acquisition, the largest of these acquisitions, closed in July 1996 at a cost
of $39.4 million and primarily consisted of operated interests in the Green
River Basin of southwestern Wyoming. In November 1996, the Company acquired
additional interests in the Fontenelle Unit, the most significant property
included in the Enserch Acquisition, at a cost of $12.5 million. In December
1996, the Company acquired primarily operated interests in gas-producing
properties in the Ozona area of the Permian Basin of West Texas for $28
million. From July through December 1996, the Company acquired 16% of the
publicly traded outstanding units of beneficial interest in Cross Timbers
Royalty Trust at a total cost of $12.8 million. These 1996 acquisitions were
primarily funded by bank borrowings (see "Liquidity and Capital Resources--
Financing" below).
1994, 1995 and 1996 Development Programs. In 1994, the Company drilled 40
wells and implemented 67 workovers. In 1995, the Company drilled 40 wells and
performed 61 recompletions and workovers. During 1996, the Company drilled 48
oil wells and 52 gas wells and completed 125 recompletions and workovers.
During 1995 and 1996, oil development was concentrated in the Prentice
Northeast Unit of West Texas. Gas
32
<PAGE>
development focused on Major County, Oklahoma throughout this three-year
period. Fourth quarter 1996 development drilling also included the Fontenelle
Unit of southwestern Wyoming. The Company's exploratory expenditures were not
significant during these years.
1997 Development Program. The Company has budgeted 173 wells to be drilled
in its 1997 development program including 114 gas and 59 oil, and plans 80
workover/recompletion activities. Natural gas development will be concentrated
in the Fontenelle Unit in southwestern Wyoming, the Ozona area in West Texas
and in Major County, Oklahoma. Oil drilling will continue to be focused in the
Company's largest oil-producing property, the Prentice Northeast Unit of West
Texas, as well as in the University Block 9 Field, where the Company increased
its working interest to 100% in January 1997 at a cost of $12.5 million.
Approximately 10% to 20% of the 1997 budget will be allocated to higher-risk
projects, including step-out development wells and exploratory drilling. Much
of the higher-risk activity will focus on the Tubb Formation in Lea County,
New Mexico, where the Company plans to recomplete up to 22 wells and drill up
to 20 wells.
1995 Common Stock Offering. In August 1995, the Company sold 2,250,000
shares of common stock. The net proceeds of $29.5 million from this offering
were used to partially fund the Santa Fe Acquisition.
1996 Preferred Stock Exchange. In September 1996, pursuant to the Company's
exchange offer, a total of 1,324,111 shares of common stock were exchanged for
1,138,729 shares of Series A convertible preferred stock.
1996 and 1997 Conversion of Subordinated Notes. During November and December
1996, $27.7 million principal of the Company's 5 1/4% convertible subordinated
notes was converted by noteholders into 1,198,454 shares of common stock. In
January 1997, the remaining principal of $29.7 million was converted by
noteholders into 1,285,495 shares of common stock.
Treasury Stock. As part of its 1996 strategic acquisition plan, the Company
purchased 1.3 million shares of common stock at a total cost of $30.7 million.
An additional 483,000 shares have been purchased through March 10, 1997 at a
cost of $12.9 million. These purchases were primarily funded by bank
borrowings.
Investment in Equity Securities. During 1994, the Company acquired 6.6% of
the common stock of Plains Petroleum Company, a publicly traded independent
oil and gas producer, at a total cost of $15.2 million. The Company sold its
investment in Plains Petroleum in 1995 at a gain of $1.6 million. During 1996,
the Company acquired less than 5% of a publicly traded independent oil and gas
producer at a total cost of $16.1 million.
Property Sales. During 1994, the Company recorded a net loss on property
sales of $100,000. During 1995 and 1996, sales of producing properties
resulted in net gains of $3 million and $500,000, respectively.
Stock Incentive Compensation. Stock incentive compensation includes stock
appreciation right ("SAR") compensation and performance share compensation,
and is the result of these stock awards and subsequent increases in the
Company's stock price. In 1994, SAR compensation was $700,000 (cash payments
of $10,000). During 1995, stock incentive compensation totaled $5.1 million,
which included SAR compensation of $2.3 million (cash payments of $800,000)
and non-cash performance share compensation of $2.8 million. During 1996,
stock incentive compensation totaled $6.2 million, which included SAR
compensation of $3.7 million (cash payments of $7.1 million, partially offset
by prior accruals) and non-cash performance share compensation of $2.5
million. Exercises and forfeitures under the 1991 Stock Incentive Plan have
reduced outstanding stock incentive units (including SARs) from 447,000 at
year-end 1994 to 371,000 at year-end 1995 and 23,000 (34,000 after the three-
for-two stock split) at year-end 1996.
Extraordinary Item. During 1995, the Company recognized an extraordinary
gain of $700,000 (net of income tax of $300,000) as a result of the purchase
and early retirement of $8.3 million principal amount of the
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Company's 5 1/4% convertible subordinated notes. During 1996, the Company
redeemed, purchased and retired a
total of $9 million principal amount of the notes at a loss before income tax
of $400,000. This loss was not presented as an extraordinary item because it
was not material to 1996 earnings. These purchases were primarily funded by
bank borrowings.
Product Prices. Oil and gas prices are affected not only by supply and
demand factors, but are also subject to substantial seasonal, political and
other fluctuations that are generally beyond the ability of the Company to
control or predict.
Crude oil prices are generally affected by global politics and supply,
particularly among OPEC members. Despite the anticipation of and eventual
resumption of Iraqi exports, 1996 oil prices reached their highest levels
since the Persian Gulf War in 1990. The average posted price per barrel of
West Texas Intermediate ("WTI") oil, a benchmark crude, was $15.63, $16.77 and
$20.45 in 1994, 1995 and 1996, respectively. Posted WTI prices fluctuated in
1996 between a monthly average low of $17.21 and high of $23.39. The average
posted WTI price for January and February 1997 was $21.98. Improvement in oil
prices from 1995 to 1996 have generally been attributed to global economic
growth and diminished excess production capacity. Crude oil prices in 1997
will continue to largely depend on these factors. Based on 1996 production,
the Company estimates that a $1.00 per barrel increase or decrease in the
average oil sales price would result in approximately a $3 million change in
1997 annual income before income tax.
Natural gas prices are generally influenced by national and regional supply
and demand, which is often dependent upon the weather. Specific gas prices are
also based on the location of production, pipeline capacity, gathering charges
and the energy content of the gas. Throughout most of 1995, gas prices were
relatively weak, primarily because of unseasonably warm weather. Gas prices
began to increase in fourth quarter 1995 when low storage levels and colder
than expected weather began to escalate prices. During 1996, U.S. gas
consumption reached record highs, and prices were at their highest level since
1985. While domestic demand continues to grow, gas prices in 1997 will largely
depend on the severity of winter weather, gas storage levels and price
competition from other energy sources. Based on 1996 production, the Company
estimates that a $0.10 per Mcf increase or decrease in the average gas sales
price would result in approximately a $3 million change in 1997 annual income
before income tax.
RESULTS OF OPERATIONS
1996 Compared to 1995
Earnings available to common stock for 1996 were $19.8 million as compared
to a net loss of $10.5 million for 1995. Significantly improved earnings are
the result of higher oil and gas prices and increased gas production from the
1995 and 1996 acquisitions and development programs. Additionally, 1995
results included a $20.3 million, pre-tax, non-cash impairment charge recorded
upon adoption of SFAS 121. Results for 1995 and 1996 included the effects of
stock incentive compensation of $5.1 million and $6.2 million, respectively.
Also included in 1995 results were net gains on sale of properties and equity
securities of $3 million and $1.6 million, respectively, and a $700,000
extraordinary gain on the Company's purchase and retirement of a portion of
its convertible subordinated notes. Earnings for 1996 have been reduced by
dividends of $500,000 on preferred stock that was issued in September 1996.
Revenues for 1996 were $161.4 million, or 43% above 1995 revenues of $112.9
million. Oil revenue increased $14.7 million or 24% primarily because of a 25%
increase in oil prices from an average of $17.09 in 1995 to $21.38 in 1996
(see "General--Product Prices" above). The Company's 1996 average oil price
was above the average WTI price of $20.45 because of improved oil marketing
margins. Oil production declined 1% from 1995 to 1996 primarily because of
property sales and natural decline, largely offset by the effects of the 1995
and 1996 acquisitions and development programs.
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<PAGE>
Gas revenue increased $32.9 million or 81% because of a 39% price increase
(see "General--Product Prices" above) combined with a 30% increase in
production. Increased gas production was attributable to the 1995 and 1996
acquisitions and development programs.
Gas gathering, processing and marketing revenues increased $4.9 million
primarily because of revenues from the gas processing plant and gathering
facility acquired as part of the Santa Fe Acquisition on August 1, 1995. Other
revenues decreased $4 million primarily because of net gains on sale of
property and equity securities in 1995.
Expenses for 1996 totaled $130.4 million as compared with total 1995
expenses of $129.9 million. Expenses for 1995 included the $20.3 million
impairment charge recorded upon adoption of SFAS No. 121 in October 1995. All
expenses other than impairment increased in 1996 primarily because of the 1995
and 1996 acquisitions.
Production expenses increased $4 million or 11%. Per BOE, production expense
decreased from $4.26 to $4.05. This decrease is primarily because the 1995 and
1996 acquisitions were predominantly gas-producing properties that generally
have lower production costs per BOE.
Taxes on production and property increased 38% or $3.3 million because of
increased oil and gas revenues. Taxes on production and property per BOE only
increased 18% from $1.04 to $1.23 because of property tax reductions on
properties acquired before 1995 that largely offset property taxes related to
the 1995 and 1996 acquisitions.
Depreciation, depletion and amortization ("DD&A") increased $1 million, or
3%, primarily because of the 1995 and 1996 acquisitions and development
programs. On a BOE basis, DD&A decreased from $4.44 in 1995 to $3.89 in 1996.
Decreased DD&A per BOE is the result of increased proved reserve estimates at
January 1, 1996, reduced depletable costs resulting from the SFAS 121
provision recorded in fourth quarter 1995, and the sale and operating
leaseback of the Tyrone gas processing plant and related gathering system.
General and administrative expense increased $3.3 million, or 25%, because
of Company growth and increased stock incentive compensation. Excluding stock
incentive compensation, general and administrative expense per BOE was $1.04
in 1996 as compared to $0.97 in 1995.
Gas gathering and processing expense increased from $2.5 million in 1995 to
$6.9 million in 1996. This increase was primarily because of rental expense
related to the Tyrone plant and gathering system lease that began in March
1996. This increase offsets related decreases in DD&A and interest.
Interest expense increased $4.5 million or 36% primarily because of
increased debt to partially fund the 1995 and 1996 acquisitions and purchases
of treasury stock and equity securities. Weighted average principal
outstanding during 1996 was $259 million at an average interest rate of 6.4%
compared with weighted average principal of $195.1 million at 6.2% for 1995.
Interest expense per BOE increased from $1.51 in 1995 to $1.76 in 1996
primarily because of financing expenditures for other than oil and gas
producing properties with bank and other short-term borrowings.
1995 Compared to 1994
Net loss for 1995 was $10.5 million as compared to net income of $3 million
for 1994. The loss for 1995 included a $20.3 million pre-tax, non-cash
impairment charge recorded upon adoption of SFAS No. 121, and a pre-tax charge
of $5.1 million for predominantly non-cash stock incentive compensation. Also
included in 1995 results were net gains on sale of properties and equity
securities of $3 million and $1.6 million, respectively, and a $700,000
extraordinary gain on the Company's purchase and retirement of a portion of
its convertible subordinated notes.
Revenues for 1995 were $112.9 million, or 17% above 1994 revenues of $96.3
million. Oil revenue increased $7 million or 13% primarily because of an 11%
increase in oil prices from an average of $15.38 in
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<PAGE>
1994 to $17.09 in 1995. The Company's 1995 average oil price was above the
average WTI price of $16.77 because of improved oil marketing margins. Oil
production increased 2% from 1994 as a result of the 1995 acquisitions,
partially offset by reduced production from natural decline and property
sales.
Gas revenue increased $2.2 million or 6% because of a 35% increase in
production, attributable to the 1995 acquisitions and the 1994 and 1995
development programs. The effects of increased production were largely offset
by a 22% decline in average gas prices. Part of the decline in the Company's
average gas price is because of a lower energy content and higher
transportation differential for production from the Hugoton Field.
Additionally, the 1994 average price was supported by sales of 25,000 Mcf per
day under contract at $2.00 per Mcf during the last six months of the year.
Gas gathering, processing and marketing revenues increased $2.8 million
primarily because of revenues from the gas processing plant and gathering
facility acquired as part of the Santa Fe Acquisition on August 1, 1995. Other
revenues increased $4.6 million because of net gains of $3 million from
property sales and a gain of $1.6 million from sale of equity securities.
Expenses for 1995 totaled $129.9 million, a $38.4 million or 42% increase
from total 1994 expenses of $91.5 million. Included in 1995 expenses is the
$20.3 million impairment charge recorded upon adoption of SFAS No. 121 in
October 1995. Other expense increases were generally attributable to the 1995
acquisitions.
Production expenses increased $3 million or 9%. Per BOE, production expense
decreased from $4.62 to $4.26. This decrease is generally because the 1995
acquisitions were predominantly gas-producing properties and therefore have
lower production costs per BOE.
Taxes on production and property increased only 1% or $100,000. Increased
taxes from the 1995 acquisitions were almost completely offset by decreased
property taxes on properties acquired before 1995, resulting in a decrease in
taxes on production and property per BOE from $1.23 to $1.04.
DD&A increased $5.2 million, or 16%, primarily because of the 1995
acquisitions, the largest of which closed on August 1. On a BOE basis, DD&A
decreased from $4.53 in 1994 to $4.44 in 1995.
General and administrative expense increased $4.6 million, or 54%, primarily
because of increased stock incentive compensation of $4.4 million. Excluding
stock incentive compensation, general and administrative expense per BOE was
$0.97 in 1995 or 13% below $1.11 in 1994.
Gas gathering and processing expense increased by $900,000 or 54% from 1994
to 1995. This increase was primarily because of operating expenses related to
the Tyrone gas processing and gathering facility acquired August 1, 1995.
Interest expense increased $4.5 million or 56% because of increased debt to
partially fund the 1995 acquisitions and an increase in interest rates.
Weighted average principal outstanding during 1995 was $195.1 million at an
average interest rate of 6.2% compared with weighted average principal of
$135.3 million at 5.5% for 1994. Interest expense per BOE was $1.15 in 1994
and $1.51 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operating
activities, public offerings of equity and debt, and bank debt. The Company's
cash requirements, other than for operations, are generally for the
acquisition and development of oil and gas properties, and debt and dividend
payments. The Company believes that its sources of liquidity are adequate to
fund its cash requirements during 1997.
Cash provided by operating activities was $42.3 million in 1994, compared to
$32.9 million in 1995 and $59.7 million in 1996. The fluctuation from 1995 to
1996 was primarily because of increased oil and gas prices and gas production,
partially offset by stock incentive compensation payments that increased $6.3
million, while
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<PAGE>
the fluctuation from 1994 to 1995 was almost entirely due to timing of
realization of accounts receivable, inventory and payables. Before changes in
working capital, cash flow from operations was $37.8 million, $40.4 million
and $68.3 million in 1994, 1995 and 1996, respectively.
The January 1994, 1995 and 1996 acquisitions were primarily financed by
proceeds from long-term debt borrowings. The 1995 acquisitions were also
partially funded by proceeds from public offerings of common stock.
Development expenditures and dividend payments have generally been funded by
cash flow from operations.
Financial Condition
Total assets increased from $403 million at December 31, 1995 to $523
million at December 31, 1996, primarily because of the 1996 acquisitions. As
of December 31, 1996, total capitalization of the Company was $457 million, of
which 69% was long-term debt. This compares with capitalization of $369
million at December 31, 1995, of which 65% was long-term debt. The increase in
the debt-to-capitalization ratio from year-end 1995 to 1996 is because of
increased borrowings under the Company's loan agreement to fund the 1996
acquisitions and other capital expenditures (see "Financing" below). After
considering the effect of the January 1997 conversion of subordinated notes,
the pro forma debt-to-capitalization ratio at December 31, 1996 was 62%.
Working Capital
The Company generally uses available cash to reduce bank debt and,
therefore, does not maintain large cash and cash equivalent balances. Short-
term liquidity needs are satisfied by bank commitments under the loan
agreement (see "Financing" below). Because of this, and since the Company's
principal source of operating cash flows (i.e., proved reserves to be produced
in the following year) cannot be reported as working capital, the Company
often has low or negative working capital.
Financing
Total borrowing commitments from commercial banks under the Revolving Credit
Agreement ("loan agreement") were $300 million at December 31, 1996. The loan
agreement provides for a revolving facility with scheduled reductions of
borrowing commitment that generally occur each June 30 and December 31. As of
December 31, 1996, borrowing commitments were scheduled to be reduced to $285
million on December 31, 1997. In connection with a property acquisition in
January 1997, borrowing commitments were increased to $306 million, which will
be reduced to $291 million on December 31, 1997. As a result of an amendment
to the Credit Agreement in connection with the Offering, such amounts will be
adjusted. See "Description of the Credit Agreement." Borrowings under the loan
agreement mature on June 30, 2002, but may be prepaid at any time without
penalty. The Company has periodically renegotiated its loan agreement to
increase borrowing commitments and extend the revolving facility; however,
there is no assurance that the Company will continue to do so in the future.
Loan capacity under the loan agreement is redetermined annually using
present value and cash flow parameters based on year-end estimated oil and gas
reserves. If the redetermined loan capacity is less than total borrowings
commitments, then such commitments will be reduced by the difference. If
borrowings exceed the redetermined capacity, the Company must reduce
borrowings to a level equal to the redetermined capacity within a specified
period.
During 1995, the Company purchased and retired $8.3 million principal amount
of its 5 1/4% convertible subordinated notes, resulting in an extraordinary
gain of $700,000. During 1996, the Company redeemed, purchased and retired a
total of $9 million principal amount of the notes at a loss of $430,000. Note
purchases were primarily funded by bank borrowings under the loan agreement.
In November and December 1996, principal of $27.7 million was converted at the
option of noteholders into 1,198,454 shares of common stock. In January 1997,
principal of $29.7 million was converted into 1,285,495 shares of common
stock. As of January 21, 1997, no notes remain outstanding.
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<PAGE>
In August 1995, the Company sold 2.3 million shares of common stock for net
proceeds of $29.5 million that were used to partially fund the Santa Fe
Acquisition.
In September 1996, pursuant to the Company's exchange offer, a total of
1,324,111 shares of common stock were exchanged for 1,138,729 shares of Series
A convertible preferred stock.
Capital Expenditures
In May 1996, the Company announced its plan to make strategic acquisitions
totaling $120 million over the following 18 months, including additional
interests in and around the Company's operations, as well as purchases of up
to two million shares of the Company's common stock. This goal excludes the
previously announced Enserch Acquisition. Since that date and through December
1996, the Company purchased producing properties totaling approximately $66
million (excluding the Enserch Acquisition of $39.4 million) and 1.3 million
treasury shares at a total cost of $30.7 million. These purchases were
primarily funded by bank debt. Producing property acquisitions include the
purchase of 16% of the outstanding beneficial units ("Units") of Cross Timbers
Royalty Trust at a total cost of $12.8 million. After the Company completed
its program to purchase one million Units in January 1997, the Board of
Directors authorized the purchase of up to one million additional Units.
The Company continues to pursue acquisitions that meet its criteria,
although there are no assurances that such properties will be available. The
Company plans to fund future acquisitions through a combination of cash flow
from operations and bank borrowings; proceeds from public equity and debt
transactions may also be utilized. The Company's base acquisition budget for
1997 is $50 million. If attractive acquisition opportunities arise during
1997, the Company could significantly exceed its base acquisition budget.
In 1996, capitalized expenditures for exploitation and development totaled
$32.3 million, compared to the budget of $40 million. Exploitation and
development costs incurred for 1996 totaled $44.8 million. Exploration
expenses in 1996 totaled $280,000. The Company has budgeted $70 million for
the 1997 development program. As it has done historically, the Company expects
to fund the 1997 development program from cash flow from operations. Since
there are no material long-term commitments associated with this budget, the
Company has the flexibility to adjust its actual development expenditures in
response to changes in product prices, industry conditions, and the effects of
the Company's acquisition and development programs.
A portion of the Company's existing properties are operated by third parties
which control the timing and amount of expenditures required to exploit the
Company's interests in such properties. Therefore, the Company can give no
assurances regarding the timing or amount of such expenditures.
To date, the Company's expenditures to comply with environmental or safety
regulations have not been significant, and the Company currently does not
expect such expenditures to be significant during 1997. However, developments
such as new regulations, enforcement policies or claims for damages could
result in significant future costs.
In March 1996, the Company sold its Tyrone gas processing plant and related
gathering system for $28 million and entered an agreement to lease the
facility from the buyers for an initial term of eight years at annual rentals
of $4 million, and with fixed renewal options for an additional 13 years. In
November 1996, the Company sold its gathering system in Major County, Oklahoma
for $8 million and entered an agreement to lease the facility from the buyers
for an initial term of eight years at annual rental of $1.6 million and with
renewal options for an additional 10 years. Proceeds of these sales were used
to reduce borrowings under the loan agreement.
Dividends
Since the Company's inception, the Board of Directors has declared quarterly
dividends of $0.075 per common share ($0.05 per share on a post-split basis).
In February 1997, the Board of Directors increased the quarterly dividend 10%
to $0.055 per share on a post-split basis, or $6.1 million annually.
Continuance of
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dividends is dependent upon available cash flow, as well as other factors. In
addition, the Company's loan agreement restricts the amount of common stock
dividends to 25% of operating cash flow for the last four quarters.
Cumulative dividends on Series A convertible preferred stock are paid
quarterly, when declared by the Board of Directors, based on an annual rate of
$1.5625 per share, or $1.8 million annually.
