<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NUMBER 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
KELLEY OIL & GAS CORPORATION
KELLEY OIL CORPORATION
KELLEY OPERATING COMPANY, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1311 76-0447267
DELAWARE 1311 76-0082502
DELAWARE 1311 76-0156485
(STATE OR OTHER JURISDICTION
OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS E. BAKER
GENERAL COUNSEL AND CORPORATE SECRETARY
KELLEY OIL & GAS CORPORATION
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
CHARLES H. STILL
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED (1) PER UNIT (2) PRICE (2) FEE
- -------------------------------------------------------------------------------------
10 3/8% Senior
Subordinated Notes
Due 2006, Series B..... $125,000,000 100.3% $128,750,000 $39,016
- -------------------------------------------------------------------------------------
</TABLE>
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(1) Represents the maximum principal amount of notes exchangeable in the
exchange offering described herein.
(2) Pursuant to Rule 457(f) under the Securities Act of 1933, the registration
fee has been calculated based on the average of the bid and asked prices
as of December 18, 1996, in the Private Offerings, Resales and Trading
through Automated Linkages (PORTAL) market, of the Registrant's 10 3/8%
Senior Subordinated Notes Due 2006, Series A, for which the securities
registered hereby will be exchanged.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
Cross-Reference Sheet
(Pursuant to Rule 404(a))
<TABLE>
<CAPTION>
FORM S-4 ITEM AND CAPTION LOCATION OR PROSPECTUS CAPTION
------------------------- ------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Page, Page 3
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.......... Summary; Risk Factors;
Selected Consolidated
Financial Data
4. Terms of the Transaction................ Summary; The Exchange Offer;
Description of the Exchange
Notes; Certain U.S. Federal
Income Tax Considerations
5. Pro Forma Financial Information......... Pro Forma Financial Data
6. Material Contracts with the Company
Being Acquired......................... Not applicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters.............. Not applicable
8. Interests of Named Experts and Counsel.. Legal Matters; Independent
Accountants; Independent
Petroleum Engineers
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not applicable
10. Information with Respect to S-3
Registrants............................ Not applicable
11. Incorporation of Certain Information by
Reference.............................. Not applicable
12. Information with Respect to S-2 or S-3
Registrants............................ Not applicable
13. Incorporation of Certain Information by
Reference.............................. Not applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants...... Summary; Selected Consolidated
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business and Properties;
Consolidated Financial
Statements
15. Information with Respect to S-3
Companies.............................. Not applicable
16. Information with Respect to S-2 or S-3
Companies.............................. Not applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies........ Not applicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited..... Not applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................ Principal Stockholders;
Certain Transactions
</TABLE>
<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
all outstanding
10 3/8% Senior Subordinated Notes Due 2006, Series A
($125,000,000 principal amount outstanding)
for
10 3/8% Senior Subordinated Notes Due 2006, Series B
($125,000,000 principal amount)
of
[KELLEY OIL & GAS CORPORATION LOGO]
---------------
The Exchange Offer will expire at 12:00 midnight, New York City time, on
, 1997, unless extended.
---------------
Kelley Oil & Gas Corporation, a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), on the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange up to an aggregate principal amount of
$125,000,000 of its 10 3/8% Senior Subordinated Notes Due 2006, Series B (the
"Exchange Notes") for an equal principal amount of its outstanding 10 3/8%
Senior Subordinated Notes Due 2006, Series A (the "Outstanding Notes", the
Exchange Notes and the Outstanding Notes are sometimes referred to
collectively as the "Notes"), in integral multiples of $1,000. The Exchange
Notes will be unsecured, general obligations of the Company, subordinated in
right of payment to all Senior Indebtedness (as defined herein) of the Company
and are substantially identical (including principal amount, interest rate,
maturity and redemption rights) to the Outstanding Notes for which they may be
exchanged pursuant to the Exchange Offer, except for certain transfer
restrictions and registration rights relating to the Outstanding Notes and
except for certain interest provisions relating to those rights. As of
September 30, 1996, after giving pro forma effect to the Refinancing, the
Company had $7.0 million Senior Indebtedness outstanding. The Company may
incur additional indebtedness under the New Credit Facility (as defined
herein) in the future, which indebtedness will constitute Senior Indebtedness.
The Exchange Notes will be guaranteed on a senior subordinated basis by the
Subsidiary Guarantors (as defined herein). The Subsidiary Guarantees (as
defined herein) will be general, unsecured obligations of the Subsidiary
Guarantors, subordinated in right of payment to all Senior Indebtedness of the
Subsidiary Guarantors. As of September 30, 1996, after giving pro forma effect
to the Refinancing, the Subsidiary Guarantors would have had no outstanding
indebtedness for borrowed money (other than the Subsidiary Guaranties). The
Outstanding Notes have been, and the Exchange Notes will be, issued under an
Indenture dated as of October 15, 1996 (the "Indenture"), among the Company
and United States Trust Company of New York, as trustee (the "Trustee"). See
"Description of the Exchange Notes". There will be no proceeds to the Company
from the Exchange Offer; however, pursuant to a Registration Agreement dated
as of October 25, 1996 (the "Registration Agreement"), among the Company and
the Placement Agents (as defined herein), the Company will bear certain
offering expenses.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that
it will deliver a prospectus in connection with any resale of Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes received in exchange for
Outstanding Notes where the Outstanding Notes were acquired by the broker-
dealer as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 90 days after the Expiration Date
(as defined herein), it will make this Prospectus available to any broker-
dealer for use in connection with a resale. See "Plan of Distribution".
(continued on page 3)
---------------
SEE "RISK FACTORS", BEGINNING ON PAGE 17, FOR A DESCRIPTION OF CERTAIN FACTORS
TO BE CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES 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 , 1997
<PAGE>
UNTIL , 1997 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
Summary.............................. 5 Certain Transactions................ 71
Risk Factors......................... 17 Description of the Exchange Notes... 72
The Exchange Offer................... 24 Certain U.S. Federal Income Tax
Use of Proceeds...................... 33 Considerations..................... 105
Capitalization....................... 34 Plan of Distribution................ 107
Selected Consolidated Financial Legal Matters....................... 108
Data................................ 35 Independent Accountants............. 108
Management's Discussion and Analysis Independent Petroleum Engineers..... 109
of Financial Condition and Results Available Information............... 109
of Operations....................... 36 Incorporation of Certain Documents.. 110
Business and Properties.............. 45 Glossary............................ 111
Company History...................... 61 Index to Consolidated Financial
Management........................... 63 Statements......................... F-1
Principal Stockholders............... 70
</TABLE>
---------------
(continued from cover page)
The Company will accept for exchange any and all validly tendered
Outstanding Notes on or before 12:00 midnight, New York City time, on
, 1997, unless extended (the "Expiration Date"). Tenders of
Outstanding Notes may be withdrawn at any time before 12:00 midnight, New York
City time, on the Expiration Date but after that time are irrevocable. United
States Trust Company of New York is acting as Exchange Agent in connection
with the Exchange Offer. The Exchange Offer is not conditioned on any minimum
principal amount of Outstanding Notes being tendered for exchange, but is
otherwise subject to certain customary conditions.
The Exchange Notes will bear interest from the date of issuance of the
Exchange Notes at a rate per annum of 10 3/8% and on the same terms as the
Outstanding Notes. Interest on the Exchange Notes will be payable semiannually
on April 15 and October 15 of each year commencing on the first such date
following the date of issuance of the Exchange Notes. Outstanding Notes that
are accepted for exchange will cease to accrue interest on and after the date
on which interest on the Exchange Notes begins to accrue. Accrued and unpaid
interest on the Outstanding Notes that are tendered in exchange for the
Exchange Notes will be payable on or before the first April 15 or October 15
following the date of issuance of the Exchange Notes.
The Outstanding Notes were sold by the Company on October 29, 1996, to
Morgan Stanley & Co. Incorporated, Chase Securities Inc. and Lazard Freres &
Co. LLC (the "Placement Agents") in transactions not registered under the
Securities Act of 1933 (the "Securities Act") in reliance on the exemption
provided in Section 4(2) of the Securities Act. The Placement Agents
subsequently placed the Outstanding Notes with qualified institutional buyers
in reliance on Rule 144A under the Securities Act. Accordingly, the
Outstanding Notes may not be reoffered, resold or otherwise transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange
Notes are being offered hereunder in order to satisfy the obligations of the
Company under the Registration Agreement. See "The Exchange Offer".
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters
issued to third parties, the Company believes that Exchange Notes issued
pursuant to this Exchange Offer may be offered for resale, resold and
otherwise transferred by a holder who is not an affiliate of the Company
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the holder is acquiring the Exchange Notes
in its ordinary course of business and is not participating in and has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes.
Persons wishing to exchange Outstanding Notes in the Exchange Offer must
represent to the Company that these conditions have been met.
3
<PAGE>
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. The
Placement Agents have advised the Company that they intend to make a market in
the Exchange Notes; however, they are not obligated to do so and any market-
making may be discontinued at any time without notice. Accordingly, no
assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Outstanding Notes will continue to be subject
to the existing restrictions on transfer thereof.
The Company expects that the Exchange Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global Exchange Note (as defined
herein), which will be deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Exchange Note representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by DTC and
its participants. After the initial issuance of the Global Exchange Note,
Exchange Notes in certificated form will be issued in exchange for the Global
Exchange Note on the terms set forth in the Indenture. See "Description of
Exchange Notes--Book Entry; Delivery and Form".
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
on as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
security other than the Exchange Notes offered hereby.
THIS PROSPECTUS (THIS "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY NOTE OFFERED HEREBY BY ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR ITS SUBSIDIARIES OR THAT THE INFORMATION SET
FORTH HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
This Prospectus includes "forward-looking statements" within the meaning of
various provisions of the Securities Act and the Securities Exchange Act of
1934 (the "Exchange Act"). All statements, other than statements of historical
facts, included in this Prospectus that address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, including statements regarding estimated future net revenues from oil
and gas reserves and the present value thereof, future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, competitive strengths, goals, expansion and growth of the
Company's business and operations, plans, references to future success,
references to intentions as to future matters and other similar matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances.
However, whether actual results and developments will conform with the
Company's expectations and predictions is subject to a number of risks and
uncertainties, including the risk factors discussed in this Prospectus;
general economic, market or business conditions; the opportunities (or lack
thereof) that may be presented to and pursued by the Company; competitive
actions by other oil and gas companies; changes in laws or regulations; and
other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made in this Prospectus
are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the expected
consequences to or effects on the Company or its business or operations.
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, financial statements and notes
thereto and other data included elsewhere in this Prospectus. As used herein,
references to the "Company" mean Kelley Oil & Gas Corporation, a Delaware
corporation, and its predecessors-in-interest. Certain oil and gas terms used
in this Prospectus are defined in the "Glossary" included herein.
THE COMPANY
Kelley Oil & Gas Corporation, an independent energy company, together with
its subsidiaries (collectively, "Kelley"), is engaged in oil and natural gas
exploration, development, production and acquisition. Kelley's activities are
concentrated primarily in two geographic areas: north Louisiana and south
Louisiana. At September 30, 1996, approximately 87% of Kelley's proved reserves
are located on 48,620 gross (23,668 net) acres within four fields in Webster
and Bienville Parishes of north Louisiana, where its activities are focused on
lower-risk development drilling. Substantially all of the balance of Kelley's
proved reserves are located in south Louisiana, primarily in Terrebonne Parish.
Kelley intends to continue its primary emphasis on development drilling in its
north Louisiana fields where it believes it has opportunities for production
growth. Kelley's exploration activities will focus on its existing
leaseholdings in Terrebonne Parish, where the Company believes successful wells
have the potential for larger reserves and production as compared to
development wells in north Louisiana. In that regard, Kelley is utilizing
advanced geophysical techniques to re-evaluate and refine interpretations of
Kelley's 3-D seismic database and has entered into a joint venture to explore
and develop its south Louisiana properties, which the Company believes will
enable it to better manage the risks and costs associated with the exploration
and development of such properties.
At January 1, 1996, Kelley had estimated proved reserves of 196.3 Bcf of
natural gas and 1,387 Mbbls of oil, aggregating 204.6 Bcfe, with 96% (by energy
content) of its proved reserves attributable to natural gas. At such date, the
present value of estimated future net revenues attributable to Kelley's proved
reserves was $175.8 million, of which $76.7 million was attributable to proved
developed producing reserves, $33.4 million was attributable to proved
developed non-producing reserves and $65.6 million was attributable to proved
undeveloped reserves. At January 1, 1996, Kelley had leaseholdings comprising
117,528 gross (59,718 net) developed acres and 56,287 gross (47,333 net)
undeveloped acres. In addition, pursuant to an acquisition effective as of July
1, 1996, Kelley purchased undeveloped reserves located on north Louisiana
properties operated by Kelley, which the Company believes added more than 30
Bcfe to Kelley's proved reserves.
In January 1996, the Company entered into financing and related agreements
(the "Contour Agreements") with Contour Production Company L.L.C. ("Contour"),
the successor to a venture formed in 1993 by Bessemer Holdings L.P.
("Bessemer"), the principal investor, and John F. Bookout to pursue
acquisitions of oil and gas reserves. The Contour Agreements provide for a two-
stage $75.0 million equity investment in the Company by Contour. On February
15, 1996, the first stage of the equity investment was completed through
Contour's $48.0 million purchase of newly issued shares of Common Stock
(representing on such date 49.8% of the voting shares of the Company) (the
"Contour Transaction"). The remaining $27.0 million of Contour's equity
commitment will be invested upon satisfaction of certain conditions, but in no
event later than January 2000.
In connection with the first stage of Contour's investment in the Company,
Mr. Bookout, formerly President and Chief Executive Officer of Shell Oil
Company, was appointed Chairman, President and Chief Executive Officer of the
Company, and certain other experienced oil industry executives were appointed
to senior management positions within the Company. The Company's new senior
management team, in an effort to increase production and cash flow, redirected
Kelley's capital resources towards an accelerated drilling program in north
Louisiana, initiating 45 gross (22.7 net) wells during the period beginning on
the date of the Contour Transaction and ending September 30, 1996. During the
same period, management was successful in reducing
5
<PAGE>
the cost of drilling in north Louisiana by implementing competitive bidding
procedures for drilling services and by reducing the time required for drilling
wells. All wells initiated by Kelley during such period were completed as
producing wells, except for wells still being drilled at the end of such
period. Kelley's average daily production from its north Louisiana properties
for September 1996, was approximately 59 Mmcfe, compared to an average daily
production of approximately 35 Mmcfe during February 1996. Kelley's total daily
production averaged approximately 77 Mmcfe for September 1996, compared to
approximately 58 Mmcfe per day during February 1996, representing an increase
of 33%.
STRATEGY
Kelley's strategy is to increase reserves, production and cash flow in a
cost-efficient manner, primarily through the development and exploration of
Kelley's existing properties and through selective acquisitions of oil and gas
reserves.
Develop Existing Assets. Kelley will focus its efforts primarily on lower-risk
development drilling activities within its existing core properties in the
Vacherie Salt Dome region of north Louisiana, where the Company believes it has
opportunities to profitably increase production and cash flow. Since the
Contour Transaction, the Company's new senior management team has refocused and
accelerated Kelley's north Louisiana drilling program. The Company presently
intends to continue dedicating a significant share of its capital resources to
its north Louisiana fields.
Implement a Disciplined Approach to Exploration. The Company's new senior
management team is implementing a disciplined approach to exploration in south
Louisiana. Utilizing current technology, Kelley continues to re-evaluate and
refine interpretations of its 3-D seismic database, which covers substantially
all of its south Louisiana exploration block, and has entered into a joint
venture that will allow it to share the risks and costs associated with
resuming exploratory drilling operations in the area. In this regard, Kelley,
together with its partner, will focus its exploration efforts in south
Louisiana in the approximately 30,000 gross (27,000 net) acres it holds in the
Houma Embayment area of Terrebonne Parish. To date, operators in this
historically prolific hydrocarbon-producing region have produced in the
aggregate more than six trillion cubic feet of natural gas equivalent.
Pursue Strategic Acquisitions. Kelley will focus its acquisition strategy
primarily on producing oil and gas properties having additional development
potential in order to augment existing production and expand and diversify its
reserve base. Potential acquisitions will be evaluated based upon a number of
factors, including development potential, profit enhancement opportunity,
geographic concentration, operatorship and various reserve and production
attributes. The Company believes that its new senior management team's
experience in evaluating and acquiring oil and gas reserves, together with the
additional financial flexibility provided by the Refinancing (as defined
herein), should enable Kelley to more effectively execute an acquisition
strategy to grow its existing asset base, enhance stockholder value and
increase cash flow.
Reduce Costs. The Company's new senior management team is committed to
achieving and maintaining an efficient cost structure. The initial steps of
Kelley's cost reduction program include the implementation of new information
and business systems, the outsourcing of selected technical and administrative
functions and the utilization of competitive bidding and improved drilling
techniques in north Louisiana to reduce drilling costs.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will aid in the
successful implementation of its strategy.
Geographic and Operating Focus. Substantially all of Kelley's reserves and
activities are concentrated in north and south Louisiana. The Company believes
its geographic focus enhances profit potential by allowing it
6
<PAGE>
to manage its large and growing asset base with a relatively small number of
employees. Moreover, the concentration of properties operated by Kelley,
particularly in the Vacherie Salt Dome area of north Louisiana, enables it to
achieve cost and operational efficiencies and to commence recompletion and new
drilling activities quickly and cost-effectively. Kelley is the operator of
properties accounting for approximately 82% of its production at September 30,
1996. As operator, Kelley possesses the ability to enhance profitability by
controlling its operating and overhead expense structure, managing production
performance and regulating capital expenditure projects. During the first nine
months of 1996, Kelley's production expenses for north Louisiana on a per unit
basis were $.24 per Mcfe compared to $.35 per Mcfe during 1995. Although Kelley
also has been successful in reducing aggregate operating costs in south
Louisiana, production expenses on a per unit basis ($.90 per Mcfe during the
first nine months of 1996) have increased due to a decline in production in
such area.
Quality Reserves. Kelley's proved reserves as of January 1, 1996, are
relatively long-lived (9.8 reserves to production ratio). Based on past
production profiles, the Company believes that its north Louisiana wells
ordinarily will produce half of their estimated ultimate reserves in the first
five years of their productive lives (generally in excess of 20 years) and will
produce at lower but more constant rates for the remainder of such lives. From
January 1, 1994 through December 31, 1995, Kelley participated in 47 gross
(18.8 net) wells (70% of which were drilled by Kelley), all of which have been
completed as producing wells, at an average development cost of $.60 per Mcfe
with gross average reserves per well of 4.1 Bcfe. These completed wells tested
at daily rates of up to 16,600 Mcfe and had an average initial daily production
rate of 5,200 Mcfe. During the period beginning with the Contour Transaction
and ending September 30, 1996, Kelley drilled 45 gross (22.7 net) wells in
north Louisiana, which were developed at a lower average cost per Mcfe than
those drilled in 1994 and 1995. The Company believes the high initial
production rates, relatively short pay-back periods and long lives of its north
Louisiana wells provide a solid base from which to pursue its exploration
strategy in south Louisiana as well as its reserve acquisition strategy.
Favorable Price and Cost Structure. Kelley's oil and gas reserves are located
in close proximity to pipeline transportation and key market locations, and,
therefore, generally command favorable prices. In north Louisiana, Kelley is
able to achieve favorable operating margins because lease operating expenses
are generally low as a result of relatively low formation pressures and minimal
liquid hydrocarbon and salt water production. Kelley's south Louisiana
properties are generally closer to transportation and market locations, and
production from these reserves generally receives higher prices because of its
rich condensate content. These higher prices partially offset the relatively
higher operating costs associated with higher formation pressures, inland water
locations and salt water disposal in south Louisiana.
Effective Use of Technology. Kelley applies advanced technology to lower the
risks and costs of exploration and development. The Company, together with its
partner, is re-evaluating and refining Kelley's 3-D seismic database, which
covers 125 square miles, including virtually all of its south Louisiana
exploration prospects. This analysis will increase the possibility of success
and allow for better well placement. Moreover, Kelley invests in computer-aided
exploration and development hardware and software and has the background and
operating experience to engage highly competent and experienced technical
consultants, as needed.
Experienced and Proven Management Team. The four members of the Company's new
senior management team have an average of approximately 30 years of experience
in the oil and gas industry and Kelley's operating managers possess significant
experience in its operating areas. In addition, the new senior management team
has been supported in its undertaking by the substantial equity investment
arising from the Contour Transaction. Through various performance incentive
programs, the Company believes that management, employee and investor interests
are strongly aligned.
7
<PAGE>
THE REFINANCING
Pursuant to an Offer to Purchase and Consent Solicitation dated September 24,
1996, as amended (the "Offer/Solicitation"), the Company offered to purchase
for cash (the "Tender Offer") any and all of its 13 1/2% Senior Notes due 1999
(the "13 1/2% Notes") at a cash price (the "Tender Offer Consideration") equal
to $1,110 per $1,000 principal amount, plus interest accrued and unpaid through
the Payment Date (as defined in the Offer/Solicitation). In conjunction
therewith, the Company also solicited (the "Solicitation") consents to the
adoption of certain amendments to the indenture (the "13 1/2% Indenture")
pursuant to which the 13 1/2% Notes were issued, and offered to pay each holder
of the 13 1/2% Notes who validly consented pursuant to the terms and conditions
of the Offer/Solicitation an amount in cash (the "Consent Payment") equal to
$30 for each $1,000 principal amount of the 13 1/2% Notes so validly
consenting. The Company received the requisite consents to allow it to amend
the 13 1/2% Indenture and amended the 13 1/2% Indenture on October 28, 1996.
The Company also received tenders from holders of approximately $99.6 million
principal amount of 13 1/2% Notes.
On October 29, 1996, the Company issued the Outstanding Notes to the
Placement Agents (the "Note Offering") pursuant to a Placement Agreement dated
October 25, 1996 (the "Placement Agreement"). The Company used substantially
all of the net proceeds from the Note Offering to pay the Tender Offer
Consideration to holders of the 13 1/2% Notes that were validly tendered and
accepted for payment pursuant to the Tender Offer and to pay Consent Payments
to holders of the 13 1/2% Notes who validly consented pursuant to the
Solicitation.
The purpose of the Offer/Solicitation and the issuance of the Outstanding
Notes was to improve the Company's financial flexibility by (i) eliminating the
covenants applicable to the 13 1/2% Notes that might impede future financing
and acquisition transactions, (ii) extending the maturities of the Company's
long-term debt and (iii) replacing senior debt with senior subordinated debt
(which will provide the Company flexibility to pursue additional senior debt
financings).
Effective December 12, 1996, the Company amended its credit facility, agented
by Texas Commerce Bank National Association (the "New Credit Facility"). The
New Credit Facility increased the Company's borrowing base to $57.5 million and
is secured by substantially all of the oil and gas assets of the Company and
its subsidiaries and the proceeds therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources". The Offering, the transactions contemplated by the
Offer/Solicitation and the consummation of the New Credit Facility are referred
to herein collectively as the "Refinancing".
----------------
The Company was incorporated in Delaware in 1994. The Company's executive
offices are located at 601 Jefferson, Suite 1100, Houston, Texas 77002, and its
telephone number is (713) 652-5200.
8
<PAGE>
THE NOTE OFFERING
THE OUTSTANDING NOTES ...... The Outstanding Notes were sold by the Company on
October 29, 1996, to the Placement Agents
pursuant to the Placement Agreement. The
Placement Agents subsequently resold the
Outstanding Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities
Act.
REGISTRATION AGREEMENT ..... The Registration Agreement grants the holders of
the Outstanding Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy those exchange rights, which
terminate on the consummation of the Exchange
Offer. If applicable law or applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange
Offer, or in certain other circumstances, the
Company has agreed to file a shelf registration
(the "Shelf Registration Statement") covering
resales of Transfer Restricted Notes (as defined
in the Registration Agreement). See "The Exchange
Offer--Shelf Registration Statement".
THE EXCHANGE OFFER
SECURITIES OFFERED ......... $125,000,000 aggregate principal amount of 10
3/8% Senior Subordinated Notes Due 2006,
Series B.
THE EXCHANGE OFFER ......... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Outstanding Notes. As of the date hereof,
$125,000,000 aggregate principal amount of
Outstanding Notes are outstanding. The Company
will issue the Exchange Notes as soon as
practicable after the Expiration Date.
Based on an interpretation of the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise
transferred by any holder thereof (other than any
holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act or a Participating Broker-Dealer)
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that the Exchange Notes are
acquired in the ordinary course of the holder's
business and that the holder does not intend to
participate and has no arrangement or
understanding with any person to participate in
the distribution of the Exchange Notes.
Each Participating Broker-Dealer must acknowledge
that it will deliver a prospectus in connection
with any resale of Exchange Notes. A broker-
dealer that delivers a prospectus to purchasers
in connection with resales will be subject to
certain of the civil liability provisions under
the Securities Act and will be bound by the
provisions of the Registration Agreement
(including certain indemnification rights and
obligations). This Prospectus, as it may
9
<PAGE>
be amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of Exchange Notes received in exchange
for Outstanding Notes where the Outstanding Notes
were acquired by the broker-dealer as a result of
market-making activities or other trading
activities. The Company has agreed that, for a
period of 90 days after the Expiration Date, it
will use its best efforts to make this Prospectus
available to any broker-dealer for use in
connection with any resale. See "Plan of
Distribution".
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the
Exchange Notes may not rely on the position of
the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available April 13,
1989) and Morgan Stanley & Co. Incorporated
(available June 5, 1991) or similar no-action
letters and, in the absence of an exemption from
applicable legislative requirements, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with the resale transaction. Failure to comply
with those requirements may result in the holder
incurring liability under the Securities Act for
which the holder is not indemnified by the
Company.
EXPIRATION DATE ............ 12:00 midnight, New York City time, on
, 1997, unless extended.
INTEREST ON THE NOTES ...... The Exchange Notes will bear interest from the
date of issuance of the Exchange Notes.
Outstanding Notes that are accepted for exchange
will cease to accrue interest on and after the
date on which interest on the Exchange Notes
begins to accrue. Accrued and unpaid interest on
the Outstanding Notes that are tendered in
exchange for the Exchange Notes will be payable
on or before the first April 15 or October 15
following the date of issuance of the Exchange
Notes.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES ......... Each holder of Outstanding Notes wishing to
accept the Exchange Offer must complete, sign and
date the accompanying Letter of Transmittal (the
"Letter of Transmittal"), or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
the Letter of Transmittal, or the facsimile,
together with the Outstanding Notes and any other
required documentation to the Exchange Agent at
the address set forth herein. By executing the
Letter of Transmittal, each holder will represent
to the Company that, among other things, the
holder or the person receiving Exchange Notes,
whether or not that person is the holder, is
acquiring the Exchange Notes in the ordinary
course of business and that neither the holder
nor any other person has any arrangement or
understanding with any person to participate in
the distribution of the Exchange Notes. In lieu
of physical delivery of the certificates
representing Outstanding Notes, tendering holders
may transfer notes pursuant to the procedure for
book-entry transfer as set forth under "The
Exchange Offer--Procedures for Tendering".
10
<PAGE>
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS ......... Any beneficial owner whose Outstanding Notes are
registered in the name of a broker-dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact the
registered holder of its Outstanding Notes
promptly and instruct the registered holder to
tender on it's behalf. If such a beneficial owner
wishes to tender on it's own behalf, it must,
before completing and executing the Letter of
Transmittal and delivering its Outstanding Notes,
either make appropriate arrangements to register
ownership of the Outstanding Notes in it's name
or obtain a properly completed bond power from
the registered holder. The transfer of registered
ownership may take considerable time.
GUARANTEED DELIVERY
PROCEDURES ................ Holders of Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding
Notes are not immediately available or who cannot
deliver their Outstanding Notes, the Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
(or comply with the procedures for book-entry
transfer) on or before the Expiration Date must
tender their Outstanding Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures".
WITHDRAWAL RIGHTS .......... Tenders may be withdrawn at any time before 12:00
midnight, New York City time, on the Expiration
Date pursuant to the procedures described under
"The Exchange Offer--Withdrawal of Tenders."
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF
EXCHANGE NOTES ............ Subject to certain conditions, the Company will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
before 12:00 midnight, New York City time, on the
Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
on the date of issuance of the Exchange Notes.
See "The Exchange Offer--Terms of the Exchange
Offer".
FEDERAL INCOME TAX
CONSIDERATIONS ............ The exchange pursuant to the Exchange Offer
should not be a taxable event for federal income
tax purposes. See "Certain U.S. Federal Income
Tax Considerations".
EFFECT ON HOLDERS OF
OUTSTANDING NOTES ......... As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Agreement,
and, with certain exceptions noted below, holders
of Outstanding Notes who do not tender their
Outstanding Notes will not have any further
registration rights under the Registration
Agreement or otherwise. Such holders will
continue to hold the untendered Outstanding Notes
and will be entitled to all the rights and
subject to all the limitations applicable thereto
under the Indenture, except to the extent those
rights or limitations, by their terms, terminate
or cease to have further effect as a result of
the
11
<PAGE>
Exchange Offer. All untendered Outstanding Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, if any
Outstanding Notes are tendered and accepted in
the Exchange Offer, the trading market of the
untendered Outstanding Notes could be adversely
affected.
SHELF REGISTRATION
STATEMENT .................. If (i) the Company determines that the Exchange
Offer may not be consummated as soon as
practicable after the Expiration Date because it
would violate applicable law or the applicable
interpretations of the staff of the Commission,
(ii) the Exchange Offer is not consummated within
210 days of the date of the Registration
Agreement, (iii) the Placement Agents so request
with respect to the Outstanding Notes not
eligible to be exchanged for Exchange Notes in
the Exchange Offer and held by them following
consummation of the Exchange Offer or (iv) any
holder of an Outstanding Note (other than an
Exchanging Dealer (as defined in the Registration
Agreement)) is not eligible to participate in the
Exchange Offer or, in the case of any holder of
Outstanding Notes (other than an Exchanging
Dealer) that participates in the Exchange Offer,
the holder does not receive freely tradeable
Exchange Notes on the date of the exchange for
validly tendered (and not withdrawn) Outstanding
Notes, the Company has agreed to file and
maintain a shelf registration statement that
would allow resales of transfer restricted
Outstanding Notes or Exchange Notes owned by such
holders.
EXCHANGE AGENT ............. United States Trust Company of New York.
12
<PAGE>
SUMMARY OF TERMS OF THE EXCHANGE NOTES
ISSUER...................... Kelley Oil & Gas Corporation.
SECURITIES OFFERED.......... $125 million principal amount of 10 3/8% Senior
Subordinated Notes Due 2006, Series B.
MATURITY.................... October 15, 2006.
INTEREST.................... Payable semiannually in cash, on April 15 and Oc-
tober 15, commencing on the first such date fol-
lowing the issuance of the Exchange Notes.
OPTIONAL REDEMPTION BY
COMPANY.................... The Exchange Notes are redeemable, at the option
of the Company, in whole or in part, at any time
on or after October 15, 2001, initially at
105.188% of their principal amount, plus accrued
interest, declining ratably to 100% of their
principal amount, plus accrued interest, on or
after October 15, 2003.
In addition, at any time prior to October 15,
1999, the Company may redeem in aggregate up to
35% of the original principal amount of Notes
with the proceeds of one or more Equity Offerings
(as defined herein), at 110.375% of their princi-
pal amount, plus accrued interest; provided, how-
ever, that either at least $75 million aggregate
principal amount of Notes must remain outstanding
after each such redemption or such redemption
must retire the Notes in their entirety. See "De-
scription of the Exchange Notes--Optional Redemp-
tion".