PRODUCTION IMBALANCES
The Company has gas production imbalance positions that are the result of
partial interest owners selling more or less than their proportionate share of
gas on jointly owned wells. Imbalances are generally settled by
disproportionate gas sales over the remaining life of the well or by cash
payment by the overproduced party to the underproduced party. The Company uses
the entitlement method of accounting for natural gas sales. At December 31,
1996, the Company's consolidated balance sheet includes a net receivable of $4
million for a net underproduced balancing position of 821,000 Mcf of natural
gas and 6,824,000 Mcf of carbon dioxide. Production imbalances do not have,
and are not expected to have, a significant impact on the Company's liquidity
or operations.
DERIVATIVES
The Company uses derivatives on a limited basis to hedge interest rate and
product price risks, as opposed to their use for trading purposes. To reduce
variable interest rate exposure on debt, the Company had entered into a series
of interest rate swap agreements, the last of which expired September 1996.
The Company had no other significant derivative transactions or balances from
1994 to 1996.
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<PAGE>
BUSINESS AND PROPERTIES
Cross Timbers Oil Company is a leading United States independent energy
company engaged in the acquisition, development, exploitation and exploration
of oil and natural gas properties, and in the production, processing,
marketing and transportation of oil and natural gas. The Company has
consistently increased proved reserves, production and cash flow since its
inception in 1986, and believes it is one of the most efficient domestic
onshore operators in the industry. The Company has grown primarily through
acquisitions of reserves, followed by aggressive development and exploitation
activities and strategic acquisitions of additional interests in or near such
reserves. The Company's oil and gas reserves are principally located in
relatively long-lived fields with well-established production histories
concentrated in western Oklahoma, the Permian Basin of West Texas and New
Mexico, the Hugoton Field of Oklahoma and Kansas and the Green River Basin of
Wyoming.
The Company has achieved substantial growth in proved reserves, production,
revenues and EBITDA over the last five years. The Company increased proved
reserves by 192% from 45.4 million BOE as of December 31, 1992 to 132.5
million BOE as of December 31, 1996 at an average finding cost of $3.90 per
BOE. Production increased from 4.9 million BOE in 1992 to 9.7 million BOE in
1996, and oil and gas revenues and EBITDA increased from $63.9 million and
$30.2 million, respectively, in 1992 to $148.4 million and $85.5 million,
respectively, in 1996.
As of December 31, 1996, the Company's estimated proved oil and gas reserves
totaled 42.4 million Bbls of oil and 540.5 Bcf of natural gas, or a total of
132.5 million BOE. Approximately 83% of these reserves, on a BOE basis, were
proved developed reserves. The average reserve-to-production index for the
Company's oil and gas proved reserves at December 31, 1996 was 12.4 years. As
of December 31, 1996, the Company owned interests in 5,309 gross (1,695 net)
wells and was the operator of wells representing 81% of the present value of
cash flows before income taxes (discounted at 10%) from estimated proved
reserves. The discounted present value of cash flows before income taxes, from
the Company's estimated proved reserves was $946.2 million at December 31,
1996, based on then current oil and gas prices of $24.25 per barrel and $3.02
per Mcf, respectively. Based on an oil price of $20.00 per barrel and a gas
price of $2.00 per Mcf, the discounted present value of cash flows before
income taxes of the Company's proved reserves as of December 31, 1996 would
have been $599.9 million. The Company has established a successful development
record and from 1992 to 1996 drilled 462 gross (189 net) development wells, of
which 449 gross (181.9 net) were commercially successful. The Company believes
that production and cash flow in 1997 and 1998 will increase significantly as
a result of acquisitions completed in 1996 and early 1997, the continued
development of existing properties and the drilling of certain higher-risk
prospects.
From inception in 1986 through December 31, 1996, the Company produced a
total of 55.4 million BOE. During this period, total proved reserves added due
to extensions, discoveries and revisions were approximately 135% of
production. Total development and exploitation costs incurred during this
period were approximately 54% of cash provided by operating activities. Over
the last three years, the Company increased, on a BOE basis, proved reserves
per share from 2.10 at year end 1993 to 4.80 at year end 1996 while
maintaining debt at approximately $2.20 per BOE of proved reserves. No
assurance can be given that this trend will continue in the future.
The following table sets forth the total amount spent by the Company to
acquire, exploit and develop its proved reserves, and the amount of such
reserves on a BOE basis, from inception in 1986 to December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE COST
COSTS BOE(A) PER BOE
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition of properties..................... $637,979 127,862 $4.99
Exploitation and development of properties.... 153,357 74,846 2.05
-------- -------
Total......................................... $791,336 202,708 $3.90
======== =======
</TABLE>
- --------
(a) Amounts set forth include proved reserves, on a BOE basis, acquired or
added through development since inception of the Company in 1986, and
therefore include proved reserves acquired, exploited or developed and
subsequently produced, distributed or sold.
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COMPANY STRENGTHS
The Company believes that its historical success and future prospects are
directly related to its unique combination of strengths, including the
following:
Quality of Existing Properties. The Company's properties are characterized
by relatively long reserve lives and highly predictable well production
profiles. Based on current production from 1,695 net producing wells, the
average reserve-to-production index for the Company's proved reserves at
December 31, 1996 was 12.4 years. In general, these properties have extensive
production histories and contain significant reserves and production
enhancement opportunities. While the Company's properties are geographically
diversified, the producing fields are concentrated within each core area,
allowing for substantial economies of scale in production and cost-effective
application of reservoir management techniques gained from prior operations.
Since the Company's inception, approximately 54% of cash provided by operating
activities has been invested in exploitation and development opportunities.
Inventory of Drilling Projects. The Company has generated a substantial
inventory of approximately 630 potential development drilling locations within
its existing properties (of which 156 have been attributed proved undeveloped
reserves), which should continue to support future net reserve additions.
Approximately 200 of these locations will require certain regulatory approvals
and legislation in Oklahoma prior to drilling. The Company has increased its
inventory of drilling projects consistently since its inception and added more
than 200 potential development drilling locations (of which 54 have been
attributed proved undeveloped reserves) through acquisitions in 1996.
Proven Acquisition Program. The Company employs a disciplined acquisition
program refined by senior management over more than 20 years to augment its
core properties and expand its reserve base. The Company's 40 engineering and
geoscience professionals use their expertise and experience gained through the
management of existing core properties to target properties with similar
geological and reservoir characteristics for acquisition. Following an
acquisition, these professionals implement development programs based on such
expertise and experience to enhance production and reduce costs. Since its
inception, the Company has completed acquisitions for an aggregate purchase
price of $638 million, representing 127.9 million BOE of proved reserves.
Additionally, since its inception the Company has added through its
exploitation and development activities 74.8 million BOE, or 59%, of the
proved reserves that it has acquired. In 1995 and 1996 alone, the Company
acquired 59 million BOE of proved reserves for an aggregate purchase price of
$237 million. The Company believes that its average acquisition cost of $4.04
per BOE of proved reserves during 1995 and 1996 ranks it in the top quartile
of independent oil and gas producers over this period.
Efficient Operations. The Company believes that the nature of its
properties, along with the operating expertise and experience of its personnel
in its principal geographic regions, have allowed the Company to lower its
average lease operating expense ratios per BOE produced. The Company is the
operator of properties representing 81% of the present value of cash flows
before income taxes (discounted at 10%) from estimated proved reserves,
allowing it to control expenses, capital allocation and the timing of
development and exploitation activities in its fields. This control and the
Company's operating expertise have allowed it to reduce substantially
production costs of acquired properties. For example, in its Prentice
Northeast Unit, the Company has reduced direct lease operating expenses by
35%, from $8.44 per BOE produced for the period from the Company's initial
acquisition in the Unit in April 1993 through December 1993, to $5.50 per BOE
produced for the year ended December 31, 1996.
Experienced Management and Technical Staff. Senior management of the Company
has worked together for over 20 years. They were co-founders of the Company in
1986 and previously served as executive officers of Southland Royalty Company,
one of the largest U.S. independent oil and gas producers prior to its
acquisition by Burlington Northern, Inc. in 1985. In addition, the Company has
40 engineering and geoscience professionals dedicated to its properties with
an average of 15 years of experience.
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BUSINESS STRATEGY
Acquiring Long-Lived, Operated Properties. The Company seeks to acquire
long-lived, onshore operated producing properties that (i) contain complex
multiple-producing horizons with the potential for increases in reserves and
production, (ii) are in the Company's core operating areas or in areas with
similar geological and reservoir characteristics and (iii) present
opportunities to reduce expenses through more efficient operations. The
Company believes that the properties it acquires provide opportunities to
increase production and reserves through the implementation of mechanical and
operational improvements, workovers, behind-pipe completions, secondary-
recovery operations, new development wells and other exploitation activities.
The Company also seeks to acquire facilities related to gathering, processing,
marketing and transporting oil and gas in areas where it owns reserves. Such
facilities can enhance profitability, reduce gathering, processing, marketing
and transportation costs, provide marketing flexibility and give the Company
access to additional markets.
Increasing Production and Reserves. A principal component of the Company's
strategy is to increase production and reserves through aggressive management
of operations and exploitation and development drilling. The Company believes
that its principal properties possess geological and reservoir characteristics
that make them well suited for production increases through low-risk
exploitation and drilling programs. The Company has generated an inventory of
approximately 630 potential drilling locations for this program. Additionally,
the Company reviews operations and mechanical data on operated properties to
determine if actions can be taken to reduce operating costs or increase
production. Such actions include installing, repairing and upgrading lifting
equipment, redesigning downhole equipment to improve production from different
zones, modifying surface facilities and conducting restimulations and
recompletions. The Company may also initiate, upgrade or revise existing
secondary-recovery operations and drill development wells. As a result of its
efforts, reserves added by the Company through revisions, extensions and
discoveries have exceeded production by 135% since 1986.
Exploration Activities. The Company's strategy has evolved to include
allocation of 10% to 20% of its annual capital budget (excluding acquisitions)
to higher-risk projects, including step-out development drilling, trend
extensions and exploration. The Company attempts to select projects that it
believes will have the potential to add substantially to proved reserves and
cash flow. Although it has not historically engaged in significant exploratory
activities, the Company believes that it can prudently and successfully add
growth potential through exploratory activities given improved technology, its
experienced technical staff and its expanded base of operations.
SIGNIFICANT PROPERTIES
The following table summarizes proved reserves and discounted present value,
before income tax, of proved reserves by the Company's major operating areas
at December 31, 1996 (In thousands):
<TABLE>
<CAPTION>
DISCOUNTED
PROVED PRESENT VALUE
RESERVES BEFORE INCOME
-------------- TAX OF
OIL GAS PROVED
(BBL) (MCF) RESERVES
------ ------- --------------
<S> <C> <C> <C> <C>
Permian Basin.................................... 31,274 77,655 $346,520 36.6%
Mid-Continent.................................... 8,512 165,334 306,730 32.4
Hugoton.......................................... 362 161,318 167,160 17.7
Rocky Mountain................................... 1,673 127,554 107,269 11.3
Other (a)........................................ 619 8,677 18,471 2.0
------ ------- -------- -----
Total............................................ 42,440 540,538 $946,150 100.0%
====== ======= ======== =====
</TABLE>
- --------
(a) Includes 396,000 Bbls and 6,431,000 Mcf and discounted present value
before income tax of $12,242,000 related to the Company's 16% ownership of
Units of Cross Timbers Royalty Trust at December 31, 1996.
42
<PAGE>
PERMIAN BASIN AREA
Prentice Field. The Prentice Field is located in Terry and Yoakum Counties,
Texas. In 1993, the Company acquired its initial interest in the Prentice
Northeast Unit in three separate transactions, accumulating a 62.1% interest.
In January 1994, the Company purchased an additional 29.4% interest in the
Prentice Northeast Unit, increasing the Company's total ownership to 91.5%.
The Company assumed operations of the Unit effective March 1, 1994. Current
net production from the 153-well Unit is approximately 2,650 Bbls of oil and
580 Mcf of gas per day. The Company also owns an interest in 80 gross (1.7
net) non-operated wells.
Discovered in 1950, the Prentice Field produces from carbonate reservoirs in
the Clear Fork and Glorieta formations at depths ranging from 6,000 to 7,000
feet. The Prentice Field has been separated into several waterflood units for
secondary-recovery operations. The Prentice Northeast Unit was formed in 1964
with waterflood operations commencing a year later. Development potential
exists through infill drilling and improvement of waterflood efficiency.
Tertiary recovery potential also exists through carbon dioxide flooding.
During 1996, the Company drilled 28 development wells in the Prentice
Northeast Unit. The Company plans to drill a total of 31 wells during 1997.
Twenty-six of these wells are 10-acre infill wells based on the success of the
1996 program. The remaining five wells are 20-acre wells strategically located
to test the deeper reservoirs discovered in 1995.
Russell Field. The Russell Field is located in Gaines County, Texas. The
Company owns an interest in 25 gross (23.4 net) wells that it operates and 139
gross (43.6 net) wells operated by others. Current net daily oil and gas
production is approximately 990 Bbls and 530 Mcf.
The Russell Field, discovered in 1943, produces from the San Andres,
Glorieta, Middle Clear Fork and Devonian formations at depths ranging from
4,800 to 10,800 feet. Exploitation potential exists through restimulations,
recompletions, infill drilling, and the implementation of secondary recovery
operations in the Middle Clear Fork and San Andres formations.
During 1996, the Company performed four recompletions to the Glorieta and
San Andres formations. The Company and its working interest partners plan to
drill five Middle Clear Fork and Glorieta wells during 1997.
Ozona Area. The Company acquired interests in 1996 in the Henderson, Ozona,
and Davidson Ranch fields located in Crockett County, Texas. The Company
acquired interests in 88 gross (49.1 net) wells that it operates and 124 gross
(26.3 net) wells operated by others. Current net daily production is
approximately 8.1 MMcf and 43 Bbls.
Oil and gas were first discovered in the Ozona area in 1962. Production is
from the Pennsylvanian Canyon sandstones and Strawn carbonates at depths
ranging from 6,500 to 9,000 feet. Development potential for this area includes
infill drilling, field extension and delineation drilling, and the possibility
of horizontal drilling in the Strawn Formation.
During 1997, the Company plans to drill a total of 32 wells divided equally
between the Henderson and Ozona Fields. The Company expects this to be one of
the most active gas development areas for the Company.
University Block 9. The University Block 9 Field is located in Andrews
County, Texas. The Company owns an interest in 36 gross (30.1 net) wells that
it operates. Current net daily production is approximately 700 Bbls of oil and
750 Mcf of gas.
The University Block 9 Field was discovered in 1953. Productive zones are of
Wolfcamp, Pennsylvanian, and Devonian age at 8,400, 8,700 and 10,400 feet,
respectively. The Company recently completed an acquisition which gave it 100%
working interest and operation of the Wolfcamp Unit, Penn Unit, and 13 of the
14 active Devonian wells. Development potential includes proper wellbore
utilization, recompletions, infill drilling and improvement of waterflood
efficiency.
43
<PAGE>
During 1996, the Company drilled 2 gross (2 net) Devonian wells. During
1997, the Company plans to drill 15 wells, making this field one of the most
active oil development areas for the Company.
MID-CONTINENT AREA
Major County Area. The Company is one of the largest producers in the
Ringwood, Northwest Okeene and Cheyenne Valley fields in Major County,
Oklahoma. The Company operates 426 gross (364.2 net) wells and has an interest
in 199 gross (45.4 net) wells operated by others. Current net daily oil and
gas production is approximately 930 Bbls and 32,700 Mcf.
Oil and gas were first discovered in the Major County area in 1945. The
fields in the Major County area are located in the Anadarko Basin and are
characterized by oil and gas production from a variety of structural and
stratigraphic traps. Productive zones range from 6,500 to 9,400 feet and
include the Oswego, Red Fork, Chester, Manning, Mississippian, Hunton and
Arbuckle formations.
The Company develops the Major County area primarily through mechanical
improvements, restimulations, recompletions to shallower zones and development
drilling. During 1996, the Company participated in the drilling of 33 gross
wells and has budgeted 21 gross (11.1 net) wells in Major County for 1997. The
primary area for drilling during 1997 is located in the western portion of the
County, and the Company will target the Mississippian and Chester formations.
A subsidiary of the Company operates a gathering system and pipeline in the
Major County area. The gathering system collects gas from 425 wells through
300 miles of pipeline in the Major County area. The gathering system has
current throughput of approximately 30,000 Mcf per day, 70% of which is
produced from Company operated wells. Estimated capacity of the gathering
system is 40,000 Mcf per day. Gas is delivered to a processing plant owned and
operated by a third party, and then transmitted by a 26-mile Company-operated
pipeline to connections with other pipelines.
The Company has operated its Major County gathering system since 1994.
Through its direct maintenance and management, the Company has achieved
operating cost reductions and improved reliability. During 1994 and 1995, the
gathering system was converted from centralized to field compression through
the installation of four field compression stations. Field compression has
allowed the system to operate more efficiently and to expand into previously
inaccessible areas.
Elk City Field. The Elk City Field is located in Beckham and Washita
Counties of western Oklahoma. The Company operates the Elk City Unit with 35
gross (31.6 net) wells and owns an interest in 9 gross (1.5 net) wells
operated by others. Current net production of the Elk City Field is
approximately 180 Bbls of oil and 5,200 Mcf of gas per day.
The Elk City Field was discovered in 1947 and has been extensively
developed. Production is from the Hoxbar (9,500 feet), Atoka (13,100 feet) and
Morrow (15,500 feet) zones. The Company's primary development activities in
this field have been to initiate mechanical efficiencies and to recomplete
additional productive intervals. Recompletions and zone isolations have been
successful and additional opportunities for these types of workovers remain in
the field. Recent recompletions to the Atoka Formation have resulted in
significant reserve additions. There are several other deep wellbores with
similar recompletion potential.
HUGOTON AREA
The Hugoton Field, discovered in 1922, covers parts of Texas, Oklahoma and
Kansas and is the largest gas field in the United States. It is estimated that
5 million productive acres exist in the entire field. The Company owns an
interest in 349 gross (327.9 net) wells that it operates and 116 gross (25.8
net) wells operated by others. Current net production averages approximately
34,400 Mcf of gas per day and 110 Bbls of oil per day.
Approximately 70% of the Company's Hugoton gas production is delivered to
the Tyrone Plant, a gas processing plant operated by the Company. In May 1996,
the Company completed the installation of a field
44
<PAGE>
compressor on the southern end of the Tyrone gathering system. This unit
compresses gas from 44 wells, 31 of which are owned by the Company, and has
resulted in a significant production increase. The Company also completed the
installation and start-up of a residue compressor and 11.5 miles of high
pressure residue pipeline during August 1996. The installation of these
facilities has allowed the Company to operate the Tyrone Plant more
efficiently and provides access to three additional interstate pipelines.
While much of the Kansas portion of the Hugoton Field has been infill
drilled on 320-acre spacing, the Company believes that there are up to 50
additional potential infill drilling locations. The Oklahoma portion is
drilled on 640-acre spacing. The Company believes that there are approximately
200 potential infill drilling locations, subject to regulatory approval and
the enactment of new legislation in Oklahoma.
During 1996, the Company installed artificial lift on 53 wells along with
drilling five gross (4.8 net) wells in the Kansas portion of the Hugoton
Field. The Company plans to drill 10 wells to the Council Grove and Chase
formations during 1997.
ROCKY MOUNTAIN AREA
Green River Basin. The Green River Basin is located in southwestern Wyoming.
The Company acquired interests in 110 gross (100.2 net) wells that it operates
and 37 gross (8.3 net) wells operated by others in the Fontenelle, Nitchie
Gulch and Pine Canyon fields during 1996. Current net daily production is
approximately 18,500 Mcf of gas and 70 Bbls of oil.
Gas production was discovered in the Fontenelle area in the early 1970's.
The producing reservoirs are the Cretaceous Frontier and Dakota sandstones at
depths ranging from 7,500 to 10,000 feet. Exploitation potential for the
fields in this area includes restimulations, recompletions and development
drilling.
During 1996, the Company drilled 10 gross (9.8 net) wells, of which eight
were completed in 1996 with the remaining two wells being completed in early
1997. The Company plans to drill approximately 30 wells during 1997, targeting
the Frontier Formation, making this one of the Company's most active
development areas.
The Company announced on March 24, 1997 that it had entered into an
agreement with Burlington Resources, Inc. to acquire producing properties in
Oklahoma, Kansas and Texas for $39.5 million, effective April 1, 1997. The
purchase, expected to close in May 1997, is subject to third party consents,
purchase price adjustments and approval of the seller's board of directors,
which is expected before the end of April. The purchase will be funded with
borrowings under the Credit Agreement.
The properties to be acquired are primarily operated interests concentrated
in northwestern Oklahoma and the Panhandle areas of Oklahoma and Texas and in
southwestern Kansas. The Company's internal engineers estimate proved reserves
attributable to the acquisition to be 36.5 Bcf equivalent (approximately 6.1
million BOE), of which more than 97% is natural gas. Current net daily
production averages 5.5 MMcf of gas equivalent (approximately 917 BOE) from
130 gross (65 net) wells with an estimated reserve-to-production index of 17.5
years. These estimates are preliminary, are based upon information available
from the seller in connection with the acquisition and have not been reviewed
by independent petroleum engineers. Approximately 30% of the purchase price is
attributable to 124 square miles (79,500 net acres) of undeveloped acreage
primarily located in Texas County, Oklahoma.
The Panhandle area and Kansas properties are located in Texas County,
Oklahoma; Seward and Stevens counties, Kansas; and Roberts County, Texas.
These properties are comprised of 91 gross (32 net) wells of which 37 gross
wells will be operated by the Company. Current production is approximately 2.6
MMcf of gas equivalent (approximately 433 BOE) per day, primarily from the
Chester and Morrow formations between 6,000 and 7,000 feet. More than 71,000
of the undeveloped acres purchased are for deep rights below the Company's
existing Texas County Chase production.
45
<PAGE>
The northwestern Oklahoma properties are located in Woods and Woodward
counties. These properties are comprised of 39 gross (33 net) wells of which
27 gross wells will be operated by the Company. Current production is
approximately 2.9 MMcf equivalent (approximately 483 BOE) per day primarily
from the Chester and Lansing/Kansas City formations between 5,000 and 7,000
feet. The acquisition also includes a gathering system for Woodward County
properties.
RESERVES
The following are estimated quantities of proved reserves and cash flows
therefrom as of December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Proved developed:
Oil (Bbls)............................... 26,948 28,946 31,883
Gas (Mcf)................................ 164,169 320,230 466,412
Proved undeveloped:
Oil (Bbls)............................... 6,633 11,042 10,557
Gas (Mcf)................................ 12,892 37,840 74,126
Total proved:
Oil (Bbls)............................... 33,581 39,988 42,440
Gas (Mcf)................................ 177,061 358,070 540,538
Estimated future net cash flows:
Before income tax........................ $406,128 $712,907 $1,737,024
After income tax......................... 344,591 581,888 1,286,037
Present value of estimated future net cash
flows, discounted at 10%:
Before income tax........................ $247,946 $405,706 $946,150
After income tax......................... 213,146 335,156 706,481
</TABLE>
Miller and Lents, Ltd. ("Miller and Lents"), an independent petroleum
engineering firm, prepared the estimates of the Company's proved reserves and
the future net cash flow (and present value thereof) attributable to proved
reserves at December 31, 1994, 1995 and 1996. As prescribed by the Commission,
such proved reserves were estimated using oil and gas prices and production
and development costs as of December 31 of each such year, without escalation.
See Note 11 to Consolidated Financial Statements appearing elsewhere in this
Offering Memorandum for additional information regarding estimated proved
reserves.
There are numerous uncertainties inherent in estimating quantities of proved
reserves, including many factors beyond the control of the Company. Reserve
engineering is a subjective process of estimating subsurface accumulations of
oil and gas that cannot be measured in an exact manner, and the accuracy of
any reserve estimate is a function of the quality of available data and the
interpretation thereof. As a result, estimates by different engineers often
vary, sometimes significantly. In addition, physical factors, such as the
results of drilling, testing and production subsequent to the date of an
estimate, as well as economic factors, such as change in product prices, may
justify revision of such estimates. Accordingly, oil and gas quantities
ultimately recovered will vary from reserve estimates.
During 1995, the Company filed estimates of oil and gas reserves as of
December 31, 1995 with the U. S. Department of Energy on Form EIA-23. These
estimates were consistent with the reserve data reported in Note 11 to
Consolidated Financial Statements for the year ended December 31, 1995, with
the exception that Form EIA-23 includes only reserves from properties operated
by the Company.
EXPLORATION AND PRODUCTION DATA
For the following data, "gross" refers to the total wells or acres in which
the Company owns a working interest and "net" refers to gross wells or acres
multiplied by the percentage working interest owned by the Company. Although
many of the Company's wells produce both oil and gas, a well is categorized as
an oil well or a gas well based upon the ratio of oil to gas production.
46
<PAGE>
PRODUCING WELLS
The following table summarizes the Company's producing wells as of December
31, 1996, all of which are located in the United States.
<TABLE>
<CAPTION>
OPERATED WELLS NON-OPERATED WELLS TOTAL(A)
--------------- ------------------- -------------
GROSS NET GROSS NET GROSS NET
--------------- ------------------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Oil........................... 595 530.3 3,050 192.2 3,645 722.5
Gas........................... 970 841.8 694 130.8 1,664 972.6
------ -------- --------- --------- ----- -------
Total......................... 1,565 1,372.1 3,744 323.0 5,309 1,695.1
====== ======== ========= ========= ===== =======
</TABLE>
- --------
(a) One gross (0.2 net) oil well and 4 gross (2.1 net) gas wells are dual
completions.
DRILLING ACTIVITY
The following table summarizes the number of development wells drilled by
the Company during the periods indicated. There were no exploratory wells
drilled during 1994, 1995 or 1996. As of December 31, 1996, the Company was in
the process of drilling 20 gross (15.8 net) wells.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---------- ---------- ----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Completed as--
Oil wells.................................... 51 4.5 71 17.3 92 45.5
Gas wells.................................... 30 24.4 24 16.8 70 38.1
Non-Productive................................. 1 1.0 2 1.1 4 2.7
--- ---- --- ---- --- ----
Total(a)................................... 82 29.9 97 35.2 166 86.3
=== ==== === ==== === ====
</TABLE>
- --------
(a) Included in totals are 50 gross (2.1 net), 61 gross (3.2 net) and 85 gross
(10.4 net) wells drilled on non-operated interests in 1994, 1995 and 1996,
respectively. Excluded from the above totals are 31 gross (0.6 net) and 21
gross (0.4 net) carbon dioxide wells drilled on non-operated interests in
1995 and 1996, respectively.
ACREAGE
The following table summarizes developed and undeveloped leasehold acreage
in which the Company owned a working interest as of December 31, 1996.
Excluded from this summary is acreage in which the Company's interest is
limited to royalty, overriding royalty and other similar interests.
<TABLE>
<CAPTION>
DEVELOPED(A)(B) UNDEVELOPED
--------------- ------------
GROSS NET GROSS NET
------- ------- ------ -----
<S> <C> <C> <C> <C>
Oklahoma........................................... 320,254 255,096 761 687
Texas.............................................. 91,505 66,762 656 199
Kansas............................................. 75,018 64,805 2,960 817
New Mexico......................................... 59,495 24,970 6,118 3,192
Wyoming............................................ 40,685 21,712 -- --
Other.............................................. 9,455 6,855 -- --
------- ------- ------ -----
Total............................................. 596,412 440,200 10,495 4,895
======= ======= ====== =====
</TABLE>
- --------
(a) "Developed acres" are acres spaced or assignable to productive wells.
(b) Certain leasehold acreage in Oklahoma and Texas is subject to a 75% net
profits interest conveyed to the Cross Timbers Royalty Trust.
47
<PAGE>
OIL AND GAS SALES PRICES AND PRODUCTION COSTS
The following table shows the average sales prices per Bbl of oil (including
condensate) and Mcf of gas (including natural gas liquids) produced and the
production costs and production and property taxes per BOE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Average sales prices(a):
Oil (per Bbl)..................................... $ 15.38 $ 17.09 $ 21.38
Gas (per Mcf)..................................... 1.81 1.42 1.97
Production costs per BOE: .......................... 4.62 4.26 4.05
Production and property taxes per BOE: ............. 1.23 1.04 1.23
</TABLE>
- --------
(a) Average sales price data includes the effects of hedging activities which
have not been significant.
DELIVERY COMMITMENTS
The Company sells to a single purchaser approximately 10,000 Mcf of gas per
day through July 1998 and 11,650 Mcf of gas per day from August 1998 through
July 2005. The Company has also entered into contracts to sell a total of
25,000 Mcf of gas per day from January through March 1997. Deliveries under
these contracts are generally in Oklahoma, where the Company's production and
reserves are adequate to meet these sales commitments.
The Company has committed to sell between 1,460,000 and 1,825,000 Mcf of gas
annually to a cogeneration facility under a take-or-pay contract that expires
in September 2004. The Company generally purchases gas to fill this
commitment.
COMPETITION AND MARKETS
The Company faces competition from other oil and gas companies in all
aspects of its business, including the acquisition of producing properties and
oil and gas leases, marketing oil and gas, and obtaining goods, services and
labor. Many of its competitors have substantially larger financial and other
resources than the Company. Competition for property purchases is affected by
available funds, available information about the property and the Company's
standards established for minimum projected return on investment. Because
gathering systems are the only practical method for the intermediate
transportation of natural gas, competition for natural gas delivery is
presented by other pipelines and gas gathering systems. Competition is also
presented by alternative fuel sources, including heating oil and other fossil
fuels. Because of the relatively long-lived nature of the Company's oil and
gas reserves and management's expertise in exploiting these reserves,
management believes that it effectively competes in the market.
The Company's ability to market oil and gas depends on many factors beyond
its control, including the extent of domestic production and imports of oil
and gas, the proximity of the Company's gas production to pipelines, the
available capacity in such pipelines, the demand for oil and gas, the effects
of weather and the effects of federal and state regulation. The Company can
give no assurance that it will always be able to market all of its production
or obtain favorable prices. The Company does not currently believe, however,
that the loss of any of its current oil or gas purchasers would have a
material adverse effect on its operations.
Decreases in oil and gas prices have had, and could have in the future, an
adverse effect on the Company's acquisition and development programs, proved
reserves, revenues, profitability, cash flow and dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General--Product Prices."
FEDERAL AND STATE REGULATION
GENERAL. There have been, and continue to be, numerous federal and state
laws and regulations governing the oil and gas industry that are often changed
in response to the current political or economic environment.
48
<PAGE>
Compliance with this regulatory burden is often difficult and costly and may
carry substantial penalties for noncompliance. The following are some specific
regulations that may affect the Company. The Company cannot predict the impact
of future legislative or regulatory initiatives.
Federal Regulation of Natural Gas. The interstate transportation and sale
for resale of natural gas is subject to federal regulation, including
regulation of tariffs charged and various other matters, by the Federal Energy
Regulatory Commission ("FERC"). The gathering system and 26-mile pipeline
operated by the Company have been declared exempt from FERC jurisdiction, and
FERC has allowed the Company to sell on a non-regulated basis. Federal
wellhead price controls on all domestic gas were terminated on January 1,
1993. The Company cannot predict the impact of government regulation on any
natural gas facilities.
In 1992, FERC issued Orders Nos. 636 and 636-A, requiring operators of
pipelines to unbundle transportation services from sales services and allow
customers to pay for only the services they require, regardless of whether
they purchase gas from such pipelines or from other suppliers. The United
States Court of Appeals upheld the unbundling provisions and other components
of FERC's orders but remanded several issues to FERC for further explanation.
On February 27, 1997, FERC issued Order No. 636-C addressing the Court's
concerns. FERC's orders remain subject to judicial review and may be changed
as a result of that review. Although FERC's regulations should generally
facilitate the transportation of gas produced from the Company's properties
and direct access to end-user markets, the impact of these regulations on
marketing the Company's production or on its gas transportation business
cannot be predicted. The Company does not believe, however, that it will be
affected any differently than other natural gas producers and marketers with
which it competes.
Federal Regulation of Oil. Sales of crude oil, condensate and natural gas
liquids are not currently regulated and are made at market prices. The net
price received from the sale of these products is affected by market
transportation costs. A significant part of the Company's oil production is
transported by pipeline. The Energy Policy Act of 1992 required FERC to adopt
a simplified ratemaking methodology for interstate oil pipelines. In 1993 and
1994, FERC issued Order Nos. 561 and 561-A, adopting rules that established
new rate methods for such pipelines. Under the new rules, effective January 1,
1995, interstate oil pipelines can change rates based on an inflation index,
although other rate mechanisms may be used in specific circumstances. The
United States Court of Appeals upheld FERC's orders in 1996. The Company
cannot predict the effect these rules may have on the cost of moving oil to
market.
State Regulation. The oil and gas operations of the Company are subject to
various types of regulation at the state and local levels. Such regulation
includes requirements for drilling permits, the method of developing new
fields, the spacing and operations of wells and waste prevention. The
production rate may be regulated and the maximum daily production allowable
from oil and gas wells may be established on a market demand or conservation
basis. These regulations may limit the Company's production from its wells and
the number of wells or locations the Company can drill.
The Company may become party to agreements relating to the construction or
operations of pipeline systems for the transportation of natural gas. To the
extent that such gas is produced, transported and consumed wholly within one
state, such operations may in certain instances be subject to the state's
administrative authority charged with regulating pipelines. The rates the
Company could charge for gas, the transportation of gas, and the construction
and operation of such pipelines would be subject to the regulations governing
such matters. Certain states are considering regulations with respect to
gathering systems. The Company cannot predict whether any rules will be
adopted or, if adopted, the effect these rules may have on the gathering
systems operated by the Company.
Federal, State or Indian Leases. The Company's operations on federal, state
or Indian oil and gas leases are subject to numerous restrictions, including
nondiscrimination statutes. Such operations must be conducted pursuant to
certain on-site security regulations and other permits and authorizations
issued by the Bureau of Land Management, Minerals Management Service and other
agencies.
49
<PAGE>
ENVIRONMENTAL REGULATION
Various federal, state and local laws regulating the discharge of materials
into the environment, or otherwise relating to the protection of the
environment, directly impact oil and gas exploration, development, production
and processing operations, and consequently may impact the Company's
operations and costs. Management believes that the Company is in material
compliance with applicable environmental laws and regulations. To date, the
Company has not expended a material amount of funds to comply with such
regulations, and management does not currently anticipate that future
compliance will have a materially adverse effect on the consolidated financial
position or results of operations of the Company.
EMPLOYEES
The Company had 306 employees as of December 31, 1996. None of the Company's
employees is represented by a union. The Company considers its relations with
its employees to be good.
50
<PAGE>
BOARD OF DIRECTORS AND MANAGEMENT
EXECUTIVE OFFICERS
The following is a list of the executive officers of the Company and their
principal positions with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Bob R. Simpson................... 48 Chairman of the Board of Directors
and Chief Executive Officer
Steffen E. Palko................. 46 Vice Chairman of the Board and President
Senior Vice President and Chief Financial
Louis G. Baldwin................. 47 Officer
Keith A. Hutton.................. 38 Senior Vice President--Asset Development
Bennie G. Kniffen................ 46 Senior Vice President and Controller
Larry B. McDonald................ 50 Senior Vice President--Operations
Kenneth F. Staab................. 40 Senior Vice President--Engineering
Thomas L. Vaughn................. 50 Senior Vice President--Operations
Vaughn O. Vennerberg II.......... 42 Senior Vice President--Land
</TABLE>
The background of these officers is as follows:
Bob R. Simpson was a co-founder of the Company with Mr. Palko and has been
Chairman and Chief Executive Officer of the Company since July 1, 1996. Prior
thereto, Mr. Simpson served as Vice Chairman and Chief Executive Officer or
held similar positions with the Company since 1986. Mr. Simpson was Vice
President of Finance and Corporate Development (1979-1986) and Tax Manager
(1976-1979) of Southland Royalty Company.
Steffen E. Palko was a co-founder with Mr. Simpson of the Company and has
been Vice Chairman and President or held similar positions with the Company
since 1986. Mr. Palko was Vice President--Reservoir Engineering (1984-1986)
and Manager of Reservoir Engineering (1982-1984) of Southland Royalty Company.
Louis G. Baldwin has been Senior Vice President and Chief Financial Officer
or held similar positions with the Company since 1986. Mr. Baldwin was
Assistant Treasurer (1979-1986) and Financial Analyst (1976-1979) of Southland
Royalty Company.
Keith A. Hutton has been Senior Vice President--Asset Development or held
similar positions with the Company since 1987. From 1982 to 1987, Mr. Hutton
was a Reservoir Engineer with Sun Exploration & Production Company.
Bennie G. Kniffen has been Senior Vice President and Controller or held
similar positions with the Company since 1986. From 1976 to 1986, Mr. Kniffen
held the position of Director of Auditing or similar positions with Southland
Royalty Company.
Larry B. McDonald has been Senior Vice President--Operations or held similar
positions with the Company since 1990. Prior to that time, Mr. McDonald owned
and operated McDonald Energy, Inc. (1986-1990).
Kenneth F. Staab has been Senior Vice President--Engineering or held similar
positions with the Company since 1986. Prior to that time, Mr. Staab was a
Reservoir Engineer with Southland Royalty Company (1982-1986).
Thomas L. Vaughn has been Senior Vice President--Operations or held similar
positions with the Company since 1988. Prior to that time, Mr. Vaughn owned
and operated Vista Operating Company (1986-1988).
Vaughn O. Vennerberg II has been Senior Vice President--Land or held similar
positions with the Company since 1987. Prior to that time, Mr. Vennerberg was
Land Manager with Hutton Gas Operating Company (1986-1987).
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<PAGE>
BOARD OF DIRECTORS
The following is a list of the members of the Company's Board of Directors
and their principal occupations.
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
---- --------------------
<C> <S>
Bob R. Simpson.............. Chairman of the Board of Directors and Chief
Executive Officer of the Company
Steffen E. Palko............ Vice Chairman of the Board and President of the
Company
Charles B. Chitty........... Private Investor
J. Luther King, Jr. ........ President, Principal and Principal Portfolio
Manager/Analyst of Luther King Capital
Management Corporation (an investment
management firm)
Scott G. Sherman............ Sole owner of Sherman Enterprises (a personal
investment firm)
J. Richard Seeds............ Career Guidance Counselor with the Springtown,
Texas Independent School District
</TABLE>
52
<PAGE>
DESCRIPTION OF THE CREDIT AGREEMENT
The following description of the Credit Agreement as in effect as of the
date of this Prospectus does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Credit Agreement. A copy of the
Credit Agreement has been filed as an exhibit to the appropriate periodic
report of the Company filed with the Commission (see "Available Information")
and is incorporated by reference in the Registration Statement of which this
Prospectus forms a part.
On June 15, 1995, the Company entered into the Credit Agreement, which
provides for a revolving line of credit. Borrowings under the Credit Agreement
are limited to the lesser of $274 million (the "Commitment") and the Borrowing
Base (as defined therein). The Borrowing Base, which generally is determined
annually, is based on the cash flow from, and the value assigned to, the
Company's oil and gas reserves. At the completion of the offering of the Old
Notes, the Borrowing Base was set at $274 million. Borrowings under the Credit
Agreement mature on June 30, 2002, and the Commitment decreases semi-annually
on each June 30 and December 31 until that date. The Company's Credit
Agreement Obligations are unsecured.
Borrowings under the Credit Agreement bear interest at any of the following
rates selected from time to time by the Company: (i) the prime rate, plus a
spread ranging from 0% to 0.25%, (ii) a rate based on certain dealers' bids
for certificates of deposit plus a spread ranging from 0.875% to 1.375% and
(iii) the London Interbank Offered Rate ("LIBOR") plus a spread ranging from
0.75% to 1.25%. The spread under each alternative rate increases as the amount
outstanding as a percentage of the Borrowing Base increases. Interest payments
are due quarterly if based on the prime rate and the earlier of quarterly or
at maturity if based on the certificate of deposit or LIBOR rate.
The Credit Agreement currently contains negative covenants that include,
among other things: (i) limitation on the incurrence of additional
indebtedness, (ii) a requirement to maintain certain coverage ratios, (iii)
limitation on the Company's total indebtedness, (iv) the right of the Banks
(as defined therein) to perfect a security interest in the Borrowing Base
properties if certain financial ratios are not met, (v) prohibition on the
repurchase or prepayment of the Notes (including a repurchase upon the
occurrence of a Change of Control or, under certain circumstances, an Asset
Sale) and (vi) certain restrictions on the payment of dividends.
Events of Default under the Credit Agreement include, among other things:
(i) the Company's failure to pay principal within one day or interest within
five days of their respective due dates, (ii) a default in the performance of
any covenant in the Credit Agreement that has not been timely remedied, (iii)
a default occurring in the payment of any Company indebtedness in excess of
$1,000,000 or with respect to a material obligation under any note or loan
agreement that has not been timely cured or if indebtedness under any loan
agreement is accelerated and not promptly paid or extended, (iv) bankruptcy,
insolvency or dissolution and (v) a deficiency in the Borrowing Base or cash
flow coverage ratio that has not been timely cured.
53
<PAGE>
DESCRIPTION OF THE NOTES
The Old Notes have been, and the New Notes will be, issued under an
indenture dated as of April 1, 1997 (the "Indenture") between the Company, as
issuer, and The Bank of New York, as trustee (the "Trustee"). The following
summary of the material provisions of the Indenture does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Indenture, including the definitions of certain terms
contained therein. A copy of the Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and is
incorporated herein by reference. The definitions of certain capitalized terms
used in the following summary are set forth below under "--Certain
Definitions."
The Old Notes and the New Notes constitute a single class of debt securities
under the Indenture. Holders of Old Notes who do not exchange their Old Notes
for New Notes pursuant to the Exchange Offer will vote together with Holders
of the New Notes for all relevant purposes under the Indenture. In that
regard, the Indenture requires that certain actions by the Holders thereunder
(including acceleration following an Event of Default) must be taken, and
certain rights must be exercised, by specified minimum percentages of the
aggregate principal amount of the outstanding securities issued under the
Indenture. In determining whether Holders of the requisite percentage in
principal amount have given any notice, consent or waiver or taken any other
action permitted under the Indenture, any Old Notes that remain outstanding
after the Exchange Offer will be aggregated with the New Notes, and the
Holders of such Notes will vote together for all such purposes. Accordingly,
at any time after the Exchange Offer is consummated, all references herein to
specified percentages in aggregate principal amount of the outstanding Notes
means such percentages in aggregate principal amount of the Old Notes and the
New Notes then outstanding.
GENERAL
The Old Notes are, and the New Notes will be, unsecured senior subordinated
obligations of the Company limited to $125,000,000 aggregate principal amount.
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. Principal of, premium,
if any, and interest on the Notes will be payable, and the Notes will be
transferable, at the office or agency of the Company in the City of New York
maintained for such purposes, which initially will be the corporate trust
office or agency of the Trustee maintained at New York, New York. In addition,
interest may be paid, at the option of the Company, by check mailed to the
Holders of the Notes at their respective addresses as shown on the Note
Register. No service charge will be made for any transfer, exchange or
redemption of Notes, but the Company or the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge that may be
payable in connection therewith.
MATURITY, INTEREST AND PRINCIPAL PAYMENTS
The Notes will mature on April 1, 2007. Interest on the Notes will accrue at
the rate of 9 1/4% per annum and will be payable semiannually on April 1 and
October 1 of each year, commencing October 1, 1997, to the Person in whose
name the Note is registered in the Note Register at the close of business on
the March 15 or September 15 next preceding such interest payment date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after April 1, 2002, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on an interest payment date that is on or
54
<PAGE>
prior to the redemption date), if redeemed during the 12-month period
beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PRICE
---- -------
<S> <C>
2002............................................................. 104.625%
2003............................................................. 103.085%
2004............................................................. 101.545%
2005 and thereafter.............................................. 100.000%
</TABLE>
In addition, at any time and from time to time prior to April 1, 2000, the
Company may, at its option, redeem in the aggregate up to 33 1/3% of the
aggregate principal amount of the Notes originally issued under the Indenture
with the proceeds of one or more Public Equity Offerings by the Company at a
redemption price (expressed as a percentage of principal amount) of 109.25%,
plus accrued and unpaid interest, if any, to the redemption date (subject to
the right of Holders of Notes on the relevant record date to receive interest
due on the relevant interest payment date); provided, however, that at least
$83,300,000 aggregate principal amount of the Notes must remain outstanding
after each such redemption. In order to effect the foregoing redemption, the
Company must mail notice of redemption no later than 60 days after the related
Public Equity Offering and must consummate such redemption within 90 days of
the closing of the Public Equity Offering.