CHANGE OF CONTROL........... Upon a Change of Control (as defined herein),
each holder of Exchange Notes (a "Holder") will
have the right to require the Company to repur-
chase such Holder's Exchange Notes at a purchase
price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest.
See "Description of the Exchange Notes--Certain
Covenants--Change of Control".
RANKING..................... The Exchange Notes will be unsecured, general ob-
ligations of the Company subordinated in right of
payment to all existing and future Senior Indebt-
edness (as defined herein) of the Company. The
Exchange Notes will rank pari passu in right of
payment with any future senior subordinated in-
debtedness of the Company and will be senior in
right of payment to all existing and future sub-
ordinated indebtedness of the Company. After giv-
ing pro forma effect to the Refinancing as of
September 30, 1996, the Company's aggregate out-
standing indebtedness for money borrowed other
than the Notes would have been approximately
$68.2 million, $7.0 million of which represented
Senior Indebtedness and the remainder of which
represented subordinated indebtedness. The Com-
pany may incur additional indebtedness under the
New Credit Facility in the future, and such in-
debtedness will constitute Senior Indebtedness.
In addition, the Exchange Notes will be effec-
tively subordinated to all liabilities of the
Company's subsidiaries (other than those of the
Subsidiary Guarantors), including trade payables.
After giving pro
13
<PAGE>
forma effect to the Refinancing, as of September
30, 1996, the Company's subsidiaries (other than
the Subsidiary Guarantors) would have had no lia-
bilities to Persons (as defined herein) other
than the Company and its subsidiaries. See "Risk
Factors--Subordination of the Notes" and "De-
scription of the Exchange Notes--Ranking".
SUBSIDIARY GUARANTIES....... The Exchange Notes will be irrevocably and uncon-
ditionally guaranteed (the "Subsidiary Guaran-
ties") on a senior subordinated basis by Kelley
Oil Corporation and Kelley Operating Company,
Ltd., each a wholly-owned subsidiary of the Com-
pany and, in the future, may be guaranteed by
other subsidiaries of the Company (collectively,
the "Subsidiary Guarantors"). The Subsidiary
Guaranties will be general, unsecured obligations
of the Subsidiary Guarantors, subordinated in
right of payment to all Senior Indebtedness of
the Subsidiary Guarantors, including the obliga-
tions of the Subsidiary Guarantors under the New
Credit Facility. After giving pro forma effect to
the Refinancing, as of September 30, 1996, the
Subsidiary Guarantors would have had no Senior
Indebtedness outstanding, other than to the Com-
pany and its subsidiaries. See "Risk Factors--
Subordination of the Exchange Notes and the Sub-
sidiary Guaranties" and "Description of the Ex-
change Notes--Ranking".
CERTAIN COVENANTS........... The indenture pursuant to which the Exchange
Notes will be issued (the "Indenture") contains
certain covenants for the benefit of the Holders,
including, among others, covenants limiting the
incurrence of additional indebtedness, the pay-
ment of dividends, the redemption of capital
stock, the making of certain investments, the re-
striction of dividends and other restrictions af-
fecting subsidiaries, the issuance of capital
stock of subsidiaries, asset sales, certain sale
and leaseback transactions, transactions with af-
filiates and certain mergers and consolidations.
However, these limitations are subject to a num-
ber of important qualifications and exceptions.
See "Description of the Exchange Notes--Certain
Covenants".
BOOK-ENTRY; DELIVERY AND
FORM....................... The Exchange Notes will be represented by one
permanent global Exchange Note in definitive,
fully registered form deposited with the Trustee
as custodian for, and registered in the name of a
nominee of, DTC. See "Description of the Exchange
Notes--Book-Entry; Delivery and Form".
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN MATTERS RELATING TO
AN INVESTMENT IN THE EXCHANGE NOTES. SEE "RISK FACTORS".
14
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables present selected summary historical and unaudited pro
forma financial and operating and reserve data for the Company. The Company was
formed in 1994 to consolidate the equity ownership (the "Consolidation") of
Kelley Oil & Gas Partners, Ltd. ("Kelley Partners") and Kelley Oil Corporation
("Kelley Oil"). The historical financial information as of and for the years
ended December 31 in each of the four years presented through 1994 is derived
from the audited consolidated financial statements of Kelley Oil. The
Consolidation was treated as a purchase of interests in Kelley Partners by the
Company for financial accounting purposes. Accordingly, the historical
financial information for the year ended December 31, 1995, reflects Kelley
Oil's historical results on a stand-alone basis through the date of the
Consolidation in February 1995, with the results of combined operations
recorded thereafter. The unaudited financial information as of September 30,
1996, and for the nine months ended September 30, 1996 and 1995 has been
prepared by the Company in accordance with generally accepted accounting
principles and reflects all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement in all material respects of the
results for the interim periods presented. Certain financial statement items in
the interim 1995 period have been reclassified to conform to the interim 1996
presentation. This information should be read in conjunction with
"Capitalization", "Selected Consolidated Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company included elsewhere in this
Prospectus. The pro forma financial information presented below is unaudited
and gives effect to the Consolidation as of January 1, 1994. The pro forma
financial information does not purport to represent what the Company's results
of operations actually would have been had the Consolidation occurred on such
date or to project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------------- ---------------------------
1991 1992 1993 1994 1995 1994 1995 1995 1995 1996
------- ------- -------- -------- --------- -------- --------- -------- ------- --------
PRO PRO
FORMA PRO FORMA FORMA
-------- --------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Oil and gas
revenues.......... $13,179 $18,098 $ 19,711 $ 15,487 $ 36,042 $ 42,348 $ 38,550 $ 26,284 $28,792 $ 40,201
Gas marketing
revenues, net..... 1,216 1,013 1,353 1,335 956 45 958 677 679 1,078
Gain on sale of oil
and gas
properties........ -- -- -- -- 777 -- 777 777 777 --
Other income....... 566 819 710 623 404 742 404 310 310 334
Production
expenses.......... 2,325 3,478 3,993 3,760 10,835 12,318 11,461 7,739 8,365 7,638
Exploration costs.. 3,012 7,126 14,226 7,404 23,387 18,083 23,727 10,523 10,863 4,216
General and
administrative
expenses.......... 2,970 3,478 4,079 5,172 7,030 8,308 7,398 4,346 4,714 6,950
Depreciation,
depletion and
amortization...... 5,813 9,768 18,857 20,474 35,591 39,727 36,190 23,704 24,303 15,293
Impairment of oil
and gas
properties(1)..... -- -- -- -- 150,138 -- 150,138 -- -- --
Restructuring
expense........... -- -- -- 1,814 1,115 1,814 1,115 -- -- 2,000
------- ------- -------- -------- --------- -------- --------- -------- ------- --------
Operating income
(loss)........... 841 (3,920) (19,381) (21,179) (189,917) (37,115) (189,340) (18,264) (17,687) 5,516
Interest income.... 587 567 796 793 582 851 587 417 422 604
Interest expense
and other debt
expenses.......... 950 2,684 6,638 4,571 21,956 12,361 22,763 15,137 15,944 18,376
------- ------- -------- -------- --------- -------- --------- -------- ------- --------
Net income (loss)
before income
taxes............ 478 (6,037) (25,223) (24,957) (211,291) (48,625) (211,516) (32,984) (33,209) (12,256)
Provision (benefit)
for taxes 25 (1,071) -- -- -- -- -- -- -- --
------- ------- -------- -------- --------- -------- --------- -------- ------- --------
Net Income (loss) 453 (4,966) (25,223) (24,957) (211,291) (48,625) (211,516) (32,984) (33,209) (12,256)
------- ------- -------- -------- --------- -------- --------- -------- ------- --------
Less: cumulative
preferred stock
dividends......... 770 729 894 2,905 6,607 4,611 7,033 4,867 5,293 --
------- ------- -------- -------- --------- -------- --------- -------- ------- --------
Net loss
applicable to
common stock..... $ (317) $(5,695) $(26,117) $(27,862) $(217,898) $(53,236) $(218,549) $(37,851) $38,502 $(12,256)
======= ======= ======== ======== ========= ======== ========= ======== ======= ========
OTHER DATA:
EBITDA(2) ......... $ 9,666 $12,974 $ 13,702 $ 8,513 $ 20,314 $ 22,509 $ 21,830 $ 15,963 $17,479 $ 27,025
Cash interest
expense(3)........ 892 2,517 3,686 2,739 15,637 9,524 16,360 10,935 11,641 14,335
Ratio of EBITDA to
cash interest
expense........... 10.8x 5.2x 3.7x 3.1x 1.3x 2.4x 1.3x 1.5x 1.5x 1.9x
Ratio of net debt
to EBITDA(4)...... .7x 2.7x 1.8x 3.6x 7.8x 5.3x 7.3x 6.4x 5.8x 4.2x
Ratio of earnings
to fixed
charges(5)........ 1.9x 1.3x
ADJUSTMENTS FOR THE
REFINANCING:
Cash interest
expense(6)........ $ 16,104 $ 10,797 $11,503 $ 13,981
Ratio of EBITDA to
cash interest
expense(6)........ 1.4x 1.5x 1.5x 1.9x
Ratio of net debt
to EBITDA(4)(6)... 8.4x 7.5x 6.9x 4.8x
CAPITAL
EXPENDITURES(7)... $23,360 $30,267 $ 38,602 $ 42,323 $ 47,005 $ 77,743 $ 48,578 $ 32,295 $33,868 $ 28,389
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF SEPTEMBER 30, 1996
DECEMBER 31, -----------------------------
1995 HISTORICAL AS ADJUSTED(6)
------------ -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................... $151,342 $179,421 $181,763
Working capital (deficit).......................... (9,233) (17,062) (15,803)
Property and equipment, net ....................... 128,642 155,502 155,502
Total long-term debt............................... 164,980 153,349 176,776
Stockholders' deficit(8)........................... (45,568) (13,835) (30,961)
</TABLE>
15
<PAGE>
SUMMARY OPERATING AND RESERVE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------- NINE MONTHS
1994 1995 ENDED
----------- ----------- SEPTEMBER 30,
PRO FORMA PRO FORMA 1996
----------- ----------- -------------
<S> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid hydrocarbons
(Mbbls)............................. 446 348 181
Natural gas (Mmcf)................... 18,141 18,828 16,221
Natural gas equivalent (Mmcfe)....... 20,817 20,916 17,307
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons
(per Bbl)........................... $ 16.30 $ 17.31 $ 21.29
Natural gas (per Mcf, including
effects of hedging)................. 1.87 1.72 2.27
Natural gas (per Mcf, excluding
effects of hedging)................. 1.88 1.65 2.35
Natural gas equivalent (per Mcfe,
including effects of hedging)....... 2.03 1.84 2.35
COSTS PER MCFE:
Production expenses.................. $ .59 $ .55 $ .44
General and administrative expenses.. .40 .35 .40
Depreciation, depletion and
amortization........................ 1.91 1.73 .88
Average finding and development
costs(9)............................ 1.05 1.54
PROVED RESERVES:
Total proved reserves (Mmcfe)........ 240,534 204,595
Reserves to production ratio(10)..... 11.6x 9.8x
Present value of estimated future net
revenues (in thousands)(11)......... $ 163,615 $175,761
Standardized measure of discounted
net cash flows (in thousands)(12)... 160,602 171,052
</TABLE>
- --------
(1) Reflects noncash impairment charges against the carrying value of proved
and unproved properties under Financial Accounting Standards Board's
Statement ("FAS") 121. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements included elsewhere in this Offering
Memorandum.
(2) EBITDA is calculated as operating income before interest expense and other
debt expenses, income taxes, exploration costs, restructuring expense,
depletion, depreciation, amortization and impairment of oil and gas
properties. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles ("GAAP"). The Company has included
information concerning EBITDA because EBITDA is a measure used by certain
investors in determining a company's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flow as determined in accordance with
GAAP as an indicator of Kelley's operating performance or liquidity. EBITDA
is not necessarily comparable to a similarly titled measure of another
company. The New Credit Facility requires the Company to maintain certain
financial ratios related to EBITDA, and the Indenture limits the Company's
ability to incur certain indebtedness, pay dividends and engage in certain
other transactions if certain financial ratios related to EBITDA are not
met. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of
the Exchange Notes--Certain Covenants".
(3) Cash interest expense consists of interest expense and other debt expenses
less accretion of original issue discount, accretion of debt valuation
discount, amortization of deferred debt issuance costs and costs associated
with the conversion of debentures.
(4) For purposes of nine month periods, the ratio of net debt to EBITDA was
calculated utilizing annualized EBITDA for such period. Net debt is
outstanding debt less cash.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations plus fixed charges.
Fixed charges consist of interest expense and other debt expenses. For the
years ended December 31, 1992 through 1995, pre-tax income from continuing
operations was insufficient to cover fixed charges by $6.6 million, $26.0
million, $25.8 million and $211.9 million, respectively, and by $50.0
million, $212.1 million, $33.4 million and $33.6 million for the pro forma
years ended December 31, 1994 and 1995, for the nine months ended September
30, 1995, and the pro forma nine months ended September 30, 1995,
respectively.
(6) As adjusted to give pro forma effect to the Refinancing.
(7) Excludes expenditures on the acquisition of proved properties, the
Consolidation and capitalized overhead.
(8) Includes extraordinary loss of $17.1 million related to the excess of the
aggregate purchase price of the 13 1/2% Notes (including Consent Payments)
over the carrying value of the 13 1/2% Notes as of September 30, 1996.
(9) Average finding and development cost per Mcfe is calculated by dividing (A)
capital expenditures (including future capital expenditures associated with
reserve additions but excluding capitalized overhead and expenditures to
acquire proved properties) relating to the properties which have been
evaluated during the period by (B) the ultimate reserve additions
(excluding reserve additions from the acquisition of proved properties)
attributable to such properties for the same period.
(10) The reserves to production ratio is calculated by dividing the total
proved reserves as of a specific date by production for the twelve-month
period immediately preceding such date. See "Glossary".
(11) Computed in accordance with SEC regulations before consideration of future
income taxes, general and administrative expenses and interest expense.
(12) Computed in accordance with SEC regulations.
- --------
Note: Comparative annual reserve replacement ratios are not presented because
such data would not be meaningful as a result of the Consolidation.
16
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors, as
well as the other information contained in this Prospectus, in evaluating an
investment in the Exchange Notes. This Prospectus contains forward-looking
statements of the Company. The Company cautions prospective investors that the
following important factors could affect the Company's actual results in the
future.
SUBSTANTIAL LEVERAGE
As of September 30, 1996, after giving pro forma effect to the Refinancing,
the Company would have had total indebtedness for money borrowed of
approximately $176.8 million and stockholders' deficit of approximately $31.0
million. The Company intends to incur additional indebtedness for money
borrowed in the future under the New Credit Facility as it executes its
strategy for acquisition, exploration and development of oil and gas reserves.
Moreover, although the Indenture contains covenants that limit the incurrence
by the Company and its subsidiaries of additional indebtedness, such
limitations are subject to a number of important qualifications and
exceptions. In addition, the accretion of principal of a non interest-bearing
or other discount security is not treated as the incurrence of indebtedness
under the Indenture. See "Description of the Exchange Notes--Certain
Covenants".
The Company's leverage could have important consequences to the holders of
the Exchange Notes, including the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired in the future; (ii)
a substantial portion of the Company's cash flow from operations will be
required for the payment of principal and interest on its indebtedness for
money borrowed, thereby reducing the funds available to the Company for
Kelley's operations, acquisitions and other purposes; (iii) the Company is
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (iv) the Company's substantial
degree of leverage may hinder its ability to adjust rapidly to changing market
conditions and could make it more vulnerable in the event of a downturn in
general economic conditions or its business. In addition, certain of the
Company's borrowings are and will continue to be at variable rates of
interest, which exposes the Company to the risk of increased interest rates.
See "--Substantial Capital Requirements", "Capitalization", "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness for money borrowed (including the
Exchange Notes) depends on its future performance and successful
implementation of its strategy, which is subject not only to its own actions
but also to general economic, financial, competitive, legislative, regulatory
and other factors beyond its control, as well as to the prevailing market
prices for oil, natural gas and natural gas liquids. There can be no assurance
that Kelley's business will generate sufficient cash flow from operations or
that future credit will be available in an amount sufficient to enable the
Company to service its indebtedness for money borrowed, including the Exchange
Notes, or make necessary capital expenditures. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
DEPLETION OF RESERVES; NECESSITY OF SUCCESSFUL EXPLORATION AND DEVELOPMENT
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Kelley's future oil and natural gas reserves and
production, and, therefore, cash flow and income, are highly dependent upon
Kelley's success in efficiently developing its current reserves and acquiring
additional reserves that are economically recoverable. At September 30, 1996,
approximately 87% of Kelley's proved reserves were located within four fields
in Webster and Bienville Parishes of north Louisiana. Without reserve
additions in excess of production through successful acquisition and
development activities, Kelley's reserves and production will decline. There
can be no assurance that Kelley will be able to develop or acquire additional
reserves to replace its current and future production.
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SUBSTANTIAL CAPITAL REQUIREMENTS
Kelley is dependent upon its ability to obtain financing for acquiring,
exploring and developing oil and natural gas properties beyond its internally
generated cash flow. Historically, Kelley has financed these activities
primarily through the issuance of debt and equity securities, through various
credit facilities and with internally generated funds. Kelley currently has
plans for substantial capital expenditures to continue its acquisition and
development activities. The Company expects to utilize the New Credit Facility
to borrow funds required from time to time to supplement its own available
cash. If revenues or the Company's borrowing base decrease as a result of
lower oil and gas prices, operating difficulties or declines in reserves, the
Company's ability to expend the capital necessary to undertake or complete
future activities may be limited. No assurances can be given that the Company
will have adequate funds available to it under the New Credit Facility to
carry out its strategy or that the Company will be able to make any mandatory
principal payments required by the lenders under such facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
VOLATILITY OF OIL, NATURAL GAS AND NATURAL GAS LIQUIDS PRICES
Kelley's financial results are affected significantly by the price received
for Kelley's oil, natural gas and natural gas liquids production.
Historically, the markets for oil, natural gas and natural gas liquids have
been volatile and are likely to continue to be volatile in the future. The
prices received by Kelley for its oil, natural gas and natural gas liquids
production and the levels of such production are subject to wide fluctuations
and depend on numerous factors beyond Kelley's control, including market
uncertainty, changes in global supply of and demand for oil, natural gas and
natural gas liquids, weather conditions, the condition of the United States
economy (particularly the manufacturing sector), the price and quantity of
foreign imports, the price and availability of alternative fuels, political
conditions (including embargoes) in or affecting other oil-producing and
natural gas-producing countries, the actions of the Organization of Petroleum
Exporting Countries and domestic government regulation, legislation and
policies. Kelley's future financial condition and results of operations will
be dependent, in part, upon the prices received for Kelley's oil and natural
gas production, as well as the costs of finding, acquiring, developing and
producing reserves. If oil and natural gas prices fall materially below their
current levels, the availability of funds and the Company's ability to repay
outstanding amounts under bank credit facilities and the Notes could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
RESTRICTIVE DEBT COVENANTS
The Company is subject to a number of significant covenants that, among
other things, restrict the ability of Kelley to dispose of assets, incur
additional indebtedness, repay other indebtedness, pay dividends, enter into
certain investments or acquisitions, repurchase or redeem capital stock,
engage in mergers or consolidations, or engage in certain transactions with
subsidiaries and affiliates and that otherwise restrict corporate activities.
There can be no assurance that such restrictions will not adversely affect the
Company's ability to finance its future operations or capital needs or engage
in other business activities that may be in the interest of the Company. In
addition, the New Credit Facility requires the Company to maintain compliance
with certain financial ratios. The ability of the Company to comply with such
ratios may be affected by events beyond the Company's control. A breach of any
of these covenants or the inability of the Company to comply with the required
financial ratios could result in a default under bank credit facilities. In
the event of any such default, all borrowings outstanding under the New Credit
Facility, together with accrued interest and other fees, could be declared due
and payable and the Company could be required to sell assets and apply all of
its available cash to repay such borrowings. The indebtedness under the New
Credit Facility is secured by substantially all of the oil and gas assets of
the Company and its subsidiaries and the proceeds therefrom, and, as a result,
the lenders thereunder would have a claim against such assets prior to other
creditors of the Company and its subsidiaries, including holders of the
Exchange Notes. If the indebtedness under the New Credit Facility or any other
indebtedness of the Company were to be accelerated, there can be no assurance
that the assets of the Company would be sufficient to repay such indebtedness
in full. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
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UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties not only in acquiring valuable oil and gas
prospects and successfully exploring and developing them but also in
estimating quantities of proved reserves believed to have been discovered and
in projecting future rates of production and the timing of development
expenditures, including many factors beyond the control of Kelley. The reserve
data set forth in this Prospectus are only estimates. Reserve estimates are
inherently imprecise and may be expected to change as additional information
becomes available. Furthermore, estimates of oil and gas reserves, of
necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured
exactly, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgment. Accordingly, estimates of the economically recoverable quantities of
oil and natural gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of
the future net revenues expected therefrom prepared by different engineers or
by the same engineers at different times may vary substantially. There also
can be no assurance that the reserves set forth in this Prospectus will
ultimately be produced or that the proved undeveloped reserves set forth in
this Prospectus will be developed within the periods anticipated. It is likely
that variances from the estimates will be material. In addition, the estimates
of future net revenues from proved reserves of Kelley and the present value
thereof are based upon certain assumptions about future production levels,
prices and costs that may not be correct when judged against actual subsequent
experience. The Company emphasizes with respect to the estimates prepared by
independent petroleum engineers that the discounted future net revenues should
not be construed as representative of the fair market value of the proved
reserves owned by Kelley since estimated future net revenues are based upon
projected cash flows which do not provide for changes in oil and natural gas
prices from those in effect on the date indicated or for escalation of
expenses and capital costs subsequent to such date. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based. Actual results will differ, and are likely to differ
materially, from the results estimated. Kelley's operations in south Louisiana
in recent years are illustrative of these uncertainties. Downward revisions
were made to Kelley's estimated proved reserves in south Louisiana in 1993 and
1995, which revisions had an adverse effect on the Company's asset base.
Accordingly, potential investors in the Exchange Notes are cautioned not to
place undue reliance on the reserve data included in this Prospectus.
BUSINESS RISKS; OPERATING HAZARDS AND UNINSURED RISKS
Oil and gas drilling activities are subject to numerous risks, including the
risk that no commercially viable oil or natural gas production will be
obtained, and many of such risks are beyond Kelley's control. The decision to
purchase, explore or develop a prospect or property will depend in part on the
evaluation of data obtained through geophysical and geological analyses,
production data and engineering studies, the results of which are often
inconclusive or subject to varying interpretations. The cost of drilling,
completing and operating wells is often uncertain, and overruns in budgeted
expenditures are common risks that can make a particular project uneconomical.
Also, technical problems encountered in actual drilling, completion and
workover activities can delay such activity and add substantial cost to a
project. Further, drilling may be curtailed, delayed or canceled as a result
of many factors, including title problems, weather conditions, compliance with
government permitting requirements, shortages of or delays in obtaining
equipment, reductions in product prices and limitations in the market for
products. At present, the level of drilling activity in the United States has
resulted in increased demand for, and therefore increased costs associated
with, drilling equipment and the services and products of other vendors to the
industry. In particular, in connection with drilling activities in the marshy
regions of south Louisiana, there has been an increased cost of drilling
operations due to increased costs for barge rigs necessary to conduct activity
in such region. Moreover, the number of drilling contractors offering barge
drilling and workover services is limited. Although to date Kelley has not
been materially adversely affected by these recent increased costs, there can
be no assurance that costs will not increase further or that necessary
equipment and services will be available at economical prices.
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The availability of a ready market for Kelley's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to pipelines or
trucking and terminal facilities. Natural gas wells may be shut in for lack of
a market or because of inadequacy or unavailability of natural gas pipeline or
gathering system capacity.
Kelley's oil and natural gas business also is subject to all of the
operating risks associated with the drilling for and production of oil and
natural gas, including, but not limited to, uncontrollable flows of oil,
natural gas, brine or well fluids into the environment (including groundwater
and shoreline contamination), blowouts, cratering, mechanical difficulties,
fires, explosions, pollution and other risks, any of which could result in
substantial losses to Kelley. Although Kelley maintains insurance at levels
that it believes are consistent with industry practices, it is not fully
insured against all risks. Losses and liabilities arising from uninsured and
underinsured events could have a material adverse effect on the financial
condition and operations of Kelley.
GOVERNMENT LAWS AND REGULATIONS
Kelley's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or
have been affected by price controls, taxes and other laws relating to the oil
and natural gas industry, by changes in such laws and by changes in
administrative regulations. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings,
whether additional laws and regulations will be adopted or the effect such
changes may have on Kelley's business or financial condition. See "Business
and Properties--Regulation".
Kelley's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The discharge of oil, natural gas, oil and gas
exploration and production wastes or other pollutants into the air, soil or
water may give rise to liabilities on the part of Kelley to the government and
third parties and may require Kelley to incur costs of remediation. No
assurance can be given that existing environmental laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations, will not materially adversely affect Kelley's operations and
financial condition or that material indemnity claims will not arise against
Kelley with respect to properties acquired or sold by Kelley. See "Business
and Properties--Regulation".
RISKS OF HEDGING TRANSACTIONS
Kelley regularly enters into hedging transactions for its natural gas
production and likely will continue to do so in the future. Such transactions
may limit potential gains by Kelley if oil and natural gas prices were to rise
substantially over the price established by the hedges and may expose Kelley
to the risk of financial loss in certain circumstances, including possibly
instances where Kelley's production is less than expected or there is an
unexpected event materially affecting prices. The natural gas swap agreements
generally provide for Kelley to receive or make counterparty payments on the
differential between a fixed price and a variable indexed price for natural
gas. Kelley is exposed to the credit risk of nonperformance by its hedging
counterparties, which generally can be quantified as the amount of unrealized
gains under the contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations" and Note
12 to the Consolidated Financial Statements of the Company included in this
Prospectus.
COMPETITION
Kelley operates in a highly competitive environment with respect to
acquiring reserves, marketing oil and natural gas and securing trained
personnel. Many of Kelley's larger competitors possess and employ financial
and personnel resources substantially greater than those available to Kelley.
Such companies may be able to pay more for productive oil and natural gas
properties and to define, evaluate, bid for and purchase a greater number of
properties than Kelley's financial or personnel resources permit. Kelley's
ability to acquire additional reserves in the future will be dependent upon
its ability to evaluate and select suitable properties and to consummate
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transactions in a highly competitive environment. In addition, there is
substantial competition for capital available for investment in the oil and
natural gas industry. There can be no assurance that Kelley will be able to
compete successfully in the future in acquiring reserves, developing reserves,
marketing hydrocarbons, attracting and retaining quality personnel, and
raising additional capital. See "Business and Properties--Competition".
DEPENDENCE ON KEY PERSONNEL
The Company believes that its current operations and future prospects are
dependent to a significant extent upon the efforts of several members of its
new senior management team, none of whom have been with the Company for more
than one year. The loss of the services of certain of these key individuals
could have an adverse effect upon the Company. The Company currently does not
maintain insurance against the loss of any of these individuals.
SUBORDINATION OF THE EXCHANGE NOTES
The Exchange Notes will be subordinated in right of payment to all existing
and future Senior Indebtedness of the Company, which includes all indebtedness
under the New Credit Facility. As of September 30, 1996, after giving pro
forma effect to the Refinancing, the Company would have had $7.0 million of
Senior Indebtedness outstanding and would have had up to $50.5 million
available under the New Credit Facility, which, if borrowed, would be Senior
Indebtedness. The Company currently conducts business through subsidiaries.
Claims of creditors of the Company's subsidiaries, including trade creditors,
secured creditors and creditors holding indebtedness and guarantees issued by
such subsidiaries, and claims of preferred stockholders (if any) of such
subsidiaries, generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Exchange Notes, even if such obligations do not
constitute Senior Indebtedness of such subsidiaries. However, the Exchange
Notes will be guaranteed by certain subsidiaries of the Company. See
"Description of the Exchange Notes--Certain Covenants--Subsidiary Guaranties".
Such guarantees, however, will be subordinate in right of payment to any
Senior Indebtedness of such subsidiaries. Although the Indenture limits the
incurrence of Indebtedness and preferred stock of certain subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by subsidiaries of
liabilities that are not considered Indebtedness under the Indenture. See
"Description of the Exchange Notes--Certain Covenants--Limitation on
Indebtedness".
The obligations of each Subsidiary Guarantor (as defined herein) under its
guaranty will be senior subordinated obligations. As such, the rights of
holders of the Exchange Notes to receive payment by a Subsidiary Guarantor
will be subordinated in right of payment to the rights of holders of Senior
Indebtedness of such Subsidiary Guarantor. The terms of the subordination with
respect to the Company's obligations under the Exchange Notes will apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its guaranty.
In the event of liquidation, dissolution, reorganization, bankruptcy or any
similar proceeding regarding the Company, the assets of the Company will be
available to pay obligations on the Exchange Notes only after the Senior
Indebtedness of the Company has been paid in full. Accordingly, there may not
be sufficient funds remaining to pay amounts due on all or any of the Exchange
Notes. In addition, the subordination provisions of the Indenture provide that
no cash payment may be made with respect to the Exchange Notes during the
continuance of a payment default under any Senior Indebtedness of the Company.
Furthermore, if certain non-payment defaults exist with respect to certain
Senior Indebtedness of the Company, the holders of such Senior Indebtedness
will be able to prevent payments on the Exchange Notes for certain periods of
time. See "Description of the Exchange Notes--Ranking".
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Exchange
Notes may require the Company to repurchase all or a portion of such holder's
Exchange Notes at 101% of the principal amount of the Exchange
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Notes, together with accrued and unpaid interest to the date of repurchase.
The Indenture requires that, prior to such a repurchase, the Company must
either repay all outstanding Senior Indebtedness or obtain any required
consents to such repurchase. If a Change of Control were to occur, the Company
may not have the financial resources to repay all of the Senior Indebtedness,
the Exchange Notes and any other indebtedness that would become payable upon
the occurrence of such Change of Control. See "--Subordination of the Exchange
Notes" and "Description of the Exchange Notes--Certain Covenants--Change of
Control".
FRAUDULENT TRANSFER LAWS
Under federal or state fraudulent transfer laws, if a court of competent
jurisdiction were to find, in a lawsuit by an unpaid creditor or a
representative of creditors, such as a trustee in bankruptcy or a debtor-in-
possession, that the Company issued the Exchange Notes with the intent to
hinder, delay or defraud present or future creditors, or received less than a
reasonably equivalent value or fair consideration for any such indebtedness,
and at the time of such incurrence (i) was insolvent, (ii) was rendered
insolvent by reason of such incurrence, (iii) was engaged or about to engage
in a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business or (iv) intended to incur,
or believed or reasonably should have believed that it would incur, debts
beyond its ability to pay as such debts matured, such court could avoid the
Company's obligations to the holders of the Exchange Notes, subordinate the
Company's obligations to the holders of the Exchange Notes to all other
indebtedness of the Company or take other action detrimental to the holders of
the Exchange Notes. In that event, there can be no assurance that any
repayment on the Exchange Notes could ever be recovered by the holders of the
Exchange Notes. Any Subsidiary Guaranty may also be subject to challenge under
fraudulent transfer laws and, in any case, will be limited to amounts that any
such Subsidiary Guarantor can guarantee without violating such laws. See
"Description of the Exchange Notes--Certain Definitions--Subsidiary Guaranty".