Selection and Notice. In the event that less than all of the Notes are to be
redeemed at any time, selection of such Notes (or any portion thereof that is
an integral multiple of $1,000) for redemption will be made by the Trustee
from the outstanding Notes not previously called for redemption (or otherwise
purchased by the Company) on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Note with
a principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption and accepted for payment.
Offers to Purchase. As described below, (a) upon the occurrence of a Change
of Control, the Company is obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase and (b) upon the occurrence of an Asset Sale, the Company may be
obligated to make offers to purchase Notes with a portion of the Net Cash
Proceeds of such Asset Sale at a purchase price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase. See "--Certain Covenants--Change of Control" and "--Limitation on
Disposition of Proceeds of Asset Sales."
SUBORDINATION
Payments of and distributions on or with respect to the Note Obligations are
subordinated, to the extent set forth in the Indenture, in right of payment to
the prior payment in full in cash or Cash Equivalents of all existing and
future Senior Indebtedness, which includes, without limitation, all Credit
Agreement Obligations of the Company. The Notes rank prior in right of payment
only to other Indebtedness of the Company which is, by its terms, expressly
subordinated in right of payment to the Notes. There is currently no
Indebtedness of the Company which would constitute such Subordinated
Indebtedness. In addition, the Note Obligations are effectively subordinated
to all of the creditors of the Company's Subsidiaries, including trade
creditors. See "Risk Factors--Subordination of Notes."
The Indenture provides that in the event of (a) any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company
(or its creditors, as such) or its assets, or (b) any liquidation, dissolution
or other winding-up of the
55
<PAGE>
Company, whether voluntary or involuntary or (c) any assignment for the
benefit of creditors or other marshaling of assets or liabilities of the
Company, all Senior Indebtedness of the Company must be paid in full in cash
or Cash Equivalents before any direct or indirect payment or distribution,
whether in cash, property or securities (excluding certain permitted equity
and subordinated debt securities referred to in the Indenture as "Permitted
Junior Securities"), is made on account of the Note Obligations. In the event
that, notwithstanding the foregoing, the Trustee or the Holder of any Note
receives any payment or distribution of properties or assets of the Company of
any kind or character, whether in cash, property or securities, by set-off or
otherwise, in respect of Note Obligations before all Senior Indebtedness is
paid or provided for in full, then the Trustee or the Holders of Notes
receiving any such payment or distribution (other than a payment or
distribution in the form of Permitted Junior Securities) will be required to
pay or deliver such payment or distribution forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
person making payment or distribution of assets of the Company for application
to the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full.
During the continuance of any default in the payment when due (whether at
Stated Maturity, upon scheduled repayment, upon acceleration or otherwise) of
principal of or premium, if any, or interest on, or of unreimbursed amounts
under drawn letters of credit or fees relating to letters of credit
constituting, any Designated Senior Indebtedness (a "Payment Default"), no
direct or indirect payment or distribution by or on behalf of the Company of
any kind or character shall be made on account of the Note Obligations or any
obligation under any Subsidiary Guarantee unless and until such default has
been cured or waived or has ceased to exist or such Designated Senior
Indebtedness shall have been discharged or paid in full in cash or Cash
Equivalents.
In addition, during the continuance of any default other than a Payment
Default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may then be accelerated (a "Non-payment Default"), after
receipt by the Trustee from the holders (or their representative) of such
Designated Senior Indebtedness of a written notice of such Non-payment
Default, no payment or distribution of any kind or character may be made by
the Company on account of the Senior Subordinated Note Obligations for the
period specified below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of a
Non-payment Default by the Trustee from the holders (or their representative)
of Designated Senior Indebtedness stating that such notice is a payment
blockage notice pursuant to the Indenture and shall end on the earliest to
occur of the following events: (i) 179 days shall have elapsed since the
receipt by the Trustee of such notice; (ii) the date, as set forth in a
written notice to the Company or the Trustee from the holders (or their
representative) of the Designated Senior Indebtedness initiating such Payment
Blockage Period, on which such default is cured or waived or ceases to exist
(provided that no other Payment Default or Non-payment Default has occurred or
is then continuing after giving effect to such cure or waiver); (iii) the date
on which such Designated Senior Indebtedness is discharged or paid in full in
cash or Cash Equivalents; and (iv) the date, as set forth in a written notice
to the Company or the Trustee from the holders (or their representative) of
the Designated Senior Indebtedness initiating such Payment Blockage Period, on
which such Payment Blockage Period shall have been terminated by written
notice to the Company or the Trustee from the holders (or their
representative) of Designated Senior Indebtedness initiating such Payment
Blockage Period, after which the Company, subject to the subordination
provisions set forth above and the existence of another Payment Default, shall
promptly resume making any and all required payments in respect of the Notes,
including any missed payments. Only one Payment Blockage Period with respect
to the Notes may be commenced within any 360 consecutive day period. No Non-
payment Default with respect to Designated Senior Indebtedness that existed or
was continuing on the date of the commencement of any Payment Blockage Period
with respect to the Designated Senior Indebtedness initiating such Payment
Blockage Period will be, or can be, made the basis for the commencement of a
second Payment Blockage Period, whether or not within a period of 360
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days (it being acknowledged that any subsequent
action, or any breach of any financial covenant for a period commencing after
the date of commencement of such Payment Blockage Period, that, in either
case, would give rise to a Non-payment Default pursuant to any provision under
which a Non-
56
<PAGE>
payment Default previously existed or was continuing shall constitute a new
Non-payment Default for this purpose; provided, however, that, in the case of
a breach of a particular financial covenant, the Company shall have been in
compliance for at least one full 90 consecutive day period commencing after
the date of commencement of such Payment Blockage Period). In no event will a
Payment Blockage Period extend beyond 179 days from the date of the receipt by
the Trustee of the notice, and there must be a 181 consecutive day period in
any 360-day period during which no Payment Blockage Period is in effect. In
the event that, notwithstanding the foregoing, the Company makes any payment
or distribution to the Trustee or the Holder of any Note prohibited by the
subordination provision of the Indenture, then such payment or distribution
will be required to be paid over and delivered forthwith to the holders (or
their representative) of Designated Senior Indebtedness.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure will constitute an Event of Default
under the Indenture and will enable the Holders of the Notes to accelerate the
maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation, receivership,
reorganization or insolvency, creditors of the Company who are holders of
Senior Indebtedness may recover more, ratably, than the Holders of the Notes,
and funds which would be otherwise payable to the Holders of the Notes will be
paid to the holders of the Senior Indebtedness to the extent necessary to pay
the Senior Indebtedness in full, and the Company may be unable to meet its
obligations in full with respect to the Notes.
As of December 31, 1996, after giving pro forma effect to the sale of the
Old Notes and the application of the net proceeds therefrom, the aggregate
amount of outstanding Senior Indebtedness would have been approximately $166.9
million. See "Use of Proceeds," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Although the Indenture contains limitations on the amount
of additional Indebtedness that the Company and the Restricted Subsidiaries
may incur, the amounts of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness or Indebtedness of
Subsidiaries to which the Notes will be subordinated. The Indenture prohibits
the incurrence by the Company of Indebtedness that is contractually
subordinated in right of payment to any Senior Indebtedness of the Company and
senior in right of payment to the Notes. Giving effect to the issuance of the
Old Notes and the application of the net proceeds therefrom, there is no
Indebtedness of the Company that is subordinated in right of payment to the
Notes and there is no Indebtedness of the Company which is pari passu in right
of payment with the Notes.
SUBSIDIARY GUARANTEES OF THE NOTES
Under the circumstances described below, the Company's payment obligations
under the Notes may in the future be jointly and severally guaranteed by
existing or future Subsidiaries of the Company as Subsidiary Guarantors. No
Subsidiaries of the Company initially executed and delivered the Indenture as
a Subsidiary Guarantor. In the event that the Notes are guaranteed by
Subsidiaries of the Company, each Subsidiary Guarantor will guarantee, jointly
and severally, to each Holder of Notes and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Notes,
including the payment of principal of (or premium, if any, on) and interest on
the Notes pursuant to its Subsidiary Guarantee. The Subsidiary Guarantees will
be subordinated to Guarantor Senior Indebtedness of the Subsidiary Guarantors
to the same extent and in the same manner as the Notes are subordinated to
Senior Indebtedness.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities (including, but not limited to, Guarantor Senior Indebtedness) 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,
result in the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee not constituting a fraudulent conveyance or fraudulent
57
<PAGE>
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor (if any) in a pro rata
amount based on the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell all,
substantially all or any portion of its assets to the Company or another
Subsidiary Guarantor without limitation, except to the extent any such
transaction is subject to the "Merger, Consolidation and Sale of Assets"
covenant of the Indenture. Each Subsidiary Guarantor may consolidate with or
merge into or sell all or substantially all of its assets to a corporation
other than the Company or another Subsidiary Guarantor (whether or not
affiliated with the Subsidiary Guarantor); provided, however, that (a) if the
surviving corporation is not the Subsidiary Guarantor, the surviving
corporation agrees to assume such Subsidiary Guarantor's Subsidiary Guarantee
and all its obligations pursuant to the Indenture (except to the extent the
following paragraph would result in the release of such Subsidiary Guarantee)
and (b) such transaction does not (i) violate any of the covenants described
below under "Certain Covenants" or in the Indenture or (ii) result in a
Default or Event of Default immediately thereafter that is continuing.
The Subsidiary Guarantee of any Restricted Subsidiary may be released upon
the terms and subject to the conditions described under paragraph (c) of
"Certain Covenants--Limitation on Non-Guarantor Restricted Subsidiaries." Each
Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Subsidiary Guarantee
and related obligations set forth in the Indenture for so long as it remains
an Unrestricted Subsidiary.
Although the Indenture does not contain any requirement that any Subsidiary
execute and deliver a Subsidiary Guarantee, certain covenants described below
require a Restricted Subsidiary in the future to execute and deliver a
Subsidiary Guarantee prior to the guarantee of other Indebtedness. See
"Certain Covenants--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries."
CERTAIN COVENANTS
The Indenture contains, among others, the covenants described below.
Limitation on Indebtedness. (a) The Indenture provides that neither the
Company nor any Restricted Subsidiary will create, incur, issue, assume,
guarantee or in any manner become directly or indirectly liable for the
payment of (collectively "incur") any Indebtedness (including any Acquired
Indebtedness), other than Permitted Indebtedness and Permitted Subsidiary
Indebtedness, as the case may be; provided, however, that the Company and its
Restricted Subsidiaries that are Subsidiary Guarantors may incur Indebtedness
if (x) the Company's Consolidated Fixed Charge Coverage Ratio for the four
full fiscal quarters immediately preceding the incurrence of such Indebtedness
(and for which financial statements are available), taken as one period (at
the time of such incurrence, after giving pro forma effect to: (i) the
incurrence of such Indebtedness and (if applicable) the application of the net
proceeds therefrom, including to refinance other Indebtedness or to acquire
producing oil and gas properties, as if such Indebtedness had been incurred
and the application of such proceeds had occurred at the beginning of such
four-quarter period; (ii) the incurrence, repayment or retirement of any other
Indebtedness (including Permitted Indebtedness) by the Company or its
Restricted Subsidiaries since the first day of such four-quarter period
(including any other Indebtedness to be incurred concurrent with the
incurrence of such Indebtedness) as if such Indebtedness had been incurred,
repaid or retired at the beginning of such four-quarter period; and (iii)
notwithstanding clause (d) of the definition of Consolidated Net Income, the
acquisition (whether by purchase, merger or otherwise) or disposition (whether
by sale, merger or otherwise) of any Person acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first
day of such four-quarter period, as if such acquisition or disposition had
occurred at the beginning of such four-quarter period), would have been equal
to at least 2.5 to 1.0 and (y) no Default or Event of Default shall have
occurred and be continuing at the time such additional Indebtedness is
incurred or would occur as a consequence of the incurrence of the additional
Indebtedness.
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<PAGE>
Limitation on Restricted Payments. (a) The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, take the following actions:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of Qualified Capital Stock of the
Company, options, warrants or other rights to purchase Qualified Capital
Stock of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any
Wholly Owned Restricted Subsidiary of the Company) or any options, warrants
or other rights to acquire such Capital Stock; provided, however, that the
Company may purchase, redeem or otherwise retire common stock of the
Company in an amount not to exceed $10,000,000 in the aggregate for all
such transactions after the date of this Indenture; and provided, further,
that the Company may make any payment of the applicable redemption price in
connection with a Qualified Redemption Transaction;
(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; provided, however, that the Company may make any payment of
the applicable redemption price in connection with a Qualified Redemption
Transaction;
(iv) declare or pay any dividend on, or make any distribution to the
holders of, any shares of Capital Stock of any Restricted Subsidiary of the
Company (other than to the Company or any of its Wholly Owned Restricted
Subsidiaries) or purchase, redeem or otherwise acquire or retire for value
any Capital Stock of any Restricted Subsidiary or any options, warrants or
other rights to acquire any such Capital Stock (other than with respect to
any such Capital Stock held by the Company or any Wholly Owned Restricted
Subsidiary of the Company);
(v) make any Investment (other than a Permitted Investment);
(vi) in connection with the acquisition of any property or asset by the
Company or its Restricted Subsidiaries after the date of the Indenture,
which property or asset would secure or be subject to any Production
Payment obligations of the Company or its Restricted Subsidiaries, make any
investment (of cash, property or other assets) in such property or asset so
acquired in addition to the amount of Indebtedness (including Production
Payment obligations) incurred by the Company or its Restricted Subsidiaries
in connection with such acquisition; or
(vii) incur any guarantee of Indebtedness of any Affiliate (other than
(a) guarantees of Indebtedness of any Restricted Subsidiary by the Company
or (b) guarantees of Indebtedness of the Company by any Restricted
Subsidiary, in each case in accordance with the terms of the Indenture);
(such payments or other actions described in (but not excluded from) clauses
(i) through (vii) are collectively referred to as "Restricted Payments"),
unless at the time of and after giving effect to the proposed Restricted
Payment (with the amount of any such Restricted Payment, if other than cash,
being 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 (excluding Permitted
Indebtedness) in accordance with the "Limitation on Indebtedness" covenant and
(3) the aggregate amount of all Restricted Payments declared or made after the
date of the Indenture shall not exceed the sum (without duplication) of the
following:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on the
first day of the first month after the date of the Indenture 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 such aggregate cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss), plus
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Company as capital contributions to the Company (other
than from any Restricted Subsidiary), plus
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(C) the aggregate net cash proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of shares of Qualified Capital Stock of the
Company or any options, warrants or rights to purchase such shares of
Qualified Capital Stock of the Company, plus
(D) the aggregate net cash proceeds received after the date of the
Indenture by the Company (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, plus
(E) the aggregate net cash proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of debt securities or shares of Redeemable
Capital Stock that have been converted into or exchanged for Qualified
Capital Stock of the Company to the extent such debt securities were
originally sold for cash, together with the aggregate cash received by the
Company at the time of such conversion or exchange, plus
(F) To the extent not otherwise included in the Company's Consolidated
Net Income, the net reduction in Investments in Unrestricted Subsidiaries
resulting from the payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case
to the Company or a Restricted Subsidiary after the date of the Indenture
from any Unrestricted Subsidiary or from the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case as
provided in the definition of "Investment"), not to exceed in the case of
any Unrestricted Subsidiary the total amount of Investments (other than
Permitted Investments) in such Unrestricted Subsidiary made by the Company
and its Restricted Subsidiaries in such Unrestricted Subsidiary after the
date of the Indenture, plus
(G) $25,000,000.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (in the case of clauses
(ii), (iii) and (iv) below) no Default or Event of Default shall have occurred
and be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such declaration complied
with the provisions of paragraph (a) above (and such payment shall be
deemed to have been paid on such date of declaration for purposes of any
calculation required by the provisions of paragraph (a) above);
(ii) 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 cash proceeds of,
a substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company;
(iii) the purchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness (other
than Redeemable Capital Stock) in exchange for or out of the aggregate net
cash proceeds of a substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of shares of Qualified Capital Stock of the Company;
(iv) the purchase, redemption, repayment, defeasance or other acquisition
or retirement for value of Subordinated Indebtedness (other than Redeemable
Capital Stock) in exchange for, or out of the aggregate net cash proceeds
of, a substantially concurrent incurrence (other than to a Restricted
Subsidiary) of Subordinated Indebtedness of the Company so long as (A) the
principal amount of such new Indebtedness does not exceed the principal
amount (or, if such Subordinated Indebtedness being refinanced provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination) of the Subordinated Indebtedness being so purchased,
redeemed, repaid, defeased, acquired or retired, plus the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of the Subordinated Indebtedness refinanced or the amount of any
premium reasonably determined by the Company as necessary to accomplish
such refinancing, plus the amount of expenses of the Company incurred in
connection with such refinancing, (B) such new Subordinated Indebtedness is
subordinated to the Notes at least to the same extent as such
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Subordinated Indebtedness so purchased, redeemed, repaid, defeased,
acquired or retired, (C) such new Subordinated Indebtedness has an Average
Life to Stated Maturity that is longer than the Average Life to Stated
Maturity of the Notes and such new Subordinated Indebtedness has a Stated
Maturity for its final scheduled principal payment that is at least 91 days
later than the Stated Maturity for the final scheduled principal payment of
the Notes; and
(v) repurchases, acquisitions or retirements of shares of Qualified
Capital Stock of the Company deemed to occur upon the exercise of stock
options or similar rights issued under employee benefit plans of the
Company if such shares represent all or a portion of exercise price or are
surrendered in connection with satisfying any Federal income tax
obligation.
The actions described in clauses (i), (ii), (iii) and (v) of this paragraph
(b) shall be Restricted Payments that shall be permitted to be taken 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 (i) 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 such clause (i)), and the actions described in clause (iv) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph
(a).
(c) In computing Consolidated Net Income of the Company under paragraph (a)
above, (1) the Company shall use audited financial statements for the portions
of the relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other current
financial data based on the books and records of the Company for the remaining
portion of such period and (2) the Company shall be permitted to rely in good
faith on the financial statements and other financial data derived from the
books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would in the good faith determination
of the Company be permitted under the requirements of the Indenture, such
Restricted Payment shall be deemed to have been made in compliance with the
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the
Company for any period.
Limitation on Issuances and Sales of Restricted Subsidiary Stock. The
Indenture provides that the Company (i) will not permit any Restricted
Subsidiary to issue any Preferred Stock (other than to the Company or a Wholly
Owned Restricted Subsidiary) and (ii) will not permit any Person (other than
the Company and/or one or more Wholly Owned Restricted Subsidiaries) to own
any Capital Stock of any Restricted Subsidiary; provided, however, that this
covenant shall not prohibit (1) the issuance and sale of all, but not less
than all, of the issued and outstanding Capital Stock of any Restricted
Subsidiary owned by the Company or any of its Restricted Subsidiaries in
compliance with the other provisions of the Indenture, or (2) the ownership by
directors of directors' qualifying shares or the ownership by foreign
nationals of Capital Stock of any Restricted Subsidiary, to the extent
mandated by applicable law.
Limitation on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or the rendering of any services) with,
or for the benefit of, any Affiliate of the Company other than a Restricted
Subsidiary (each, other than a Restricted Subsidiary, being an "Interested
Person"), unless (i) such transaction or series of transactions is on terms
that are no less favorable to the Company or such Restricted Subsidiary, as
the case may be, than those that would be available in a comparable arm's
length transaction with unrelated third parties who are not Interested
Persons, (ii) with respect to any one transaction or series of transactions
involving aggregate payments in excess of $1,000,000, the Company delivers an
officer's certificate to the Trustee certifying that such transaction or
series of transactions complies with clause (i) above and such transaction or
series of transactions has been approved by the Board of Directors of the
Company and (iii) with respect to any one transaction or series of
transactions involving aggregate payments in excess of $10,000,000, the
officer's
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certificate referred to in clause (ii) above also certifies that such
transaction or series of transactions has been approved by a majority of the
Disinterested Directors or, in the event there are no such Disinterested
Directors, that the Company has obtained a written opinion from an independent
nationally recognized investment banking firm or appraisal firm, in either
case specializing or having a specialty in the type and subject matter of the
transaction or series of transactions at issue, which opinion shall be to the
effect set forth in clause (i) above or shall state that such transaction or
series of transactions is fair from a financial point of view to the Company
or such Restricted Subsidiary; provided, however, that this covenant does not
restrict the Company from (1) paying reasonable and customary regular
compensation and fees to directors of the Company who are not employees of the
Company or any Restricted Subsidiary or (2) paying dividends on, or making
distributions with respect to, shares of Capital Stock of the Company on a pro
rata basis to the extent permitted by the "Limitation on Restricted Payments"
covenant.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume, affirm or suffer to exist or become effective any Lien of any
kind, except for Permitted Liens, on or with respect to any of its property or
assets (including any intercompany notes), whether owned at the date of the
Indenture or thereafter acquired, or any income, profits or proceeds
therefrom, or assign or otherwise convey any right to receive income thereon,
unless (x) in the case of any Lien securing Subordinated Indebtedness, the
Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Lien and (y) in the case of any other Lien, the
Notes are directly secured equally and ratably with the obligation or
liability secured by such Lien. The incurrence of additional secured
Indebtedness by the Company or any Restricted Subsidiary is subject to further
limitations on the incurrence of Indebtedness as described under "--Limitation
on Indebtedness."
Change of Control. Upon the occurrence of a Change of Control, the Company
is obligated to make an offer to purchase all of the then outstanding Notes (a
"Change of Control Offer"), and shall purchase, on a business day (the "Change
of Control Purchase Date") not more than 70 nor less than 30 days following
the Change of Control, all of the then outstanding Notes validly tendered
pursuant to such Change of Control Offer at a purchase price (the "Change of
Control Purchase Price") equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the Change of Control Purchase Date.