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes currently are owned by a relatively small number of
beneficial owners. The Outstanding Notes have not been registered under the
Securities Act and are subject to significant restrictions on resale. The
Exchange Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the Outstanding Notes or
the Exchange Notes on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Company has been advised by the Placement
Agents that, following consummation of the Exchange Offer, they currently
intend to make a market in the Exchange Notes. However, the Placement Agents
are not obligated to do so, and any market making activity with respect to the
Exchange Notes may be discontinued at any time without notice. If commenced,
such market making activity will be subject to the limits imposed in the
Exchange Act, and may be limited during the Exchange Offer or the pendency of
the Shelf Registration Statement. Accordingly no assurance can be given that
an active public or other market will develop for the Exchange Notes or as to
the liquidity of or the trading market for the Exchange Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
Outstanding Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender their Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities
with respect to the tenders of Outstanding Notes for exchange. Outstanding
Notes that are not tendered or are tendered but not accepted will, following
the consummation of the Exchange Offer, continue to be subject to the existing
restrictions on transfer thereof. On consummation of the Exchange Offer, the
registration rights under the Registration Agreement will terminate except
that if (i) the Company determines that the Exchange Offer may not be
consummated as soon as practicable after the Expiration Date because it would
violate applicable law or the applicable interpretations of the staff of the
Commission, (ii) the Exchange Offer is not consummated within 210 days of the
date of the Registration Agreement, (iii) the Placement Agents so request with
respect to the Outstanding Notes not eligible to be exchanged for Exchange
Notes in the Exchange Offer and held by them
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following consummation of the Exchange Offer or (iv) any holder of an
Outstanding Note (other than an Exchanging Dealer) is not eligible to
participate in the Exchange Offer or, in the case of any holder of Outstanding
Notes (other than an Exchanging Dealer) that participates in the Exchange
Offer, the holder does not receive freely tradeable Exchange Notes on the date
of the exchange for validly tendered (and not withdrawn) Notes, the Company
has agreed to file and maintain a shelf registration statement that would
allow resales of transfer restricted Outstanding Notes or Exchange Notes owned
by the holders. In addition, any holder of Outstanding Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if
so, will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where the Outstanding Notes were acquired by
the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of those Exchange Notes. See "Plan of Distribution". To the
extent that Outstanding Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Outstanding
Notes could be adversely affected. See "The Exchange Offer".
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF OUTSTANDING
NOTES
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Agreement. If the Exchange Offer is
consummated, the Company does not, except in very limited circumstances set
forth in the Registration Agreement, intend to file further registration
statements for the sale or other disposition of Outstanding Notes.
Consequently, following completion of the Exchange Offer, holders of
Outstanding Notes seeking liquidity in their investment would have to rely on
an exemption to the registration requirements under applicable securities
laws, including the Securities Act, with respect to any sale or other
disposition of Outstanding Notes.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on October 29, 1996, to the
Placement Agents pursuant to the Placement Agreement. The Placement Agents
subsequently resold the Outstanding Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. In conjunction with the
Placement Agreement, the Company entered into the Registration Agreement with
the Placement Agents, which requires, among other things, that the Company
file with the Commission a registration statement under the Securities Act
with respect to an offer by the Company to the holders of the Outstanding
Notes ("Holders") to issue and deliver to the Holders, in exchange for
Outstanding Notes, a like principal amount of Exchange Notes. The Registration
Agreement obligates the Company to use its best efforts to cause the
registration statement relating to the Exchange Offer to be declared effective
by the Commission under the Securities Act, to commence the Exchange Offer and
to issue and deliver the Exchange Notes to Holders. The Exchange Notes are to
be issued without a restrictive legend and may be reoffered and resold by the
holder without restrictions or limitations under the Securities Act (other
than any holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act). A copy of the Registration Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "Holder" with respect to the Exchange Offer
means any person in whose name the Outstanding Notes are registered on the
books of the Company or any other person who has obtained a properly completed
bond power from the registered holder.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where the Outstanding Notes were acquired by
the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of Exchange Notes. See "Plan of Distribution".
TERMS OF THE EXCHANGE OFFER
On the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal, the Company will accept any and all Outstanding
Notes validly tendered and not withdrawn before 12:00 midnight, New York City
time, on the Expiration Date. As soon as practicable after the Expiration
Date, the Company will issue $1,000 principal amount of Exchange Notes in
exchange for $1,000 principal amount of Outstanding Notes accepted in the
Exchange Offer. Holders may tender some or all of their Outstanding Notes
pursuant to the Exchange Offer. However, Outstanding Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that (i) the Exchange Notes have been
registered under the Securities Act and will not bear legends restricting the
transfer thereof and (ii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Agreement. The Exchange
Notes will evidence the same debt as the Outstanding Notes and will be
entitled to the benefits of the Indenture.
As of the date of this Prospectus, $125,000,000 aggregate principal amount
of the Outstanding Notes was outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company. The Company has fixed the
close of business of , 1997, as the record date for the Exchange
Offer for purposes of determining the persons to whom this Prospectus and the
Letter of Transmittal will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder, including Rule 14e-1 thereunder.
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The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for those unaccepted Outstanding Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "--Fees and Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 midnight New York City time, on
, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice and issue a notice of such extention
by press release or other public announcement, each before 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Outstanding Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written notice
of the delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose the amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and,
depending on the significance of the amendment and the manner of disclosure to
the registered Holders, the Company will extend the Exchange Offer for a period
of five to 10 business days if the Exchange Offer would otherwise expire during
that five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from the date of issuance of the
Exchange Notes. Interest on the Exchange Notes will be payable semiannually on
each April 15 and October 15, commencing on the first such date following the
date of issuance of the Exchange Notes. Outstanding Notes that are accepted
for exchange will cease to accrue interest on and after the date on which
interest on the Exchange Notes begins to accrue. Accrued and unpaid interest
on the Outstanding Notes that are tendered in exchange for the Exchange Notes
will be payable on or before the first April 15 or October 15 following the
date of issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender those Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof,
25
<PAGE>
have the signatures thereon guaranteed if required by the Letter of
Transmittal and mail or otherwise deliver the Letter of Transmittal or the
facsimile, together with the Outstanding Notes and any other required
documents, to the Exchange Agent before 12:00 midnight, New York City time, on
the Expiration Date. To be tendered effectively, the Outstanding Notes, Letter
of Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "Exchange Agent" before 12:00
midnight, New York City time, on the Expiration Date. Delivery of the
Outstanding Notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of book-entry transfer must be received
by the Exchange Agent before the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the Company
the representation set forth below in the second paragraph under the heading
"Resale of Exchange Notes".
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between the Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR THEM.
Any beneficial owner whose Outstanding Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct the
registered Holder to tender on it's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, the guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Outstanding Notes listed therein, those Outstanding Notes must
be endorsed or accompanied by a properly completed bond power, signed by the
registered Holder as the registered Holder's name appears on the Outstanding
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing, and unless waived by
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Exchange Notes at the DTC (the "Book-Entry Transfer Facility") for the purpose
of facilitating the Exchange Offer, and subject to the establishment thereof,
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry
26
<PAGE>
delivery of the Outstanding Notes by causing the Book-Entry Transfer Facility
to transfer the Outstanding Notes into the Exchange Agent's account with
respect to the Outstanding Notes in accordance with the Book-Entry Transfer
Facility's procedures for transfer. Although delivery of the Outstanding Notes
may be effected through book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth below on or before the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under those procedures; provided, however,
that a participant in DTC's book-entry system may, in accordance with DTC's
Automated Tender Offer Program procedures and in lieu of physical delivery to
the Exchange Agent of a Letter of Transmittal, electronically acknowledge its
receipt of, and agreement to be bound by, the terms of the Letter of
Transmittal. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Outstanding Notes not properly tendered or any Outstanding Notes the
Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Outstanding
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify Holders of defects or irregularities with respect to tenders of
Outstanding Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until all
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Holders, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where the Outstanding Notes were acquired by
the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of Exchange Notes. See "Plan of Distribution".
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available, (ii) who cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, before the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) before the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of the Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Outstanding Notes (or a confirmation of
book-entry transfer of those Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
27
<PAGE>
(c) the properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of book-
entry transfer of those Outstanding Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility) and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration Date.
On request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time before 12:00 midnight, New York City time, on the
Expiration Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein before 12:00 midnight, New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Outstanding Notes to be
withdrawn (the "Depositor"), (ii) identify the Outstanding Notes to be
withdrawn (including the certificate number(s) and principal amount of the
Outstanding Notes, or, in the case of Outstanding Notes transferred by book-
entry transfer, the name and number of the account at the Book-Entry Transfer
Facility to be credited), (iii) be signed by the Holder in the same manner as
the original signature on the Letter of Transmittal by which the Outstanding
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with
respect to the Outstanding Notes register the transfer of those Outstanding
Notes in the name of the person withdrawing the tender, (iv) specify the name
in which any such Outstanding Notes are to be registered, if different from
that of the Depositor and (v) if applicable because the Outstanding Notes have
been tendered pursuant to book-entry procedures, specify the name and number
of the participant's account at DTC to be credited, if different from that of
the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Outstanding
Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Outstanding Notes so withdrawn are validly
retendered. Any Outstanding Notes that have been tendered but that are not
accepted for exchange, will be returned to the Holder thereof without cost to
the Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time before the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to issue Exchange Notes for, any
Outstanding Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of any Outstanding Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
that might materially impair the ability of the Company to proceed with the
Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company or any of its
subsidiaries;
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred that might materially impair the ability of the Company to proceed
with the Exchange Offer;
28
<PAGE>
(c) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted that might materially impair
the ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company;
(d) there shall occur a change in the current interpretation by the staff
of the Commission that permits the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Outstanding Notes to be offered for resale,
resold and otherwise transferred by Holders thereof (other than broker-
dealers and any Holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act;
provided that the Exchange Notes are acquired in the ordinary course of the
Holders' business and the Holders have no arrangement or understanding with
any person to participate in the distribution of the Exchange Notes; or
(e) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby.
If the Company determines in good faith and in the exercise of its
reasonable discretion that any of the conditions are not satisfied, the
Company may (i) refuse to accept any Outstanding Notes and return all tendered
Outstanding Notes to the tendering Holders, (ii) extend the Exchange Offer and
retain all Outstanding Notes tendered before the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw tenders of
Outstanding Notes (see "--Withdrawal of Tenders") or (iii) waive the
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Outstanding Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose the waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and, depending on the significance of
the waiver and the manner of disclosure to the registered Holders, the Company
will extend the Exchange Offer for a period of five to 10 business days if the
Exchange Offer would otherwise expire during that five to 10 day period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of his Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Hand Delivery: By Overnight Courier: By Mail:
770 Broadway
111 Broadway 13th Floor Box 843
Lower Level New York, NY 10003 Peter Cooper Station
New York, NY 10005 Attn: Corporate Trust Service New York, NY 10276
Attn: Corporate Trust Window Attn: Corporate Trust
By Facsimile Transmission: For Information:
(For Eligible Institutions Only) (800) 548-6565
(212) 420-6152
Confirm by Telephone:
(800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation is being made by mail;
however, additional solicitation may be made by telegraph, telephone or in
person by officers and regular employees of the Company and its affiliates.
29
<PAGE>
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration
expenses, including fees and expenses of the Trustee, filing fees, blue sky
fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of the Outstanding Notes pursuant to the Exchange Offer, then
the amount of that transfer tax (whether imposed on the registered Holder or any
other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, which is face value as adjusted for original issue
discount, as reflected in the Company's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
RESALE OF EXCHANGE NOTES
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued in the Exchange Offer in exchange for the Outstanding
Notes may be offered for sale, resold or otherwise transferred by any holder
thereof without compliance with the registration and prospectus delivery
requirements of the Securities Act. Based on an interpretation by the staff of
the Commission set forth in no-action letters issued to third parties, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold and otherwise
transferred by any holder of Exchange Notes (other than any holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the Exchange Notes are
acquired in the ordinary course of the holder's business and the holder does
not intend to participate and has no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes. Any holder
who tenders in the Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the Exchange Notes may not
rely on the position of the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available April 13, 1989) and Morgan Stanley &
Co., Incorporated (June 5, 1991), or similar no-action letters, but rather
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any
such resale transaction should be covered by an effective registration
statement containing the selling security holders information required by Item
507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where the Outstanding Notes were acquired by
the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of Exchange Notes. See "Plan of Distribution".
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of
the person receiving the Exchange Notes, whether or not that person is a
Holder, (ii) neither the Holder nor any such other person has an arrangement
or understanding with any person to participate in the distribution of the
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities
Act in
30
<PAGE>
connection with any resale of the Exchange Notes and cannot rely on the no-
action letters referenced above and (b) failure to comply with those
requirements in such instance could result in the Holder incurring liability
under the Securities Act for which the Holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each Holder that may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company will represent to the Company that the Holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Agreement, and, except
as described under "--Shelf Registration Statement", Holders of Outstanding
Notes who do not tender their Outstanding Notes will not have any further
registration rights under the Registration Agreement or otherwise.
Accordingly, any Holder of Outstanding Notes that does not exchange its
Outstanding Notes for Exchange Notes will continue to hold the untendered
Outstanding Notes and will be entitled to all the rights and limitations
applicable thereto under the Indenture, except to the extent those rights or
limitations that, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Outstanding Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company (on redemption thereof
or otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Outstanding Notes are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning
of Rule 144A under the Securities Act in a transaction meeting the
requirements of Rule 144A, (iv) outside the United States to a foreign person
pursuant to the exemption from the registration requirements of the Securities
Act provided by Regulation S thereunder, (v) to an institutional accredited
investor that, before the transfer, furnishes to United States Trust Company
of New York, as trustee, a signed letter containing certain representations
and agreements relating to the restrictions on transfer of the Outstanding
Notes evidenced thereby (the form of which letter can be obtained from the
Trustee) or (vi) pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
Accordingly, to the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, the trading market for the untendered Outstanding Notes
could be adversely affected.
SHELF REGISTRATION STATEMENT
If (i) the Company determines that the Exchange Offer may not be consummated
as soon as practicable after the Expiration Date because it would violate
applicable law or the applicable interpretations of the staff of the
Commission, (ii) the Exchange Offer is not consummated within 210 days of the
date of the Registration Agreement, (iii) the Placement Agents so request with
respect to the Outstanding Notes not eligible to be exchanged for Exchange
Notes in the Exchange Offer and held by them following consummation of the
Exchange Offer or (iv) any holder of an Outstanding Note (other than an
Exchanging Dealer) is not eligible to participate in the Exchange Offer or, in
the case of any holder of Outstanding Notes (other than an Exchanging Dealer)
that participates in the Exchange Offer, the holder does not receive freely
tradeable Exchange Notes on the date of the exchange for validly tendered (and
not withdrawn) Notes, the Company has agreed to file and maintain a shelf
registration statement that would allow resales of transfer restricted
Outstanding Notes or Exchange Notes owned by those holders.
31
<PAGE>
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied on as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will tender be accepted from or, on behalf of) holders of Outstanding
Notes in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of that
jurisdiction. However, the Company may, at its discretion, take such action as
it may deem necessary to make the Exchange Offer in that jurisdiction and
extend the Exchange Offer to holders of Outstanding Notes in that
jurisdiction. In any jurisdiction the securities laws or blue sky laws of
which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of that
jurisdiction.
The Company may in the future seek to acquire untendered Outstanding Notes
in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company has no present plans to acquire any
Outstanding Notes that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Outstanding Notes,
except for the filing, if required, of the Shelf Registration Statement.
32
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Agreement. The
Company will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Outstanding Notes in
like principal amount, the form and terms of which are the same as the form
and terms of the Exchange Notes (which they replace), except as otherwise
described herein. The Outstanding Notes surrendered in exchange for Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase or decrease in
the indebtedness of the Company.
The net proceeds of the Note Offering were approximately $119.8 million. The
Company used substantially all of these proceeds to pay the Tender Offer
Consideration to holders of the 13 1/2% Notes that were validly tendered and
accepted for payment pursuant to the Tender Offer and to pay Consent Payments
to holders of the 13 1/2% Notes who validly consented pursuant to the
Solicitation.
33
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1996, and the as adjusted capitalization of the Company as of
such date to give effect to the Refinancing.
<TABLE>
<CAPTION>
AS OF SEPTEMBER
30, 1996
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
LONG-TERM DEBT:
Bank debt(1).............................................. $ 7,000 $ 7,000
13 1/2% Senior Notes due 1999............................. 96,796 435
10 3/8% Senior Subordinated Notes Due 2006................ -- 119,788
8 1/2% Convertible Subordinated Debentures due 2000....... 22,605 22,605
7 7/8% Convertible Subordinated Notes due 1999............ 26,948 26,948
-------- --------
Total long-term debt.................................... 153,349 176,776
-------- --------
STOCKHOLDERS' DEFICIT:
Convertible Exchangeable Preferred Stock.................. 2,618 2,618
Common Stock.............................................. 983 983
Additional paid-in capital................................ 273,088 273,088
Retained deficit(2)....................................... (290,524) (307,650)
-------- --------
Total stockholders' deficit............................. (13,835) (30,961)
-------- --------
Total capitalization.................................. $139,514 $145,815
======== ========
</TABLE>
- --------
(1) The borrowing base under the New Credit Facility currently is $57.5
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
(2) Includes an extraordinary loss of $17.1 million related to the excess of
the aggregate purchase price of the 13 1/2% Notes (including Consent
Payments) over the carrying value of the 13 1/2% Notes as of September 30,
1996.
34
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected historical and unaudited pro forma
financial data for the Company. The historical financial information as of and
for the years ended December 31 in each of the four years presented through
1994 is derived from the audited consolidated financial statements of Kelley
Oil. The Consolidation was treated as a purchase of interests in Kelley
Partners by the Company for financial accounting purposes. Accordingly, the
historical financial information for the year ended December 31, 1995,
reflects Kelley Oil's historical results on a stand-alone basis through the
date of the Consolidation in February 1995, with the results of combined
operations recorded thereafter. The unaudited financial information as of
September 30, 1996, and for the nine months ended September 30, 1996 and 1995
has been prepared by the Company in accordance with generally accepted
accounting principles and reflects all adjustments (consisting of normal
recurring adjustments) necessary for a fair statement in all material respects
of the results for the interim periods presented. Certain financial statement
items in the interim 1995 period have been reclassified to conform to the
interim 1996 presentation. This information should be read in conjunction with
"Capitalization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus. The pro forma financial
information presented below is unaudited and gives effect to the Consolidation
as of January 1, 1994. The pro forma financial information does not purport to
represent what the Company's results of operations actually would have been
had the Consolidation occurred on such date or to project the Company's
results of operations for any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------------- ----------------------------
1991 1992 1993 1994 1995 1994 1995 1995 1995 1996
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
PRO PRO PRO
FORMA FORMA FORMA
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Oil and gas
revenues........ $13,179 $18,098 $ 19,711 $ 15,487 $ 36,042 $ 42,348 $ 38,550 $ 26,284 $ 28,792 $ 40,201
Gas marketing
revenues, net... 1,216 1,013 1,353 1,335 956 45 958 677 679 1,078
Gain on sale of
oil and gas
properties...... -- -- -- -- 777 -- 777 777 777 --
Other income..... 566 819 710 623 404 742 404 310 310 334
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Total operating
revenues....... 14,961 19,930 21,774 17,445 38,179 43,135 40,689 28,048 30,558 41,613
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Production
expenses........ 2,325 3,478 3,993 3,760 10,835 12,318 11,461 7,739 8,365 7,638
Exploration
costs........... 3,012 7,126 14,226 7,404 23,387 18,083 23,727 10,523 10,863 4,216
General and
administrative
expenses........ 2,970 3,478 4,079 5,172 7,030 8,308 7,398 4,346 4,714 6,950
Depreciation,
depletion and
amortization.... 5,813 9,768 18,857 20,474 35,591 39,727 36,190 23,704 24,303 15,293
Impairment of oil
and gas
properties(1) .. -- -- -- -- 150,138 -- 150,138 -- -- --
Restructuring
expense......... -- -- -- 1,814 1,115 1,814 1,115 -- -- 2,000
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Operating income
(loss).......... 841 (3,920) (19,381) (21,179) (189,917) (37,115) (189,340) (18,264) (17,687) 5,516
Interest income.. 587 567 796 793 582 851 587 417 422 604
Interest expense
and other debt
expenses........ 950 2,684 6,638 4,571 21,956 12,361 22,763 15,137 15,944 18,376
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Income (loss)
before income
taxes........... 478 (6,037) (25,223) (24,957) (211,291) (48,625) (211,516) (32,984) (33,209) (12,256)
Provision
(benefit) for
taxes........... 25 (1,071) -- -- -- -- -- -- -- --
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Net income
(loss).......... 453 (4,966) (25,223) (24,957) (211,291) (48,625) (211,516) (32,984) (33,209) (12,256)
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Less: cumulative
preferred stock
dividends....... 770 729 894 2,905 6,607 4,611 7,033 4,867 5,293 --
------- ------- -------- -------- --------- -------- --------- -------- -------- --------
Net loss
applicable to
common stock.... $ (317) $(5,695) $(26,117) $(27,862) $(217,898) $(53,236) $(218,549) $(37,851) $(38,502) $(12,256)
======= ======= ======== ======== ========= ======== ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $71,308 $95,562 $87,145 $106,513 $151,342 $179,421
Working capital
(deficit).............. 9,856 15,646 2,622 3,788 (9,233) (17,062)
Property and equipment,
net.................... 34,568 50,019 58,018 74,912 128,642 155,502
Total long-term debt.... 18,272 44,763 34,814 37,242 164,980 153,349
Stockholders' equity
(deficit).............. 28,297 24,411 27,415 45,180 (45,568) (13,835)
</TABLE>
- -------
(1) Reflects noncash impairment charges against the carrying value of proved
and unproved properties under FAS 121. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company included elsewhere in
this Prospectus.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the information
contained in the Financial Statements of the Company included elsewhere in
this Prospectus.
GENERAL
Kelley is engaged in oil and natural gas exploration, development,
production and acquisition. Kelley's activities are concentrated primarily in
two geographic areas: north Louisiana and south Louisiana. At September 30,
1996, approximately 87% of Kelley's proved reserves are located on 48,620
gross (23,668 net) acres within four fields in Webster and Bienville Parishes
of north Louisiana, where its activities are focused on lower-risk development
drilling. Substantially all of the balance of Kelley's proved reserves are
located in south Louisiana, primarily in Terrebonne Parish. Kelley intends to
continue its primary emphasis on development drilling in its north Louisiana
fields where it believes it has opportunities for production growth. Kelley's
exploration activities will focus on its existing leaseholdings in Terrebonne
Parish, where the Company believes successful wells have the potential for
larger reserves and production as compared to development wells in north
Louisiana. In that regard, Kelley is utilizing advanced geophysical techniques
to re-evaluate and refine interpretations of Kelley's 3-D seismic database and
is pursuing industry partnerships in order to manage the exploration risks
associated with its south Louisiana properties.
Fourth Quarter Extraordinary Loss. In connection with repurchase of the 13
1/2% Notes and the payment of Consent Payments pursuant to the Tender Offer
and the Solicitation, the Company expects to incur an extraordinary loss in
the fourth quarter of 1996 of approximately $17.0 million, representing the
excess of the aggregate purchase price of the 13 1/2% Notes (including Consent
Payments) over their carrying value as of the date of the consummation of the
Refinancing.
Pro Forma Comparison. Because Kelley's historical results for periods prior
to the Consolidation reflect operations of Kelley Oil alone, they are not
comparable with its operating results after February 1995, which reflect
Kelley's combined operations following the Consolidation. Accordingly, the
following discussion of comparative results of operations for the nine months
ended September 30, 1995 and 1996 and the years ended December 31, 1994 and
1995 reflect pro forma information for the first nine months of 1995 and for
both 1994 and 1995, giving effect to the Consolidation from the beginning of
1994. The Company believes this provides a more meaningful comparison of
results and operational trends than a comparison based on historical results.
The discussion of comparative results for the years ended 1993 and 1994
reflects historical financial information for Kelley Oil on a stand-alone
basis. The following table sets forth certain operating data regarding net
production, average sales prices, production expenses and revenues associated
with Kelley's oil and natural gas operations for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------
1993 1994 1994 1995 1995 1996
------ ------ ------ ------ ------- -------
PRO PRO PRO
FORMA FORMA FORMA
------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons
(Mbbls)......................... 202 171 446 348 273 181
Natural gas (Mmcf)............... 7,327 6,697 18,141 18,828 14,178 16,221
Natural gas equivalent (Mmcfe)... 8,539 7,723 20,817 20,916 15,813 17,307
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons
(per Bbl)....................... $17.84 $16.31 $16.30 $17.31 $ 17.53 $ 21.29
Natural gas (per Mcf)............ 2.20 1.89 1.87 1.72 1.69 2.27
Natural gas equivalent (per
Mcfe)........................... 2.31 2.01 2.03 1.84 1.82 2.35
COST PER MCFE:
Production expenses.............. .47 .49 .59 .55 .53 .44
General and administrative
expenses........................ .48 .67 .40 .35 .30 .40
Depreciation, depletion and
amortization.................... 2.21 2.65 1.91 1.73 1.54 .88
</TABLE>
36
<PAGE>
Impairment of Assets. In the fourth quarter of 1995, the Company implemented
the Financial Accounting Standards Board's Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("FAS 121"). Under FAS 121, certain assets are required to be reviewed
periodically for impairment whenever circumstances indicate their carrying
amount exceeds their fair value and may not be recoverable. As a result of its
continuing operating losses and a decline in its proved reserves at January 1,
1996, from year-earlier pro forma levels, the Company performed an assessment
of the carrying value of Kelley's oil and gas properties indicating an
impairment should be recognized as of year end. Under this analysis, the fair
value for Kelley's proved oil and gas properties was estimated on a depletable
unit basis using escalated pricing and present value discount factors
reflecting risk assessments. The fair value of Kelley's unproved properties
was predicated on current acreage cost estimates. Based on this analysis,
Kelley recognized noncash impairment charges against the carrying values of
its proved and unproved oil and gas properties under FAS 121 aggregating $83.4
million and $66.7 million, respectively, at December 31, 1995.
Contour Transaction. In November 1995, the Company reported that it expected
to be substantially capital constrained by the middle of 1996 due to low
levels of internally generated cash flow and borrowing restrictions. At that
time, the Company implemented an immediate reduction in its drilling
activities and aggressively pursued outside capital in the form of an equity
placement, merger or sale of the Company. Following discussions with potential
acquirors, the Company entered into the Contour Agreements in January 1996,
which provide for a two-stage equity investment of $75 million in the Company
by Contour. Pursuant to the Contour Transaction in February 1996, the Company
appointed John F. Bookout as Chairman, President and Chief Executive Officer
of the Company, and other experienced industry executives to other senior
management positions. See "Company History".
The Contour Transaction enabled the Company's new senior management team to
institute an accelerated developmental drilling program within Kelley's north
Louisiana properties, which has resulted in 35 gross (21.7 net) new wells
being drilled through September 30, 1996. Except for wells still being drilled
at the end of such period, all such wells were completed as producing wells.
The Company expects to initiate drilling on approximately 25 new wells during
the remainder of the year. In addition, the new senior management team has
implemented cost-cutting measures designed to streamline Kelley's operations,
which included a $2.0 million restructuring charge in the first half of 1996
associated primarily with staff reductions and related severance settlements
with certain employees and various reorganization costs. These charges along
with charges incurred in prior periods are included in accounts payable and
accrued expenses on the balance sheet in the amount of $2.2 million, of which
$.5 million is associated with restructuring charges incurred in prior
periods. The Company expects to incur an additional restructuring charge in
the fourth quarter of 1996 associated with staff reductions as a result of
additional consolidation and streamlining of operations. Although these
factors should reduce total overhead costs in 1997, this reduction may not be
fully reflected in the level of reported general and administrative expenses
as a result of a reduction in the level of overhead capitalized and allocated
to exploration expense compared to prior periods.
Hedging Activities. Kelley periodically uses forward sales contracts,
natural gas swap agreements and options to reduce exposure to downward price
fluctuations on its natural gas production. The swap agreements generally
provide for Kelley to receive or make counterparty payments on the
differential between a fixed price and a variable indexed price for natural
gas. Gains and losses realized by Kelley from hedging activities are included
in oil and gas revenues and average sales prices. Kelley's hedging activities
also cover the oil and gas production attributable to the interest in such
production of the public unitholders in Kelley's subsidiary partnerships.
Through a combination of natural gas swap agreements, forward sales contracts
and options, 69.4% of Kelley's natural gas production for the third quarter of
1996 was affected by Kelley's hedging transactions at an average NYMEX quoted
price of $2.17 per MMBTU before transaction and transportation costs on gas
delivered under forward sales contracts. Approximately 57.6% of Kelley's
anticipated natural gas production for the balance of 1996 has been hedged by
natural gas swap agreements, forward sales contracts and options at an average
NYMEX quoted price of $2.25 per MMBTU before transaction and transportation
costs.
37
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
30, 1996. The Company's oil and gas revenues of $40.2 million for the first
nine months of 1996 increased 39.6% compared to $28.8 million on a pro forma
basis in the same period last year primarily as a result of increased gas
prices and production volumes. Production of natural gas during the current
period increased 14.1% to 16.2 million Mcf from 14.2 million Mcf in the first
nine months of 1995, while the average price of natural gas increased 34.3% to
$2.27 per Mcf in the current period from $1.69 per Mcf in the corresponding
period last year. Kelley's production of natural gas peaked in the first
quarter of 1995 and steadily declined in the second and third quarters of 1995
as a result of poor drilling results in south Louisiana. During the fourth
quarter of 1995, the Company's prior management implemented a significant
reduction in drilling activity, which adversely affected production in the
first half of 1996. The Company's current accelerated drilling program is
expected to impact production favorably in the second half of 1996. Production
of crude oil and natural gas liquids during the first nine months of 1996
totaled 181,016 barrels, with an average sales price of $21.29 per barrel
compared to 272,576 barrels at $17.53 per barrel in the first nine months of
1995, representing a volume decrease of 33.6% and a price increase of 21.4% on
a pro forma basis. The decline in oil and condensate volumes reflects the
decline in liquids-rich south Louisiana gas production.
For the first nine months of 1996, revenues from natural gas marketing and
transportation operations, net of associated costs, increased 57.1% to $1.1
million from $.7 million for the same period in 1995.
Production expenses for the first nine months of 1996 decreased 9.5% to $7.6
million from $8.4 million in the same period last year on a pro forma basis,
reflecting lower average costs on production from north Louisiana, which is
increasing in proportion to other higher cost production from south Louisiana.
On a unit basis, production expenses decreased from $.53 per Mcfe in the first
nine months of 1995 to $.44 per Mcfe in the current period.
Exploration costs totaled $4.2 million in the first nine months of 1996 and
$10.9 million on a pro forma basis in the corresponding period of 1995, a
decrease of 61.5%, primarily reflecting a suspension by the new senior
management team of exploratory drilling pending a re-evaluation and
reorientation of Kelley's exploration activities. The decrease in these
expenses also reflects lower geological and geophysical expenses and unproved
leasehold impairment costs.
General and administrative expenses of $7.0 million in the first nine months
of 1996 increased 48.9% compared to $4.7 million on a pro forma basis in the
corresponding period last year. The increase was primarily attributable to
bonuses and interim salaries (aggregating $1.0 million) paid in connection
with the Contour Transaction to certain members of the Company's prior
management team and a decrease in the level of general and administrative
expenses capitalized or allocated to exploration expense. The amounts so
capitalized or allocated were $1.4 million and $1.6 million, respectively,
less in 1996 than in the corresponding period of 1995. On a unit basis, these
expenses increased from $.30 per Mcfe in the first nine months of 1995 to $.40
per Mcfe in the current period.
Interest and other debt expenses of $18.4 million in the current period
increased 15.7% from $15.9 million on a pro forma basis in the first nine
months of 1995. The increase in interest expense resulted primarily from
higher interest rates under the 13 1/2% Notes than under the $90.0 million of
bank debt refinanced with proceeds from the offering of the 13 1/2% Notes in
June 1995 and higher average debt levels during the current period. See "--
Liquidity and Capital Resources". Included in its 1996 interest expense of
$14.5 million, the Company recorded noncash charges in the first three
quarters of 1996 of $1.7 million for amortization of debt issuance costs, $.7
million for accretion of note discount, $1.5 million for accretion of debt
valuation discount and $.1 million in imputed interest associated with the
acquisition of oil and gas properties.
Depreciation, depletion and amortization decreased 37.0% from $24.3 million
on a pro forma basis in the first nine months of 1995 to $15.3 million in the
current period, primarily as a result of (i) lower depletion rates
38
<PAGE>
following impairment charges aggregating $150.1 million recognized in the
fourth quarter of 1995 against the carrying value of Kelley's oil and gas
properties under FAS 121 and (ii) an increase in quantities of proved
developed reserves. On a unit basis, depreciation, depletion and amortization
for oil and gas activities decreased from $1.54 per Mcfe in the first nine
months of 1995 to $.88 per Mcfe in the current period.
In the second quarter of 1996, the Company incurred a $2 million
restructuring charge associated primarily with staff reductions and related
severance settlements with certain employees and various reorganization costs.
Kelley recognized net losses of $12.3 million in the first nine months of
1996 and $33.2 million on a pro forma basis in the same period last year. The
decline in the net losses was primarily attributable to higher oil and gas
prices, increased production and lower depreciation, depletion and
amortization and exploration costs, partially offset by higher interest and
general and administrative expenses.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995. Pro
forma oil and gas revenues of $38.6 million for 1995 decreased 8.7% compared
to $42.3 million in 1994. Pro forma production of natural gas during 1995
increased 3.8% to 18.8 million Mcf from 18.1 million Mcf in 1994, while the
average price of natural gas decreased 8.0% to $1.72 per Mcf in 1995 from
$1.87 per Mcf in the prior year. Production of crude oil and natural gas
liquids in 1995 totaled 347,697 barrels, with an average sales price of $17.31
per barrel compared to 446,283 barrels at $16.30 per barrel in 1994,
representing a volume decline of 22.1% and a price increase of 6.2% on a pro
forma basis. The decline in oil and gas condensate volumes reflects the
decline in liquids rich south Louisiana gas production.
The decrease in pro forma oil and gas revenues for 1995 was primarily
attributable to production declines in the third and fourth quarters,
including the loss of production from the divestiture of nonstrategic
properties at the beginning of the third quarter and lower natural gas prices.
The prices received for Kelley's natural gas production reflect the benefits
of hedging arrangements, which added $1.8 million to pro forma oil and gas
revenues in 1995. See "--General--Hedging Activities".
Additionally, Kelley recognized a gain of $.8 million from the sale of
nonstrategic properties in July 1995. These nonstrategic properties were
offered for sale due to their high operating costs and low priority within
Kelley's development strategy. Kelley received net proceeds of $6.8 million
for the properties, which accounted for approximately 4.6% of its pro forma
proved reserves as of January 1, 1995. The sales affected production levels
for the second half of the year. See "--Liquidity and Capital Resources--
Liquidity".
Production expenses for 1995 decreased 6.5% on a pro forma basis to $11.5
million from $12.3 million in 1994, primarily reflecting a shift to north
Louisiana production. For the same reason, on a unit basis, pro forma
production expenses decreased to $.55 per Mcfe in 1995 from $.59 per Mcfe in
the prior year.
Pro forma exploration costs totaled $23.7 million in 1995 and $18.1 million
in 1994, an increase of 30.9%. The increase in these expenses resulted from
higher dry hole and leasehold expiration expenses in south Louisiana.
Pro forma general and administrative expenses of $7.4 million in 1995
decreased 10.8% compared to $8.3 million in 1994, reflecting the benefits of
the restructuring implemented at the end of 1994 plus ongoing cost containment
measures. In addition, the Company incurred one-time expenses associated with
the Consolidation of $.6 million during 1994. On a unit basis, these expenses
decreased from $.40 per Mcfe in 1994 to $.35 per Mcfe in 1995.
39
<PAGE>
On a pro forma basis, interest and other debt expenses of $22.8 million in
1995 increased 83.9% from $12.4 million in the prior year. The increase in
interest expense resulted partially from higher debt levels and from higher
interest rates associated with the issuance of the Notes in June 1995. In
addition to its interest expense, Kelley recorded noncash charges in 1995 of
$3.8 million for amortization of debt issuance costs, of which $1.7 million
represents prepaid financing costs written off in connection with a related
bank debt refinancing. Kelley also recorded noncash charges in 1995 for
accretion of note discount and accretion of debt valuation discount of $.8
million and $1.9 million, respectively.
Depreciation, depletion and amortization decreased 8.9% on a pro forma basis
from $39.7 million in 1994 to $36.2 million in 1995, generally as a result of
lower net capitalized costs in 1995. On a unit basis, depreciation, depletion
and amortization decreased from $1.91 per Mcfe in 1994 to $1.73 per Mcfe in
1995.
In December 1994, the Company implemented a restructuring including staff
reductions of approximately 25% to streamline management and administrative
functions and reduce general and administrative expenses. An additional
management realignment was implemented in the fourth quarter of 1995.
Nonrecurring charges of $1.1 million and $1.8 million primarily related to
severance costs were taken in the fourth quarters of 1995 and 1994,
respectively.
Kelley recognized pro forma net losses before income taxes of $211.5 million
in 1995 and $48.6 million in the prior year. The increased loss primarily
reflects noncash impairment charges of $150.1 million in 1995 against the
carrying value of proved and unproved oil and gas properties, lower gas prices
and higher interest expense and exploration costs, partially offset by lower
charges for depreciation, depletion and amortization.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1994.
Historical oil and gas revenues of $15.5 million for 1994 decreased 21.3%
compared to $19.7 million in 1993. Production of natural gas during 1994
decreased 8.6% to 6.7 million Mcf from 7.3 million Mcf in 1993, while the
average price of natural gas decreased 14.1% to $1.89 per Mcf in 1994 from
$2.20 per Mcf in the prior year. Production of crude oil and natural gas
liquids in 1994 totaled 171,456 barrels, with an average sales price of $16.31
per barrel, compared to 202,064 barrels at $17.84 per barrel in 1993,
representing volume and price declines of 15.1% and 8.6%, respectively. The
decrease in oil and gas production and revenues during 1994 was due primarily
to the 1993 downturn in drilling performance, production declines in certain
existing wells and reductions in Kelley's interests in wells that were subject
to the roll-up of Kelley Partners 1991 Development Drilling Partnership. The
impact of these factors was partially offset by added production from new
wells primarily in the third and fourth quarters of 1994, when historical gas
equivalent production increased 24.3% and 27.1%, respectively, from levels for
such quarters in the prior period.
Production expenses relating to historical oil and gas operations for 1994
and 1993 were $3.8 million and $4.0 million, respectively, a decrease of 5.0%
on a comparative basis. As a percentage of historical oil and gas revenues,
production expenses increased to 24.3% in 1994 from 20.3% in the prior year,
reflecting the decline in natural gas prices. For the same reason, on a unit
basis, production expenses increased to $.49 per Mcfe in 1994 from $.47 per
Mcfe in the prior year.
Historical exploration costs of $7.4 million were expensed in 1994 compared
to $14.2 million in 1993, a decrease of 47.9%, primarily reflecting the focus
on lower risk prospects during 1994. The decrease in these historical expenses
during 1994 was partially offset by an increase in unproved leasehold
impairment provisions, delay rental costs and geological and geophysical
costs.
Historical general and administrative expenses of $5.2 million in 1994
increased 26.8% compared to $4.1 million in 1993, reflecting additional
overhead expenses borne by Kelley prior to the Consolidation. On a historical
basis, these expenses are net of reimbursed overhead incurred on behalf of
Kelley Partners, Kelley's subsidiary developmental drilling partnerships
("DDPs") and other working interest owners of properties operated by Kelley,
aggregating $12.5 million in both 1994 and 1993.
40
<PAGE>
Historical interest expense of $3.1 million in 1994 decreased 24.4% from
$4.1 million in 1993, primarily reflecting the repayment of borrowings under
the Company's credit facilities in May 1994 from part of the proceeds of a
public offering of Preferred Stock. In addition, the Company incurred debt
conversion costs of $2.5 million and $1.4 million during 1993 and 1994,
respectively. Interest expense was further reduced upon the issuance of
Preferred Stock during September 1994 in exchange for outstanding convertible
subordinated debentures. The decrease in interest expense from lower direct
debt in 1994 was partially offset by Kelley's proportionate share of Kelley
Partners' increased interest expense.
Depreciation, depletion and amortization increased 8.5% on a historical
basis from $18.9 million in 1993 to $20.5 million in 1994, primarily as a
result of an increase in properties subject to amortization per Mcfe. For the
same reason, on a unit basis, depreciation, depletion and amortization
increased to $2.65 per Mcfe in 1994 from $2.21 per Mcfe in the prior year.
In December 1994, the Company implemented a restructuring including staff
reductions of approximately 25% to streamline management and administrative
functions and reduce general and administrative expenses. Nonrecurring charges
of $1.8 million primarily related to severance costs were taken in the fourth
quarter of 1994.
The Company recognized net losses before income taxes of $25.0 million in
1994 and $25.2 million in 1993. In addition, the Company recognized noncash
charges of $1.4 million plus related expenses for the issuance of preferred
stock in exchange for outstanding debentures in the third quarter of 1994 and
$2.1 million plus related expenses for the issuance of common stock of Kelley
Oil upon conversion of $21.9 million principal amount of debentures at a
temporarily reduced conversion rate in the third quarter of 1993.
LIQUIDITY AND CAPITAL RESOURCES
General. Kelley's liquidity is materially affected by cash flows generated
from its oil and gas production and was adversely affected by unsuccessful
drilling results in recent years on higher risk prospects in south Louisiana.
In addition, high interest expense and restrictions under Kelley's debt
instruments after the Consolidation limited Kelley's ability to fund drilling
projects. These restrictions required the Company to suspend preferred stock
dividends and seek a substantial equity infusion in early 1996 to avoid a
financial covenant default under the credit agreement in effect at that time.
This effort resulted in the Contour Transaction, completed in February 1996.
The Contour Transaction allowed the Company to retire its outstanding bank
debt, secure a new banking facility and improve its working capital position.
See "Company History".
Although the Contour Transaction has provided Kelley with the means to
continue its drilling operations with the objective of increasing its cash
flow and reserves, the Company continues to have $168.3 million face amount of
debt outstanding, requiring $19.0 million in annual cash interest payments. On
a pro forma basis after giving effect to the Refinancing as of September 30,
1996, the face amount of the Company's debt outstanding would have been $193.7
million and annual cash interest payments on such debt would have been
approximately $18.5 million. Although dividends are prohibited under the New
Credit Facility and are restricted under the Indenture, the outstanding
preferred stock is cumulative, requires dividends to accumulate at the rate of
$4.6 million annually and carries liquidation preferences over the Common
Stock totaling $47.1 million at September 30, 1996, including such dividend
arrearages. The New Credit Facility permits the Company to make a one-time
$4.6 million payment of such dividend arrearages on or prior to May 1, 1997.
The Indenture also permits the Company to make such payment. The Board of
Directors of the Company, however, has not determined whether to make any
payments for dividend arrearages at this time, and any such payment must not
be prohibited under applicable corporate law.
Liquidity. Net cash provided by operating activities, before working capital
adjustments, during the first nine months of 1996 aggregated $8.1 million. The
Company's cash position was increased during the period by $48.0 million from
the issuance of 48.0 million shares of Common Stock in the Contour
Transaction. These increases were offset by $4.1 million of transaction costs.
Funds used in investing and financing activities were comprised of property
and equipment expenditures of $40.9 million and net principal retirements of
$15.0 million on bank
41
<PAGE>
borrowings. As a result of these activities, cash and cash equivalents
decreased from $6.4 million at December 31, 1995 to $2.5 million as of
September 30, 1996. As of that date, Kelley had a working capital deficit of
$17.1 million, compared to a working capital deficit of $9.2 million at the
end of 1995.
Net cash used in operating activities, before working capital adjustments,
aggregated $4.6 million during 1995. During the year, the Company's cash
position was increased through proceeds of $16.0 million from the issuance of
4.0 million shares of Common Stock in an institutional private placement, net
proceeds of $95.3 million from the sale of the 13 1/2% Notes, proceeds of
$37.1 million from borrowings under the its credit facilities, net proceeds of
$6.8 million from the sale of nonstrategic properties, cash of $1.6 million
received in the Consolidation and proceeds of $.3 million from the exercise of
employee stock options. Funds used in investing and financing activities were
comprised of property and equipment expenditures of $47.0 million, principal
payments of $100.0 million on long-term borrowings and preferred stock
dividends of $6.6 million. As a result of these activities, cash and cash
equivalents decreased from $9.3 million at December 31, 1994 to $6.4 million
at December 31, 1995. As of that date, Kelley had a working capital deficit of
$9.2 million, as compared to a working capital surplus of $3.8 million at the
end of 1994.
The following table sets forth on an unaudited basis historical and pro
forma cash flow from operating activities before working capital adjustments
and EBITDA.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------
1993 1994 1994 1995 1995 1996
------- ------- ------- ------- -------- -------
PRO PRO PRO
FORMA FORMA FORMA
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used
in) operating activities
before working capital
adjustments................ $ 8,063 $ 1,857 $ 4,917 $(4,124) $ 183 $ 9,149
Net cash used in investing
activities................. 38,520 42,058 75,960 39,535 (25,035) 40,872
EBITDA(1)................... 13,702 8,513 22,509 21,830 17,479 27,025
</TABLE>
- --------
(1) EBITDA is calculated as operating income before interest expense and other
debt expenses, income taxes, exploration costs, restructuring expense,
depletion, depreciation, amortization, and impairment of oil and gas
properties. EBITDA is not a measure of cash flow as determined by GAAP.
The Company has included information concerning EBITDA because EBITDA is a
measure used by certain investors in determining a company's historical
ability to service its indebtedness. EBITDA should not be considered as an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with GAAP as an indicator of Kelley's operating
performance or liquidity. EBITDA is not necessarily comparable to a
similarly titled measure of another company. The New Credit Facility
requires the Company to maintain certain financial ratios related to
EBITDA, and the Indenture limits the Company's ability to incur certain
indebtedness, pay dividends and engage in certain other transactions if
certain financial ratios related to EBITDA are not met. See "Description
of the New Credit Facility" and "Description of the Exchange Notes--
Certain Covenants".
New Credit Facility. In February 1996, the Company repaid outstanding bank
borrowings of $30.0 million under its then existing credit facility with
proceeds from the Contour Transaction. See "Company History". In connection
with the Contour Transaction, the Company entered into a credit facility,
which was replaced by the New Credit Facility effective as of December 12,
1996. The borrowers under the New Credit Facility are the Company, Kelley Oil
Corporation ("Kelley Oil") and Kelley Operating Company, Ltd. ("Kelley
Operating"), with Concorde Gas Marketing, Inc. (a subsidiary of the Company)
and the Company's subsidiary partnerships as guarantors.
The New Credit Facility provides for a maximum $125 million revolving credit
loan and matures, with all amounts owed thereunder becoming due and payable,
effective December 12, 2006. Borrowings under the New
42
<PAGE>
Credit Facility are subject to a borrowing base to be determined semi-annually
by the lenders (based in part on the proved oil and gas reserves and other
assets of Kelley) which may be redetermined more frequently at the election of
the lenders or the borrowers. Initially, the borrowing base is $57.5 million.
To the extent that the borrowing base is less than the aggregate principal
amount of all outstanding loans and letters of credit under the New Credit
Facility, 50% of such deficiency must be cured within 90 days and the balance
must be cured within the next 90 days unless such deficiency is a result of an
asset sale, in which case the deficiency must be cured on the date the
borrowing base is re-determined as a result of such sale. Borrowings under the
New Credit Facility are secured by substantially all of the oil and gas assets
of the Company and its subsidiaries and the proceeds therefrom.
So long as no default or event of default (as defined in the New Credit
Facility) is continuing, borrowings under the New Credit Facility bear
interest, at the option of the Borrowers, at either (i) LIBOR plus 1.0% to
1.5% (depending on the level of utilization of the borrowing base) or (ii) the
higher of (a) the agent's prime rate and (b) the federal funds rate plus 0.5%.
The Borrowers incur a quarterly commitment fee ranging from 0.30% to 0.375%
per annum on the average unused portion of the borrowing base, depending upon
the level of utilization.
The New Credit Facility contains covenants which, among other things, limit
the amount of debt Kelley may incur, limit the placement of liens on Kelley's
assets, limit lease transactions, limit Kelley's ability to enter into certain
hedging transactions, restrict the ability of the Company or any of its
subsidiaries to merge with or into another person and prevent the Company from
prepaying certain Subordinated Indebtedness, including the Notes, unless
certain conditions are met. Further, covenants require that, for specified
periods, the Company maintain specified ratios between EBITDA and Senior
Indebtedness and EBITDA and interest on Indebtedness.
The New Credit Facility also prohibits the payment of dividends, except that
it permits the one-time payment on or prior to May 1, 1997 of $4.6 million on
dividend arrearages on the outstanding preferred stock. The Board of Directors
of the Company, however, has not determined whether to make any payments for
dividend arrearages at this time, and any such payment must not be prohibited
under applicable corporate law.
In addition, a reduction in Bessemer's or its affiliates' ownership of the
Company below 20% of the Company's Common Stock is considered an event of
default under the New Credit Facility.
Contour. Pursuant to the second stage of Contour's equity investment in the
Company, Contour has committed to provide an additional $27.0 million in
equity financing upon satisfaction of certain conditions, including the
absence of any Company debt repurchase or redemption obligations, but in no
event later than January 2000. While exercise of such commitment cannot be
assured prior to January 2000, any proceeds received pursuant to such
commitment will reduce Kelley's dependence on outside financing to support
subsequent drilling and acquisition activities. See "Company History--Contour
Transaction".
Recent Acquisition. On September 30, 1996, Kelley closed the purchase of
interests in certain undeveloped reserves located in the Sibley, Sailes, West
Bryceland and Ada fields effective as of July 1, 1996. The Company believes
that this acquisition has increased Kelley's proved reserves by more than 30
Bcfe. The purchase price for the acquired properties was $10 million, subject
to certain adjustments, which the Company financed through borrowings under
the Company's credit facility. The Company also is responsible for certain
capital expenditures incurred by the seller from March 1, 1996 through July 1,
1996.
Industry Partnership. Pursuant to the terms and conditions of a joint
venture with Williams Production--Gulf Coast Company, a unit of the Williams
Companies ("Williams"), effective December 1, 1996, Williams purchased a 50%
interest in Kelley's 27,000 net acreage position in the Houma Embayment in
Terrebonne Parish, Louisiana for a total purchase price of $20.5 million, a
portion of which is committed under the joint venture to drill up to eight
exploration prospects in such area. Williams also acquired 50% of Kelley's
interest in 23 wells and related facilities in this area. Pursuant to the
joint venture, Kelley and Williams have begun a two-rig exploratory drilling
program by spudding their initial well in the Houma Embayment. The Company
believes
43
<PAGE>
that the joint venture will accelerate the exploration and evaluation of the
Company's south Louisiana properties, where the Company previously had
suspended drilling operations. See "Business and Properties--Significant
Properties".
Capital Commitments. In February 1994, the 1994 Development Drilling Program
(the "1994 DDP") completed a public offering of 20.9 million units at $3.00
per unit on a preemptive basis to public unitholders in Kelley Partners.
Kelley Oil's subscription commitment to the 1994 DDP, after return of capital,
aggregated $56.0 million or 92.2% of the 1994 DDP's total. As of September 30,
1996, Kelley Oil had contributed $46.0 million to the 1994 DDP, together with
interest at a market rate on the portion of its commitment that remained
outstanding after November 1994. Kelley Oil intends to contribute the unfunded
portion of its commitment, which totaled $10.0 million at September 30, 1996,
together with interest, as funds are needed for completion of the 1994 DDP's
drilling program. Kelley Oil is the primary beneficiary of these commitments
as a result of its 92.2% ownership in the 1994 DDP, while approximately $.8
million can be attributable to the public unitholders' interests in the 1994
DDP.
During 1996, Kelley's capital expenditures continue to be focused on
development drilling in north Louisiana, where Kelley currently expects to
participate in drilling a total of approximately 70 gross wells, subject to
regulatory and third party consents. In addition, Kelley plans to balance its
drilling strategy by pursuing acquisition opportunities to expand its reserve
base and operating areas, while utilizing its joint venture with Williams to
explore and develop its higher potential exploratory prospects in south
Louisiana. Kelley has an active program for ongoing evaluation of
opportunities meeting its acquisition criteria. There can be no assurance that
attractive acquisition candidates will be available to the Company on terms it
deems reasonable or that any completed acquisition will ultimately prove to be
a successful undertaking by the Company.
The Company anticipates that, except for any significant property
acquisitions, business combinations or development required by exploratory
success (and subject to price stability), cash flow from operations, and
borrowings under the New Credit Facility will be adequate to fund Kelley's
debt service obligations, expected capital expenditure requirements and
working capital needs. To fully realize Kelley's objectives for property
development and acquisitions, however, the Company may be required to pursue
additional financing alternatives.
Stock-Based Compensation. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("FAS 123"), effective for the Company
on January 1, 1996. FAS 123 permits, but does not require, a fair-value based
method of accounting for employee stock option plans, resulting in
compensation expense being recognized in the results of operations when stock
options are granted. The Company has not elected (and does not expect to
elect) to follow the fair-value based method of accounting for stock option
plans, and therefore, no compensation expense is (or will be) recognized.
However, as required by FAS 123, the Company will provide pro forma disclosure
of net income and earnings per share in the notes to its consolidated
financial statements for future periods as if the fair-value based method of
accounting had been applied.
Inflation and Changing Prices. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation.
44
<PAGE>
BUSINESS AND PROPERTIES
THE COMPANY
Kelley is engaged in oil and natural gas exploration, development,
production and acquisition. Kelley's activities are concentrated primarily in
two geographic areas: north Louisiana and south Louisiana. At September 30,
1996, approximately 87% of Kelley's proved reserves are located on 48,620
gross (23,668 net) acres within four fields in Webster and Bienville Parishes
of north Louisiana, where its activities are focused on lower-risk development
drilling. Substantially all of the balance of Kelley's proved reserves are
located in south Louisiana, primarily in Terrebonne Parish. Kelley intends to
continue its primary emphasis on development drilling in its north Louisiana
fields where it believes it has opportunities for production growth. Kelley's
exploration activities will focus on its existing leaseholdings in Terrebonne
Parish, where the Company believes successful wells have the potential for
larger reserves and production as compared to development wells in north
Louisiana. In that regard, Kelley is utilizing advanced geophysical techniques
to re-evaluate and refine interpretations of Kelley's 3-D seismic database and
has entered into a joint venture to explore and develop its south Louisiana
properties, which the Company believes will enable it to better manage the
risks and costs associated with the exploration and development of such
properties.
At January 1, 1996, Kelley had estimated proved reserves of 196.3 Bcf of
natural gas and 1,387 Mbbls of oil, aggregating 204.6 Bcfe, with 96% (by
energy content) of its proved reserves attributable to natural gas. At such
date, the present value of estimated future net revenues attributable to
Kelley's proved reserves (based on a December 1995 monthly weighted average
natural gas price of $2.06 per Mcf and a 1995 year-end crude oil price of
$19.73 per Bbl) was $175.8 million, of which $76.7 million was attributable to
proved developed producing reserves, $33.4 million was attributable to proved
developed non-producing reserves and $65.6 million was attributable to proved
undeveloped reserves. At January 1, 1996, Kelley had leaseholdings comprising
117,528 gross (59,718 net) developed acres and 56,287 gross (47,333 net)
undeveloped acres. In addition, pursuant to an acquisition effective as of
July 1, 1996, Kelley purchased undeveloped reserves located on north Louisiana
properties operated by Kelley, which the Company believes added more than 30
Bcfe to Kelley's proved reserves.
In January 1996, the Company entered into financing and related agreements
(the "Contour Agreements") with Contour Production Company L.L.C. ("Contour"),
the successor to a venture formed in 1993 by Bessemer Holdings L.P.
("Bessemer"), the principal investor, and John F. Bookout to pursue
acquisitions of oil and gas reserves. The Contour Agreements provide for a
two-stage $75.0 million equity investment in the Company by Contour. On
February 15, 1996, the first stage of the equity investment was completed
through Contour's $48 million purchase of newly issued shares of Common Stock
(representing on such date 49.8% of the voting shares of the Company) (the
"Contour Transaction"). The remaining $27.0 million of Contour's equity
commitment will be invested upon satisfaction of certain conditions, but in no
event later than January 2000.
In connection with the first stage of Contour's investment in the Company,
Mr. Bookout, formerly President and Chief Executive Officer of Shell Oil
Company, was appointed Chairman, President and Chief Executive Officer of the
Company, and certain other experienced oil industry executives were appointed
to senior management positions within the Company. The Company's new senior
management team, in an effort to increase production and cash flow, redirected
Kelley's capital resources towards an accelerated drilling program in north
Louisiana, initiating 45 gross (22.7 net) wells during the period beginning on
the date of the Contour Transaction and ending September 30, 1996. During the
same period, management was successful in reducing the cost of drilling in
north Louisiana by implementing competitive bidding procedures for drilling
services and by reducing the time required for drilling wells. All wells
initiated by Kelley during such period were completed as producing wells,
except for wells still being drilled at the end of such period. Kelley's
average daily production from its north Louisiana properties for September
1996, was approximately 59 Mmcfe, compared to an average daily production of
approximately 35 Mmcfe during February 1996. Kelley's total daily production
averaged approximately 77 Mmcfe for September 1996, compared to approximately
58 Mmcfe per day during February 1996, representing an increase of 33%.
45
<PAGE>
STRATEGY
Kelley's strategy is to increase reserves, production and cash flow in a
cost-efficient manner, primarily through the development and exploration of
Kelley's existing properties and through selective acquisitions of oil and gas
reserves.
Develop Existing Assets. Kelley will focus its efforts primarily on lower-risk
development drilling activities within its existing core properties in the
Vacherie Salt Dome region of north Louisiana, where the Company believes it
has opportunities to profitably increase production and cash flow. Since the
Contour Transaction, the Company's new senior management team has refocused
and accelerated Kelley's north Louisiana drilling program. The Company
presently intends to continue dedicating a significant share of its capital
resources to its north Louisiana fields.
Implement a Disciplined Approach to Exploration. The Company's new senior
management team is implementing a disciplined approach to exploration in south
Louisiana. Utilizing current technology, Kelley continues to re-evaluate and
refine interpretations of its 3-D seismic database, which covers substantially
all of its south Louisiana exploration block, and has entered into a joint
venture that will allow it to share the risks and costs associated with
resuming exploratory drilling operations in the area. In this regard, Kelley,
together with any such partners, will focus its exploration efforts in south
Louisiana in the approximately 30,000 gross (27,000 net) acres it holds in the
Houma Embayment area of Terrebonne Parish. To date, operators in this
historically prolific hydrocarbon-producing region have produced in the
aggregate more than six trillion cubic feet of natural gas equivalent.
Pursue Strategic Acquisitions. Kelley will focus its acquisition strategy
primarily on producing oil and gas properties having additional development
potential in order to augment existing production and expand and diversify its
reserve base. Potential acquisitions will be evaluated based upon a number of
factors, including development potential, profit enhancement opportunity,
geographic concentration, operatorship and various reserve and production
attributes. The Company believes that its new senior management team's
experience in evaluating and acquiring oil and gas reserves, together with the
additional financial flexibility provided by the Refinancing (as defined
herein), should enable Kelley to more effectively execute an acquisition
strategy to grow its existing asset base, enhance stockholder value and
increase cash flow.
Reduce Costs. The Company's new senior management team is committed to
achieving and maintaining an efficient cost structure. The initial steps of
Kelley's cost reduction program include the implementation of new information
and business systems, the outsourcing of selected technical and administrative
functions and the utilization of competitive bidding and improved drilling
techniques in north Louisiana to reduce drilling costs.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will aid in
the successful implementation of its strategy.
Geographic and Operating Focus. Substantially all of Kelley's reserves and
activities are concentrated in north and south Louisiana. The Company believes
its geographic focus enhances profit potential by allowing it to manage its
large and growing asset base with a relatively small number of employees.
Moreover, the concentration of properties operated by Kelley, particularly in
the Vacherie Salt Dome area of north Louisiana, enables it to achieve cost and
operational efficiencies and to commence recompletion and new drilling
activities quickly and cost-effectively. Kelley is the operator of properties
accounting for approximately 82% of its current production. As operator,
Kelley possesses the ability to enhance profitability by controlling its
operating and overhead expense structure, managing production performance and
regulating capital expenditure projects. During the first nine months of 1996,
Kelley's production expenses for north Louisiana on a per unit basis were $.24
per Mcfe compared to $.35 per Mcfe during 1995. Although Kelley also has been
successful in reducing aggregate operating costs in south Louisiana,
production expenses on a per unit basis ($.90 per Mcfe during the first nine
months of 1996) have increased due to a decline in production in such area.
Quality Reserves. Kelley's proved reserves as of January 1, 1996, are
relatively long-lived (9.8 reserves to production ratio). Based on past
production profiles, the Company believes that its north Louisiana wells
46
<PAGE>
ordinarily will produce half of their estimated ultimate reserves in the first
five years of their productive lives (generally in excess of 20 years) and
will produce at lower but more constant rates for the remainder of such lives.
From January 1, 1994 through December 31, 1995, Kelley participated in 47
gross (18.8 net) wells (70% of which were drilled by Kelley), all of which
have been completed as producing wells, at an average development cost of $.60
per Mcfe with gross average reserves per well of 4.1 Bcfe. These completed
wells tested at daily rates of up to 16,600 Mcfe and had an average initial
daily production rate of 5,200 Mcfe. During the period beginning with the
Contour Transaction and ending September 30, 1996, Kelley drilled 45 gross
(22.7 net) wells in north Louisiana, which were developed at a lower average
cost per Mcfe than those drilled in 1994 and 1995. The Company believes the
high initial production rates, relatively short pay-back periods and long
lives of its north Louisiana wells provide a solid base from which to pursue
its exploration strategy in south Louisiana as well as its reserve acquisition
strategy.
Favorable Price and Cost Structure. Kelley's oil and gas reserves are located
in close proximity to pipeline transportation and key market locations, and,
therefore, generally command favorable prices. In north Louisiana, Kelley is
able to achieve favorable operating margins because lease operating expenses
are generally low as a result of relatively low formation pressures and
minimal liquid hydrocarbon and salt water production. Kelley's south Louisiana
properties are generally closer to transportation and market locations, and
production from these reserves generally receives higher prices because of its
rich condensate content. These higher prices partially offset the relatively
higher operating costs associated with higher formation pressures, inland
water locations and salt water disposal in south Louisiana.