The Change of Control Offer is required to remain open for at least 20
Business Days and until the close of business on the fifth business day prior
to the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each Noteholder a
notice of the Change of Control Offer, which notice shall govern the terms of
the Change of Control Offer and shall state, among other things, the
procedures that Noteholders must follow to accept the Change of Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes delivered by Noteholders seeking to accept
the Change of Control Offer. If on a Change of Control Purchase Date the
Company does not have available funds sufficient to pay the Change of Control
Purchase Price or is prohibited from purchasing the Notes, an Event of Default
will occur under the Indenture. The definition of "Change of Control" includes
an event by which the Company sells, conveys, transfers or leases all or
substantially all of its properties to any Person; the phrase "all or
substantially all" is subject to applicable legal precedent and as a result in
the future there may be uncertainty as to whether a Change of Control has
occurred.
The Company 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 at the
same purchase price, at the same times and otherwise in substantial compliance
with the requirements applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Company intends to comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder, if applicable, in the event
that a Change of Control occurs and the Company is
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required to purchase Notes as described above. The existence of a Holder's
right to require, subject to certain conditions, the Company to repurchase its
Notes upon a Change of Control may deter a third party from acquiring the
Company in a transaction that constitutes, or results in, a Change of Control.
Limitation on Disposition of Proceeds of Asset Sales. (a) The Indenture
provides that the Company will not, and will not permit any Restricted
Subsidiary to, engage in any 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 of the assets and
properties sold or otherwise disposed of pursuant to the Asset Sale (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a board resolution) and (ii) at least 75% of
the consideration received by the Company or the Restricted Subsidiary, as the
case may be, in respect of such Asset Sale consists of cash, Cash Equivalents
or the assumption by the purchaser of liabilities of the Company (other than
liabilities of the Company that are by their terms subordinated to the Notes)
or any Restricted Subsidiary as a result of which the Company and its
remaining Restricted Subsidiaries are no longer liable.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may either (x) apply the Net Cash Proceeds thereof to permanently
reduce Senior Indebtedness or to permanently reduce Guarantor Senior
Indebtedness, or (y) invest all or any part of the Net Cash Proceeds thereof,
within 365 days after such Asset Sale, in properties and assets which replace
the properties and assets that were the subject of the Asset Sale or in
properties and assets that will be used in the business of the Company or its
Restricted Subsidiaries, as the case may be ("Replacement Assets"). The amount
of such Net Cash Proceeds not applied or invested as provided in this
paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds
$15,000,000, the Company shall make an offer to purchase, from all Holders of
the Notes and any then outstanding Pari Passu Indebtedness required to be
repurchased or repaid on a permanent basis in connection with an Asset Sale,
an aggregate principal amount of Notes and any then outstanding Pari Passu
Indebtedness equal to such Excess Proceeds as follows:
(i) (A) the Company shall make an offer to purchase (a "Net Proceeds
Offer") from all Holders of the Notes in accordance with the procedures set
forth in the Indenture the maximum principal amount (expressed as a
multiple of $1,000) of Notes that may be purchased out of an amount (the
"Payment Amount") equal to the product of such Excess Proceeds multiplied
by a fraction, the numerator of which is the outstanding principal amount
of the Notes and the denominator of which is the sum of the outstanding
principal amount of the Notes and such Pari Passu Indebtedness, if any
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined herein) of all Notes tendered), and (B) to the
extent required by such Pari Passu Indebtedness and provided there is a
permanent reduction in the principal amount of such Pari Passu
Indebtedness, the Company shall make an offer to purchase Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu
Indebtedness Amount") equal to the excess of the Excess Proceeds over the
Payment Amount.
(ii) The offer price for the Notes shall be payable in cash in an amount
equal to 100% of the principal amount of the Notes tendered pursuant to a
Net Proceeds Offer, plus accrued and unpaid interest, if any, to the date
such Net Proceeds Offer is consummated (the "Offered Price"), in accordance
with the procedures set forth in the Indenture. To the extent that the
aggregate Offered Price of the Notes tendered pursuant to a Net Proceeds
Offer is less than the Payment Amount relating thereto or the aggregate
amount of the Pari Passu Indebtedness that is purchased or repaid pursuant
to the Pari Passu Offer is less than the Pari Passu Indebtedness Amount
(such shortfall constituting a "Net Proceeds Deficiency"), the Company may
use such Net Proceeds Deficiency, or a portion thereof, for general
corporate purposes, subject to the limitations of the "Limitation on
Restricted Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such Net
Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds shall be
reset to zero.
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The Company will not permit any Subsidiary to enter into or suffer to exist
any agreement that would place any restriction of any kind (other than
pursuant to law or regulation) on the ability of the Company to make a Net
Proceeds Offer following any Asset Sale. The Company intends to comply with
Rule 14e-1 under the Exchange Act, and any other securities laws and
regulations thereunder, if applicable, in the event that an Asset Sale occurs
and the Company is required to purchase Notes as described above.
Limitation on Non-Guarantor Restricted Subsidiaries. (a) The Indenture
provides that the Company will not permit any Restricted Subsidiary that is
not a Subsidiary Guarantor to guarantee the payment of any Indebtedness of the
Company unless (i)(A) such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a Subsidiary
Guarantee of the Notes by such Restricted Subsidiary which Subsidiary
Guarantee will be subordinated to Guarantor Senior Indebtedness (but no other
Indebtedness) to the same extent that the Notes are subordinated to Senior
Indebtedness and (B), with respect to any guarantee of Subordinated
Indebtedness by a Restricted Subsidiary, any such guarantee shall be
subordinated to such Restricted Subsidiary's Subsidiary Guarantee at least to
the same extent as such Subordinated Indebtedness is subordinated to the
Notes; (ii) such Restricted Subsidiary waives, and agrees not in any manner
whatsoever to claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee until such time as the
obligations guaranteed thereby are paid in full; and (iii) such Restricted
Subsidiary shall deliver to the Trustee an opinion of independent legal
counsel to the effect that such Subsidiary Guarantee has been duly executed
and authorized and constitutes a valid, binding and enforceable obligation of
such Restricted Subsidiary, except insofar as enforcement thereof may be
limited by bankruptcy, insolvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and except insofar as
enforcement thereof is subject to general principles of equity; provided,
however, that this paragraph (a) shall not be applicable to (1) any guarantee
of any Restricted Subsidiary that (x) existed at the time such Person became a
Restricted Subsidiary of the Company and (y) was not incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary of
the Company or (2) any guarantee of any Restricted Subsidiary of Indebtedness
of the Company described in clause (i) of the definition of Permitted
Indebtedness.
(b) The Indenture provides that the Company shall not, and shall not permit
any of its Restricted Subsidiaries to, transfer any assets, businesses,
divisions, real property or equipment to any Restricted Subsidiary (other than
sales of oil and gas production in the ordinary course of business at prices
under contracts in existence as of the date of the Indenture or on terms not
less favorable to the Subsidiary than would be obtainable at the time in
comparable transactions through arms-length dealings with Persons other than
Affiliates of the Company or any transfer that results in Permitted Subsidiary
Indebtedness) or acquire Capital Stock of a new Restricted Subsidiary that in
either case is not a Subsidiary Guarantor unless (i) such transferee or new
Restricted Subsidiary enters into a Subsidiary Guarantee by complying with
paragraph (a) of this covenant or (ii) the aggregate fair market value (as
determined in good faith by the Board of Directors), at the time of such
proposed transfer or acquisition, of such assets, businesses, divisions, real
property or equipment proposed to be transferred or Capital Stock of a new
Restricted Subsidiary proposed to be acquired, together with the aggregate
fair market value of all assets, businesses, divisions, real property or
equipment previously transferred pursuant to this clause (ii) and Capital
Stock previously acquired pursuant to this clause (ii) (in each case valued at
the time of transfer or acquisition) does not exceed (x) the greater of
$35,000,000 and 5% of Adjusted Consolidated Net Tangible Assets less (y) the
book value of total combined assets of all Subsidiaries of the Company at
December 31, 1996, as reflected in a consolidating balance sheet of the
Company prepared in accordance with GAAP (exclusive, in the case of each of
clauses (x) and (y), of intercompany receivables and liabilities due from the
Company and assets subject to any Sale/Leaseback Transaction treated as an
operating lease in the consolidated financial statements of the Company);
provided, however, that, in the case of clause (ii), if the Restricted
Subsidiary to which such transfer was made or whose Capital Stock was acquired
subsequently enters into a Subsidiary Guarantee, such transfer or acquisition
shall be treated as having been made pursuant to clause (i).
(c) Notwithstanding the foregoing and the other provisions of the Indenture,
any Subsidiary Guarantee incurred by a Restricted Subsidiary pursuant to the
covenant shall provide by its terms that it shall be
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automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person that is not an Affiliate of the Company,
of all of the Company's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture), (ii) the merger of such Restricted Subsidiary
into the Company or any other Restricted Subsidiary (provided the surviving
Restricted Subsidiary assumes the Subsidiary Guarantee) or the liquidation and
dissolution of such Restricted Subsidiary (in each case to the extent not
prohibited by the Indenture), or (iii) (x) the release or discharge of all
guarantees by such Restricted Subsidiary of any Indebtedness other than the
Note Obligations, except a discharge or release by or as a result of payment
under such guarantees and (y) after giving effect to the proposed release and
discharge, the aggregate total combined assets of all Restricted Subsidiaries
that are not Subsidiary Guarantors (exclusive of intercompany receivables and
liabilities due from the Company and assets subject to any Sale/Leaseback
Transaction treated as an operating lease in the consolidated financial
statements of the Company) do not exceed the greater of $35,000,000 and 5% of
Adjusted Consolidated Net Tangible Assets.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock to the Company or any
Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any
Restricted Subsidiary, (c) make an Investment in the Company or any Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or
any Restricted Subsidiary, except for such encumbrances or restrictions (i)
pursuant to an agreement in effect or entered into on the date of the
Indenture, (ii) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any other Person, or the properties or assets
of any other Person, other than the Person, or the property or assets of the
Person, so acquired or (iii) existing under any agreement that extends,
renews, refinances or replaces the agreements containing the restrictions in
the foregoing clauses (i) and (ii); provided, however, that the terms and
conditions of any such restrictions are not materially less favorable to the
Holders of the Notes than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced.
Limitation on Other Senior Subordinated Indebtedness. The Indenture provides
that the Company will not incur, directly or indirectly, any Indebtedness
which is expressly subordinate or junior in right of payment in any respect to
Senior Indebtedness unless such Indebtedness ranks pari passu in right of
payment with the Notes, or is expressly subordinated in right of payment to
the Notes.
Reports. The Indenture requires that the Company (and the Subsidiary
Guarantors, if applicable) file on a timely basis with the Commission, to the
extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, the
annual reports, quarterly reports and other documents that the Company would
be required to file if it were subject to Section 13 or 15(d) of the Exchange
Act). The Company (and the Subsidiary Guarantors, if applicable) are also
required (a) to file with the Trustee, and provide to each Holder of Notes,
without cost to such Holder, copies of such reports and documents within 15
days after the date on which the Company files such reports and documents with
the Commission or the date on which the Company (and the Subsidiary
Guarantors, if applicable) would be required to file such reports and
documents if the Company (and the Subsidiary Guarantors, if applicable) were
so required and (b) if filing such reports and documents with the Commission
is not accepted by the Commission or is prohibited under the Exchange Act, to
furnish at the Company's cost copies of such reports and documents to any
Holder of Notes promptly upon written request. The Company is obligated to
make available, upon request, to any Holder of Notes the information required
by Rule 144A(d)(4) under the Securities Act during any period in which the
Company is not subject to Section 13 or 15(d) of the Exchange Act.
Future Designation of Restricted and Unrestricted Subsidiaries. The
foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens)
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may be affected by the designation by the Company of any existing or future
Subsidiary of the Company as an Unrestricted Subsidiary. Generally, a
Restricted Subsidiary includes any Subsidiary of the Company, whether existing
on or after the date of the Indenture, unless the Subsidiary of the Company is
designated as an Unrestricted Subsidiary pursuant to the terms of the
Indenture. The definition of "Unrestricted Subsidiary" set forth under the
caption "--Certain Definitions" describes the circumstances under which a
future Subsidiary of the Company may be designated as an Unrestricted
Subsidiary by the Board of Directors of the Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS, ETC.
The Company will not, in any single transaction or series of related
transactions, merge or consolidate with or into any other Person, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of Affiliated Persons,
and the Company will not permit any of its Restricted Subsidiaries to enter
into any such transaction or series of transactions if such transaction or
series of transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all
of the properties and assets of the Company and its Restricted Subsidiaries on
a consolidated basis to any other Person or group of Affiliated Persons,
unless at the time and after giving effect thereto (i) either (A) if the
transaction or transactions is a merger or consolidation, the Company shall be
the surviving Person of such merger or consolidation, or (B) the Person (if
other than the Company) formed by such consolidation or into which the Company
or such Restricted Subsidiary is merged or to which the properties and assets
of the Company or such Restricted Subsidiary, as the case may be, are sold,
assigned, conveyed, transferred, leased or otherwise disposed of (any such
surviving Person or transferee Person being the "Surviving Entity") shall be a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall, in either
case, expressly assume by a supplemental indenture to the Indenture executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture, and, in each
case, the Indenture shall remain in full force and effect; (ii) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating any Indebtedness not
previously an obligation of Company or any of its Restricted Subsidiaries in
connection with or as a result of such transaction as having been incurred at
the time of such transaction), no Default or Event of Default shall have
occurred and be continuing; (iii) except in the case of the consolidation or
merger of any Restricted Subsidiary with or into the Company, immediately
after giving effect to such transaction or transactions on a pro forma basis,
the Consolidated Net Worth of the Company (or the Surviving Entity if the
Company is not the continuing obligor under the Indenture) is at least equal
to the Consolidated Net Worth of the Company immediately before such
transaction or transactions; (iv) except in the case of the consolidation or
merger of any Restricted Subsidiary with or into the Company or any Wholly
Owned Restricted Subsidiary, immediately before and immediately after giving
effect to such transaction or transactions on a pro forma basis (on the
assumption that the transaction or transactions occurred on the first day of
the period of four fiscal quarters ending immediately prior to the
consummation of such transaction or transactions, with the appropriate
adjustments with respect to the transaction or transactions being included in
such pro forma calculation), the Company (or the Surviving Entity if the
Company is not the continuing obligor under the Indenture) could incur $1.00
of additional Indebtedness (excluding Permitted Indebtedness) pursuant to the
"Limitation on Indebtedness" covenant; (v) each Subsidiary Guarantor, unless
it is the other party to the transactions described above, shall have by
supplemental indenture to the Indenture confirmed that its Subsidiary
Guarantee of the Notes shall apply to such Person's obligations under the
Indenture and the Notes; and (vi) if any of the properties or assets of the
Company or any of its Restricted Subsidiaries would upon the consummation of
such transaction or series of related transactions become subject to any Lien
(other than a Permitted Lien), the creation and imposition of such Lien shall
have been in compliance with the "Limitation on Liens" covenant.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officers' Certificate stating that such consolidation, merger,
transfer, lease or other disposition and the supplemental indenture in respect
thereto comply with the requirements under the
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Indenture and an Opinion of Counsel stating that the requirements of clause
(i) of the preceding paragraph have been complied with. Upon any consolidation
or merger or any sale, assignment, transfer, lease or other disposition of all
or substantially all of the assets of the Company in accordance with the
foregoing, in which the Company is not the continuing corporation, the
Surviving Entity shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor corporation had been named as the Company therein, and
thereafter the Company, except in the case of a lease, will be discharged from
all obligations and covenants under the Indenture and the Notes.
EVENTS OF DEFAULT
The following constitute "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, on any
of the Notes, whether such payment is due at maturity, upon redemption,
upon repurchase pursuant to a Change of Control Offer or a Net Proceeds
Offer, upon acceleration or otherwise; or
(ii) default in the payment of any installment of interest on any of the
Notes, when it becomes due and payable, and the continuance of such default
for a period of 30 days; or
(iii) default in the performance or breach of the provisions of the
"Merger, Consolidation and Sale of Assets" section of the Indenture, the
failure to make or consummate a Change of Control Offer in accordance with
the provisions of the "Change of Control" covenant or the failure to make
or consummate a Net Proceeds Offer in accordance with the provisions of the
"Limitation on Disposition of Proceeds of Asset Sales" covenant; or
(iv) the Company or any Subsidiary Guarantor shall fail to perform or
observe any other term, covenant or agreement contained in the Notes, any
Subsidiary Guarantee or the Indenture (other than a default specified in
(i), (ii) or (iii) above) for a period of 30 days after written notice of
such failure requiring the Company to remedy the same shall have been given
(x) to the Company by the Trustee or (y) to the Company and the Trustee by
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding; or
(v) the occurrence and continuation beyond any applicable grace period of
any default in the payment of the principal of (or premium, if any, on) or
interest on any Indebtedness of the Company (other than the Notes) or any
Restricted Subsidiary for money borrowed when due, or any other default
causing acceleration of any Indebtedness of the Company or any Restricted
Subsidiary for money borrowed, provided, however, that the aggregate
principal amount of such Indebtedness shall exceed $5,000,000; and provided
further, that if any such default is cured or waived or any such
acceleration rescinded, or such debt is repaid, within a period of 10 days
from the continuation of such default beyond the applicable grace period or
the occurrence of such acceleration, as the case may be, such Event of
Default under the Indenture and any consequential acceleration of the Notes
shall be automatically rescinded, so long as such rescission does not
conflict with any judgment or decree; or
(vi) the commencement of proceedings, or the taking of any enforcement
action (including by way of set-off), by any holder of at least $5,000,000
in aggregate principal amount of Indebtedness of the Company or any
Restricted Subsidiary, after a default under such Indebtedness, to retain
in satisfaction of such Indebtedness or to collect or seize, dispose of or
apply in satisfaction of such Indebtedness, property or assets of the
Company or any Restricted Subsidiary having a fair market value (as
determined by the Board of Directors of the Company and evidenced by a
board resolution) in excess of $5,000,000 individually or in the aggregate,
provided that if any such proceedings or actions are terminated or
rescinded, or such Indebtedness is repaid, such Event of Default under the
Indenture and any consequential acceleration of the Notes shall be
automatically rescinded, so long as (a) such rescission does not conflict
with any judgment or decree and (b) the holder of such Indebtedness shall
not have applied any such property or assets in satisfaction of such
Indebtedness; or
(vii) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect, enforceable in accordance with its terms
(except pursuant to the release of any such Subsidiary Guarantee in
accordance with the Indenture); or
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(viii) certain events giving rise to ERISA liability; or
(ix) final judgments or orders rendered against the Company or any
Restricted Subsidiary that are unsatisfied and that require the payment in
money, either individually or in an aggregate amount, that is more than
$5,000,000 over the coverage under applicable insurance policies and either
(i) commencement by any creditor of an enforcement proceeding upon such
judgment (other than a judgment that is stayed by reason of pending appeal
or otherwise) or (ii) the occurrence of a 60-day period during which a stay
of such judgment or order, by reason of pending appeal or otherwise, was
not in effect; or
(x) the entry of a decree or order by a court having jurisdiction in the
premises (A) for relief in respect of the Company or any Restricted
Subsidiary in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar
law or (B) adjudging the Company or any Restricted Subsidiary bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment or composition of the Company or a Restricted Subsidiary under
any applicable federal or state law, or appointing under any such law a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Restricted Subsidiary or of a
substantial part of their consolidated assets, or ordering the winding up
or liquidation of their affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect
for a period of 60 consecutive days; or
(xi) the commencement by the Company or any Restricted Subsidiary of a
voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or any other
case or proceeding to be adjudicated bankrupt or insolvent, or the consent
by the Company or any Restricted Subsidiary to the entry of a decree or
order for relief in respect thereof in an involuntary case or proceeding
under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, or the filing by
the Company or any Restricted Subsidiary of a petition or consent seeking
reorganization or relief under any applicable federal or state law, or the
consent by it under any such law to the filing of any such petition or to
the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or other similar official)
of any of the Company or any Restricted Subsidiary or of any substantial
part of their consolidated assets, or the making by it of an assignment for
the benefit of creditors under any such law, or the admission by it in
writing of its inability to pay its debts generally as they become due or
taking of corporate action by the Company or any Restricted Subsidiary in
furtherance of any such action.
If an Event of Default (other than as specified in clause (x) or (xi) above)
shall occur and be continuing, the Trustee, by written notice to the Company,
or the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee and the Company, may declare the
principal of, premium, if any, and accrued interest on all of the outstanding
Notes due and payable immediately, upon which declaration all amounts payable
in respect of the Notes shall be immediately due and payable. If an Event of
Default specified in clause (x) or (xi) above occurs and is continuing, then
the principal of, premium, if any, and accrued interest on all of the
outstanding Notes shall ipso facto become and be immediately due and payable
without any declaration, notice or other act on the part of the Trustee or any
Holder of Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration if (a) the Company or any Subsidiary Guarantor has
paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid
or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all Notes, (iii) the principal of
and premium, if any, on any Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the
Notes, and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest and overdue principal at the rate borne by the
Notes which has become due otherwise than by such declaration of acceleration;
(b) the rescission would not conflict with any judgment or
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decree of a court of competent jurisdiction; and (c) all Events of Default,
other than the nonpayment of principal of, premium, if any, and interest on
the Notes that has become due solely by such declaration of acceleration, have
been cured or waived.
Under certain circumstances described in the Indenture, in the event of a
declaration of acceleration in respect of the Notes because of an Event of
Default specified in clauses (v) or (vi) above shall have occurred and be
continuing, such declaration of acceleration 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 had been
accelerated, then the holders thereof have rescinded their declaration of
acceleration in respect of such Indebtedness.
The Holders of not less than a majority in aggregate principal amount of the
outstanding Notes may on behalf of the Holders of all the Notes waive any past
Defaults under the Indenture, except a Default in the payment of the principal
of, premium, if any, or interest on any Note, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the Holder of each Note outstanding.
No Holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless 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 the Indenture, the Trustee has
failed to institute such proceeding within 60 days after receipt of such
notice and offer of indemnity and the Trustee, within such 60-day period, has
not received directions inconsistent with such written request by Holders of a
majority in aggregate principal amount of the outstanding Notes. Such
limitations do not apply, however, 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 Note on or after the respective due dates expressed in such
Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Noteholders unless such Holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes 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 under the Indenture.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee shall mail to each Holder of the Notes notice of the Default within 60
days after the occurrence thereof; provided, however, that in case of a
Default of the type listed in clause (v) above, no notice to Holders shall be
given until at least 60 days after the occurrence thereof. Except in the case
of a Default in payment of principal of, premium, if any, or interest on any
Notes, the Trustee may withhold the notice to the Holders of such Notes if a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interest of the Noteholders.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company and the Subsidiary Guarantors
of its obligations under the Indenture and as to any default in such
performance. The Company is also required to notify the Trustee within ten
days of any Default.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations of
the Company and the Subsidiary Guarantors with respect to the outstanding
Notes ("legal defeasance"). Such legal defeasance means
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that the Company and the Subsidiary Guarantors shall be deemed to have paid
and discharged the entire Indebtedness represented by the outstanding Notes,
except for (i) the rights of Holders of outstanding Notes to receive payment
in respect of the principal of, premium, if any, on and interest on such Notes
when such payments are due, (ii) the Company's obligations to issue temporary
Notes, register the transfer or exchange of any Notes, replace mutilated,
destroyed, lost or stolen Notes and maintain an office or agency for payments
in respect of the Notes, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to terminate the obligations of the Company and any Subsidiary Guarantor with
respect to certain covenants that are set forth in the Indenture, some of
which are described under "--Certain Covenants" above, and any omission to
comply with such obligations shall not constitute a Default with respect to
the Notes ("covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance, (i) the
Company or any Subsidiary Guarantor must irrevocably deposit, with the
Trustee, in trust, for the benefit of the Holders of the Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Indenture), or
a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, on and interest on the outstanding Notes to
redemption or maturity; (ii) the Company shall have delivered to the Trustee
an Opinion of Counsel to the effect that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such legal defeasance or covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such legal defeasance or covenant
defeasance had not occurred (in the case of legal defeasance, such opinion
must refer to and be based upon a published ruling of the Internal Revenue
Service or a change in applicable federal income tax laws); (iii) no Default
shall have occurred and be continuing on the date of such deposit; (iv) such
legal defeasance or covenant defeasance shall not cause the Trustee to have a
conflicting interest under the Indenture or the Trust Indenture Act with
respect to any securities of the Company or any Subsidiary Guarantor; (v) such
legal defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a default under, any material agreement or
instrument to which the Company or any Subsidiary Guarantor is a party or by
which it is bound; and (vi) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel satisfactory to the Trustee,
which, taken together, state that all conditions precedent under the Indenture
to either legal defeasance or covenant defeasance, as the case may be, have
been complied with and that no violations under agreements governing any other
outstanding Indebtedness would result therefrom.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the 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 Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable or will become due and payable at
their Stated Maturity within one year, or are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the serving
of notice of redemption by the Trustee in the name, and at the expense, of the
Company, and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amounts sufficient to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of (and premium, if any, on) and interest on the
Notes to the date of deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be,
together with instructions from the Company irrevocably directing the Trustee
to apply such funds to the payment thereof at maturity or redemption, as the
case may be, (ii) the Company has paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel satisfactory to the
Trustee, which, taken together, state that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
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AMENDMENTS AND WAIVERS
From time to time, the Company and the Trustee may, without the consent of
the Noteholders, amend, waive or supplement the Indenture or the Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, maintaining the qualification of, the Indenture
under the Trust Indenture Act, or making any change that does not adversely
affect the rights of any Noteholder. Other amendments and modifications of the
Indenture or the Notes may be made by the Company, the Subsidiary Guarantors
and the Trustee with the consent of the Holders of not less than a majority of
the aggregate principal amount of the outstanding Notes; provided, however,
that no such modification or amendment may, without the consent of the Holder
of each outstanding Note affected thereby, (a) change the Stated Maturity of
the principal of, or any installment of interest on any Note, (b) reduce the
principal amount of (or the premium, if any, on) or interest on any Note, (c)
change the coin or currency of payment of principal of (or the premium, if
any, on) or interest on, any Note, (d) impair the right to institute suit for
the enforcement of any payment on or with respect to any Note, (e) reduce the
above-stated percentage of aggregate principal amount of outstanding Notes
necessary to modify or amend the Indenture, (f) reduce the percentage of
aggregate principal amount of outstanding Notes necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, (h) modify any provision of the
Indenture relating to the Subsidiary Guarantees in a manner adverse to the
Holders, or (i) amend, change or modify the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control
or make and consummate the Net Proceeds Offer with respect to any Asset Sale
or modify any of the provisions or definitions with respect thereto.
The Holders of a majority in aggregate principal amount of the outstanding
Notes may waive compliance by the Company with certain restrictive provisions
of the Indenture. The Holders of a majority in aggregate principal amount of
the outstanding Notes may waive any past Default under the Indenture, except a
Default in the payment of principal (or premium, if any, on) or interest on
the Notes or in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the Holder of each Note
outstanding.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in
it under the Indenture and use the same degree of care and skill in its
exercise as a prudent Person would exercise under the circumstances in the
conduct of such Person's own affairs.
The Indenture and provisions of the Trust Indenture Act contain limitations
on the rights of the Trustee thereunder, should it become a creditor of the
Company, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions; provided,
however, that if it acquires any conflicting interest (as defined) it must
eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees provide that they
will be governed by the laws of the State of New York, without regard to the
principles of conflicts of law.
BOOK-ENTRY, DELIVERY AND FORM
A portion of the Old Notes was represented initially by a single global Note
(the "Global Old Note") that was deposited with, or on behalf of, the
Depository Trust Company ("DTC"). The Global Old Note is registered in the
name of Cede & Co., as nominee of the DTC, and beneficial interests in the
Global Old Note are shown
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on, and transfers thereof are effected only through, records maintained by the
Depositary and its participants. Except as provided below, the New Notes also
will be issued in the form of one or more global Notes (the "Global New Notes"
and, together with the Global Old Note, the "Global Notes"). The Global New
Notes will be deposited on the original date of issuance of the New Notes
with, or on behalf of, DTC and registered in the name of Cede & Co., as
nominee of DTC. The interest of beneficial owners of Notes in the Global Notes
will be represented through financial institutions acting on their behalf as
direct or indirect participants of DTC.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the
Global Notes will be shown on, and the transfer of these ownership interests
will be effected only through, records maintained by DTC or its nominee (with
respect to interests of participants) and the records of participants (with
respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. In addition, no beneficial owner
of an interest in a Global Note will be able to transfer that interest except
in accordance with the applicable procedures of DTC and, if applicable, Cedel,
societe anonyme ("Cedel"), and Morgan Guaranty Trust Company of New York, as
operator of the Euroclear system ("Euroclear") (in addition to those under the
Indenture).
Payments on Global Notes will be made to DTC or its nominee, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. The Company expects that DTC
or its nominee, upon receipt of any payment in respect of a Global Note
representing any Notes held by it or its nominee, will immediately credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note
for such Notes as shown on the records of DTC or its nominee. The Company also
expects that payments by participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. The laws of some states require that certain
Persons take physical delivery of securities in definitive form. Consequently,
the ability to transfer beneficial interests in a Global Note to such Persons
may be limited. Because DTC can only act on behalf of participants, who in
turn act on behalf of indirect participants (as defined below) and certain
banks, the ability of a Person having a beneficial interest in a Global Note
to pledge such interest to Persons that do not participate in the DTC system,
or otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate of such interest.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities that its
participants deposit with DTC and facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through
or maintain a custodial relationship with a direct participant, either
directly or indirectly ("indirect participants"). The rules applicable to DTC
and its participants are on file with the Commission. Although DTC, Euroclear
and Cedel are expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of
DTC,
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Euroclear and Cedel, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or the participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in a
Global Note may, upon request to the Company or the Trustee, exchange such
beneficial interest for Notes represented by Certificates in definitive form
registered in the name of such Person or such Person's nominee ("Certificated
Securities"). Upon any such issuance, the Trustee is required to register such
Notes in the name of, and cause the same to be delivered to, such Person or
Persons (or the nominee of any thereof). In addition, if (i) DTC or any
successor depositary (the "Depositary") notifies the Company in writing that
the Depositary is no longer willing or able to act as a depositary and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the Depositary of its Global Note,
Certificated Securities will be issued to each Person that the Depositary
identifies as the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Depositary in identifying the beneficial owners of the related Notes, and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Depositary for all purposes (including with
respect to the registration and delivery, and the respective principal
amounts, of the Notes to be issued).
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Asset Acquisition from such Person, (b) outstanding at the
time such Person becomes a Subsidiary of any other Person (other than any
Indebtedness incurred in connection with, or in contemplation of, such Asset
Acquisition or such Person becoming such a Subsidiary) or (c) any renewals,
extensions, substitutions, refinancings or replacements (each, for purposes of
this clause, a "refinancing") by the Company of any Indebtedness described in
clause (a) or (b) of this definition, including any successive refinancings,
so long as (A) any such new Indebtedness shall be in a principal amount that
does not exceed the principal amount (or, if such Indebtedness being
refinanced provides for an amount less than the principal amount thereof to be
due and payable upon a declaration of acceleration thereof, such lesser amount
as of the date of determination) so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms
of the Indebtedness refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing, plus
the amount of expenses of the Company incurred in connection with such
refinancing, and (B) in the case of any refinancing of Subordinated
Indebtedness, such new Indebtedness is made subordinate to the Notes at least
to the same extent as the Indebtedness being refinanced and (C) such new
Indebtedness has an Average Life longer than the Average Life of the Notes and
a final Stated Maturity later than the final Stated Maturity of the Notes.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (a) the sum of (i) discounted future net
revenues from proved oil and gas reserves of the Company and its Restricted
Subsidiaries calculated in accordance with SEC guidelines before any state or
federal income taxes, as estimated by a nationally recognized firm of
independent petroleum engineers in a reserve report prepared as of the end of
the Company's most recently completed fiscal year, as increased by, as of the
date of determination, the estimated discounted future net revenues from (A)
estimated proved oil and gas reserves acquired since the date of such year-end
reserve report, and (B) estimated oil and gas reserves attributable to upward
revisions of estimates of proved oil and gas reserves since the date of such
year-end reserve report due to exploration, development or exploitation
activities, in each case calculated in accordance with SEC guidelines
(utilizing the prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the estimated discounted future net
revenues from (C) estimated proved oil and gas reserves produced or disposed
of since the
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date of such year-end reserve report and (D) estimated oil and gas reserves
attributable to downward revisions of estimates of proved oil and gas reserves
since the date of such year-end reserve report due to changes in geological
conditions or other factors which would, in accordance with standard industry
practice, cause such revisions, in each case calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end reserve report);
provided, however, that, in the case of each of the determinations made
pursuant to clauses (A) through (D), such increases and decreases shall be as
estimated by the Company's petroleum engineers, unless in the event that there
is a Material Change as a result of such acquisitions, dispositions or
revisions, then the discounted future net revenues utilized for purposes of
this clause (a)(i) shall be confirmed in writing by a nationally recognized
firm of independent petroleum engineers, (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 attributable, 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 or (B) the appraised value, as estimated by
independent appraisers, of other tangible assets (including, without
duplication, Investments in unconsolidated Restricted Subsidiaries) of the
Company and its Restricted Subsidiaries, as of the date no earlier than the
date of the Company's latest audited financial statements, minus (b) the sum
of (i) minority interests (other than a minority interest in a Subsidiary that
is a business trust or similar entity formed for the primary purpose of
issuing preferred securities the proceeds of which are loaned to the Company
or a Restricted Subsidiary), (ii) any net gas balancing liabilities of the
Company and its Restricted Subsidiaries reflected in the Company's latest
audited financial statements, (iii) to the extent included in (a)(i) above,
the discounted future net revenues, calculated in accordance with SEC
guidelines (utilizing the prices utilized in the Company's year-end reserve
report), 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 Volumetric Production Payments on the schedules
specified with respect thereto and (iv) the discounted future net revenues,
calculated in accordance with SEC guidelines, attributable to reserves subject
to Dollar-Denominated Production Payments which, based on the estimates of
production and price assumptions included in determining the discounted future
net revenues specified in (a)(i) above, would be necessary to fully satisfy
the payment obligations of the Company and its Restricted Subsidiaries with
respect to Dollar-Denominated Production Payments on the schedules specified
with respect thereto. If the Company changes its method of accounting from the
successful efforts method to the full cost method or a similar method of
accounting, "Adjusted Consolidated Net Tangible Assets" will continue to be
calculated as if the Company were still using the successful efforts method of
accounting.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control," when used with respect to any Person, means the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of this definition, beneficial ownership of 10% or
more of the voting common equity (on a fully diluted basis) or options or
warrants to purchase such equity (but only if exercisable at the date of
determination or within 60 days thereof) of a Person shall be deemed to
constitute control of such Person. No Person shall be deemed an Affiliate of
an oil and gas royalty trust solely by virtue of ownership of units of
beneficial interest in such trust.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or any Restricted Subsidiary shall be merged with or
into the Company or any Restricted Subsidiary or (b) the acquisition by the
Company or any Restricted Subsidiary of the assets of any Person which
constitute all or substantially all of the assets of such Person or any
division or line of business of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by means of a
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Sale/Leaseback Transaction or by way of merger or consolidation)
(collectively, for purposes of this definition, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (a) any Capital
Stock of any Restricted Subsidiary held by the Company or any Restricted
Subsidiary; (b) all or substantially all of the properties and assets of any
division or line of business of the Company or any of its Restricted
Subsidiaries; or (c) any other properties or assets of the Company or any of
its Restricted Subsidiaries other than a disposition of hydrocarbons or other
mineral products in the ordinary course of business. For the purposes of this
definition, the term "Asset Sale" shall not include (i) any transfer of
properties or assets that is governed by, and made in accordance with, the
provisions described under "Merger, Consolidation and Sale of Assets, Etc.;"
(ii) any transfer of properties or assets to an Unrestricted Subsidiary, if
permitted under the provisions described under "Limitation on Restricted
Payments;" (iii) any trade or exchange of oil and gas properties or shares of
Capital Stock in any corporation in the Oil and Gas Business owned by the
Company or any Restricted Subsidiary for oil and gas properties owned or held
by another Person provided that (x) the fair market value of the properties or
shares traded or exchanged by the Company or such Restricted Subsidiary
(including any cash or Cash Equivalents, not to exceed 15% of such fair market
value, to be delivered by the Company or such Restricted Subsidiary) is
reasonably equivalent to the fair market value of the properties (together
with any cash or Cash Equivalents, not to exceed 15% of such fair market
value) to be received by the Company or such Restricted Subsidiary as
determined in good faith by (A) any officer of the Company if such fair market
value is less than $5,000,000 and (B) the Board of Directors of the Company as
certified by a certified resolution delivered to the Trustee if such fair
market value is equal to or in excess of $5,000,000; provided, however, that
if such resolution indicates that such fair market value is equal to or in
excess of $10,000,000 such resolution shall be accompanied by a written
appraisal by a nationally recognized investment banking firm or appraisal
firm, in each case specializing or having a speciality in oil and gas
properties, and (y) such exchange is approved by a majority of the
Disinterested Directors of the Company; or (iv) any transfer of properties or
assets having a fair market value of less than $2,000,000.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount
of rent required to be paid by such Person under the lease during the primary
term thereof, without giving effect to any renewals at the option of the
lessee, discounted from the respective due dates thereof to such date of
determination at the rate of interest per annum implicit in the terms of the
lease. As used in the preceding sentence, the "net amount of rent" under any
lease for any such period shall mean the sum of rental and other payments
required to be paid with respect to such period by the lessee thereunder,
excluding any amounts required to be paid by such lessee on account of
maintenance and repairs, insurance, taxes, assessments, water rates or similar
charges. In the case of any lease which is terminable by the lessee upon
payment of a penalty, such net amount of rent shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under
such lease subsequent to the first date upon which it may be so terminated.
"Average Life" means, with respect to any Indebtedness, as at any date of
determination, the quotient obtained by dividing (a) the sum of the products
of (i) the number of years (and any portion thereof) from the date of
determination to the date or dates of each successive scheduled principal
payment (including, without limitation, any sinking fund or mandatory
redemption payment requirements) of such Indebtedness multiplied by (ii) the
amount of each such principal payment by (b) the sum of all such principal
payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents in the equity
interests (however designated) in such Person, and any rights (other than debt
securities convertible into an equity interest), warrants or options
exercisable for, exchangeable for or convertible into such an equity interest
in such Person.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the
purpose of the Indenture, the amount of such obligation at any date shall be
the capitalized amount thereof at such date, determined in accordance with
GAAP.
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"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of
365 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500,000,000; (iii) commercial
paper with a maturity of 365 days or less issued by a corporation that is not
an Affiliate of the Company and is organized under the laws of any state of
the United States or the District of Columbia and rated at least A-1 by S&P or
at least P-1 by Moody's; (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with any commercial bank meeting the specifications of
clause (ii) above; and (v) overnight bank deposits and bankers' acceptances at
any commercial bank meeting the qualifications specified in clause (ii) above.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d)(3) or
14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than
40% of the total voting power of the outstanding Voting Stock of the Company;
(b) the Company is merged with or into or consolidated with another Person
and, immediately after giving effect to the merger or consolidation, (A) less
than 50% of the total voting power of the outstanding Voting Stock of the
surviving or resulting Person is then "beneficially owned" (within the meaning
of Rule 13d-3 under the Exchange Act) in the aggregate by (x) the stockholders
of the Company immediately prior to such merger or consolidation, or (y) if a
record date has been set to determine the stockholders of the Company entitled
to vote with respect to such merger or consolidation, the stockholders of the
Company as of such record date and (B) any "person" or "group" (as such terms
are used in Sections 13(d)(3) or 14(d)(2) of the Exchange Act) has become the
direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 40% of the total voting power of the Voting Stock
of the surviving or resulting Person; (c) the Company, either individually or
in conjunction with one or more Restricted Subsidiaries, sells, conveys,
transfers or leases, or the Restricted Subsidiaries sell, convey, transfer or
lease, all or substantially all of the assets of the Company and the
Restricted Subsidiaries, taken as a whole (either in one transaction or a
series of related transactions), including Capital Stock of the Restricted
Subsidiaries, to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); (d) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the stockholders
of the Company was approved by a vote of 66 2/3% of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Company then
in office; or (e) the liquidation or dissolution of the Company.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
of (a) the sum of Consolidated Net Income, Consolidated Interest Expense,
Consolidated Income Tax Expense and Consolidated Non-cash Charges deducted in
computing Consolidated Net Income, in each case, for such period, of the
Company and its Restricted Subsidiaries on a consolidated basis, all
determined in accordance with GAAP, decreased (to the extent included in
determining Consolidated Net Income) by the sum of (A) the amount of deferred
revenues that are amortized during such period and are attributable to
reserves that are subject to Volumetric Production Payments and (B) amounts
recorded in accordance with GAAP as repayments of principal and interest
pursuant to Dollar-Denominated Production Payments, to (b) the sum of such
Consolidated Interest Expense for such period; provided, however, that (i) in
making such computation, the Consolidated Interest Expense attributable to
interest on any Indebtedness required to be computed on a pro forma basis in
accordance with clause (x) of the "Limitation on Indebtedness" covenant and
bearing a floating interest rate
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shall be computed as if the rate in effect on the date of computation had been
the applicable rate for the entire period, (ii) in making such computation,
the Consolidated Interest Expense attributable to interest on any Indebtedness
under a revolving credit facility required to be computed on a pro forma basis
in accordance with clause (x) of the "Limitation on Indebtedness" covenant
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period, provided that such average daily balance shall
be reduced by the amount of any repayment of Indebtedness under a revolving
credit facility during the applicable period, which repayment permanently
reduced the commitments or amounts available to be reborrowed under such
facility, (iii) notwithstanding clauses (i) and (ii) of this proviso, interest
on Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by agreements relating to Interest Rate Protection Obligations,
shall be deemed to have accrued at the rate per annum resulting after giving
effect to the operation of such agreements and (iv) in making such
calculation, Consolidated Interest Expense shall exclude interest attributable
to Dollar-Denominated Production Payments.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (i) the interest expense of the Company and its Restricted
Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing and (e) all accrued interest, in each case to the extent
attributable to such period, (ii) to the extent any Indebtedness of any Person
(other than the Company or a Restricted Subsidiary) is guaranteed by the
Company or any Restricted Subsidiary, the aggregate amount of interest paid or
accrued by such other Person during such period attributable to any such
Indebtedness, in each case to the extent attributable to that period, (iii)
the aggregate amount of the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by the
Company and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP and (iv) the aggregate amount of
dividends paid or accrued on Redeemable Capital Stock or Preferred Stock of
the Company and its Restricted Subsidiaries, to the extent such Redeemable
Capital Stock or Preferred Stock is owned by Persons other than Restricted
Subsidiaries.
"Consolidated Net Income" means, for any period, the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period as
determined in accordance with GAAP, adjusted by excluding (a) net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto),
(b) net after-tax gains or losses (less all fees and expenses relating
thereto) attributable to Asset Sales, (c) the net income (or net loss) of any
Person (other than the Company or any of its Restricted Subsidiaries), in
which the Company or any of its Restricted Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or its Restricted Subsidiaries in
cash by such other Person during such period (regardless of whether such cash
dividends, distributions or interest on indebtedness is attributable to net
income (or net loss) of such Person during such period or during any prior
period), (d) net income (or net loss) of any Person combined with the Company
or any of its Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (e) the net
income of any Restricted Subsidiary to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary is
not at the date of determination permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (f) income resulting from transfers
of assets received by the Company or any Restricted Subsidiary from an
Unrestricted Subsidiary and (g) any write-downs of non-current assets;
provided, however, that any ceiling limitation write-downs under SEC
guidelines shall be treated as capitalized costs, as if such write-downs had
not occurred.
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"Consolidated Net Worth" means, at any date, the consolidated stockholders'
equity of the Company less the amount of such stockholders' equity
attributable to Redeemable Capital Stock or treasury stock of the Company and
its Restricted Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, depletion, amortization, impairment and other non-cash expenses
of the Company and its Restricted Subsidiaries reducing Consolidated Net
Income for such period, determined on a consolidated basis in accordance with
GAAP (excluding any such non-cash charge which requires an accrual of or
reserve for cash charges for any future period).