Effective Use of Technology. Kelley applies advanced technology to lower the
risks and costs of exploration and development. The Company, together with its
partner, is re-evaluating and refining Kelley's 3-D seismic database, which
covers 125 square miles, including virtually all of its south Louisiana
exploration prospects. This analysis will increase the possibility of success
and allow for better well placement. Moreover, Kelley invests in computer-
aided exploration and development hardware and software and has the background
and operating experience to engage highly competent and experienced technical
consultants, as needed.
Experienced and Proven Management Team. The four members of the Company's new
senior management team have an average of approximately 30 years of experience
in the oil and gas industry and Kelley's operating managers possess
significant experience in its operating areas. In addition, the new senior
management team has been supported in its undertaking by the substantial
equity investment arising from the Contour Transaction. Through various
performance incentive programs, the Company believes that management, employee
and investor interests are strongly aligned.
DESCRIPTION OF PROPERTIES
Kelley's properties are located principally in Louisiana. As of January 1,
1996, Kelley owned interests in a total of 371 gross (156.8 net) producing
wells, of which 198 wells were operated by Kelley, accounting for 82% of
Kelley's current production. As of that date, Kelley had leaseholdings
covering 117,528 gross (59,718 net) developed acres and 56,287 gross (47,333
net) undeveloped acres. Approximately 96% of Kelley's proved oil and gas
reserves (by energy content) as of January 1, 1996, was natural gas. The
reserves to production ratio for these properties (based on 1995 production
rates) was estimated to be 9.8 as of January 1, 1996.
SIGNIFICANT PROPERTIES
Kelley's core natural gas properties in north Louisiana are located in the
Sailes, Sibley, West Bryceland and Ada fields of Webster and Bienville
Parishes, while its core properties in south Louisiana are concentrated in
Terrebonne Parish. Production is primarily from the Hosston (north Louisiana)
and Miocene (south Louisiana) formations. Substantially all of Kelley's oil
and gas properties are pledged to secure borrowings under the New Credit
Facility. The following table sets forth certain information about Kelley's
interests in its most significant fields, together with information for all
other fields combined. Pro forma production data gives effect to the
Consolidation as of January 1, 1995.
47
<PAGE>
SIGNIFICANT PROVED PROPERTIES
<TABLE>
<CAPTION>
PROVED RESERVES AS OF
JANUARY 1, 1996 PRODUCTION
----------------------------------------- -----------------------------------------
TWELVE MONTHS
ENDED NINE MONTHS ENDED
PRESENT VALUE DECEMBER 31, 1995 SEPTEMBER 30, 1996
GAS OF ESTIMATED -------------------- --------------------
OIL GAS EQUIVALENT FUTURE NET OIL GAS OIL GAS
PROPERTY (MBBLS) (MMCF) (MMCFE) REVENUES (MBBLS) (MMCF) (MBBLS) (MMCF)
- -------- ------- ------- ---------- -------------- ------- ---------- ------- ------
PRO FORMA
--------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTH LOUISIANA:
Sibley Field.......... 128 60,840 61,608 $ 53,112 4 2,347 7 3,977
Sailes Field.......... 131 52,844 53,630 44,033 24 5,821 27 4,826
West Bryceland Field.. 82 43,744 44,236 28,776 4 1,462 6 2,170
Ada Field............. 22 13,398 13,530 11,885 1 425 2 919
SOUTH LOUISIANA(1):
Orange Grove/
Humphreys Field...... 172 8,266 9,298 11,979 69 3,136 32 1,399
Ouiski Bayou Field.... 202 2,690 3,902 4,902 46 1,116 19 524
Fire Island Field..... 36 1,602 1,818 3,374 25 1,060 12 614
OTHER:
As a group............ 614 12,889 16,573 17,700 175 3,461 76 1,792
----- ------- ------- -------- ------- ---------- ------- ----------
Total............. 1,387 196,273 204,595 $175,761 348 18,828 181 16,221
===== ======= ======= ======== ======= ========== ======= ==========
</TABLE>
- --------
(1) Effective December 1, 1996, Kelley entered into a joint venture whereby it
sold in the Houma Embayment, including in the Orange Grove/Humphreys and
Ouiski Bayou fields, 50% of its net acreage position as well as 50% of its
interest in 23 wells and related facilities in such area. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources".
Additional information regarding these fields is set forth below. Well and
reserve information is provided as of January 1, 1996.
NORTH LOUISIANA
Kelley's operations in this region are focused primarily on four contiguous
fields in the Vacherie Salt Dome area. Production is primarily from the
Hosston Sandstone interval with an average thickness of 3,000 feet. Wells are
typically drilled to a maximum depth of approximately 10,500 feet. Operations
in this region do not typically experience high formation pressures or
significant associated liquid production or salt water disposal. Recently,
increases in recoveries from north Louisiana wells have been achieved from
revised interpretations of geological fault systems, revised fracture
stimulation techniques and regulatory changes that allowed the commingling of
production from multiple zones. Based on past production profiles, the Company
believes that its north Louisiana wells will ordinarily produce half of their
estimated ultimate reserves in the first five years of their productive lives
(generally in excess of 20 years) and will produce at lower but more constant
rates for the remainder of such lives. At September 30, 1996, Kelley operated
an aggregate of 153 gross (84.2 net) wells in this region.
Sibley Field. The Sibley Field is located in Webster Parish, Louisiana. The
Sibley Field proved reserves were 58% developed and 28.9% producing as of
December 31, 1995. As of September 30, 1996, Kelley had interests in 57 gross
(15.9 net) wells producing primarily from the Hosston formation at depths
ranging from 4,500 to 9,000 feet. Kelley operates 28 of the wells. Kelley
completed as producers 11 gross (3.2 net) wells in the Sibley Field from
January 1, 1996, through September 30, 1996, and was in the process of
drilling 1 gross (.4 net) well in this field on September 30, 1996.
48
<PAGE>
Sailes Field. The Sailes Field is located in Bienville Parish, Louisiana. The
Sailes Field proved reserves were 57% developed and 39.1% producing as of
December 31, 1995. As of September 30, 1996, Kelley had interests in 78 gross
(41.3 net) wells producing from the Hosston formation at depths ranging from
7,000 to 10,500 feet. Kelley operates 69 of the wells. Kelley completed as
producers 12 gross (7.5 net) wells in the Sailes Field from January 1, 1996,
through September 30, 1996.
West Bryceland Field. The West Bryceland Field is located in Bienville
Parish, Louisiana. The West Bryceland Field proved reserves were 43% developed
and 14.8% producing as of December 31, 1995. As of September 30, 1996, Kelley
had interests in 69 gross (24.8 net) wells producing from the Hosston formation
at depths ranging from 6,500 to 10,500 feet. Kelley operates 39 of the wells.
Kelley completed as producers 10 gross (4.6 net) wells in the West Bryceland
Field from January 1, 1996, through September 30, 1996, and was in the process
of drilling 5 gross (3.3 net) wells in this field on September 30, 1996.
Ada Field. The Ada Field is located in Bienville and Webster Parishes,
Louisiana. The Ada Field proved reserves were 45% developed and 11.5% producing
as of December 31, 1995. As of September 30, 1996, Kelley had interests in 17
gross (7.7 net) wells producing primarily from the Hosston formation at depths
ranging from 6,000 to 10,000 feet. Kelley operates 10 of the wells. Kelley
completed as producers 2 gross (.9 net) wells in the Ada Field from January 1,
1996, through September 30, 1996.
Recent Acquisition. On September 30, 1996, Kelley closed the purchase of
interests in certain undeveloped reserves located in the Sibley, Sailes, West
Bryceland and Ada fields effective as of July 1, 1996. The Company believes
that this acquisition has increased Kelley's proved reserves by more than 30
Bcfe. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
SOUTH LOUISIANA
Kelley's operations in this region primarily are focused on four fields in
the Houma Embayment area and one field in nearby Vermilion Parish. The Houma
Embayment is composed of high-quality reservoir rock, contributing to high
production rates. Wells are typically drilled to a depth of approximately
11,000 to 17,000 feet. Kelley's south Louisiana properties generally are
located in close proximity to transportation and market locations, and
production therefrom generally receives higher prices because of its rich
condensate content. The Company believes these factors partially offset the
higher operating costs associated with higher formation pressures, salt water
disposal and liquid hydrocarbon handling associated with the region. Kelley
operates an aggregate of 54 gross (49.0 net) wells in this region and currently
is not drilling any wells in the region. Kelley's average working interest in
these properties is approximately 90%. The three most significant fields are
described below.
Orange Grove/Humphreys Field. The Orange Grove/Humphreys Field is located in
Terrebonne Parish, Louisiana. All Orange Grove/Humphreys Field proved reserves
were developed and 75.7% were producing as of December 31, 1995. As of
September 30, 1996, Kelley had interests in 15 gross (12.8 net) wells producing
primarily from the Miocene 1st Hollywood and Bourg formations at depths ranging
from 2,500 to 13,900 feet. Kelley operates 13 of the wells.
Ouiski Bayou Field. The Ouiski Bayou Field is located in Terrebonne Parish,
Louisiana. All Ouiski Bayou Field proved reserves were developed and producing
as of December 31, 1995. As of September 30, 1996, Kelley had interests in 2
gross (1.7 net) wells producing from the Cib op and KK formations at depths
ranging from 14,880 to 18,000 feet. Kelley operates all of the wells.
Fire Island Field. The Fire Island Field is located in Vermilion Parish,
Louisiana. All Fire Island proved reserves were developed and producing as of
December 31, 1995. As of September 30, 1996, Kelley had an interest in 1 gross
(.95 net) well, which is operated by Kelley producing from the MA-36 formation
at a depth of 14,400 feet.
Industry Partnership. Pursuant to the terms and conditions of a joint venture
with Williams, effective December 1, 1996, Williams purchased a 50% interest in
Kelley's 27,000 net acreage position in the Houma Embayment, including in the
Orange Grove/Humphreys and Ouiski Bayou fields, for a total purchase price of
$20.5
49
<PAGE>
million, a portion of which is committed under the joint venture to drill up
to eight exploration prospects in such area. Williams also acquired 50% of
Kelley's interest in 23 wells and related facilities in this area. Pursuant to
the joint venture, Kelley and Williams have begun a two-rig exploratory
drilling program by spudding their initial well in the Houma Embayment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
PROVED RESERVES
General. Reserve estimates contained herein were prepared by H. J. Gruy &
Associates, Inc. ("Gruy") independent petroleum engineers, as of January 1,
1996, and were prepared by Kelley and reviewed by Gruy at January 1, 1994 and
1995. The estimates were prepared in accordance with SEC regulations using
market or contract prices at the end of each reported period. Prices and
operating and development costs are not escalated but are held constant over
the estimated life of the reserves. See "Risk Factors--Uncertainties in
Estimating Reserves and Future Net Revenues".
Quantities. The following table sets forth the estimated quantities of
proved and proved developed reserves of crude oil (including condensate and
natural gas liquids) and natural gas owned by Kelley for the years ended
December 31, 1993, 1994 and 1995 and principal components of the changes in
the quantities of reserves for each of the periods then ended. See "Risk
Factors--Uncertainties in Estimating Reserves and Future Net Revenues".
PROVED RESERVES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995
--------------- -------------- ---------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Beginning balance.......... 1,837 69,804 1,114 64,875 1,236 93,612
Revisions of previous
estimates................. (913) (23,177) 75 16,055 (558) (27,006)
Dilutive effect of
offerings................. (210) (5,030) -- -- -- --
Purchases of oil and gas
properties................ -- -- -- -- 1,756 127,962
Revisions of purchased oil
and gas properties........ -- -- -- -- (766) (37,021)
Extensions, discoveries,
improved recovery and
other additions........... 602 30,605 218 19,379 156 66,864
Sale of reserves........... -- -- -- -- (118) (10,388)
Production................. (202) (7,327) (171) (6,697) (319) (17,750)
----- ------- ----- ------ ----- -------
Ending balance............. 1,114 64,875 1,236 93,612 1,387 196,273
===== ======= ===== ====== ===== =======
PROVED DEVELOPED RESERVES:
Producing.................. 365 17,434 414 28,806 669 63,488
Non-producing.............. 237 12,658 260 19,665 528 47,799
----- ------- ----- ------ ----- -------
Total proved developed... 602 30,092 674 48,471 1,197 111,287
===== ======= ===== ====== ===== =======
</TABLE>
Reserves as of January 1, 1996, declined 14.9% to 204.6 Bcfe when compared
to pro forma reserves of 240.5 Bcfe reported as of January 1, 1995 (after
giving effect to the Consolidation). In 1995, Kelley added 13.6 Bcfe of
reserves through successful drilling in north Louisiana and added 53.2 Bcfe
from 36 gross (12.5 net) proved undeveloped reserve locations in core north
Louisiana fields. These additions were offset by downward revisions resulting
from the reassessment of certain developed and undeveloped south Louisiana
properties aggregating 11.6 Bcfe and 39.6 Bcfe, respectively, and the
divestiture of certain nonstrategic properties, which accounted for
approximately 11.1 Bcfe. Upward revisions to reserve estimates during 1994
were related to successful developmental drilling, which allowed additional
reserves to be categorized as proved. Downward revisions to reserve estimates
in 1993 reflected unsuccessful drilling activities in south Louisiana. The
dilutive effect of offerings in 1993 relates to the sale of units by Kelley
Partners, which reduced Kelley Oil's proportional interest in Kelley Partners'
reserves.
50
<PAGE>
The addition of reserves in 1995 attributable to "Purchases" is attributable
to the Consolidation. At the end of 1995, further evaluation led to revisions
of the quantities of reserves acquired in the Consolidation.
Values. The following table sets forth estimated future net revenues from
the production and sale of Kelley's estimated proved reserves and the present
value of estimated future net revenues on a historical basis as of January 1,
1994, on a pro forma basis as of January 1, 1995, and on a historical basis as
of January 1, 1996. Pro forma information gives effect to the Consolidation as
of January 1, 1995.
The prices used in the information presented below were based on oil and
natural gas prices received at the end of each reported period without
escalation. Gas prices as of any month end, as customary, are based upon the
weighted average price of gas for such month. The prices as of December 31,
1995 were $2.06 per Mcf of natural gas and $19.73 per barrel of crude oil,
compared to prices as of December 31, 1993 and 1994 of $2.49 and $1.66,
respectively, per Mcf of natural gas and $13.80 and $15.65, respectively, per
barrel of crude oil.
Estimated future net revenues are computed after giving effect to estimated
future development and production costs, based on year-end costs and assuming
the continuation of existing economic conditions. The calculation does not
take into account the effect of various cash outlays, including general and
administrative costs and interest expense, and does not give effect to
estimated future income taxes. In computing the present value of the estimated
future net revenues, a discount factor of 10% was used to adjust for the
present value of estimated future net revenues. Present value, regardless of
the discount rate used, is materially affected by assumptions about the timing
of future production, which may prove to have been inaccurate. The following
reserve value data represents estimates only, which are subject to
considerable uncertainty. See "Risk Factors--Uncertainties in Estimating
Reserves and Future Net Revenues". Additional reserve information is included
in Note 15 ("Supplementary Information") of the Consolidated Financial
Statements included elsewhere in this Prospectus.
ESTIMATED FUTURE NET REVENUES FROM PROVED RESERVES
<TABLE>
<CAPTION>
AS OF JANUARY 1,
--------------------------
1994 1995 1996
-------- -------- --------
PRO FORMA
---------
(IN THOUSANDS)
<S> <C> <C> <C>
Estimated future net revenues from production
of proved reserves:
Proved developed............................. $ 65,644 $169,444 $195,376
Proved undeveloped........................... 67,234 102,983 123,430
-------- -------- --------
Total proved............................... $132,878 $272,427 $318,806
======== ======== ========
Present value of estimated future net revenues:
Proved developed............................. $ 43,207 $107,025 $110,114
Proved undeveloped........................... 32,059 56,590 65,647
-------- -------- --------
Total proved............................... $ 75,266 $163,615 $175,761
======== ======== ========
</TABLE>
The Company has not filed any estimates of reserves with any federal
authority or agency during the past year other than estimates contained in
filings with the SEC.
There are numerous uncertainties in estimating quantities of proved reserves
believed to have been discovered and in projecting future rates of production
and the timing of development expenditures, including many factors beyond the
control of the Company. The reserve data set forth in this Prospectus are only
estimates. Reserve estimates are inherently imprecise and may be expected to
change as additional information becomes available. Furthermore, estimates of
oil and gas reserves, of necessity, are projections based on engineering data,
and there are uncertainties inherent in the interpretation of such data as
well as the projection of future rates of production and the timing of
development expenditures. Reservoir engineering is a subjective process of
51
<PAGE>
estimating underground accumulations of oil and natural gas that cannot be
measured exactly, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Accordingly, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
There also can be no assurance that the reserves set forth herein will
ultimately be produced or that the proved undeveloped reserves set forth
herein will be developed within the periods anticipated. It is likely that
variances from the estimates will be material. In addition, the estimates of
future net revenues from proved reserves of Kelley and the present value
thereof are based upon certain assumptions about future production levels,
prices and costs that may not be correct when judged against actual subsequent
experience. The Company emphasizes with respect to the estimates prepared by
independent petroleum engineers that the discounted future net revenues should
not be construed as representative of the fair market value of the proved
reserves owned by Kelley since discounted future net revenues are based upon
projected cash flows which do not provide for changes in oil and natural gas
prices from those in effect on the date indicated or for escalation of
expenses and capital costs subsequent to such date. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based. Actual results will differ, and are likely to differ
materially, from the results estimated. Accordingly, investors in Exchange
Notes are cautioned not to place undue reliance on the reserve data included
in this Prospectus. See "Risk Factors--Uncertainties in Estimating Reserves
and Future Net Revenues".
PRODUCTION, PRICE AND COST HISTORY
The following table sets forth certain production data, the average sales
prices and average production expenses attributable to Kelley's properties on
a historical basis for 1993, 1994 and 1995 and for the nine months ended
September 30, 1996, and on a pro forma basis for 1994 and 1995 after giving
effect to the Consolidation as of January 1, 1994. Detailed additional
information concerning Kelley's oil and gas production activities is contained
in the Supplementary Information in Note 15 to the Consolidated Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------- SEPTEMBER 30,
1993 1994 1995 1994 1995 1996
------ ------ ------ --------- --------- -------------
PRO FORMA PRO FORMA
--------- ---------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid
hydrocarbons (Mbbls).. 202 171 319 446 348 181
Natural gas (Mmcf)..... 7,327 6,697 17,750 18,141 18,828 16,221
Natural gas equivalent
(Mmcfe)............... 8,539 7,723 19,664 20,817 20,916 17,307
AVERAGE SALES PRICE PER
UNIT:
Oil and other liquid
hyrocarbons (per
Bbl).................. $17.84 $16.31 $17.37 $16.30 $17.31 $21.29
Natural gas (per Mcf).. 2.20 1.89 1.71 1.87 1.72 2.27
Natural gas equivalent
(per Mcfe)............ 2.31 2.01 1.83 2.03 1.84 2.35
AVERAGE PRODUCTION
EXPENSES (PER MCFE)..... .47 .49 .55 .59 .55 .44
</TABLE>
PRODUCTION PERFORMANCE
Kelley's equivalent gas production for the nine months ended September 30,
1996, represents on a pro forma basis a 9.4% increase when compared to the
same period last year. On a pro forma basis, equivalent gas production in 1995
was essentially unchanged from 1994. Within its core properties in north
Louisiana, Kelley participated in the completion as producing wells 21 gross
(8.7 net), 26 gross (10.1 net) and 48 gross (24.1 net) wells as to which
drilling was initiated in 1994, 1995 and the first nine months of 1996,
respectively. However,
52
<PAGE>
Kelley's production during these periods was adversely affected by several
factors, including production declines in its south Louisiana properties where
certain major wells performed below expectations, disappointing drilling
results in south Louisiana and the sale of nonstrategic properties in July
1995.
In 1995, revised completion techniques contributed to higher initial flow
rates in many of Kelley's new north Louisiana wells, some of which were not
completed and brought on production until late in 1995 and thus did not
contribute significantly to production until 1996. After declining to a total
of approximately 4.4 Bcfe in the third quarter of 1995, equivalent gas
production has increased 22.7% to 5.4 Bcfe during the second quarter of 1996.
In the second quarter of 1996, Kelley further increased its focus on north
Louisiana operations with the initiation of a six-rig drilling program. As a
result of recent well completions in north Louisiana and the accelerated
drilling program, Kelley anticipates further improvement in production levels
in that area.
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1995, Kelley had leaseholdings comprising 117,528 gross
(59,718 net) developed acres and 56,287 gross (47,333 net) undeveloped acres,
all located within the continental United States. The oil and gas leases in
which Kelley has an interest are for varying primary terms and many,
particularly in south Louisiana, require the payment of delay rentals in lieu
of drilling operations. In north Louisiana most of Kelley's leasehold
interests are held by production, that is, so long as natural gas and oil are
produced from the properties covered thereby, the leases continue
indefinitely. The leases may be surrendered at any time by notice to the
lessors, by the cessation of production or by failure to make timely payment
of delay rentals.
As of December 31, 1995, Kelley had working interests in 344 gross (145.4
net) productive gas wells and 27 gross (11.4 net) productive oil wells
(including producing wells and wells capable of production). The following
table sets forth Kelley's ownership interests in its leaseholds as of December
31, 1995.
<TABLE>
<CAPTION>
DEVELOPED(1) UNDEVELOPED(2)
--------------------- ---------------------
GROSS ACRES NET ACRES GROSS ACRES NET ACRES
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Louisiana........................ 106,649 58,508 56,287 47,333
Texas............................ 8,747 1,083 -- --
Other states..................... 2,132 127 -- --
------- ------ ------ ------
Total.......................... 117,528 59,718 56,287 47,333
======= ====== ====== ======
</TABLE>
- --------
(1) Acres spaced or assignable to productive wells.
(2) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas,
regardless of whether that acreage contains proved reserves.
53
<PAGE>
DEVELOPMENT AND EXPLORATION
The following table sets forth the number of gross and net productive and
dry development wells and exploratory wells drilled by Kelley in north
Louisiana and in south Louisiana and elsewhere during the periods indicated,
together with pro forma information giving effect to the Consolidation as of
January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------- NINE MONTHS ENDED
1993 1994 1994 1995 SEPTEMBER 30, 1996
------------- ------------- ------------- ------------- -------------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
------ ------ ------ ------ ------ ------ ------ ------ -------------------
PRO FORMA PRO FORMA
------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NORTH LOUISIANA:
Exploratory wells:
Oil.................. -- -- -- -- -- -- -- -- -- --
Natural gas.......... -- -- -- -- -- -- -- -- -- --
Dry.................. 1 .61 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ --------- ---------
Total.............. 1 .61 -- -- -- -- -- -- -- --
====== ====== ====== ====== ====== ====== ====== ====== ========= =========
Development wells:
Oil.................. -- -- -- -- -- -- 1 .05 1 .04
Natural gas.......... 6 1.10 22 5.92 22 8.53 22 9.26 43 21.40
Dry.................. 2 .22 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ --------- ---------
Total.............. 8 1.32 22 5.92 22 8.53 23 9.31 44 21.44
====== ====== ====== ====== ====== ====== ====== ====== ========= =========
Total north Louisiana:
Producing............ 6 1.10 22 5.92 22 8.53 23 9.31 44 21.44
Dry.................. 3 .83 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ --------- ---------
Total.............. 9 1.93 22 5.92 22 8.53 23 9.31 44 21.44
====== ====== ====== ====== ====== ====== ====== ====== ========= =========
SOUTH LOUISIANA AND
OTHER:
Exploratory wells:
Oil.................. -- -- -- -- -- -- -- -- -- --
Natural gas.......... 3 1.30 3 1.48 3 2.09 -- -- -- --
Dry.................. 4 1.75 3 1.98 3 2.78 1 .95 -- --
------ ------ ------ ------ ------ ------ ------ ------ --------- ---------
Total.............. 7 3.05 6 3.46 6 4.87 1 .95 -- --
====== ====== ====== ====== ====== ====== ====== ====== ========= =========
Development wells:
Oil.................. -- -- -- -- -- -- -- -- -- --
Natural gas.......... 9 3.88 6 3.25 6 4.57 4 3.78 -- --
Dry.................. -- -- 1 .63 1 .89 1 .95 -- --
------ ------ ------ ------ ------ ------ ------ ------ --------- ---------
Total.............. 9 3.88 7 3.88 7 5.46 5 4.73 -- --
====== ====== ====== ====== ====== ====== ====== ====== ========= =========
Total south Louisiana
and other:
Producing............ 12 5.18 9 4.73 9 6.66 4 3.78 -- --
Dry.................. 4 1.75 4 2.61 4 3.67 2 1.90 -- --
------ ------ ------ ------ ------ ------ ------ ------ --------- ---------
Total.............. 16 6.93 13 7.34 13 10.33 6 5.68 -- --
====== ====== ====== ====== ====== ====== ====== ====== ========= =========
</TABLE>
On September 30, 1996, Kelley had 8 gross (3.91 net) development wells in
progress, all in north Louisiana.
MARKETING
Kelley does not refine or process any of the oil and natural gas it
produces. Kelley's natural gas production is sold to various purchasers
typically in the areas where the natural gas is produced. Kelley currently is
able to sell, under contract or in the spot market, all of its natural gas at
current market prices. Substantially all of Kelley's natural gas is sold under
short-term contracts or contracts providing for periodic adjustments or in the
spot market; therefore, its revenue streams are sensitive to changes in
current market prices. Kelley's sales of crude oil, condensate and natural gas
liquids generally are made at posted field prices, which are not subject to
regulation.
54
<PAGE>
In addition to marketing Kelley's natural gas production, a subsidiary of
the Company provides gas transportation arrangements, supervises gas gathering
operations and performs revenue receipt and disbursement services as well as
regulatory filing, recordkeeping, inspection, testing and monitoring
functions. Another subsidiary of the Company coordinates the connection of
newly drilled wells to various pipeline systems, does gas market surveys and
oversees gas balancing with its various gas gatherers and transporters. During
1994, Kelley received from certain of its members and from unrelated customers
either fees or a marketing differential at the rate of $.05 per MMBTU of gas
sold and delivered under these arrangements. For 1995 and the first nine
months of 1996, the marketing fee was modified to 2% of the resale price for
marketed natural gas. The Company believes that similar arrangements are
customary among natural gas producers and their marketing affiliates. See
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements included elsewhere in this Prospectus for information as to the
Company's net gas marketing revenues, which include such marketing fees
received by such subsidiary.
Kelley believes that its activities are not currently constrained by a lack
of adequate transportation systems or system capacity and does not foresee any
material disruption in available transportation for its production. However,
there can be no assurance that Kelley will not encounter any such constraints
in the future. In such event, Kelley would be forced to seek alternate sources
of transportation and may face increased costs.
HEDGING
The prices received for Kelley's natural gas production are subject to
market fluctuations. From time to time, Kelley has used forward sales
contracts, natural gas swap agreements and options to minimize the exposure of
Kelley's natural gas production to downward price fluctuations. Kelley's
hedging activities also cover the natural gas production attributable to the
interest in such production of the public unitholders in Kelley's subsidiary
partnerships. Through a combination of swap agreements and forward sales
contracts, 13.9 million MMBTUs of Kelley's natural gas production for 1995
were affected by hedging transactions at an average NYMEX quoted price of
$1.78 per MMBTU before transaction costs and transportation costs on gas
delivered under forward sales contracts. For the first nine months of 1996,
through a combination of natural gas swap agreements and forward sales
contracts, approximately 69.4% of Kelley's anticipated natural gas production
was affected by hedging transactions at an average NYMEX quoted price of $2.17
per MMBTU before transaction and transportation costs on gas delivered under
forward sales contracts. Approximately 57.6% of Kelley's anticipated natural
gas production for the balance of 1996 had been hedged through swap agreements
or forward sales contracts at an average NYMEX quoted price of $2.25 per MMBTU
before transaction and transportation costs on gas delivered under forward
sales contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General".
COMPETITION
Kelley operates in a highly-competitive environment with respect to
acquiring reserves, marketing oil and natural gas and securing trained
personnel. Many of Kelley's larger competitors possess and employ financial
and personnel resources substantially greater than those available to Kelley.
Such companies may be able to pay more for productive oil and natural gas
properties and to define, evaluate, bid for and purchase a greater number of
properties than Kelley's financial or personnel resources permit. Kelley's
ability to acquire additional reserves in the future will be dependent upon
its ability to evaluate and select suitable properties and to consummate
transactions in a highly-competitive environment. In addition, there is
substantial competition for capital available for investment in the oil and
natural gas industry. There can be no assurance that Kelley will be able to
55
<PAGE>
compete successfully in the future in acquiring reserves, developing reserves,
marketing hydrocarbons, attracting and retaining quality personnel, and
raising additional capital.
REGULATION
Kelley's operations are subject to extensive and continually changing
regulation, as legislation affecting the oil and natural gas industry is under
constant review for amendment and expansion. Many departments and agencies,
both federal and state, are authorized by statute to issue and have issued
rules and regulations binding on the oil and natural gas industry and its
individual participants. The failure to comply with such rules and regulations
can result in substantial penalties. The regulatory burden on the oil and
natural gas industry increases Kelley's cost of doing business and,
consequently, affects its profitability. However, Kelley does not believe that
it is affected in a significantly different manner by these regulations than
are its competitors in the oil and natural gas industry. Because of the
numerous and complex federal and state statutes and regulations that may
affect Kelley, directly or indirectly, the following discussion of certain
statutes and regulations should not be relied upon as an exhaustive review of
all matters affecting Kelley's operations.
TRANSPORTATION AND PRODUCTION
Transportation and Sale of Natural Gas. Prior to January 1, 1993, various
aspects of Kelley's natural gas operations were subject to regulations by the
FERC under the Natural Gas Act of 1938 (the "NGA") and the NGPA with respect
to "first sales" of natural gas, including price controls and certificate and
abandonment authority regulations. However, as a result of the enactment of
the Decontrol Act, the remaining "first sales" restrictions imposed by the NGA
and the NGPA terminated on January 1, 1993.
The FERC regulates interstate natural gas pipeline transportation rates and
service conditions, which affect the marketing of gas produced by Kelley, as
the revenues received by Kelley for sales of such natural gas. Since the
latter part of 1985, the FERC has adopted policies intended to make natural
gas transportation more accessible to gas buyers and sellers on an open and
nondiscriminatory basis. The FERC's most recent action in this area, Order No.
636, reflected the FERC's finding that, under the then-existing regulatory
structure, interstate pipelines and other gas merchants, including producers,
did not compete on a "level playing field" in selling gas. Order No. 636
instituted individual pipeline services restructuring proceedings, designed
specifically to "unbundle" those services provided by many interstate
pipelines (for example, transportation, sales and storage) so that buyers of
natural gas may secure supplies and delivery services from the most economical
source, whether interstate pipelines or other parties. The FERC has issued
final orders in the restructuring proceedings, and a number of pipelines have
filed tariff sheets reflecting refinements in the implementation of Order No.
636 following three years of operation under the program. In addition, the
FERC has announced its intention to reexamine certain of its transportation
related policies, including the appropriate manner in which interstate
pipelines release transportation capacity under Order No. 636 and, more
recently, the price that shippers can charge for released capacity. The FERC
also has issued a new policy regarding the use of nontraditional methods of
setting rates for interstate gas pipelines in certain circumstances as
alternatives to cost-of-service based rates. A number of pipelines have
obtained FERC authorization to charge negotiated rates as one such
alternative.
Although the FERC's actions, such as Order No. 636, do not regulate gas
producers such as Kelley, these actions are intended to foster increased
competition within all phases of the natural gas industry. To date, the FERC's
pro-competition policies have not materially affected Kelley's business or
operations. On a prospective basis, however, such orders may substantially
increase the burden on the producers and transporters to nominate and deliver
on a daily basis a specified volume of natural gas. Producers and transporters
which deliver deficient volume or volumes in excess of such daily nominations
could be subject to additional charges by the pipeline carriers.
The United States Court of Appeals for the District of Columbia Circuit has
affirmed the Commission's Order No. 636 restructuring rule and remanded
certain issues for further explanation or clarification. Numerous
56
<PAGE>
petitions seeking judicial review of the individual pipeline restructuring
orders are currently pending in the United States Court of Appeals for the
District of Columbia Circuit. It is not possible to predict what, if any,
effect the order on remand or the Court's decision in the individual pipeline
cases will have on the Company. The Company does not believe, however, that it
will be affected any differently than other gas producers or marketers with
which it competes.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. Kelley cannot predict when or if any such
proposals might become effective or their effect, if any, on Kelley's
operations. The natural gas industry historically has been very heavily
regulated; thus there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
Transportation and Sale of Crude Oil. Sales of crude oil and condensate can
be made by Kelley at market prices not subject at this time to price controls.
The price that Kelley receives from the sale of these products is affected by
the cost of transporting the products to market. Commencing in October 1993,
the FERC issued a series of orders (Order Nos. 561 and 561-A) in which it
revised its regulations governing the rates that may be charged by oil
pipelines. The new rules, which became effective January 1, 1995, provide a
simplified, generally applicable method for regulating such rates by use of an
index for setting rate ceilings. In certain circumstances, the new rules
permit oil pipelines to establish rates using traditional costs of service and
other methods of ratemaking. On October 28, 1994, the FERC issued two separate
Orders (Nos. 571 and 572), which adopt additional regulations governing rates
that an oil pipeline may be authorized to charge. Order No. 571 authorizes a
pipeline to implement cost-of-service based rates, provided it can demonstrate
that there is a substantial divergence between the actual costs experienced by
the carrier and the indexed rate that the pipeline is directed to charge under
Order No. 561. In Order No. 572, the FERC adopted regulations that authorize a
pipeline to charge market-based rates, provided it can demonstrate that it
lacks significant market power in the market(s) in which it proposes to charge
such rates. These rules have been affirmed by the U.S. Court of Appeals for
the District of Columbia Circuit. The effect that these new rules may have on
moving Kelley's liquid products to market cannot yet be determined.
Regulation of Production. The production of oil and natural gas is subject
to regulation under a wide range of state and federal statutes, rules, orders
and regulations. State and federal statutes and regulations require permits
for drilling operations, drilling bonds and reports concerning operations.
Most states in which Kelley owns and operates properties have regulations
governing conservation matters, including provisions for the unitization or
pooling of oil and natural gas properties, the establishment of maximum rates
of production from oil and natural gas wells and the regulation of the
spacing, plugging and abandonment of wells. Many states also restrict
production to the market demand for oil and natural gas and several states
have indicated interest in revising applicable regulations. The effect of
these regulations is to limit the amount of oil and natural gas Kelley can
produce from its wells and to limit the number of wells or the locations at
which Kelley can drill. Moreover, each state generally imposes an ad valorem,
production or severance tax with respect to production and sale of crude oil,
natural gas and gas liquids within its jurisdiction.
ENVIRONMENTAL REGULATIONS
General. Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, affect Kelley's operations and costs. In
particular, Kelley's exploration, development and production operations, its
activities in connection with storage and transportation of crude oil and
other liquid hydrocarbons and its use of facilities for treating, processing
or otherwise handling hydrocarbons and wastes therefrom are subject to
stringent environmental regulation. As with the industry generally, compliance
with existing regulations increases Kelley's overall cost of business. Such
areas affected include unit production expenses primarily related to the
control and limitation of air emissions and the disposal of produced water,
capital costs to drill exploration and development wells resulting from
expenses primarily related to the management and disposal of drilling fluids
and other oil and gas exploration wastes and capital costs to construct,
maintain and upgrade equipment and facilities.
57
<PAGE>
The Company incurs some expenses related to the disposition of drilling
fluids and produced waters, but these costs do not constitute a material
expense to the Company. The Company anticipates that it will incur additional
expenses related to compliance with environmental regulations at the time it
abandons a producing property or lease. The amount of these costs will vary,
but based on the Company's experience, the amount and timing of these costs
should not materially increase the Company's overall cost of business. In
addition, the Company does not anticipate that it will be required to make any
significant capital expenditures to comply with current environmental
requirements.
Environmental regulations historically have been subject to frequent change
by regulatory authorities, and the Company is unable to predict the ongoing
cost to Kelley to comply with these laws and regulations or the future impact
of such regulations on its operations. However, the Company does not believe
that changes to these regulations will materially adversely affect Kelley's
competitive position because its competitors are similarly affected. A
discharge of hydrocarbons or hazardous substances into the environment could
subject Kelley to substantial expense, including both the cost to comply with
applicable regulations pertaining to the remediation of releases of hazardous
substances into the environment and claims by neighboring landowners and other
third parties for personal injury and property damage. Kelley maintains some
insurance, which may provide some protection against some environmental
liabilities, but the coverage of such insurance and the amount of protection
afforded thereby cannot be predicted with respect to any particular possible
environmental liability and may not be adequate to protect Kelley from
substantial expense.
Water. The Oil Pollution Act (the "OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 (the "FWPCA")
and other statutes as they pertain to prevention and response to oil spills.
The OPA subjects owners of facilities to strict, joint and potentially
unlimited liability for removal costs and certain other consequences of an oil
spill, where such spill is into navigable waters, along shorelines or in the
exclusive economic zone. In the event of an oil spill into such waters,
substantial liabilities could be imposed upon the Company. States in which
Kelley operates also have enacted similar laws. Regulations are being
developed under both the OPA and state laws that may impose additional
regulatory burdens on the Company.
The FWPCA imposes restrictions and strict controls regarding the discharge
of produced waters and other oil and gas wastes into navigable waters. These
controls have become more stringent over the years, and it is probable that
additional restrictions will be imposed in the future. Permits must be
obtained to discharge pollutants into state and federal waters. The FWPCA
provides for civil, criminal and administrative penalties for any unauthorized
discharges of oil and other hazardous substances in reportable quantities and,
along with the OPA, imposes substantial potential liability for the costs of
removal, remediation and damages. State laws for the control of water
pollution also provide varying civil, criminal and administrative penalties
and impose liabilities in the case of a discharge of petroleum or its
derivatives, or other hazardous substances, into state waters. In addition,
the Environmental Protection Agency ("EPA") has promulgated regulations that
require many oil and gas production operations to obtain permits to discharge
storm water runoff. The Company believes that compliance with existing permits
and with foreseeable new permit requirements will not have a material adverse
effect on the Kelley's financial condition or results of operations.
Air Emissions. The operations of Kelley are subject to the Federal Clean Air
Act and comparable state and local statutes. The Company believes that
Kelley's operations are in substantial compliance with such statutes in all
states in which it operates.
Amendments to the Federal Clean Air Act enacted in 1990 require or will
require most industrial operations in the United States to incur capital
expenditures in order to meet air emission control standards developed by the
EPA and state environmental agencies. Although no assurances can be given, the
Company believes implementation of such amendments will not have a material
adverse effect on Kelley's financial condition or results of operations.
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<PAGE>
Solid Waste. The Federal Resource Conservation and Recovery Act ("RCRA") is
the principal federal statute governing the treatment, storage and disposal of
hazardous wastes. RCRA imposes stringent operating requirements (and liability
for failure to meet such requirements) on a person who is either a "generator"
or "transporter" of hazardous waste or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. At present, RCRA includes a
statutory exemption that allows oil and gas exploration and production wastes
to be classified as non-hazardous waste. A similar exemption is contained in
many of the state counterparts to RCRA. As a result, Kelley is not required to
comply with a substantial portion of RCRA's requirements because Kelley's
operations generate minimal quantities of hazardous wastes. However, at
various times in the past, proposals have been made to rescind the exemption
that excludes oil and gas exploration and production wastes from regulation as
hazardous waste under RCRA. Repeal or modification of this exemption by
administrative, legislative or judicial process, or through changes in
applicable state statutes, would increase the volume of hazardous waste to be
managed and disposed of by Kelley. Hazardous wastes are subject to more
rigorous and costly disposal requirements than are non-hazardous wastes. Such
changes in the regulations may result in additional capital expenditures or
operating expenses by Kelley.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as "Superfund", imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons that contributed to the release of a "hazardous substance"
into the environment. These persons include the "owner" or "operator" of the
site and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. CERCLA also authorizes the EPA and, in some
instances, third parties to act in response to threats to the public health or
the environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of its ordinary operations, Kelley may
generate waste that may fall within CERCLA's definition of a "hazardous
substance". Kelley may be jointly and severally liable under CERCLA or under
analogous state laws for all or part of the costs required to clean up sites
at which such wastes have been disposed.
Kelley currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although Kelley has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or
other wastes may have been disposed of or released on or under the properties
owned or leased by Kelley or on or under other locations where such wastes
have been taken for disposal. In addition, many of these properties have been
operated by third parties whose actions with respect to the treatment and
disposal or release of hydrocarbons or other wastes were not under Kelley's
control. These properties and wastes disposed thereon may be subject to
CERCLA, RCRA and analogous state laws. Under such laws, Kelley could be
required to remove or remediate previously disposed wastes (including wastes
disposed of or released by prior owners or operators), to clean up
contaminated property (including contaminated groundwater) or to perform
remedial plugging operations to prevent future contamination.
TITLE TO PROPERTIES
Kelley's properties, in addition to being mortgaged to secure the New Credit
Facility, are subject to royalty interests, liens incident to operating
agreements, liens for current taxes and other customary burdens, including
other mineral encumbrances and restrictions. The Company does not believe that
any mortgage, lien or other burden materially interferes with the use of such
properties in the operation of Kelley's business.
The Company believes that Kelley has satisfactory title to or rights in all
of its producing properties. As is customary in the oil and natural gas
industry, minimal investigation of title is made at the time of acquisition of
undeveloped properties. Title investigation is made, and title opinions of
local counsel are generally obtained before commencement of drilling
operations or at least in connection with the preparation of division orders
when production is obtained and the revenues therefrom are allocated.
59
<PAGE>
EMPLOYEES
As of November 30, 1996, Kelley had 70 full-time employees. Kelley's staff
includes employees experienced in geology, geophysics, petroleum engineering,
land acquisition and management, finance and accounting. None of Kelley's
employees is represented by a union. Kelley has never experienced an
interruption in its operations from any kind of labor dispute, and its working
relationships with its employees are satisfactory.
LEGAL PROCEEDINGS
Following Kelley Oil's announcement of the initial proposal for the
Consolidation in August 1994, four separate lawsuits were filed against Kelley
Oil and its directors relating to the Consolidation and the 1991 DDP Exchange.
In November 1994, Kelley Oil entered into a memorandum of understanding with
the plaintiffs in three of the lawsuits, providing for a proposed settlement
based on the revised Consolidation proposal negotiated by a special committee
of Kelley Oil's nonmanagement directors and the settling plaintiffs. A
stipulation and agreement of compromise, settlement and release reflecting the
terms of the proposed settlement was filed in the United States District Court
for the Southern District of Texas on November 23, 1994. At a hearing held on
the same date, the court approved the consolidation of all four lawsuits and
the certification of a unitholder class requested by the settling parties. On
March 3, 1995, following a hearing on the fairness of the settlement, the
court entered a final order approving the settlement, dismissing the
consolidated lawsuits with prejudice and reducing the award of attorneys' fees
and disbursements contemplated by the stipulation to $1.5 million, payable $.3
million in cash and the balance in Common Stock of the Company. An appeal
subsequently filed by the nonsettling plaintiff is currently pending in the
United States Court of Appeals for the Fifth Circuit. Although the Company
believes approval of the settlement and dismissal of the lawsuits should be
upheld, it could be required, if not upheld, to litigate certain claims
alleged in the lawsuits, including the adequacy and fairness of the exchange
ratios for the Consolidation.
Kelley is involved from time to time in various claims and lawsuits
incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material effect on the financial
condition of Kelley.
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<PAGE>
COMPANY HISTORY
THE CONSOLIDATION
The Company was formed in 1994 to consolidate the equity ownership of Kelley
Partners and Kelley Oil. Prior to the Consolidation in 1994, drilling
activities were conducted jointly by Kelley Partners and DDPs sponsored by
Kelley Oil for that purpose. Historically, Kelley Oil (the managing general
partner of Kelley Partners) participated proportionately in these operations,
with Kelley Partners retaining one-third of its working interest in each
prospect and assigning drilling rights for the balance of its interest to a
DDP. In addition to serving as managing general partner of each DDP, Kelley
Oil purchased for its own investment account all units in DDPs that were not
subscribed preemptively by other investors in Kelley Partners. In the
Consolidation, the Company acquired Kelley Oil's interests in the remaining
DDPs sponsored during 1994 and 1992 aggregating 92.2% and 84.3%, respectively.
The Consolidation was completed on February 7, 1995 upon approval by investors
in Kelley Partners and Kelley Oil.
In the Consolidation, the outstanding capital stock of Kelley Oil and units
in Kelley Partners ("Units") held by investors other than Kelley Oil and its
subsidiaries ("public unitholders") were converted into a total of 43.7
million shares of Common Stock of the Company, 2.4 million shares of the
Company's $2.625 convertible exchangeable preferred stock ("Public Preferred
Stock") and 2.2 million shares of cumulative convertible preferred stock
("ESOP Preferred Stock") held by its Employee Stock Ownership Plan (the
"ESOP"). As a result of the Consolidation, Kelley Oil became a wholly-owned
subsidiary of the Company, and Kelley Partners became a 99.99%-owned
subsidiary partnership. The Consolidation was treated as a purchase of the
public unitholders' interests in Kelley Partners by the Company for financial
accounting purposes. Accordingly, historical financial and reserve information
presented in this Prospectus thereto reflects Kelley Oil's historical results
on a stand-alone basis prior to the Consolidation, with the results of
Kelley's combined operations recorded thereafter.
THE CONTOUR TRANSACTION
In November 1995, the Company reported that it expected to be substantially
capital constrained by the middle of 1996 due to low levels of internally
generated cash flow and borrowing restrictions. At that time, Kelley
implemented an immediate reduction in its drilling activities and aggressively
pursued outside capital in the form of an equity placement, merger or sale of
the Company. Following discussions with potential acquirors, the Company
entered into the Contour Agreements in January 1996, which provided for a two-
stage equity investment of $75 million in the Company by Contour. On February
15, 1996, the first stage of the equity investment was completed through
Contour's $48 million purchase of newly issued shares of Common Stock
(representing on such date 49.8% of the voting shares of the Company) (the
"Contour Transaction"). Additionally, the Company entered into an option
agreement (the "Contour Option"), under which Contour has committed to provide
the Company with $27 million in additional equity financing through an option
to purchase 27 million shares (the "Maximum Option Number") of Common Stock
upon satisfaction of certain conditions, including the absence of any Company
debt repurchase or redemption obligations as a result of the purchase (a "Debt
Event"), but in no event later than January 2000. A Debt Event would occur
upon (i) a "Change of Control" as defined in the 13 1/2% Indenture, (ii) a
"Change in Control" as defined in the indenture for the Company's 7 7/8%
Convertible Subordinated Notes due 1999 (the "7 7/8% Notes") or (iii) a
"Redemption Event" as defined in the indenture for the Company's 8 1/2%
Convertible Subordinated Debentures due 2000 (the "8 1/2% Debentures"). A Debt
Event with respect to either series of notes or the 8 1/2% Debentures would
entitle each holder of the affected securities to require the repurchase or
redemption of the holder's securities. Contour is required to exercise the
Contour Option for the Maximum Option Number within 30 days after it concludes
in its sole discretion that a Debt Event would not occur as a result of the
purchase but in no event later than January 2000. While the exercise of the
Contour Option would not cause a Debt Event under the indenture for the 8 1/2%
Debentures, it would require waivers or consents from the holders of a
majority in aggregate principal amount of the 7 7/8% Notes. The Refinancing
eliminated the possibility of a Debt Event as to the 13 1/2% Notes.
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<PAGE>
In connection with the Contour Transaction, the Company also (i) obtained
consents from its principal stockholders to amend its Certificate of
Incorporation to increase its authorized Common Stock from 100 million shares
to 200 million shares, (ii) entered into employment agreements with John F.
Bookout and other new executives named by him, (iii) reduced the size of its
Board to seven members and reconstituted the Board with three continuing
directors and four designees of Contour and (iv) replaced its credit facility.
Proceeds from the Contour Transaction, after repayment of bank debt, plus
funds available under its credit facility have permitted Kelley to continue
drilling operations and permitted it to pursue acquisition opportunities
needed to execute its business strategy for replacing its production and
expanding its reserves. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
OTHER
In March 1996, Kelley Partners was merged into the Company (the "Partnership
Merger") as part of ongoing efforts to streamline operations and reduce costs.
Prior to the Partnership Merger, Kelley Partners had outstanding 8 1/2%
Debentures in the aggregate principal amount of $26.9 million and 7 7/8% Notes
in the aggregate principal amount at maturity of $34.4 million. Under the
terms of the Consolidation, the 8 1/2% Debentures and 7 7/8% Notes became
convertible into the Company's Common Stock or a combination of its Common
Stock and Public Preferred Stock instead of units in Kelley Partners based on
the exchange ratios for the units in the Consolidation. In connection with the
Partnership Merger, the two outstanding subordinated debt issues became direct
obligations of the Company.
In March 1996, the Special Conversion Right for the Public Preferred Stock
was triggered by the Contour Transaction. Under the Special Conversion Right,
the conversion price of the Public Preferred Stock was reduced to $4.00 for a
period of 45 days ended April 25, 1996. A total of .7 million shares of Public
Preferred Stock were tendered pursuant to the Special Conversion Right,
resulting in the issuance of 4.4 million shares of Common Stock and a
reduction in the outstanding Public Preferred Stock to 1.7 million shares as
of June 30, 1996. Although dividends on both classes of preferred stock were
suspended in January 1996, the decrease in outstanding Public Preferred Stock
and the conversion of the ESOP Preferred Stock will reduce future dividend
arrearages. Although the Board of Directors of the Company has made no
determination regarding the payment of dividend arrearages on the Public
Preferred Stock, and while any such payments must not be prohibited under
applicable corporate law, the New Credit Facility and the Indenture are
expected to permit the Company to make a one-time payment of such dividend
arrearages on or before January 31, 1997. However, the New Credit Facility
prohibits the payment of future preferred dividends.
The Company had four outstanding series of ESOP Preferred Stock, which
ranked junior in dividend and liquidation rights to the Public Preferred
Stock. In June 1996, each of the outstanding 1.9 million shares of ESOP
Preferred Stock was redeemed for one share of the Company's Common Stock.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Current Directors and Executive Officers. In February 1996, upon the closing
of the Contour Transaction, John F. Bookout, President of Contour, was
appointed as Chairman of the Board, President and Chief Executive Officer of
the Company. In connection with the Contour Transaction, the Board of
Directors appointed Dallas D. Laumbach, William C. Rankin and, on July 16,
1996, Thomas E. Baker to senior executive positions with the Company, and the
Board was reconstituted with three continuing directors and four designees of
Contour.
Set forth below are the names, ages and positions of the current executive
officers and directors of the Company. All directors are elected for a term of
one year and serve until their successors are duly elected and qualified. All
executive officers hold office until their successors are duly appointed and
qualified.
<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR OF
THE COMPANY
NAME AGE POSITION SINCE
---- --- -------- -----------
<S> <C> <C> <C>
John F. Bookout......... 73 President, Chief Executive Officer and a Director 1996
Thomas E. Baker......... 65 General Counsel and Corporate Secretary 1996
Dallas D. Laumbach...... 59 Senior Vice President--Exploration and Production 1996
William C. Rankin....... 47 Senior Vice President and Chief Financial Officer 1996
Charles L. Winn, Sr. ... 68 Senior Vice President--Exploration 1991
William E. Albrecht..... 45 Vice President--Engineering and Development 1996
Lawrence G. Marble...... 43 Controller and Principal Accounting Officer 1996
Stephen M. Smith........ 45 Treasurer 1995
John J. Conklin, Jr. ... 66 Director 1993
Ralph P. Davidson....... 69 Director 1993
William J. Murray....... 81 Director 1984
Ogden M. Phipps......... 57 Director 1996
Michael B. Rothfeld..... 49 Director 1996
Ward W. Woods........... 55 Director 1996
</TABLE>
John F. Bookout joined the Company as Chairman of the Board, President and
Chief Executive Officer in February 1996 upon completion of the Contour
Transaction. He served as Chairman of the Board of Contour since its inception
in 1993. Before joining Contour as a founder, Mr. Bookout served in positions
of increasing responsibility for 38 years at Shell Oil Company, starting in
1950 as a geologist and culminating from 1976 through June 1988 as President,
Chief Executive Officer and a director. From 1988 through 1993, he served as a
member of the Supervisory Board of Royal Dutch Petroleum. He currently serves
on the board of directors of McDermott International Inc., J. Ray McDermott,
S.A. and The Investment Company of America as well as the board of trustees of
the United States Counsel for International Business and various civic and
educational bodies. Mr. Bookout received Bachelor's and Master's degrees in
geology from the University of Texas.
Thomas E. Baker, an attorney, joined the Company in July 1996 as General
Counsel and Corporate Secretary. His experience includes 28 years at Shell Oil
Company, where he served as a Corporate Secretary from 1984 until his
retirement in 1991. From 1991 through 1996, Mr. Baker was engaged in a private
consulting practice. Mr. Baker received a B.S. in accounting from the
University of Notre Dame, and an LL.B. and an LL.M. from Georgetown University
and an LL.M. from New York University.
Dallas D. Laumbach has served as Senior Vice President--Exploration and
Production of the Company since February 1996 and has served concurrently as
President of Concorde Gas, Inc. since August 1996. He previously served as
Senior Vice President of Contour since December 1993. Before joining Contour,
Mr. Laumbach served in positions of increasing responsibility for 24 years at
Shell Oil Company, concluding as Manager--Business Development in Shell's Head
Office. He received a Bachelor's degree in mechanical
63
<PAGE>
engineering from Iowa State University, a Master's degree in mechanical
engineering from the University of New Mexico and a Ph.D. in mechanical
engineering from Massachusetts Institute of Technology.
William C. Rankin has served as Senior Vice President and Chief Financial
Officer of the Company since February 1996. He previously served as Vice
President and Chief Financial Officer of Contour commencing in March 1994,
after serving eight years as a senior financial officer of Hadson Corporation,
including the last four years as Senior Vice President and Chief Financial
Officer of Hadson Energy Resources Corporation. Mr. Rankin received a
Bachelor's degree in accounting from the University of Arkansas.
Charles L. Winn, Sr. joined the Company in October 1991 and has served as
Senior Vice President since October 1995 and as a Vice President since
February 1993. From 1973 until joining the Company, he was the President and
principal shareholder of Wincan, Inc., which was a private company engaged in
the geophysical interpretation of oil and gas prospects through the
application of advanced seismic techniques and was acquired by Kelley Oil in
1991. Mr. Winn studied mechanical engineering at Texas Tech University.
William E. Albrecht has served as Vice President--Production of the Company
since February 1996. He joined Contour in October 1993 as a Vice President
after serving for one year in the Corporate Engineering Group at Enron Oil &
Gas Company. During 1991 and 1990, Mr. Albrecht served as Manager of
Acquisitions for Pacific Enterprises Oil Company and Hadson Energy Resources
Corporation, respectively. Mr. Albrecht received a Bachelor's degree in
engineering from the U.S. Military Academy at West Point and a Master's degree
in systems management from the University of Southern California.
Lawrence G. Marble has served as Controller and Principal Accounting Officer
of the Company since April 1996. Prior to joining the Company, he served as
Controller for Energy Development Corporation for seven years, and for the
previous thirteen years held various accounting management positions with
Total Minatome Corporation, CSX Oil & Gas Corporation and Arthur Andersen &
Co. Mr. Marble is a certified public accountant and received his Bachelor's
degree in accounting from Texas A&M University.
Stephen M. Smith has served as Treasurer of the Company since November 1995.
Prior to joining the Company, Mr. Smith served as Vice President--Energy at
Bank One, Texas, N.A. for more than five years. He received a Bachelor's
degree in finance from the University of Texas and a Master's degree in
finance from the University of Houston.
John J. Conklin, Jr. has served as a director of the Company since November
1993. Mr. Conklin has been a private investor since his retirement in 1989 as
a senior partner of Conklin, Cahill & Co., a member firm of the New York Stock
Exchange, where he was active for over 35 years. He has also served as a
member of the Board of Governors of the New York Stock Exchange, the Board of
Directors of the New York Futures Exchange and the National Market Advisory
Board.
Ralph P. Davidson served as Chairman of the Board of the Company from
October 1995 through February 1996 and has served as a director of the Company
since November 1993. Mr. Davidson served since 1993 as the Chairman of Capital
Publishing Company, the publisher of Washington Monthly, a journal of
political commentary, while also providing consulting services to nonprofit
organizations since 1991 as President of Davidson Associates. From 1980
through 1987, he was Chairman of the Board of Time, Inc., where he spent 21
years with Time Magazine in various executive capacities. Mr. Davidson is a
director of First Interstate Bancorp and a member of the Board of Trustees of
Phoenix House and the National Council for Adoption.
William J. Murray has served as a director of the Company since March 1984.
Mr. Murray has been an independent petroleum consultant for more than the past
five years. He served on the Texas Railroad Commission for 16 years, during
six of which he served as Chairman. Mr. Murray currently serves on a number of
industry committees, including as Chairman of the Industry Advisory Committee
on Natural Gas Ratable Take and Chairman of the Industry Voluntary Allocation
Committee.
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<PAGE>
Ogden M. Phipps has served as a director of the Company since February 1996.
He was Chairman of the Board of Bessemer Securities Corporation ("BSC") from
1982 through 1994 and of The Bessemer Group, Incorporated ("BGI") from 1991
through 1994. BSC is the principal limited partner of Bessemer Holdings, L.P.
("Bessemer"). Mr. Phipps continues to serve as a director of BSC and BGI. He
also serves as a director of Stant Corporation and several private companies
and an officer and director of several non-profit organizations.
Michael B. Rothfeld has served as a director of the Company since February
1996. Since 1989, he has been the sole stockholder and president of
corporations that serve as a general partner or manager of the general partner
of Bessemer and other investment partnerships. He is also the sole stockholder
and president of a corporation that is a general partner of Bessemer Partners
& Co. From June 1989 through June 1993, Mr. Rothfeld was also a Managing
Director of BSC. He is Chairman of the Board of Graphic Controls Corporation
and a director of several private companies.
Ward W. Woods has served as a director of the Company since February 1996.
Since 1989, he has been the sole stockholder and president of corporations
that serve as the managing general partner or principal manager of the general
partner of Bessemer and other investment partnerships. He is also the sole
stockholder and president of a corporation that is the managing general
partner of Bessemer Partners & Co. Mr. Woods is the President and Chief
Executive Officer of BSC, which he joined in 1989. He is Chairman of the Board
of Stant Corporation, BCP/Essex Holdings, Inc. and a director of Freeport-
McMoRan Copper & Gold Inc., Boise Cascade Corporation, Graphic Controls
Corporation and several private companies.
BOARD AND COMMITTEES
During 1996, the Board was comprised of (i) Messrs. Conklin, Davidson and
Murray, who remained on the Board after the Contour Transaction and (ii) Fair
Colvin, Jr., Bromley DeMeritt, Frank G. Lyon, W. Matt Ralls and Alan N.
Sidnam, who resigned in accordance with the agreement covering the Contour
Transaction. See "--Directors and Executive Officers".
The Board has established an Audit Committee and a Compensation Committee.
During the first months of 1996, both committees were comprised Messrs.
Conklin, Davidson, Lyon, Murray and Sidnam. In April 1996, the Board made new
assignments for these Committees and established a Nominating Committee. The
new assignments are as follows:
<TABLE>
<CAPTION>
AUDIT COMPENSATION NOMINATING
COMMITTEE COMMITTEE COMMITTEE
--------- ------------ ----------
<S> <C> <C>
Ralph P. Davidson--Chairman Ward W. Woods--Chairman Ogden M. Phipps--Chairman
John J. Conklin, Jr. John J. Conklin, Jr. William J. Murray
Michael B. Rothfeld Ralph P. Davidson Ward W. Woods
Ogden M. Phipps
</TABLE>
The Audit Committee is charged with various duties relating to the Company's
financial reporting obligations. These responsibilities include recommending
the appointment of independent auditors to the Board, reviewing the
compensation of the auditors, reviewing the scope and results of the annual
audit performed by the independent auditors, assuring that proper guidelines
are established for the dissemination of financial information, conferring
with the auditors to assure the adequate training and supervision of the
Company's accounting personnel, meeting periodically with the auditors, the
Board and senior management to ensure the adequacy of internal controls and
reporting functions and reviewing the Company's consolidated financial
statements. The Audit Committee held one meeting during 1996, with all members
of the Committee participating.
The Compensation Committee has the authority to review the compensation
policies of the Company, consider and recommend to the Board succession plans
for senior management and administer and make awards under the Company's
employee benefit plans. The Compensation Committee held two meetings during
1996, with all members of the Committee participating.
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<PAGE>
The Nominating Committee was formed in 1996 to evaluate the size and
composition of the Board and establish guidelines for director qualifications.
Any recommendations by stockholders will be considered if received within 120
days prior to the anniversary date of the last annual meeting of stockholders.
COMPENSATION OF DIRECTORS
The Company's nonmanagement directors receive compensation of $3,750 on a
quarterly basis and $1,000 per committee meeting attended.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table sets forth the total remuneration paid during 1996, 1995
and 1994 to the two individuals who served as the Chief Executive Officer of
the Company during 1996 and the Company's four other most highly compensated
executive officers during 1996 (the "Named Executive Officers"). Compensation
for 1996 reflects full-year amounts estimated as of December 15, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION ALL OTHER
--------------------------------------- OPTION/SAR
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2) AWARDS (#) COMPENSATION(3)
- --------------------------- ---- --------- ------------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John F. Bookout(4)...... 1996 $ 700,000 $ -- $ -- -- $ 2,667
Chairman, President and
CEO 1995 -- -- -- -- --
1994 -- -- -- -- --
Fair Colvin, Jr.(4)..... 1996 171,875 150,000 7,200 -- 144,792(5)
Former CEO; Former Pres-
ident 1995 275,000 -- -- 300,000 22,500
of Concorde Gas, Inc. 1994 275,000 137,500 -- -- 24,247
Dallas D. Laumbach(4)... 1996 166,250 -- -- 862,500 3,800
Senior Vice President-- 1995 -- -- -- -- --
Exploration and Produc-
tion 1994 -- -- -- -- --
William C. Rankin(4).... 1996 144,375 -- -- 862,500 3,300
Senior Vice President
and Chief 1995 -- -- -- -- --
Financial Officer 1994 -- -- -- -- --
Charles L. Winn, Sr. ... 1996 160,000 -- 13,200 -- 3,200
Senior Vice President-- 1995 145,833 -- -- 150,000 21,875
Exploration 1994 143,000 -- -- -- 23,115
William E. Albrecht(4).. 1996 109,374 -- -- 775,000 2,500
Vice President--Engi-
neering 1995 -- -- -- -- --
and Development 1994 -- -- -- -- --
</TABLE>
- --------
(1) Bonus payments in each year reflect awards for performance.
(2) Perquisites and other benefits did not exceed 10% of any named officer's
total annual salary and bonus.