"Credit Agreement" means the Revolving Credit Agreement dated June 15, 1995
among the Company and Morgan Guaranty Trust Company of New York and
NationsBank of Texas, N.A., as co-agents, and the other banks specified
therein, as such agreement may be amended, modified, supplemented, extended,
restated, replaced (including replacement after the termination of such
agreement), restructured, increased, renewed or refinanced from time to time
in one or more credit agreements, loan agreements, instruments or similar
agreements, as such may be further amended, modified, supplemented, extended,
restated, replaced (including replacement after the termination of such
agreement), restructured, increased, renewed or refinanced from time to time.
"Credit Agreement Obligations" means all monetary obligations of every
nature of the Company or a Restricted Subsidiary, including, without
limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities, from time
to time owed to the lenders or any agent under or in respect of the Credit
Agreement.
"Default" means any event, act or condition that is, or after notice or
passage of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness
constituting Credit Agreement Obligations and (ii) any other Senior
Indebtedness which (a) at the time of incurrence equals or exceeds $10,000,000
in aggregate principal amount and (b) is specifically designated by the
Company in the instrument evidencing such Senior Indebtedness as "Designated
Senior Indebtedness" for purpose of the Indenture.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors of the Company is
required to deliver a resolution of the Board of Directors under the
Indenture, a member of the Board of Directors of the Company who does not have
any material direct or indirect financial interest (other than an interest
arising solely from the beneficial ownership of Capital Stock of the Company)
in or with respect to such transaction or series of transactions.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Event of Default" has the meaning set forth above under the caption "Events
of Default."
"GAAP" means generally accepted accounting principles, consistently applied,
that are set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as may be approved by a
significant segment of the accounting profession of the United States of
America, which are applicable as of the date of the Indenture.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of nonperformance) of
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all or any part of such obligation, including, without limiting the foregoing,
the payment of amounts drawn down by letters of credit. When used as a verb,
"guarantee" shall have a corresponding meaning.
"Guarantor Senior Indebtedness" means all Indebtedness of a Subsidiary
Guarantor created, incurred, assumed or guaranteed by such Subsidiary
Guarantor (and all renewals, substitutions, refinancings or replacements
thereof) (including the principal of, interest on and fees, premiums, expenses
(including costs of collection), indemnities and other amounts payable in
connection with, such Indebtedness) (and including, in the case of the Credit
Agreement, interest accruing after the filing of a petition by or against such
Subsidiary Guarantor under any bankruptcy law, in accordance with and at the
rate, including any default rate, specified with respect to such Indebtedness,
whether or not a claim for such interest is allowed as a claim after such
filing in any proceeding under such bankruptcy law), unless the instrument
governing such Indebtedness expressly provides that such Indebtedness is not
senior in right of payment to its Subsidiary Guarantee. Notwithstanding the
foregoing, Guarantor Senior Indebtedness of a Subsidiary Guarantor will not
include (i) Indebtedness of such Subsidiary Guarantor evidenced by its
Subsidiary Guarantee, (ii) Indebtedness of such Subsidiary Guarantor that is
expressly subordinated or junior in right of payment to any Guarantor Senior
Indebtedness of such Subsidiary Guarantor or its Subsidiary Guarantee, (iii)
Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11 United States Code, is by its terms without
recourse to such Subsidiary Guarantor, (iv) any repurchase, redemption or
other obligation in respect of Redeemable Capital Stock of such Subsidiary
Guarantor, (v) to the extent it might constitute Indebtedness, any liability
for federal, state, local or other taxes owed or owing by such Subsidiary
Guarantor, (vi) Indebtedness of such Subsidiary Guarantor to the Company or
any of the Company's other Subsidiaries or any other Affiliate of the Company
or any of such Affiliate's Subsidiaries, and (vii) that portion of any
Indebtedness of such Subsidiary Guarantor which at the time of issuance is
issued in violation of the Indenture (but, as to any such Indebtedness, no
such violation shall be deemed to exist for purposes of this clause (vii) if
the holder(s) of such Indebtedness or their representative or such Subsidiary
Guarantor shall have furnished to the Trustee an opinion of counsel
unqualified in all material respects of independent legal counsel, addressed
to the Trustee (which legal counsel may, as to matters of fact, rely upon a
certificate of such Subsidiary Guarantor) to the effect that the incurrence of
such Indebtedness does not violate the provisions of such Indenture);
provided, however, that the foregoing exclusions shall not affect the
priorities of any Indebtedness arising solely by operation of law in any case
or proceeding or similar event described in clause (a), (b) or (c) of the
second paragraph of "--Subordination."
"Holder" or "Noteholder" means a Person in whose name a Note is registered
in the Note Register.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities 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, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit, bankers' acceptance or
other similar credit transaction and in connection with any agreement to
purchase, redeem, exchange, convert or otherwise acquire for value any Capital
Stock of such Person, or any warrants, rights or options to acquire such
Capital Stock, now or hereafter outstanding, if, and to the extent, any of the
foregoing would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (b) all obligations of such Person evidenced
by bonds, notes, debentures or other similar instruments, if, and to the
extent, any of the foregoing would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, (c) all Indebtedness of such
Person 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, (d) all
Capitalized Lease Obligations of such Person, (e) the Attributable
Indebtedness (in excess of any related Capitalized Lease Obligations) related
to any Sale/Leaseback Transaction of such Person, (f) all Indebtedness
referred to in the preceding clauses of other Persons and all dividends 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 property (including, without limitation, accounts
and contract rights) owned by such Person, even
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though such Person has not assumed or become liable for the payment of such
Indebtedness (the amount of such obligation being deemed to be the lesser of
the value of such property or asset or the amount of the obligation so
secured), (g) all guarantees by such Person of Indebtedness referred to in
this definition (including, with respect to any Production Payment, any
warranties or guaranties of production or payment by such Person with respect
to such Production Payment but excluding other contractual obligations of such
Person with respect to such Production Payment), (h) all Redeemable Capital
Stock of such Person valued at the greater of its voluntary or involuntary
maximum fixed repurchase price plus accrued dividends, (i) all obligations of
such Person under or in respect of currency exchange contracts and Interest
Rate Protection Obligations and (j) any amendment, supplement, modification,
deferral, renewal, extension or refunding of any liability of such Person of
the types referred to in clauses (a) through (i) above. For purposes hereof,
the "maximum fixed repurchase price" of any Redeemable Capital Stock which
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 the Indenture, and if such price is based upon, or
measured by, the fair market value of such Redeemable Capital Stock, such fair
market value shall be determined in good faith by the board of directors of
the issuer of such Redeemable Capital Stock, provided, however, that if such
Redeemable Capital Stock is not at the date of determination permitted or
required to be repurchased, the "maximum fixed repurchase price" shall be the
book value of such Redeemable Capital Stock. Subject to clause (g) of the
first sentence of this definition, neither Dollar-Denominated Production
Payments nor Volumetric Production Payments shall be deemed to be
Indebtedness.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
Person calculated by applying a fixed or a floating rate of interest on the
same notional amount and includes, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to
protect against or manage such Person's and any of its Subsidiaries' exposure
to fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or
capital contribution to (by means of any transfer of cash or other property or
assets to others or any payment for property, assets or services for the
account or use of others), or any purchase or acquisition by such Person of
any Capital Stock, bonds, notes, debentures or other securities (including
derivatives) or evidences of Indebtedness issued by, any other Person. In
addition, the fair market value of the net assets of any Restricted Subsidiary
at the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary shall be deemed to be an "Investment" made by the Company in such
Unrestricted Subsidiary at such time. "Investments" shall exclude (a)
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices and (b) Interest Rate Protection Obligations entered
into in the ordinary course of business or as required by any Permitted
Indebtedness or any Indebtedness incurred in compliance with the "Limitation
on Indebtedness" covenant, but only to the extent that the notional principal
amount of such Interest Rate Protection Obligations does not exceed 105% of
the principal amount of such Indebtedness to which such Interest Rate
Protection Obligations relate and (c) bonds, notes, debentures or other
securities received in compliance with the "Limitation on Disposition of
Proceeds of Asset Sales" covenant.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance or similar agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any agreement to give or grant a Lien or any lease, conditional
sale or other title retention agreement having substantially the same economic
effect as any of the foregoing) upon or with respect to any property of any
kind. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 50% during a fiscal quarter
in the estimated discounted future net cash flows from proved
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oil and gas reserves of the Company and its Restricted Subsidiaries,
calculated in accordance with clause (a) (i) of the definition of Adjusted
Consolidated Net Tangible Assets; provided, however, that the following will
be excluded from the calculation of Material Change: (i) any acquisitions
during the quarter of oil and gas reserves that have been estimated by a
nationally recognized firm of independent petroleum engineers and on which a
report or reports exist and (ii) any disposition of properties held at the
beginning of such quarter that have been disposed of as provided in the
"Limitation on Disposition of Proceeds of Asset Sales" covenant.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as provided therein or in the Indenture,
whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment banks) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any Person (other than the Company or any Restricted
Subsidiary) owning a beneficial interest in the assets subject to the Asset
Sale and (iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve required in accordance
with GAAP consistently applied against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the
case may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officers' Certificate
delivered to the Trustee; provided, however, that any amounts remaining after
adjustments, revaluations or liquidations of such reserves shall constitute
Net Cash Proceeds.
"Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries, minus (ii) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or a Restricted Subsidiary incurred in connection
with the acquisition by the Company or a Restricted Subsidiary of any property
or assets and as to which (a) the holders of such Indebtedness agree that they
will look solely to the property or assets so acquired and securing such
Indebtedness for payment on or in respect of such Indebtedness and (b) no
default with respect to such Indebtedness would permit (after notice or
passage of time or both), according to the terms thereof, any holder of any
Indebtedness of the Company or a Restricted Subsidiary to declare a default on
such Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity.
"Note Register" means the register maintained by or for the Company in which
the Company shall provide for the registration of the Notes.
"Note Obligations" means any principal of, premium, if any, and interest on,
and any other amounts (including, without limitation, any payment obligations
with respect to the Notes as a result of any Asset Sale, Change of Control or
redemption) owing in respect of, the Notes payable pursuant to the terms of
the Notes or the Indenture or upon acceleration of the Notes.
"Oil and Gas Business" means (i) the acquisition, exploration, development,
operation and disposition of interests in oil, gas and other hydrocarbon
properties, (ii) the gathering, marketing, treating, processing, storage,
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refining, selling and transporting of any production from such interests or
properties, (iii) any business relating to or arising from exploration for or
development, production, treatment, processing, storage, refining,
transportation or marketing of oil, gas and other minerals and products
produced in association therewith, and (iv) any activity necessary,
appropriate or incidental to the activities described in the foregoing clauses
(i) through (iii) of this definition.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Notes.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Company under one or more bank credit or
revolving credit facilities in an aggregate principal amount at any one
time outstanding not to exceed the greater of (A) $300,000,000 and (B) an
amount equal to the sum of (x) $150,000,000 and (y) 20% of Adjusted
Consolidated Net Tangible Assets determined as of the date of the
incurrence of such Indebtedness (such greater amount being referred to as
the "Adjusted Maximum Credit Amount") (plus interest and fees under such
facilities), less any amounts derived from Asset Sales and applied to the
required permanent reduction of Senior Indebtedness (and a permanent
reduction of the related commitment to lend or amount available to be
reborrowed in the case of a revolving credit facility) under such credit
facilities as contemplated by the "Limitation on Disposition of Proceeds of
Asset Sales" covenant (the "Maximum Credit Amount") (with the Maximum
Credit Amount to be an aggregate maximum amount for the Company and all
Restricted Subsidiaries, pursuant to clause (i) of the definition of
"Permitted Subsidiary Indebtedness"), and any renewals, amendments,
extensions, supplements, modifications, deferrals, refinancings or
replacements (each, for purposes of this clause, a "refinancing") thereof
by the Company, including any successive refinancings thereof by the
Company, so long as the aggregate principal amount of any such new
Indebtedness, together with the aggregate principal amount of all other
Indebtedness outstanding pursuant to this clause (i) (and clause (i) of the
definition of "Permitted Subsidiary Indebtedness"), shall not at any one
time exceed the Maximum Credit Amount;
(ii) Indebtedness of the Company under the Notes;
(iii) Indebtedness of the Company outstanding on the date of the
Indenture (and not repaid or defeased with the proceeds of the offering of
the Old Notes);
(iv) obligations of the Company pursuant to Interest Rate Protection
Obligations, but only to the extent such obligations do not exceed 105% of
the aggregate principal amount of the Indebtedness covered by such Interest
Rate Protection Obligations; obligations under currency exchange contracts
entered into in the ordinary course of business; and hedging arrangements
that the Company enters into in the ordinary course of business for the
purpose of protecting its production against fluctuations in oil or natural
gas prices;
(v) Indebtedness of the Company to any Restricted Subsidiaries;
(vi) in-kind obligations relating to net gas balancing positions arising
in the ordinary course of business and consistent with past practice;
(vii) Indebtedness in respect of bid, performance or surety bonds issued
or other reimbursement obligations for the account of the Company or any
Restricted Subsidiary in the ordinary course of business, including
guarantees and letters of credit supporting such bid, performance, surety
bonds or other reimbursement obligations (in each case other than for an
obligation for money borrowed);
(viii) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by the
Company of any Indebtedness of the Company other than Indebtedness incurred
pursuant to clauses (iv), (vii) and (viii) of this definition, including
any successive refinancings by the Company, so long as (A) any such new
Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced plus the amount of any premium required to be
paid
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in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
by the Company as necessary to accomplish such refinancing, plus the amount
of expenses of the Company incurred in connection with such refinancing,
and (B) in the case of any refinancing of Subordinated Indebtedness, such
new Indebtedness is made subordinate to the Notes at least to the same
extent as the Indebtedness being refinanced and (C) such new Indebtedness
has an Average Life equal to or longer than the Average Life of the
Indebtedness being refinanced and a final Stated Maturity equal to or later
than the final Stated Maturity of the Indebtedness being refinanced;
(ix) Non-Recourse Indebtedness; and
(x) other Indebtedness of the Company in an aggregate principal amount
not in excess of $25,000,000 at any one time outstanding.
"Permitted Investments" means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in the Company or any of its Restricted
Subsidiaries; (iii) Investments in an amount not to exceed 5% of Adjusted
Consolidated Net Tangible Assets determined as of the date of the making or
incurrence of such Permitted Investment at any one time outstanding; (iv)
Investments by the Company or any of its Restricted Subsidiaries in another
Person, if as a result of such Investment (A) such other Person becomes a
Restricted Subsidiary of the Company or (B) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to, the Company or a Restricted Subsidiary; (v) entry into
operating agreements, joint ventures, partnership agreements, working
interests; royalty interests, mineral leases, processing agreements, farm-out
agreements, contracts for the sale, transportation or exchange of oil and
natural gas, unitization agreements, pooling arrangements, area of mutual
interest agreements or other similar or customary agreements, transactions,
properties, interests or arrangements, and Investments and expenditures in
connection therewith or pursuant thereto, in each case made or entered into in
the ordinary course of the Oil and Gas Business, excluding, however,
Investments in corporations; (vi) entry into any hedging arrangements in the
ordinary course of business for the purpose of protecting the Company's or any
Restricted Subsidiary's production against fluctuations in oil or natural gas
prices; (vii) Investments in units of any oil and gas royalty trust; or
(viii) entry into a joint venture or partnership agreement in connection with
ownership and operation of office and building real estate and related assets
owned by the Company or any Restricted Subsidiary and contribution of such
assets to such entity.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date the Old Notes were first issued;
(b) Liens securing the Notes;
(c) Liens in favor of the Company or a Subsidiary Guarantor;
(d) Liens securing Senior Indebtedness or Guarantor Senior Indebtedness;
(e) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(f) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(g) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, leases, government contracts and leases, performance and return of
money bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money but including lessee or operator obligations
under statutes, governmental regulations or instruments related to the
ownership, exploration and production of oil, gas and minerals on state,
federal or foreign lands or waters);
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(h) judgment Liens not giving rise to an Event of Default so long as any
appropriate legal proceedings which may have been duly initiated for the
review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(i) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the ordinary
conduct of the business of the Company or any of its Restricted
Subsidiaries;
(j) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(k) Liens resulting from the deposit of funds or evidences of
Indebtedness in trust for the purpose of defeasing Indebtedness of the
Company or any of the Subsidiaries;
(l) Liens securing obligations under hedging agreements that the Company
or any Restricted Subsidiary enters into in the ordinary course of business
for the purpose of protecting its production against fluctuations in oil or
natural gas prices;
(m) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(n) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(o) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets;
(p) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(q) Liens securing Interest Rate Protection Obligations which Interest
Rate Protection Obligations relate to Indebtedness that is secured by Liens
otherwise permitted under this Indenture;
(r) Liens on, or related to, properties or assets to secure all or part
of the costs incurred in the ordinary course of business for the
exploration, drilling, development or operation thereof;
(s) Liens on pipeline or pipeline facilities which arise out of operation
of law;
(t) Liens arising under operating agreements, joint venture agreements,
partnership agreements, oil and gas leases, farm-out agreements, division
orders, contracts for the sale, transportation or exchange of oil and
natural gas, unitization and pooling declarations and agreements, area of
mutual interest agreements and other agreements which are customary in the
Oil and Gas Business;
(u) Liens reserved in oil and gas mineral leases for bonus or rental
payments and for compliance with the terms of such leases;
(v) Liens constituting survey exceptions, encumbrances, easements, or
reservations of, or rights to others for, rights-of-way, zoning or other
restrictions as to the use of real properties, and minor defects of title
which, in the case of any of the foregoing, were not incurred or created to
secure the payment of borrowed money or the deferred purchase price of
Property or services, and in the aggregate do not materially adversely
affect the value of Property of the Company and the Restricted
Subsidiaries, taken as a whole, or materially impair the use of such
Properties for the purposes for which such Properties are held by the
Company or any Restricted Subsidiaries; and
(w) Liens securing Non-Recourse Indebtedness; provided, however, that the
related Non-Recourse Indebtedness shall not be secured by any property or
assets of the Company or any Restricted Subsidiary other than the property
and assets acquired by the Company with the proceeds of such Non-Recourse
Indebtedness.
Notwithstanding anything in clauses (a) through (w) of this definition, the
term "Permitted Liens" does not include any Liens resulting from the creation,
incurrence, issuance, assumption or guarantee of any Production
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Payments other than Production Payments that are created, incurred, issued,
assumed or guaranteed in connection with the financing of, and within 30 days
after, the acquisition of the properties or assets that are subject thereto.
"Permitted Subsidiary Indebtedness" means any of the following:
(i) Indebtedness of any Restricted Subsidiary under one or more bank
credit or revolving credit facilities (and "refinancings" thereof) in an
amount at any one time outstanding not to exceed the Maximum Credit Amount
(in the aggregate for all Restricted Subsidiaries and the Company, pursuant
to clause (i) of the definition of "Permitted Indebtedness");
(ii) Indebtedness of any Restricted Subsidiary outstanding on the date of
the Indenture;
(iii) obligations of any Restricted Subsidiary pursuant to Interest Rate
Protection Obligations, but only to the extent such obligations do not
exceed 105% of the aggregate principal amount of the Indebtedness covered
by such Interest Rate Protection Obligations; and hedging arrangements that
any Restricted Subsidiary enters into in the ordinary course of business
for the purpose of protecting its production against fluctuations in oil or
natural gas prices;
(iv) the Subsidiary Guarantees (and any assumption of the obligations
guaranteed thereby);
(v) Indebtedness of any Restricted Subsidiary relating to guarantees by
such Restricted Subsidiary of Permitted Indebtedness pursuant to clause (i)
of the definition of "Permitted Indebtedness;"
(vi) in-kind obligations relating to net gas balancing positions arising
in the ordinary course of business and consistent with past practice;
(vii) Indebtedness in respect of bid, performance or surety bonds or
other reimbursement obligations issued for the account of any Restricted
Subsidiary in the ordinary course of business, including guarantees and
letters of credit supporting such bid, performance, surety bonds or other
reimbursement obligations (in each case other than for an obligation for
money borrowed);
(viii) Indebtedness of any Restricted Subsidiary to any other Restricted
Subsidiary or to the Company;
(ix) Indebtedness relating to guarantees by any Restricted Subsidiary
permitted to be incurred pursuant to paragraph (a) of the "Limitation on
Non-Guarantor Restricted Subsidiaries" covenant;
(x) Non-Recourse Indebtedness; and
(xi) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by any
Restricted Subsidiary of any Indebtedness of such Restricted Subsidiary,
including any successive refinancings by such Restricted Subsidiary, so
long as (x) any such new Indebtedness shall be in a principal amount that
does not exceed the principal amount (or, if such Indebtedness being
refinanced provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination) so refinanced plus the amount of
any premium required to be paid in connection with such refinancing
pursuant to the terms of the Indebtedness refinanced or the amount of any
premium reasonably determined by such Restricted Subsidiary as necessary to
accomplish such refinancing, plus the amount of expenses of such Subsidiary
incurred in connection with such refinancing and (y) such new Indebtedness
has an Average Life equal to or longer than the Average Life of the
Indebtedness being refinanced and a final Stated Maturity equal to or later
than the final Stated Maturity of the Indebtedness being refinanced.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued
after the date of the Indenture, including, without limitation, all classes
and series of preferred or preference stock of such Person.
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"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Public Equity Offering" means an underwritten public offering for cash by
the Company of its Qualified Capital Stock pursuant to a registration
statement that has been declared effective by the Commission (other than a
registration statement on Form S-8 or any successor form or otherwise relating
to equity securities issuable under any employee benefit plan of the Company).