(3) 1996 amounts include matching contributions by the Company to the named
executive officer's 401(k) account. 1995 and 1994 amounts reflect the
portion of contributions to the ESOP attributable to the named executive
officers. Prior to 1996, the Company made annual contributions to the
ESOP, on behalf of all employees, in an amount equal to 15% of their cash
compensation up to a specified level. See "--Employee Benefit Plans--
Section 401(k) and Employee Stock Ownership Plan".
(4) Mr. Colvin served as President and CEO from October 1995 through February
1996. In February 1996, Mr. Bookout was appointed Chairman, President and
CEO of the Company, Mr. Colvin remained President of Concorde Gas, Inc.,
Mr. Laumbach was appointed Senior Vice President--Exploration and
Production, Mr. Rankin was appointed Senior Vice President and Chief
Financial Officer and Mr. Albrecht was appointed Vice President--
Engineering and Development. In August 1996, Mr. Colvin retired from
Kelley.
(5) Includes $103,125 paid to Mr. Colvin during 1996 pursuant to his Change of
Control Agreement and $41,667 pursuant to a consulting agreement with the
Company. See "Certain Transactions".
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<PAGE>
STOCK OPTIONS
The Company maintains incentive stock option plans (collectively, the "ISO
Plans") adopted in 1987 (the "1987 Plan"), 1991 (the "1991 Plan"), 1995 (the
"1995 Plan") and 1996 (the "1996 Plan"), covering 500,000 shares, 500,000
shares, 1.5 million shares and 1.0 million shares, respectively, of Common
Stock. The Company also maintains a 1996 Nonqualified Stock Option Plan (the
"NSO Plan"), which was adopted in February 1996 in accordance with the terms
of the Contour Agreements and provides for the grant of options to purchase a
total of 2.5 million shares of Common Stock to new senior executives
designated by Mr. Bookout. See "Employee Benefit Plans--Stock Option Plans".
The following table sets forth information as of December 31, 1996, on stock
options held by the Named Executive Officers in 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT OPTIONS AT
NAME ON EXERCISE REALIZED YEAR END(1) YEAR END(3)
---- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
John F. Bookout................ None N/A None N/A
Fair Colvin, Jr. .............. None N/A 300,000(1) 75,000(1)
Dallas D. Laumbach............. None N/A 862,500(2) 1,401,563(2)
William C. Rankin.............. None N/A 862,500(2) 1,401,563(2)
Charles L. Winn, Sr. .......... None N/A 150,000(1) 37,000(1)
William E. Albrecht............ None N/A 775,000(2) 1,259,375(2)
</TABLE>
- --------
(1) All of the stock options are currently exercisable after giving effect to
accelerated vesting of unvested options as a result of change of control
provisions for options granted under the 1995 Plan, which were triggered
by the Contour Transaction.
(2) None of the options are currently exercisable as a result of vesting
provisions.
(3) Calculated utilizing the closing price of the Common Stock on the Nasdaq
Stock Market on December 16, 1996.
The following table provides information about options granted during 1996
under the NSO Plan to the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE VALUE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL EXERCISE RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS OR BASE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN (PER EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR SHARE) DATE 5% 10%
---- ------------ ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John F. Bookout......... -- -- -- -- -- --
Fair Colvin, Jr. ....... -- -- -- -- -- --
Dallas D. Laumbach...... 862,500 34.5% 1.00 2/15/2006 1,404,922 2,237,103
William C. Rankin....... 862,500 34.5% 1.00 2/15/2006 1,404,922 2,237,103
Charles L. Winn, Sr. ... -- -- -- -- -- --
William E. Albrecht..... 775,000 31.0% 1.00 2/15/2006 1,262,393 2,010,150
</TABLE>
- --------
(1) In accordance with SEC guidelines, the potential realizable value was
calculated assuming that the market value of the underlying security
appreciates in value from the date of grant to the end of the option term
at the assumed rate noted in the table. Actual gains, if any, upon
exercise of NSOs and sales of the underlying shares of Common Stock will
be dependent on future performance and stock market conditions, which may
not reflect the potential realizable values shown in the table.
67
<PAGE>
EMPLOYEE BENEFIT PLANS
Section 401(k) and Employee Stock Ownership Plan. The Company has converted
its ESOP into a Section 401(k) Plan (the "401(k) Plan"). All employees are
eligible to participate in the 401(k) Plan. The Company previously contributed
to the ESOP an annual amount equal to 15% of each employee's compensation (up
to a specified level) to enable the ESOP to purchase qualifying securities for
the accounts of employees. Qualifying securities were allocated to employees'
accounts in the ESOP in amounts that were proportionate to the ESOP's
repayment of borrowings incurred to purchase those securities, all of which
are currently allocated following repayment of ESOP borrowings in 1995.
Employees become fully vested in their accounts in the 401(k) Plan after six
years of service. Prior to converting the ESOP into a Section 401(k) Plan, the
ESOP held Preferred Stock which the Board redeemed in exchange for the same
number of shares of Common Stock. Effective with the conversion of the ESOP
into a Section 401(k) Plan, participants have the opportunity to invest their
accounts in various mutual funds and in Common Stock. The Company matches
employees' contributions to the 401(k) Plan in an amount up to 6% of the
employee's salary.
Stock Option Plans. The purpose of the ISO Plans and the NSO Plan is to
offer eligible employees of the Company and its subsidiaries an opportunity to
acquire or increase their proprietary interests in the Company and provide
additional incentive to contribute to its performance and growth. The ISO
Plans are designed to qualify under section 422 of the Code. Under the 1987
Plan, options were granted to purchase a total of 185,000 shares of common
stock of Kelley Oil at $1.10 per share during 1988 and 315,000 shares at $2.00
per share during 1989. Under the 1991 Plan, options were granted to purchase a
total of 219,000 shares of Kelley Oil's common stock at $7 5/8 per share
during 1991, 15,000 shares at $7.00 per share during 1993 and 266,000 shares
of Common Stock at prices ranging from $1 3/4 to $2 3/8 per share during 1995.
The options granted under the 1991 Plan with an exercise price of $7 5/8 per
share were repriced in 1995, to the extent then outstanding, at $4 1/8 per
share. Under the 1995 Plan, options to purchase a total of 1.5 million shares
of Common Stock were granted during 1995 at exercise prices ranging from $1
3/4 to $2 3/8 per share. In 1995, 1994 and 1993, options were exercised for a
total of 225,000, 66,000 and 58,000 shares, respectively, at prices from $1.10
to $7 5/8 per share.
The exercise price for options granted under the ISO Plans is fixed by the
Compensation Committee of the Board at the fair market value of the Common
Stock at the time of the grant. Each option granted under the ISO Plans is
exercisable during the term of the optionee's employment and three years
thereafter for up to ten years from the date of grant. The exercise price for
options granted under the NSO Plan is $1.00 per share. The ISO Plans and NSO
Plan will terminate upon the earlier of (i) the date on which all shares
available for issuance have been issued upon the exercise of options granted
thereunder or (ii) ten years from the date of adoption or April 2001 in the
case of the 1996 Plan.
EMPLOYMENT AGREEMENTS
In connection with the Contour Transaction, the Company entered into three-
year employment agreements with John F. Bookout, Dallas D. Laumbach, William
C. Rankin and William E. Albrecht at base salaries of $800,000, $190,000,
$165,000 and $125,000, respectively. Each of the agreements provides for a
lump sum severance payment if the covered executive is terminated without
cause, as defined in the agreements. The severance payment would be equal to
one year's compensation based on the salary and bonus rate at the time of
termination, except that Mr. Bookout would be entitled to a payment covering
the balance of the three year term. Each of the agreements provides for
various customary benefits and for indemnification of the covered executive
under certain conditions.
CHANGE OF CONTROL AGREEMENTS
In November 1995, the Company entered into change of control agreements with
16 management and professional personnel, entitling them to severance benefits
in the event their employment with the Company is terminated under certain
circumstances following a change of control, as defined in the agreements. For
this
68
<PAGE>
purpose, the Contour Transaction constituted a change of control. The
severance benefits amount to salary continuation for twelve months, based on
the employee's highest compensation rate during the two years prior to
termination, for all covered employees other than certain executive officers,
including Mr. Colvin and Mr. Winn, Sr., who were entitled upon termination of
employment to salary continuation for a period ranging from 18 months to 36
months, depending on the individual. The Company's change of control
agreements with six individuals were triggered upon their termination of
employment during 1996. In addition, Mr. Colvin's change of control agreement
was triggered upon his retirement from the Company in August 1996, which
requires total payments to Mr. Colvin over a three-year period aggregating
$825,000. See "Certain Transactions." The Company currently has outstanding
change of control agreements with certain management and professional
personnel, under which the Company would be obligated to pay up to an
aggregate of approximately $.9 million if the employment of these individuals
were terminated under certain circumstances within two years of the Contour
Transaction.
69
<PAGE>
PRINCIPAL STOCKHOLDERS
NONMANAGEMENT OWNERSHIP
The following table sets forth information as of September 30, 1996, with
respect to the persons known by the Company to own beneficially more than five
percent of any class of its capital stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
-------------- ------------------- ----------------------- ----------
<S> <C> <C> <C>
Common Stock Contour Production Company L.L.C.(1) 48,000,000(1) 48.84%
630 Fifth Avenue, 39th Floor
New York, New York 10111
</TABLE>
- --------
(1) Excludes 27.0 million shares of Common Stock subject to the Contour
Option. Bessemer owns a majority of the membership interests in Contour.
Based on a Statement on Schedule 13-D filed with the SEC, Contour and
Bessemer are each deemed to beneficially own the shares of Common Stock
held of record by Contour following the Closing of the Contour
Transaction. As of November 30, 1996, those shares represented 47.98% of
the Company's total voting power. JFB Squared, Ltd. and Bevairohn, Ltd.,
partnerships controlled by John F. Bookout, Chairman, President and CEO of
the Company, and three other investment partnerships having the same
general partner as Bessemer own the remaining interests in Contour and may
be deemed to beneficially own the Common Stock held by Contour. Contour
has agreed, subject to certain limitations, to vote for the election of
Mr. Bookout as a director of the Company.
MANAGEMENT OWNERSHIP
The following table sets forth information as of September 30, 1996, with
respect to the Common Stock and Public Preferred Stock beneficially owned,
directly or indirectly, by each of the Company's directors, by the Named
Executive Officers and by all of its current directors and executive officers
as a group.
<TABLE>
<CAPTION>
SHARES
SHARES OF
OF PUBLIC
NAME OF COMMON PERCENT PREFERRED PERCENT
BENEFICIAL OWNER STOCK(1) OF CLASS STOCK OF CLASS
- ---------------- -------- -------- --------- --------
<S> <C> <C> <C> <C>
John F. Bookout(2)........................ -- -- -- --
Fair Colvin, Jr. ......................... 117,627 .12 -- --
Dallas D. Laumbach........................ -- -- -- --
William C. Rankin......................... -- -- -- --
Charles L. Winn, Sr. (3).................. 166,957 .17 -- --
William E. Albrecht....................... -- -- -- --
John J. Conklin, Jr. ..................... 71,037 .07 -- --
Ralph P. Davidson(4)...................... 122,862 .13 4,500 .26%
William J. Murray(5)...................... 86,680 .09 2,000 .11
Ogden M. Phipps........................... -- -- -- --
Michael B Rothfeld(2)..................... -- -- -- --
Ward W. Woods(2).......................... -- -- -- --
All current directors and executive
officers as a group (14 persons)......... 456,536 .46% 6,500 .37%
</TABLE>
- --------
(1) Represents shares of Common Stock owned directly and indirectly as
indicated below, exclusive of indirect beneficial ownership under the ISO
Plans and the NSO Plan, which amount to 1.142 million shares and 2.5
million shares, respectively.
(2) Excludes 48.0 million shares of Common Stock held by Contour, in which
Messrs. Bookout, Rothfeld and Woods and partnerships controlled by Mr.
Bookout have an indirect interest and as to which each of Messrs. Rothfeld
and Woods have disclaimed beneficial ownership. Also excludes 27.0 million
shares of Common Stock subject to the Contour Option.
(3) Includes 744 shares of Common Stock held by Mr. Winn's wife.
(4) Includes 122,253 shares of Common Stock held by Mr. Davidson's wife and
609 shares of Common Stock and 500 shares of Public Preferred Stock held
by his daughter.
(5) Includes 4,875 shares of Common Stock held in a pension trust and 2,000
shares of Public Preferred Stock held in Mr. Murray's defined benefit
pension plan.
70
<PAGE>
CERTAIN TRANSACTIONS
Kelley Oil was the managing general partner of Kelley Partners prior to the
merger of Kelley Partners into the Company in March 1996 and is the managing
general partner of DDPs sponsored prior to the Consolidation to conduct
development drilling operations on selected properties of the Company. Kelley
Oil was reimbursed by Kelley Partners and the DDPs for all appropriate
administrative and overhead expenses incurred in the administration of these
partnerships aggregating approximately $1.6 million net of intercompany
eliminations in 1995. Kelley Oil was also reimbursed by these affiliated
programs for direct costs incurred and advanced in connection with their lease
acquisition, exploration and development activities aggregating approximately
$6.1 million in 1995.
Following the removal of David L. Kelley as Chairman, President and Chief
Executive Officer of the Company in October 1995, the Company entered into
consulting arrangements with Mr. Kelley at a monthly rate of $10,000 through
December 31, 1996. The Company also entered into a termination and settlement
agreement with Mr. Kelley, providing for (i) severance benefits to Mr. Kelley
aggregating $467,000 payable in monthly installments through December 31,
1996, (ii) transfer to Mr. Kelley of title to his corporate automobile with an
estimated value of $24,000, (iii) assumption of his unfunded subscriptions for
units in the 1992 DDP and the 1994 DDP in exchange for those units pursuant to
their respective partnership agreements, (iv) miscellaneous benefits with a
total estimated value of $75,000 and (v) an undertaking to pay Mr. Kelley an
amount equal to any federal income tax liability incurred by him as special
general partner of Kelley Partners and its operating partnership upon any
merger of Kelley Partners or its operating partnership into the Company, as a
result of which the Company paid Mr. Kelley $70,000 in connection with the
March 1996 merger of Kelley Partners into the Company.
During 1995, the Company entered into change of control agreements with 16
employees entitling them to salary continuation for a period of 12 months,
except for Fair Colvin, Matt Ralls and Charles Winn, for whom the periods are
36 months, 24 months and 18 months, respectively, in the event their
employment is terminated under certain circumstances within two years after a
change of control, as defined in the agreements. See "Management--Change of
Control Agreements". During the first nine months of 1996, the Company's
change of control agreements with W. Matt Ralls, Amelia Johnson, Russell T.
Stevens, Fair Colvin and Regan Wood were triggered entitling them to salary
continuation aggregating $474,000, $89,250, $102,000, $825,000 and $152,000,
respectively. During the fourth quarter of 1996, the Company's change of
control agreements with Claude C. Crumrine and Stephen Stabile were triggered,
entitling them to salary continuation aggregating $109,220 and $85,000,
respectively. The Company's maximum liability under its change of control
agreements with remaining employees as of December 15, 1996, was approximately
$.9 million. In connection with Mr. Colvin's resignation, the Company entered
into a six-month consulting agreement with Mr. Colvin, which expires February
15, 1997 and pursuant to which he will be paid an aggregate consulting fee of
$50,000.
In connection with the Contour Transaction, the Company entered into an
agreement (the "Advisory Agreement") with Bessemer Partners & Co. ("BPCO"), an
affiliate of Bessemer, providing for the engagement of BPCO to provide the
Company with financial advisory services for a term expiring at the end of
1998. Under the Advisory Agreement, BPCO has assisted the Company in arranging
a new credit facility and negotiating the related agreements and is assisting
the Company in restructuring its current capital structure. For its services
under the Advisory Agreement, BPCO received an advisory fee of $2 million at
the closing of the Contour Transaction and $500,000 in December 1996 and is
entitled to receive $500,000 per year payable in December 1997 and 1998. In
addition, BPCO is entitled to reimbursement of expenses incurred in connection
with rendering advisory services. The Company also has agreed to indemnify
BPCO and its affiliates against certain liabilities under the Advisory
Agreement.
It is the policy of the Company to structure any transactions between the
Company and its officers, directors, principal stockholders or other
affiliates only on terms no less favorable to the Company than terms that
could be obtained on an arms-length basis from unrelated parties and only upon
approval by a majority of the Company's independent and disinterested
directors.
71
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued as a separate series of notes under an
indenture (the "Indenture") dated as of October 15, 1996, among the Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd. and United States Trust
Company of New York, as trustee (the "Trustee"). The Exchange Notes will be
senior unsecured obligations of the Company and are substantially identical
(including principal amount, interest rate, maturity and redemption rights) to
the Outstanding Notes for which they may be exchanged pursuant to this offer,
except for certain transfer restrictions and registration rights relating the
Outstanding Notes and except for certain interest provisions relating to those
rights. Under the terms of the Indenture, the covenants and events of default
will apply equally to the Exchange Notes and the Outstanding Notes, and the
Exchange Notes and the Outstanding Notes will be treated as one class for all
actions to be taken by the holders thereof and for determining their
respective rights under the Indenture. References to the Notes include the
Exchange Notes and the Outstanding Notes unless the context otherwise
requires. The Outstanding Notes were issued under the Indenture on October 29,
1996, in an aggregate principal amount of $125,000,000. The Indenture is
subject to and governed by the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The following summaries of certain provisions of the
Indenture and the Registration Agreement do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Indenture and the Registration Agreement, including the
definition of certain terms contained therein and those terms that are made a
part of the Indenture by reference to the Trust Indenture Act. Copies of the
Indenture and Registration Agreement have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. Capitalized terms
not otherwise defined below or elsewhere in this Prospectus have the meanings
given to them in the Indenture. The definitions of certain capitalized terms
used in the summary are set forth below under "--Certain Definitions".
GENERAL
The Exchange Notes will be unsecured senior subordinated obligations of the
Company, limited to $125 million aggregate principal amount, and will mature
on October 15, 2006. The Exchange Notes will bear interest at the rate per
annum of 10 3/8% from the date of issuance of the Exchange Notes, payable
semiannually to Holders of record at the close of business on the April 1 or
October 1 immediately preceding the interest payment date on April 15 and
October 15 of each year, commencing on the first such date following the
issuance of the Exchange Notes. Outstanding Notes that are accepted for
exchange will cease to accrue interest on and after the date on which interest
on the Exchange Notes begins to accrue. Accrued and unpaid interest on the
Outstanding Notes that are exchanged for Exchange Notes will be payable on or
before the first April 15 or October 15 following the date of issuance of the
Exchange Notes. Interest on overdue principal and (to the extent permitted by
law) on overdue installments of interest will accrue at 1% per annum in excess
of such rate. Interest on the Exchange Notes will be computed on the basis of
a 360-day year of twelve 30-day months.
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge shall be made for any registration of transfer or exchange of
Exchange Notes, but the Company may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph the Exchange Notes will not
be redeemable at the option of the Company prior to October 15, 2001.
Thereafter, the Exchange Notes will be redeemable, at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in
percentages of principal amount), plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed
during the 12-month period commencing on October 15 of the years set forth
below:
72
<PAGE>
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001................................... 105.188%
2002................................... 102.594
2003 and thereafter.................... 100
</TABLE>
In addition, at any time and from time to time prior to October 15, 1999,
the Company may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Equity Offerings
following which there is a Public Market, at a redemption price (expressed as
a percentage of principal amount) of 110.375% plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that either at least $75 million aggregate principal amount
of the Notes must remain outstanding after each such redemption or such
redemption must retire the Notes in their entirety.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Exchange Notes.
SUBSIDIARY GUARANTIES
Kelley Operating and Kelley Oil have issued, and each other Restricted
Subsidiary of the Company (other than the Programs) that has total net assets
as of the end of the most recent fiscal year (as set forth on the balance
sheet of such Restricted Subsidiary prepared in accordance with GAAP) equal to
or greater than the greater of $2.5 million and one percent (1%) of Adjusted
Consolidated Net Tangible Assets as of such date will issue, a Subsidiary
Guaranty of the Notes as described herein. Each Subsidiary Guarantor, as
primary obligor and not merely as surety, will irrevocably and unconditionally
guarantee on a senior subordinated basis the performance and the punctual
payment when due, whether at Stated Maturity, by acceleration, by redemption
or otherwise, of all the obligations of the Company under the Indenture and
the Notes (all such obligations guaranteed by the Subsidiary Guarantors being
herein called the "Guaranteed Obligations" and each such Subsidiary Guaranty
being herein called a "Subsidiary Guaranty"). Each Subsidiary Guaranty will be
limited in amount to an amount not to exceed the maximum amount that can,
after giving effect to all other contingent and fixed liabilities of the
applicable Subsidiary Guarantor, be guaranteed by such Subsidiary Guarantor
without rendering such Subsidiary Guaranty voidable under applicable law
relating to fraudulent transfer or fraudulent conveyance or similar laws
affecting the rights of creditors generally. Each Subsidiary Guarantor will
agree to pay, in addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the Trustee and
the Holders in enforcing any rights under the Subsidiary Guaranty with respect
to such Subsidiary Guarantor.
Each Subsidiary Guaranty is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon the relevant Subsidiary Guarantor and (c) enure to the
benefit of and be enforceable by the Trustee, the Holders and their
successors, transferees and assigns.
Pursuant to the Indenture, any Subsidiary Guarantor may consolidate with,
merge with or into, or transfer all or substantially all its assets to any
other Person to the same extent the Company may consolidate with, merge with
or into, or transfer all or substantially all its assets to, any other Person;
provided, however, that if such Person is not the Company or a Subsidiary
Guarantor, such Subsidiary Guarantor's obligations under the
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<PAGE>
Indenture and its Subsidiary Guaranty must be expressly assumed by such other
Person. However, upon the sale or disposition (by merger or otherwise) of any
Subsidiary Guarantor to an entity (other than to the Company or a Subsidiary
Guarantor) permitted by the Indenture, such Subsidiary Guarantor will be
released and relieved from all its obligations under its Subsidiary Guaranty.
See "--Certain Covenants--Merger and Consolidation".
RANKING
The indebtedness evidenced by the Exchange Notes and any Subsidiary Guaranty
will be unsecured, general obligations of the Company and the relevant
Subsidiary Guarantor, respectively, subordinated in right of payment, as set
forth in the Indenture, to the prior payment of all Senior Indebtedness of the
Company or Senior Indebtedness of the applicable Subsidiary Guarantor, as the
case may be, including the Company's and such Subsidiary Guarantor's
obligations under the Credit Agreement. After giving pro forma effect to the
Refinancing, as of September 30, 1996, the Company would have had
approximately $7.0 million of Senior Indebtedness outstanding.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Exchange Notes and only Indebtedness of a Subsidiary Guarantor
that is Senior Indebtedness of such Subsidiary Guarantor will rank senior to
such Subsidiary Guarantor's Subsidiary Guaranty, in each case in accordance
with the provisions of the Indenture. The Exchange Notes and the Subsidiary
Guaranties will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company or Senior Subordinated Indebtedness
of the relevant Subsidiary Guarantor, as the case may be. The Company has
agreed in the Indenture that it will not Incur, directly or indirectly, and it
will not permit any Subsidiary Guarantor to Incur, directly or indirectly, any
Indebtedness that is subordinate or junior in ranking in right of payment to
its Senior Indebtedness unless such Indebtedness is Senior Subordinated
Indebtedness or is expressly subordinated in right of payment to Senior
Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be
subordinated or junior to Secured Indebtedness merely because it is unsecured.
Substantially all the operations of the Company are currently conducted
through its subsidiaries. Claims of creditors of such subsidiaries, including
trade creditors, secured creditors and creditors holding guarantees issued by
such subsidiaries, and claims of preferred stockholders (if any) of such
subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Exchange Notes, even though such obligations may not
constitute Senior Indebtedness. The Exchange Notes and each Subsidiary
Guaranty, therefore, will be effectively subordinated to creditors (including
trade creditors) and preferred stockholders (if any) of subsidiaries of the
Company (other than the relevant Subsidiary Guarantor). After giving pro forma
effect to the Refinancing, as of September 30, 1996, the Company's
subsidiaries (other than the Subsidiary Guarantors) would have had no
liabilities to any Person other than the Company and its subsidiaries.
Although the Indenture limits the incurrence of Indebtedness and the issuance
of preferred stock of certain of the Company's subsidiaries, such limitation
is subject to a number of significant qualifications; moreover, the Indenture
does not impose any limitation on the incurrence by such subsidiaries of
liabilities that are not considered Indebtedness under the Indenture. See
"--Certain Covenants--Limitation on Indebtedness and Preferred Stock of
Subsidiaries".
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Notes (collectively, "pay the Notes") if (i) any Designated Senior
Indebtedness is not paid when due or (ii) any other default on Designated
Senior Indebtedness occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either
case, the default has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Indebtedness has been paid in full.
However, the Company may pay the Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
second preceding sentence) with respect to any Designated Senior Indebtedness
pursuant to which the
74
<PAGE>
maturity thereof may be accelerated immediately without further notice (except
such notice as may be required to effect such acceleration) or the expiration
of any applicable grace periods, the Company may not pay the Notes for a
period (a "Payment Blockage Period") commencing upon the receipt by the
Trustee (with a copy to the Company) of written notice (a "Blockage Notice")
of such default from the Representative of the holders of such Designated
Senior Indebtedness specifying an election to effect a Payment Blockage Period
and ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the
Person or Persons who gave such Blockage Notice, (ii) because the default
giving rise to such Blockage Notice is no longer continuing or (iii) because
such Designated Senior Indebtedness has been repaid in full). Notwithstanding
the provisions described in the immediately preceding sentence, unless the
holders of such Designated Senior Indebtedness or the Representative of such
holders have accelerated the maturity of such Designated Senior Indebtedness,
the Company must resume payments on the Notes after the end of such Payment
Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period, irrespective of the number
of defaults with respect to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of Senior
Indebtedness will be entitled to receive payment in full of such Senior
Indebtedness before the Noteholders are entitled to receive any payment, and
until the Senior Indebtedness is paid in full, any payment or distribution to
which Noteholders would be entitled but for the subordination provisions of
the Indenture will be made to holders of such Senior Indebtedness as their
interests may appear. If a distribution is made to Noteholders that, due to
the subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty, as
they relate to the principal of and interest on the Notes, are unsecured
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior
Indebtedness of such Subsidiary Guarantor. The terms of the subordination
provisions described above with respect to the Company's obligations under the
Notes apply equally to a Subsidiary Guarantor and the obligations of such
Subsidiary Guarantor under its Subsidiary Guaranty, as they relate to the
principal of and interest on the Notes.
By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and creditors of
the Company who are not holders of Senior Indebtedness may recover less,
ratably, than holders of Senior Indebtedness and may recover more, ratably,
than the Noteholders.
Notwithstanding the foregoing, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described under
"Defeasance" below will not be contractually subordinated in right of payment
to any Senior Indebtedness or subject to the restrictions described herein.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in the Oil and Gas Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however,
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that any such Restricted Subsidiary described in clauses (ii) or (iii) above
is primarily engaged in the Oil and Gas Business.
"Adjusted Consolidated Assets" means at any time the total amount of assets
of the Company and its consolidated Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), after deducting
therefrom all current liabilities of the Company and its consolidated
Restricted Subsidiaries (excluding intercompany items), all as set forth on
the consolidated balance sheet of the Company and its consolidated Restricted
Subsidiaries as of the end of the most recent fiscal quarter ended at least 45
days prior to the date of determination.
"Adjusted Consolidated Net Tangible Assets" or "CNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenues from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before
any state or federal income taxes, as estimated in a reserve report prepared
as of the end of the Company's most recently completed fiscal year, which
reserve report is prepared or reviewed by independent petroleum engineers, as
increased by, as of the date of determination, the discounted future net
revenues of (A) estimated proved oil and gas reserves of the Company and its
Restricted Subsidiaries attributable to any material acquisition consummated
since the date of such year-end reserve report, and (B) estimated oil and gas
reserves of the Company and its Restricted Subsidiaries attributable to
material extensions, discoveries and other additions and upward determinations
of estimates of proved oil and gas reserves due to exploration, development or
exploitation, production or other activities conducted or otherwise occurring
since the date of such year-end reserve report which would, in the case of
determinations made pursuant to clauses (A) and (B), in accordance with
standard industry practice, result in such additions or revisions, in each
case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such year-end reserve report), and decreased by, as of the date of
determination, the discounted future net revenues of (C) estimated proved oil
and gas reserves of the Company and its Restricted Subsidiaries produced or
disposed of since the date of such year-end reserve report and (D) reductions
in the estimated oil and gas reserves of the Company and its Restricted
Subsidiaries since the date of such year-end reserve report attributable to
material downward determinations of estimates of proved oil and gas reserves
due to exploration, development or exploitation, production or other
activities conducted or otherwise occurring since the date of such year-end
reserve report which would, in the case of determinations made pursuant to
clauses (C) and (D), in accordance with standard industry practice, result in
such determinations, in each case calculated in accordance with SEC guidelines
(utilizing the prices utilized in such year-end reserve report); provided
that, in the case of each of the determinations made pursuant to clauses (A)
through (D), such increases and decreases shall be as estimated by the
Company's engineers, except that if as a result of such acquisitions,
dispositions, discoveries, extensions or revisions, there is a Material Change
which is an increase, then such increases and decreases in the discounted
future net revenue shall be confirmed in writing by an independent petroleum
engineer, (ii) the capitalized costs that are attributable to oil and gas
properties of the Company and its Restricted Subsidiaries to which no proved
oil and gas reserves are attributed, based on the Company's books and records
as of a date no earlier than the date of the Company's latest annual or
quarterly financial statements, (iii) the Net Working Capital on a date no
earlier than the date of the Company's latest annual or quarterly financial
statements and (iv) the greater of (I) the net book value on a date no earlier
than the date of the Company's latest annual or quarterly financial statements
and (II) the appraised value, as estimated by independent appraisers, of other
tangible assets of the Company and its Restricted Subsidiaries as of a date no
earlier than the date of the Company's latest audited financial statements
(provided that the Company shall not be required to obtain such an appraisal
of such assets if no such appraisal has been performed), minus (b) the sum of
(i) minority interests, (ii) any gas balancing liabilities of the Company and
its Restricted Subsidiaries reflected in the Company's latest audited
financial statements, (iii) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices utilized in the
Company's year-end reserve report), attributable to reserves subject to
participation interests, overriding royalty interests or other interests of
third parties, pursuant to participation, partnership, vendor financing or
other agreements then in effect, or which otherwise are required to be
delivered to third parties, (iv) the discounted future net revenues,
calculated in accordance with SEC guidelines (utilizing the same prices
utilized in the Company's year-end reserve report), attributable to reserves
that are required to
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be delivered to third parties to fully satisfy the obligations of the Company
and its Restricted Subsidiaries with respect to Volumetric Production Payments
on the schedules specified with respect thereto and (v) the discounted future
net revenues, calculated in accordance with SEC guidelines, attributable to
reserves subject to Dollar-Denominated Production Payments that, based on the
estimates of production included in determining the discounted future net
revenues specified in the immediately preceding clause (a)(i) (utilizing the
same prices utilized in the Company's year-end reserve report), would be
necessary to satisfy fully the obligations of the Company and its Restricted
Subsidiaries with respect to Dollar-Denominated Production Payments on the
schedules specified with respect thereto.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants--Limitation on Restricted Payments", "--Certain Covenants--
Limitation on Affiliate Transactions" and "--Certain Covenants--Limitations on
Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any
beneficial owner of Capital Stock representing 5% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of the Company or of
rights or warrants to purchase such Capital Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof. Shareholders and Affiliates of
Bessemer Securities Corporation ("BSC") that would not be Affiliates of the
Company other than by reason of being shareholders or Affiliates of BSC and
that neither in fact participate in the management of any of BSC, Bessemer,
Holdings or the Company, nor are controlled by BSC, Bessemer, Holdings, the
Company, or any of their respective Affiliates who in fact participate in the
management of any of BSC, Bessemer, Holdings or the Company, shall not be
deemed to be "Affiliates" of the Company.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of
this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary.