"Public Market" exists at any time with respect to the Qualified Capital
Stock of the Company if such Qualified Capital Stock of the Company is then
(a) registered with the Commission pursuant to Section 12(b) or 12(g) of the
Exchange Act and (b) traded either on a national securities exchange or on the
NASDAQ Stock Market.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Qualified Redemption Transaction" means a call for redemption of any
Capital Stock or Subordinated Indebtedness (including any Subordinated
Indebtedness accounted for as a minority interest of the Company that is held
by a Subsidiary that is a business trust or similar entity formed for the
primary purpose of issuing preferred securities the proceeds of which are
loaned to the Company or a Restricted Subsidiary) that by its terms is
convertible into common stock of the Company if on the date of notice of such
call for redemption (i) a Public Market exists in the shares of common stock
of the Company and (ii) the average closing price on the Public Market for
shares of common stock of the Company for the twenty trading days immediately
preceding the date of such notice exceeds 120% of the conversion price per
share (determined by reference to the redemption price) of common stock of the
Company issuable upon conversion of the Capital Stock or Subordinated
Indebtedness called for redemption.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to 91 days
after the final Stated Maturity of the Notes or is redeemable at the option of
the holder thereof at any time prior to 91 days after such final Stated
Maturity, or is convertible into or exchangeable for debt securities at any
time prior to 91 days after such final Stated Maturity.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary of the
Company is an Unrestricted Subsidiary or is designated as an Unrestricted
Subsidiary pursuant to the terms of the Indenture.
"S&P" means Standard and Poor's Rating Group, a division of McGraw Hill,
Inc., and its successors.
"Sale/Leaseback Transaction" means, with respect to any Person, any direct
or indirect arrangement pursuant to which properties or assets are sold or
transferred by such Person or a Subsidiary of such Person and are thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Subsidiaries.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on any Indebtedness of the Company (including, in the case of the Credit
Agreement, interest accruing after the filing of a petition by or against the
Company under any bankruptcy law, in accordance with and at the rate,
including any default rate, specified with respect to such indebtedness,
whether or not a claim for such interest is allowed as a claim after such
filing in any proceeding under such bankruptcy law), whether outstanding on
the date of the Indenture or thereafter created, incurred or assumed, unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include
(a) Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in
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right of payment to any Senior Indebtedness of the Company, (c) Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of Title 11 United States Code, is by its terms without recourse to the
Company, (d) any repurchase, redemption or other obligation in respect of
Redeemable Capital Stock of the Company, (e) to the extent it might constitute
Indebtedness, any liability for federal, state, local or other taxes owed or
owing by the Company, (f) Indebtedness of the Company to a Subsidiary of the
Company or any other Affiliate of the Company or any of such Affiliate's
Subsidiaries, and (g) that portion of any Indebtedness of the Company which at
the time of issuance is issued in violation of the Indenture (but, as to any
such Indebtedness, no such violation shall be deemed to exist for purposes of
this clause (g) if the holder(s) of such Indebtedness or their representative
or the Company shall have furnished to the Trustee an opinion of counsel
unqualified in all material respects of independent legal counsel, addressed
to the Trustee (which legal counsel may, as to matters of fact, rely upon a
certificate of the Company) to the effect that the incurrence of such
Indebtedness does not violate the provisions of such Indenture); provided that
the foregoing exclusions shall not affect the priorities of any Indebtedness
arising solely by operation of law in any case or proceeding or similar event
described in clause (a), (b) or (c) of the second paragraph of "--
Subordination."
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and, when used with respect to any other Indebtedness or any
installment of interest thereon, means the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or such installment of interest is due and
payable.
"Subordinated Indebtedness" means Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) a corporation a majority
of whose Voting Stock is at the time, directly or indirectly, owned by such
Person, by one or more Subsidiaries of such Person or by such Person and one
or more Subsidiaries thereof or (ii) any other Person (other than a
corporation), including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, has at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person
performing similar functions).
"Subsidiary Guarantee" means any guarantee of the Notes by (i) any
Subsidiary Guarantor in accordance with the provisions set forth in
"Subsidiary Guarantees of Notes" and (ii) any Restricted Subsidiary in
accordance with the provisions set forth in the "Limitation on Non-Guarantor
Restricted Subsidiaries" covenant.
"Subsidiary Guarantor" means (i) each of the Company's Restricted
Subsidiaries that becomes a guarantor of the Notes in compliance with the
provisions described under "--Subsidiary Guarantees of the Notes" or the
provisions of the "Limitation on Non-Guarantor Restricted Subsidiaries"
covenant and (ii) each of the Company's Subsidiaries executing a supplemental
indenture in which such Subsidiary agrees to be bound by the terms of the
Indenture and to guarantee on an unsubordinated basis the payment of the Notes
pursuant to the provisions described under "--Subsidiary Guarantees of Notes."
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination will be designated an Unrestricted Subsidiary by the
Board of Directors of the Company as provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may
designate any Subsidiary of the Company as an Unrestricted Subsidiary so long
as (a) neither the Company nor any Restricted Subsidiary is directly or
indirectly liable pursuant to the terms of any Indebtedness of such
Subsidiary, (b) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity, (c) neither the Company nor any
Restricted Subsidiary has made an Investment in such Subsidiary unless such
Investment was made pursuant to, and in accordance with, the "Limitation on
Restricted Payments" covenant
87
<PAGE>
(other than Investments of the type described in clause (iv) of the definition
of Permitted Investments), and (d) such designation shall not result in the
creation or imposition of any Lien on any of the Properties of the Company or
any Restricted Subsidiary (other than any Permitted Lien or any Lien the
creation or imposition of which shall have been in compliance with the
"Limitation on Liens" covenant); provided, however, that with respect to
clause (a), the Company or a Restricted Subsidiary may be liable for
Indebtedness of an Unrestricted Subsidiary if (x) such liability constituted a
Permitted Investment or a Restricted Payment permitted by the "Limitation on
Restricted Payments" covenant, in each case at the time of incurrence, or (y)
the liability would be a Permitted Investment at the time of designation of
such Subsidiary as an Unrestricted Subsidiary. Any such designation by the
Board of Directors of the Company shall be evidenced to the Trustee by filing
a board resolution with the Trustee giving effect to such designation. The
Board of Directors of the Company may designate any Unrestricted Subsidiary as
a Restricted Subsidiary if, immediately after giving effect to such
designation, (i) no Default or Event of Default shall have occurred and be
continuing, (ii) the Company could incur $1.00 of additional Indebtedness (not
including the incurrence of Permitted Indebtedness) under the first paragraph
of the "Limitation on Indebtedness" covenant and (iii) if any of the
Properties of the Company or any of its Restricted Subsidiaries would upon
such designation become subject to any Lien (other than a Permitted Lien), the
creation or imposition of such Lien shall have been in compliance with the
"Limitation on Liens" covenant.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to the
extent all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company.
EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the initial issuance and sale of the Old Notes, the
Company entered into the Registration Rights Agreement pursuant to which the
Company agreed, for the benefit of the holders of the Old Notes, at the
Company's cost, to use its reasonable best efforts (i) to file with the
Commission the Exchange Offer Registration Statement with respect to the
Exchange Offer within 45 days after the date of original issuance of the Old
Notes, (ii) to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 105 days of the date of original
issuance of the Old Notes, (iii) to keep the Exchange Offer Registration
Statement effective until the closing of the Exchange Offer, and (iv) to cause
the Exchange Offer to be consummated within 180 days of the original issuance
date of the Old Notes. Promptly after the Exchange Offer Registration
Statement has been declared effective, the Company will offer the New Notes in
exchange for surrender of the Old Notes. The Company will keep the Exchange
Offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the Exchange Offer has been mailed to the holders of
the Old Notes.
In the event that the Exchange Offer is not consummated within 180 days
after the original issuance of the Old Notes, or upon the request of the
Initial Purchasers in certain circumstances, the Company will, in lieu of
effecting (or, in the case of such a request by the Initial Purchasers, in
addition to effecting) the registration of the New Notes pursuant to the
Exchange Offer Registration Statement (i) as promptly as practicable, file
with the Commission the Shelf Registration Statement covering resales of the
Old Notes, (ii) use its best efforts to cause the Shelf Registration Statement
to be declared effective under the Securities Act by the 180th day after the
date of original issuance of the Old Notes (or promptly in the event of a
request by the Initial Purchasers)
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<PAGE>
and (iii) use their best efforts to keep effective the Shelf Registration
Statement until two years after its effective date (or until one year after
such effective date if such Shelf Registration Statement is filed at the
request of the Initial Purchasers) or until all of the Old Notes covered by
such Shelf Registration Statement have been sold. In the event of the filing
of a Shelf Registration Statement, the Company will provide to each Holder of
the Old Notes copies of the prospectus which is a part of the Shelf
Registration Statement and notify each such Holder when the Shelf Registration
Statement has become effective. A Holder of Notes that sells such Old Notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
In addition, each Holder of the Old Notes will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement in order to have its
Old Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding the increase in the interest rate borne by the Old Notes
described in the second succeeding paragraph.
Each Old Note contains a legend to the effect that the Holder of such Old
Notes, by its acceptance thereof, is deemed to have agreed to be bound by the
provisions of the Registration Rights Agreement. In that regard, each Holder
is deemed to have agreed that, upon receipt of notice from the Company of the
occurrence of any event that makes any statement in the prospectus that is
part of the Shelf Registration Statement (or, in the case of Participating
Broker-Dealers, the prospectus that is a part of the Exchange Offer
Registration Statement) untrue in any material respect or that requires the
making of any changes in such prospectus in order to make the statements
therein not misleading or of certain other events specified in the
Registration Rights Agreement, such Holder (or Participating Broker-Dealer, as
the case may be) will suspend the sale of Old Notes pursuant to such
prospectus until the Company has amended or supplemented such prospectus to
correct such misstatement or omission, has furnished copies of the amended or
supplemented prospectus to such holder (or Participating Broker-Dealer, as the
case may be) or the Company has given notice that the sale of the Old Notes
may be resumed, as the case may be. If the Company shall give such notice to
suspend the sale of the Old Notes, it shall extend the relevant period
referred to above during which it is required to keep effective the Shelf
Registration Statement (or the period during which Participating Broker-
Dealers are entitled to use the prospectus included in the Exchange Offer
Registration Statement in connection with the resale of Exchange Notes, as the
case may be) by the number of days during the period from and including the
date of the giving of such notice to and including the date when holders shall
have received copies of the supplemented or amended prospectus necessary to
permit resales of the Old Notes or to and including the date on which the
Company has given notice that the sale of Old Notes may be resumed, as the
case may be.
In the event that the Exchange Offer is not consummated or a Shelf
Registration Statement with respect to the Old Notes is not declared effective
on or prior to the 180th day following the date of original issuance of the
Old Notes, the interest rate borne by the Old Notes shall be increased by .50%
per annum following such 180th day. Upon the consummation of the Exchange
Offer after the 180th day, the interest rate on the Old Notes from the date of
such consummation will be reduced to the original Old Note interest rate.
The Registration Rights Agreement is governed by, and shall be construed in
accordance with, the laws of the State of New York. The summary herein of
certain provisions of the Registration Rights Agreement is not complete and is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Registration Rights Agreement, a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus forms a
part. In addition, the information set forth above concerning certain
interpretations of and positions taken by the staff of the Commission is not
intended to constitute legal advice and prospective investors should consult
their own legal advisors with respect to such matters.
89
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New 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 New 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 New Notes received in exchange for Old Notes if
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until July 12, 1997 (90 days from the date of this
Prospectus), all dealers effecting transactions in the New Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New 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 New 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 or the purchasers of any such New Notes. Any broker-
dealer that resells New 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 New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes
and any commission 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 Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the holders of
the Notes) other than commissions or concessions of any brokers or dealers and
will indemnify the Holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
The Company has agreed that, without the prior written consent of Merrill
Lynch on behalf of the Initial Purchasers, it will not, directly or
indirectly, issue, sell, offer to sell, grant any option for the sale of or
otherwise dispose of any debt securities of the Company (other than the New
Notes) on or before September 29, 1997.
LEGAL MATTERS
Certain legal matters with respect to the New Notes offered hereby will be
passed on for the Company by Kelly, Hart & Hallman, a professional
corporation, Fort Worth, Texas.
EXPERTS
The consolidated financial statements of Cross Timbers Oil Company as of
December 31, 1996 and 1995, and for the three years in the period ended
December 31, 1996, incorporated by reference in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are incorporated by reference
herein in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
The information appearing or incorporated by reference in this Prospectus
from the Company's Annual Report on Form 10-K for the year ended December 31,
1996 regarding the quantities of reserves of the oil and gas properties owned
by the Company and the future net cash flows and the present values thereof
from such reserves is derived from reserve reports prepared or reviewed by
Miller and Lents, and, to such extent, are included or incorporated by
reference herein in reliance upon the authority of said firm as experts with
respect to the matters contained in such reports.
90
<PAGE>
GLOSSARY OF CERTAIN OIL AND GAS TERMS
Wherever used herein, the following terms shall have the meanings specified.
Bbl--One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
BOE--Barrels of oil equivalent (converting six Mcf of natural gas to one Bbl
of oil).
Bcf--One billion cubic feet, used herein in reference to natural gas or
carbon dioxide.
Developed Acreage--Acres which are allocated or assignable to producing
wells or wells capable of production.
Development Well--A well drilled within the proved area of an oil and
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry Well--A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion as an oil or natural gas
well.
EBITDA--Earnings (excluding discontinued operations and charges resulting
from changes in accounting) before interest expense, income taxes, depletion,
depreciation and amortization, and the provision for impairment of oil and
natural gas properties. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. EBITDA information has been included
in this Offering Memorandum because EBITDA is a measure used by certain
investors in determining historical ability to service indebtedness. EBITDA
should not be considered as an alternative to, or more meaningful than, net
income or cash flows as determined in accordance with generally accepted
accounting principles as an indicator of operating performance or liquidity.
Exploratory Well--A well drilled to find and produce oil or natural gas on
an unproved area, 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.
Gross Acres or Gross Wells--The total acres or wells, as the case may be, in
which a working interest is owned.
Infill Well--A well drilled between known producing wells to better exploit
the reservoir.
MBOE--One thousand barrels of oil equivalent.
Mcf--One thousand cubic feet, used herein in reference to natural gas or
carbon dioxide.
MMcf--One million cubic feet, used herein in reference to natural gas or
carbon dioxide.
Net Acres or Net Wells--The sum of the fractional working interests owned in
gross acres or gross wells.
NYMEX--New York Mercantile Exchange.
Oil and Natural Gas Lease--An instrument by which a mineral fee owner grants
to lessee the right for a specific period of time to explore for oil and
natural gas underlying the lands covered by the lease and the right to produce
any oil and natural gas so discovered generally for so long as there is
production in economic quantities from such lands.
Overriding Royalty Interest--A fractional undivided interest in an oil and
natural gas property entitling the owner to a share of oil and natural gas
production, in addition to the usual royalty paid to the owner, free of costs
of production.
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<PAGE>
PDNP--Proved developed, nonproducing or behind the pipe reserves.
Productive Well--A well that is producing oil or natural gas or that is
capable of production.
Proved Developed Reserves--Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves--The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves or PUD--Reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for completion.
PV10%--The discounted future net cash flows for proved oil and natural gas
reserves computed on the same basis as the Standardized Measure, but without
deducting income taxes, which is not in accordance with generally accepted
accounting principles. PV10% is an important financial measure for evaluating
the relative significance of oil and natural gas properties and acquisitions,
but should not be construed as an alternative to the Standardized Measure (as
determined in accordance with generally accepted accounting principles).
Recompletion--The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Royalty Interest--An interest in an oil and natural gas property entitling
the owner to a share of oil and natural gas production free of costs of
production.
SEC--Securities and Exchange Commission.
Secondary Recovery--A method of oil and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.
Standardized Measure--The estimated future net cash flows from proved oil
and natural gas reserves computed using prices and costs, at the dates
indicated, after income taxes and discounted at 10%.
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.
Waterflood--The injection of water into a reservoir to fill pores vacated by
produced fluids, thus maintaining reservoir pressure and assisting production.
Working Interest--The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens
and to all costs of exploration, development and operations and all risks in
connection therewith.
Workover--Operations on a producing well to restore or increase production.
92
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE INITIAL PURCHASERS OR ANY OF THEIR RESPEC-
TIVE AFFILIATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE NOTES IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 14
The Exchange Offer....................................................... 20
Use of Proceeds.......................................................... 28
Capitalization........................................................... 28
Recent Developments...................................................... 29
Selected Historical Financial Data....................................... 30
Selected Reserve and Operating Data...................................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business and Properties.................................................. 40
Board of Directors and Management........................................ 51
Description of the Credit Agreement...................................... 53
Description of the Notes................................................. 54
Exchange Offer; Registration Rights...................................... 88
Plan of Distribution..................................................... 90
Legal Matters............................................................ 90
Experts.................................................................. 90
Glossary of Certain Oil and Gas Terms.................................... 91
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$125,000,000
EXCHANGE OFFER
[LOGOS OF CROSS TIMBERS OIL COMPANY APPEARS HERE]
CROSS TIMBERS OIL COMPANY
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
----------------
PROSPECTUS
----------------
MAY 14, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the Prospectus which
forms a part of this Registration Statement.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is incorporated in Delaware. Under Section 145 of the
Delaware General Corporation Law (the "DGCL"), a Delaware corporation has the
power, under specified circumstances, to indemnify its directors, officers,
employees and agents in connection with actions, suits or proceedings brought
against them by a third party or in the right of the corporation, by reason of
the fact that they were or are such directors, officers, employees or agents,
against expenses and liabilities incurred in any such action, suit or
proceeding so long as they acted in good faith and in a manner that they
reasonably believed to be in, or not opposed to, the best interests of such
corporation, and with respect to any criminal action, that they had no
reasonable cause to believe their conduct was unlawful. With respect to suits
by or in the right of such corporation, however, indemnification is generally
limited to attorneys' fees and other expenses and is not available if such
person is adjudged to be liable to such corporation unless the court
determines that indemnification is appropriate. A Delaware corporation also
has the power to purchase and maintain insurance for such persons. Article
Nine of the Restated Certificate of Incorporation of the Registrant permits
indemnification of directors and officers to the fullest extent permitted by
Section 145 of the DGCL. Reference is made to the Restated Certificate of
Incorporation of the Registrant.
Additionally, the Company has acquired directors and officers insurance in
the amount of $10,000,000, which includes coverage for liability under the
federal securities laws.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director provided that such provisions may not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock)
of the DGCL or (iv) for any transaction from which the director derived an
improper personal benefit. Article Ten of the Registrant's Restated
Certificate of Incorporation contains such a provision.
The above discussion of the Registrant's Restated Certificate of
Incorporation and Sections 102(b)(7) and 145 of the DGCL is not intended to be
exhaustive and is qualified in its entirety by such Restated Certificate of
Incorporation and statutes.
ITEM 21(A). EXHIBITS.
<TABLE>
<C> <S>
4.1 --Indenture, dated as of April 1, 1997, between the Company and The Bank
of New York, as Trustee.*
4.2 --Form of 9 1/4% Series A Senior Subordinated Notes due 2007.*
4.3 --Form of 9 1/4% Series B Senior Subordinated Notes due 2007.*
5.1 --Opinion of Kelly, Hart & Hallman, P.C. as to the legality of the
Notes.*
12.1 --Statement re: Computation of Ratios (incorporated by reference to
Exhibit 12.1 to Annual Report on Form 10-K for the year ended December
31, 1996).
23.1 --Consent of Arthur Andersen & Co.
23.2 --Consent of Kelly, Hart & Hallman, P.C. (set forth in their opinion
filed as Exhibit 5.1).*
23.3 --Consent of Miller and Lents, Ltd.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
24.1 --Powers of attorney.*
25.1 --Form T-1 Statement of Eligibility of Trustee under the Trust Indenture
Act of 1939, as amended, of The Bank of New York.*
99.1 --Form of Letter of Transmittal.*
99.2 --Form of Notice of Guaranteed Delivery.*
</TABLE>
- --------
*Previously filed.
ITEM 22. UNDERTAKINGS.
The undersigned hereby undertakes:
(a) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 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.
(b) 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 the documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(c) 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.
(d) that, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF FORT
WORTH, STATE OF TEXAS, ON MAY 14, 1997.
Cross Timbers Oil Company
/s/ Louis G. Baldwin
By: _________________________________
LOUIS G. BALDWIN
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Director and
* Chairman of the May 14, 1997
- ------------------------------------- Board (Principal
BOB R. SIMPSON Executive Officer)
Director, Vice
* Chairman of the May 14, 1997
- ------------------------------------- Board and President
STEFFEN E. PALKO (Principal
Executive Officer)
Director
- -------------------------------------
CHARLES B. CHITTY
Director
* May 14, 1997
- -------------------------------------
J. LUTHER KING, JR.
Director
* May 14, 1997
- -------------------------------------
SCOTT G. SHERMAN
Director
* May 14, 1997
- -------------------------------------
J. RICHARD SEEDS
/s/ Louis G. Baldwin Senior Vice
- ------------------------------------- President and Chief May 14, 1997
LOUIS G. BALDWIN Financial Officer
(Principal
Financial Officer)
Senior Vice
* President and May 14, 1997
- ------------------------------------- Controller
BENNIE G. KNIFFEN (Principal
Accounting Officer)
/s/ Louis G. Baldwin
By: ____________________________
LOUIS G. BALDWIN
ATTORNEY-IN-FACT
II-3
<PAGE>
EXHIBIT 23.1
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
As independent public accountants, we hereby consent to the incorporation by
reference in this Amendment No. 1 to Registration Statement on Form S-4, No.
333-26607, of Cross Timbers Oil Company of our report dated March 13, 1997,
included in Cross Timbers Oil Company's Annual Report on Form 10-K for the
year ended December 31, 1996, and to all references to our firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 14, 1997
<PAGE>
EXHIBIT 23.3
[MILLER AND LENTS, LTD. LETTERHEAD]
May 14, 1997
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, TX 75102
Re: Securities and Exchange Commission
Form S-4 Registration Statement, No. 333-26603
Gentlemen:
The firm of Miller and Lents, Ltd. consents to the incorporation of its
estimated Proved Reserves, Future Net Revenues, and Present Values of Future Net
Revenues in the Cross Timbers Oil Company Form S-4 Registration Statement, No.
333-26603, and to reference to our Firm in such registration statement.
Miller and Lents, Ltd. has no interests in Cross Timbers Oil Company or
any of its affiliated companies or subsidiaries and is not to receive any such
interest as payment for such reports and has no director, officer, or employee,
or otherwise, connected with Cross Timbers Oil Company. We are not employed by
Cross Timbers Oil Company on a contingent basis.
Yours very truly
MILLER AND LENTS, LTD.
By
-------------------------------------
James C. Pearson
President