Notwithstanding the foregoing, none of the following shall be deemed to be an
Asset Disposition: (1) a disposition by a Restricted Subsidiary to the Company
or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (2)
for purposes of the covenant described under "--Certain Covenants--Limitation
on Sales of Assets and Subsidiary Stock" only, a disposition that constitutes
a Restricted Payment permitted by the covenant described under "--Certain
Covenants--Limitation on Restricted Payments"), (3) the sale or transfer
(whether or not in the ordinary course of business) of oil and gas properties
or direct or indirect interests in real property; provided, however, that at
the time of such sale or transfer such properties do not have associated with
them any proved reserves, (4) the abandonment, farm-out, lease or sublease of
developed or undeveloped oil and gas properties in the ordinary course of
business, (5) the trade or exchange by the Company or any Restricted
Subsidiary of any oil and gas property owned or held by the Company or such
Restricted Subsidiary for any oil and gas property owned or held by another
Person or (6) the sale or transfer of hydrocarbons or other mineral products
or surplus or obsolete equipment in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
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"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday (as defined in
the Indenture).
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that for purposes of this clause (i) such person shall be
deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company; provided, however,
that the Permitted Holders beneficially own (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the
Company than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other person is
the beneficial owner (as defined in this clause (i)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation and the Permitted Holders beneficially own (as
defined in this proviso), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(ii) during any period of two consecutive years from and after the Issue
Date, individuals who at the beginning of such period constituted the Board
of Directors (together with any new directors whose election by such Board
of Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger
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or consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed into
or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, (2) if the Company or any Restricted
Subsidiary has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of such period or if any Indebtedness is to
be repaid, repurchased, defeased or otherwise discharged on the date of the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio, EBITDA and Consolidated Interest Expense for such period shall be
calculated on a pro forma basis as if such discharge had occurred on the first
day of such period and as if the Company or such Restricted Subsidiary has not
earned the interest income actually earned during such period in respect of
cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such
period the Company or any Restricted Subsidiary shall have made any Asset
Disposition (other than an Asset Disposition involving assets having a fair
market value of less than the greater of one percent (1%) of Adjusted
Consolidated Net Tangible Assets as of the end of the Company's then most
recently completed fiscal year and $2.0 million), then EBITDA for such period
shall be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to EBITDA (if negative), directly
attributable thereto for such period and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale), (4)
if since the beginning of such period the Company or any Restricted Subsidiary
(by merger or otherwise) shall have made an Investment in any Restricted
Subsidiary (or any person which becomes a Restricted Subsidiary) or an
acquisition (including by way of lease) of assets, including any acquisition
of assets occurring in connection with a transaction requiring a calculation
to be made hereunder, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition occurred
on the first day of such period and (5) if since the beginning of such period
any Person (that subsequently became a Restricted Subsidiary or was merged
with or into the Company or any Restricted Subsidiary since the beginning of
such period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (3) or (4) above if made by the Company or a Restricted Subsidiary
during such period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma
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calculations shall be determined in good faith by a responsible financial or
accounting Officer of the Company. If any Indebtedness bears a floating rate
of interest and is being given pro forma effect, the interest of such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of the Company and its consolidated Restricted
Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a consolidated basis, after
eliminating (i) all intercompany items between the Company and any Restricted
Subsidiary and (ii) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication,
(i) interest expense attributable to capital leases and imputed interest with
respect to Attributable Debt, (ii) capitalized interest, (iii) non-cash
interest expenses, (iv) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (v) net
costs (including amortization of fees and upfront payments) associated with
interest rate caps and other interest rate and currency options that, at the
time entered into, resulted in the Company and its Restricted Subsidiaries
being net payees as to future payouts under such caps or options, and interest
rate and currency swaps and forwards for which the Company or any of its
Restricted Subsidiaries has paid a premium, (vi) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, to the extent that, by the terms of the Preferred
Stock, failure to pay such dividends would result in a bankruptcy of the
issuer thereof and (vii) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary or secured by a Lien on assets of the Company or any
Restricted Subsidiary to the extent such Indebtedness constitutes Indebtedness
of the Company or any Restricted Subsidiary (whether or not such Guarantee or
Lien is called upon); provided, however, "Consolidated Interest Expense" shall
not include any (w) amortization of costs relating to debt issuances
(including the amortization of debt discount) other than the amortization of
debt discount related to the issuance of securities with an original issue
price of not more than 90% of the principal thereof, (x) amortization of debt
discount to the extent it relates to revaluations of financial instruments
recognized in connection with the Consolidation, (y) Consolidated Interest
Expense with respect to any Indebtedness Incurred pursuant to clause (b)(8) of
the covenant described under "--Certain Covenants--Limitation on Indebtedness"
and (z) noncash interest expense Incurred in connection with interest rate
caps and other interest rate and currency options that, at the time entered
into, resulted in the Company and its Restricted Subsidiaries being either
neutral or net payors as to future payouts under such caps or options.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person (other than the Company) if such Person is not a Restricted Subsidiary,
except that (A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary, to
the limitations contained in clause (iii) below) and (B) the Company's equity
in a net loss of any such Person for such period shall be included in
determining such Consolidated Net Income; (ii) any net income (or loss) of any
Person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any
net income of any Restricted Subsidiary if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period
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shall be included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Restricted Subsidiary during such period
to the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income;
(iv) any gain or loss realized upon the sale or other disposition of any
assets of the Company or its consolidated Subsidiaries (including pursuant to
any sale-and-leaseback arrangement) which is not sold or otherwise disposed of
in the ordinary course of business and any gain or loss realized upon the sale
or other disposition of any Capital Stock of any Person; (v) extraordinary
gains or losses; and (vi) the cumulative effect of a change in accounting
principles. Notwithstanding the foregoing, for the purposes of the covenant
described under "Certain Covenants--Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Tangible Assets", as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet
of the Company and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to
purchase accounting and after deducting therefrom Consolidated Current
Liabilities and, to the extent otherwise included, the amounts of: (i)
minority interests in consolidated Subsidiaries held by Persons other than the
Company or a Restricted Subsidiary; (ii) excess of cost over fair value of
assets of businesses acquired, as determined in good faith by the Board of
Directors; (iii) any revaluation or other write-up in book value of assets
subsequent to the Issue Date as a result of a change in the method of
valuation in accordance with GAAP consistently applied; (iv) unamortized debt
discount and expenses and other unamortized deferred charges, goodwill,
patents, trademarks, service marks, trade names, copyrights, licenses,
organization or developmental expenses and other intangible items; (v)
treasury stock; (vi) cash set apart and held in a sinking or other analogous
fund established for the purpose of redemption or other retirement of Capital
Stock to the extent such obligation is not reflected in Consolidated Current
Liabilities; and (vii) Investments in and assets of Unrestricted Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of
any action for the purpose of which the determination is being made, as (i)
the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Contour Option" means that certain Option Agreement, dated as of February
15, 1996, between the Company and Contour Production Company L.L.C., a
Delaware limited liability company.
"Credit Agreement" means that certain Credit Agreement, dated as of February
14, 1996, by and among the Company and Texas Commerce Bank National
Association (or any successor thereto or replacement thereof), as agent and as
a lender, and certain other institutions, as lenders, including any related
notes, guarantees, collateral documents, instruments and agreements executed
in connection therewith, and in each case as amended, restated, modified,
renewed, refunded, replaced or refinanced, in whole or in part, from time to
time.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including the Credit Agreement) or
commercial paper facilities with banks or other institutional lenders
providing for revolving credit loans, term loans, production payments,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against
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such receivables) or letters of credit, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all the obligations of the
Company or any Restricted Subsidiary under any Credit Facility and (ii) any
other Senior Indebtedness of the Company which, at the date of determination,
has an aggregate principal amount outstanding of, or under which, at the date
of determination, the holders thereof are committed to lend up to, at least
$25.0 million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock to
the extent that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any
event, it (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock or (iii) is redeemable, in whole or in part, at the
option of the holder thereof, in each case described in the immediately
preceding clauses (i), (ii) or (iii), on or prior to the Stated Maturity of
the Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
provisions described under "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock" and "--Certain Covenants--Change of Control"; provided
further, however, that the Company's Convertible Exchangeable Preferred Stock
outstanding on the Issue Date shall not be deemed Disqualified Stock.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) provision for taxes based on
income or profits, (b) depletion and depreciation expense, (c) amortization
expense (d) exploration costs and (e) all other non-cash charges (excluding
any such non-cash charge to the extent that it represents an accrual of or
reserve for cash charges in any future period or amortization of a prepaid
cash expense that was paid in a prior period except such amounts as the
Company determines in good faith are nonrecurring), and less, to the extent
included in calculating such Consolidated Net Income and in excess of any
costs or expenses attributable thereto and deducted in calculating such
Consolidated Net Income, the sum of (x) the amount of deferred revenues that
are amortized during such period and are attributable to reserves that are
subject to Volumetric Production Payments and (y) amounts recorded in
accordance with GAAP as repayments of principal and interest pursuant to
Dollar-Denominated Production Payments. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation
and amortization and other non-cash charges of, a Subsidiary of the Company
shall be added to Consolidated Net Income to compute EBITDA only to the extent
(and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Subsidiary or its stockholders.
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"Equity Offering" means a primary offering, whether public or private, of
shares of common stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness of such Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by
such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of
principal of a non-interest bearing or other discount security shall not be
deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all Attributable Debt in
respect of Sale/Leaseback Transactions entered into by such Person; (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property (which purchase price is due more than six months after the date of
taking delivery of title to such property), including all obligations of such
Person for the deferred purchase price of property under any title retention
agreement (but excluding trade accounts payable arising in the ordinary course
of business); (iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
obligations (other than obligations described in (i) through (iii) above)
entered into in the ordinary course of business of such Person to the extent
such letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed no later than the tenth Business Day following
receipt by such Person of a demand for reimbursement following payment on the
letter of credit); (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person the liquidation
preference with respect to, any Preferred Stock (but
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excluding, in each case, any accrued dividends); (vi) all obligations of such
Person relating to any Production Payment or in respect of production
imbalances (but excluding production imbalances arising in the ordinary course
of business); (vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee (including, with respect to any Production Payment, any
warranties or guarantees of production or payment by such Person with respect
to such Production Payment but excluding other contractual obligations of such
Person with respect to such Production Payment); (viii) all obligations of the
type referred to in clauses (i) through (vii) of other Persons secured by any
Lien on any property or asset of such first-mentioned Person (whether or not
such obligation is assumed by such first-mentioned Person), the amount of such
obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured and (ix) to the extent not
otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date.
It is understood that none of the following shall constitute Indebtedness:
(i) indebtedness arising from agreements providing for indemnification or
adjustment of purchase price or from guarantees securing any obligations of
the Company or any of its Subsidiaries pursuant to such agreements, incurred
or assumed in connection with the disposition of any business, assets or
Subsidiary of the Company, other than guarantees or similar credit support by
the Company or any of its Subsidiaries of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Subsidiary for the
purpose of financing such acquisition; (ii) any trade payables and other
accrued current liabilities incurred in the ordinary course of business as the
deferred purchase price of property; (iii) obligations arising from guarantees
to suppliers, lessors, licensees, contractors, franchisees or customers
incurred in the ordinary course of business; (iv) obligations (other than
express Guarantees of indebtedness for borrowed money) in respect of
Indebtedness of other Persons arising in connection with (A) the sale or
discount of accounts receivable, (B) trade acceptances and (C) endorsements of
instruments for deposit in the ordinary course of business, (v) obligations in
respect of performance bonds provided by the Company or its Subsidiaries in
the ordinary course of business and refinancings thereof; (vi) obligations
arising from the honoring by a bank or other financial institution of a check,
draft or similar instrument drawn against insufficient funds in the ordinary
course of business, provided, however, that such obligation is extinguished
within two business days of its incurrence; and (vii) obligations in respect
of any obligations under workers' compensation laws and similar legislation.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers or joint interest partners or drilling partnerships
sponsored by the Company or any Restricted Subsidiary in the ordinary course
of business that are recorded as accounts receivable on the balance sheet of
the lender) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person. For
purposes of the definition of "Unrestricted Subsidiary", the definition of
"Restricted Payment" and the covenant described under "--Certain Covenants--
Limitation on Restricted Payments", (i) "Investment" shall include the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest
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in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Limited Recourse Indebtedness" means, with respect to any Production
Payments, Indebtedness, the terms of which limit the liability of the Company
and its Restricted Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with respect to such
Indebtedness would permit any holder of any other Indebtedness of the Company
or any Restricted Subsidiary to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 15% during a fiscal quarter
in the discounted future net revenues from proved oil and gas reserves of the
Company and its Restricted Subsidiaries, calculated in accordance with clause
(a)(i) of the definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be excluded from the calculation of
Material Change: (i) any acquisitions during the fiscal quarter of oil and gas
reserves that have been estimated by independent petroleum engineers and with
respect to which a report or reports of such engineers exist and (ii) any
disposition of properties existing at the beginning of such fiscal quarter
that have been disposed of in compliance with the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock".
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees (including financial and other advisory
fees) and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with
the terms of any Lien upon or other security agreement of any kind with
respect to such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid
out of the proceeds from such Asset Disposition, (iii) all distributions and
other payments required to be made to minority interest holders in
Subsidiaries or joint ventures as a result of such Asset Disposition and (iv)
the deduction of appropriate amounts provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved hydrocarbon reserves,
the discounted future net revenues associated with such reserves, determined
in accordance with the rules and regulations (including interpretations
thereof) of the SEC in effect on the Issue Date.
"Net Working Capital" means (a) all current assets of the Company and its
Restricted Subsidiaries minus (b) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, determined in accordance with GAAP.
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"Offering Memorandum" means the Offering Memorandum dated October 25, 1996,
in connection with the sale of the Outstanding Notes.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, acquisition, production, processing (but not
refining), marketing, storage and transportation of, hydrocarbons, and other
related energy and natural resource businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Hedging Contract" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed
to provide protection against oil and gas price fluctuations.
"Permitted Business Investment" means any Investment made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for, acquiring,
developing, producing, processing, gathering, marketing or transporting oil
and gas through agreements, transactions, interests or arrangements which
permit one to share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives customarily achieved
through the conduct of Oil and Gas Business jointly with third parties,
including (i) ownership interests in oil and gas properties, processing
facilities, gathering systems or ancillary real property interests and (ii)
Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, qunitization agreements, pooling
agreements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties.
"Permitted Holders" means (i) the members of Contour Production Company
L.L.C., a Delaware limited liability company ("Contour"), as of the Issue Date
(the "Contour Group"), (ii) Contour, so long as Contour is controlled (as
defined in the definition of "Affiliate" above), directly or indirectly, by
the Contour Group, (iii) officers, principals, employees, direct or indirect
owners or Affiliates of Persons described in clauses (i) or (ii), (iv) Persons
who beneficially own Voting Stock of the Company on the Issue Date and (v)
officers or employees of the Company or any of its Subsidiaries as of the
Issue Date.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is an Oil and Gas
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is an Oil and Gas
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary
deems reasonable under the circumstances; (v) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made
in the ordinary course of business; (vii) stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Restricted Subsidiary or in satisfaction of
judgments; (viii) any Person to the extent such Investment represents the non-
cash portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "--Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" and (ix) Permitted
Business Investments.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United
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States government bonds to secure surety or appeal bonds to which such Person
is a party, or deposits as security for contested taxes or import duties or
for the payment of rent, in each case Incurred in the ordinary course of
business; (b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings or other Liens arising out of judgments or
awards against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review; (c) Liens for
property taxes not yet subject to penalties for non-payment or which are being
contested in good faith and by appropriate proceedings; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute Indebtedness;
(e) minor survey exceptions, minor encumbrances, easements or reservations of,
or rights of others for, licenses, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties which
were not Incurred in connection with Indebtedness and which do not in the
aggregate materially impair their use in the operation of the business of such
Person; (f) Liens securing Indebtedness Incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to, property of
such Person (including Liens securing Indebtedness of the pollution control or
revenue bond type); provided, however, that the Lien may not extend to any
other property owned by such Person or any of its Subsidiaries at the time the
Lien is Incurred, and the Indebtedness secured by the Lien may not be Incurred
more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation
of the property subject to the Lien; (g) Liens to secure Indebtedness
permitted under the provisions described in clause (b)(1) or (b)(8) under
"--Certain Covenants--Limitation on Indebtedness"; provided, however, that any
such Lien securing Indebtedness described in such clause (b)(8) shall be
limited to the hydrocarbons related thereto and any gathering systems utilized
in gathering and transporting such hydrocarbons; (h) Liens existing on the
Issue Date; (i) Liens on property or shares of Capital Stock of another Person
at the time such other Person becomes a Subsidiary of such Person; provided,
however, that such Liens are not created, incurred or assumed in connection
with, or in contemplation of, such other Person becoming such a Subsidiary;
provided further, however, that such Lien may not extend to any other property
owned by such Person or any of its Subsidiaries; (j) Liens on property at the
time such Person or any of its Subsidiaries acquires the property, including
any acquisition by means of a merger or consolidation with or into such Person
or a Subsidiary of such Person; provided, however, that such Liens are not
created, incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person
owing to such Person or a wholly owned Subsidiary of such Person (or, in the
case of the Company, to a Wholly Owned Subsidiary); (l) Liens securing Hedging
Obligations so long as such Hedging Obligations relate to Indebtedness that
is, and is permitted to be under the Indenture, secured by a Lien on the same
property securing such Hedging Obligations; (m) Liens arising in the ordinary
course of business in favor of the United States, any state thereof, any
foreign country or any department, agency, instrumentality or political
subdivision of any such jurisdiction, to secure partial, progress, advance or
other payments pursuant to any contract or statute; (n) Liens to secure any
Refinancing (or successive Refinancing) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clauses (f),
(h), (i) and (j); provided, however, that (x) such new Lien shall be limited
to all or part of the same property that secured the original Lien (plus
improvements to or on such property) and (y) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of (A)
the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clause (f), (h), (i) or (j) at the time the
original Lien became a Permitted Lien and (B) an amount necessary to pay any
fees and expenses, including premiums, related to such Refinancing; (o) Liens
on, related to, properties to secure all or part of the costs incurred in the
ordinary course of business of exploration, drilling, development or operation
thereof; (p) Liens on pipeline or pipeline facilities which arise out of
operation of law; (q) Liens reserved in oil and gas mineral leases for bonus
or rental payments and for compliance with the terms of such leases; and (r)
Liens arising under partnership agreements, oil and gas leases, farm-out
agreements, division orders, contracts for the sale, purchase, exchange,
transportation or processing (but not the refining) of oil, gas or other
hydrocarbons, unitization and pooling declarations and agreements, development
agreements, operating
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agreements, area of mutual interest agreements, and other similar agreements
which are customary in the Oil and Gas Business. Notwithstanding the
foregoing, "Permitted Liens" will not include any Lien described in clause
(f), (i) or (j) above to the extent (A) such Lien applies to any Additional
Assets or Permitted Business Investment acquired directly or indirectly from
Net Available Cash pursuant to clause (a)(i)(B) or paragraph (c) of the
covenant described under "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock" and (B) the fair value of such Additional Assets or
Permitted Business Investment is less than the sum of (x) the amount of
Indebtedness secured by such Lien plus (y) the amount of Net Available Cash so
invested in such Additional Assets or Permitted Business Investment.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Programs" means Kelley Partners 1992 Development Drilling Program, a Texas
limited partnership, and Kelley Partners 1994 Development Drilling Program, a
Texas limited partnership, together with Kelley Partners 1992 Development
Drilling Joint Venture, a Texas general partnership, Kelley Partners 1994
Development Drilling Joint Venture, a Texas general partnership, and each of
their respective successors.
"Public Market" means any time when at least 15% of the total issued and
outstanding common stock of the Company has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness (including an
Incurrence pursuant to clause (ii) of the first or third paragraph of the
covenant described under "--Certain Covenants--Merger and Consolidation").
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness and Indebtedness that is deemed to be
Incurred at the time of a merger or consolidation pursuant to clause (ii) of
the first or third paragraph of the covenant described under "--Certain
Covenants--Merger and Consolidation", provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary (other than a Subsidiary Guarantor) that Refinances Indebtedness of
the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
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"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (x) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock), (y) dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and (z) pro rata dividends or other distributions made
by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders
(or owners of an equivalent interest in the case of a Subsidiary that is an
entity other than a corporation)), (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held
by any Person or of any Capital Stock of a Restricted Subsidiary held by any
Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition)
or (iv) the making of any Investment in any Person (other than a Permitted
Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means with respect to any Person (i) Indebtedness of
such Person, and all obligations of such Person under any Credit Facilities,
whether outstanding on the Issue Date or thereafter Incurred and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating such Person to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness evidenced
by notes, debentures, bonds or other similar instruments for the payment of
which such Person is responsible or liable unless, with respect to obligations
described in the immediately preceding clause (i) or (ii), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding,
it is provided that such obligations are subordinate in right of payment to
the Notes or the applicable Subsidiary Guaranty, as the case may be; provided,
however, that Senior Indebtedness shall not include (1) any obligation of such
Person to any Subsidiary of such Person, (2) any liability for Federal, state,
local or other taxes owed or owing by such Person, (3) any accounts payable or
other liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of such Person (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in any respect to any other
Indebtedness or other obligation of such Person or (5) that portion of any
Indebtedness which at the time of Incurrence is Incurred in violation of the
Indenture (other than, in the case of the Company or any of its Restricted
Subsidiaries, Indebtedness under any Credit Facility that is Incurred on the
basis of a representation by the Company to the applicable lenders that such
Person is permitted to Incur such Indebtedness under the Indenture).
"Senior Subordinated Indebtedness" means (i) with respect to the Company,
the Notes and any other Indebtedness of the Company that specifically provides
that such Indebtedness is to rank pari passu with the Notes in right of
payment and is not subordinated by its terms in right of payment to any
Indebtedness or other
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obligation of the Company which is not Senior Indebtedness and (ii) with
respect to a Subsidiary Guarantor, the Subsidiary Guaranty of such Subsidiary
Guarantor and any other Indebtedness of such Subsidiary Guarantor that
specifically provides that such Indebtedness is to rank pari passu with such
Subsidiary Guaranty in right of payment and is not subordinated by its terms
in right of payment to any Indebtedness or other obligation of such Subsidiary
Guarantor which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to
that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i)
such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means Kelley Operating, Kelley Oil and each other
Restricted Subsidiary of the Company (other than the Programs) that (i) has
total net assets as of the end of the most recent fiscal year (as set forth on
the balance sheet of such Subsidiary prepared in accordance with GAAP) equal
to or greater than the greater of $2.5 million and one percent (1%) of
Adjusted Consolidated Net Tangible Assets as of such date and (ii) delivers a
Subsidiary Guaranty.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes, which Guarantee will be
subordinated to Senior Indebtedness of such Subsidiary Guarantor on
substantially the same terms as the Notes are subordinated to Senior
Indebtedness of the Company. Any such Subsidiary Guaranty (i) will be
substantially in the form prescribed by the Indenture, (ii) will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering such Subsidiary
Guaranty, as it relates to such Subsidiary Guarantor, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally and (iii) will
provide that, upon the sale or other disposition (including by way of
consolidation or merger) of a Subsidiary Guarantor or the sale or disposition
of all or substantially all the assets of a Subsidiary Guarantor permitted by
the Indenture, such Subsidiary Guarantor shall be released from all its
obligations under its Subsidiary Guaranty.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the
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types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 180 days after the date of acquisition, issued
by a Person (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time
as of which any investment therein is made of "P-2" (or higher) according to
Moody's Investors Service, Inc. or "A-2" (or higher) according to Standard and
Poor's Ratings Group, and (v) investments in securities with maturities of six
months or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Total Assets" of the Company means the total consolidated assets of the
Company and its Restricted Subsidiaries, as shown on the most recent balance
sheet of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien
on any property of, the Company or any other Subsidiary of the Company that is
not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000
or less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under "--Certain
Covenants--Limitation on Restricted Payments". The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could Incur $1.00 of additional Indebtedness under paragraph (a) of
the covenant described under "--Certain Covenants--Limitation on Indebtedness"
and (y) no Default shall have occurred and be continuing. Any such designation
by the Board of Directors shall be evidenced by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by
other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned
by the Company or one or more Wholly Owned Subsidiaries.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company or a Subsidiary Guarantor
may Incur Indebtedness if, on the date of such Incurrence and after giving
effect thereto, the
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Consolidated Coverage Ratio equals or exceeds (i) 2.0 to 1.0, if such
Indebtedness is Incurred on or prior to September 30, 1999, (ii) 2.25 to
1.0, if such Indebtedness is Incurred after September 30, 1999 and on or
prior to September 30, 2001, and (iii) 2.5 to 1.0 if such Indebtedness is
Incurred after September 30, 2001.
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary may Incur the following Indebtedness:
(1) Indebtedness of the Company Incurred pursuant to any Credit
Facility, so long as the aggregate principal amount of all
Indebtedness outstanding under all Credit Facilities does not,
at any one time, exceed the aggregate amount of borrowing
availability as of such date under all Credit Facilities that
determine availability on the basis of a borrowing base or other
asset-based calculation; provided, however, that in no event
shall the aggregate principal amount of Indebtedness Incurred
pursuant to this clause (1) outstanding at any one time exceed
$250.0 million; provided further, however, that if the Company
or a Subsidiary Guarantor Incurs any Indebtedness pursuant to
this clause (1) that would cause the total principal amount of
Indebtedness outstanding under this clause (1) to exceed an
amount equal to $150.0 million (less the aggregate amount of all
Net Available Cash of Asset Dispositions applied to reduce
Senior Indebtedness pursuant to clause (a)(i)(A) of the covenant
described under the caption "--Limitation on Sales of Assets and
Subsidiary Stock"), the Consolidated Coverage Ratio on the date
of such Incurrence must be at least 2.0 to 1.0;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness (other than to the
Company or another Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof;
(3) The Notes and the Subsidiary Guaranties;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this
covenant);
(5) Indebtedness or Preferred Stock of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than
Indebtedness or Preferred Stock Incurred in connection with, or
to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became
a Restricted Subsidiary or was acquired by the Company);
provided, however, that on the date of such acquisition and
after giving effect thereto, the Consolidated Coverage Ratio
equals or exceeds (i) 1.8 to 1.0, if such Indebtedness is
Incurred on or prior to September 30, 1999, (ii) 2.05 to 1.0, if
such Indebtedness is Incurred after September 30, 1999 and on or
prior to September 30, 2001, and (iii) 2.3 to 1.0, if such
Indebtedness is Incurred after September 30, 2001.
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4), (5)
above, this clause (6) or clause (7) or (13) below; provided,
however, that to the extent such Refinancing Indebtedness
directly or indirectly Refinances Indebtedness or Preferred
Stock of a Restricted Subsidiary described in clause (5), such
Refinancing Indebtedness shall be Incurred only by such
Restricted Subsidiary or the Company;
(7) Indebtedness of the Company or a Restricted Subsidiary
represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or
cost of construction or
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improvement of property used in an Oil and Gas Business and in
each case Incurred no later than 365 days after the date of such
acquisition or the date of completion of such construction or
improvement; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (7) in any single
calendar year shall not exceed $15.0 million;
(8) Indebtedness with respect to Production Payments; provided,
however, that any such Indebtedness shall be Limited Recourse
Indebtedness; provided further, however, that the Net Present
Value of the reserves related to such Production Payments shall
not exceed 30% of the Total Assets of the Company at the time of
Incurrence;
(9) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company
and its Restricted Subsidiaries pursuant to the Indenture;
(10) Indebtedness under Oil and Gas Hedging Contracts and Currency
Agreements entered into in the ordinary course of business for the
purpose of limiting risks that arise in the ordinary course of
business of the Company;
(11) Indebtedness in respect of letters of credit issued for the
benefit of the Company or any of its Restricted Subsidiaries to
the extent they are issued in connection with the ordinary course
of business of the Company and its Restricted Subsidiaries,
Incurred in an aggregate principal amount which, when taken
together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (11) and then outstanding, does
not exceed $15.0 million;
(12) Indebtedness of the Company or a Restricted Subsidiary Incurred
to finance capital expenditures (or Refinancings thereof) in an
aggregate principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to
this clause (12) and then outstanding, does not exceed $10.0
million;
(13) Indebtedness of the Company or a Restricted Subsidiary Incurred
for the purpose of financing all or any part of the cost of
acquiring oil and gas reserves, another Person (other than a
Person that was, immediately prior to such acquisition, a
Subsidiary of the Company) engaged in the Oil and Gas Business or
all or substantially all the assets of such a Person; provided,
however, that on the date of such Incurrence and after giving
effect thereto, the Consolidated Coverage Ratio equals or exceeds
(i) 1.8 to 1.0, if such Indebtedness is Incurred on or prior to
September 30, 1999, (ii) 2.05 to 1.0, if such Indebtedness is
Incurred after September 30, 1999 and on or prior to September 30,
2001, and (iii) 2.3 to 1.0 if such Indebtedness is Incurred after
September 30, 2001; and
(14) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company
and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (1)
through (13) above or paragraph (a)) does not exceed the greater
of 6% of Adjusted Consolidated Net Tangible Assets as of the end
of the most recent fiscal year ending at least 90 days prior to
the date of such Incurrence and $15.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds
thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to the Notes to
at least the same extent as such Subordinated Obligations; provided,
however, that this paragraph (c) shall not prohibit the Company from
refinancing at maturity any of its Subordinated Obligations outstanding on
the Issue Date; provided, further, however, that this paragraph (c) shall
not prohibit the Refinancing of the Company's 7 7/8% Convertible
Subordinated Notes due 1999, provided that within 30 days thereafter the
Company receives $27.0 million Net Cash Proceeds from the exercise of the
Contour Option.
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(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in its
sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not,
and the Company shall not permit any Subsidiary Guarantor to, Incur (i) any
Indebtedness if such Indebtedness is subordinate or junior in ranking in
any respect to any Senior Indebtedness of such Person, unless such
Indebtedness is Senior Subordinated Indebtedness of such Person or is
expressly subordinated in right of payment to Senior Subordinated
Indebtedness of such Person or (ii) any Secured Indebtedness that is not
Senior Indebtedness of such Person unless contemporaneously therewith
effective provision is made to secure the Notes or the relevant Subsidiary
Guaranty equally and ratably with such Secured Indebtedness for so long as
such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described
under "--Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during
the period (treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the Notes are
originally issued to the end of the most recent fiscal quarter ending at least
45 days prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B)
the aggregate Net Cash Proceeds received by the Company from the issuance or
sale of its Capital Stock (other than Disqualified Stock) subsequent to the
Issue Date (other than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for the benefit of
their employees); (C) the aggregate Net Cash Proceeds received by the Company
from the issue or sale subsequent to the Issue Date of its Capital Stock
(other than Disqualified Stock) to an employee stock ownership plan; provided,
however, that if such employee stock ownership plan incurs any Indebtedness
with respect thereto, such aggregate amount shall be limited to an amount
equal to any increase in the Consolidated Net Worth of the Company resulting
from principal repayments made by such employee stock ownership plan with
respect to such Indebtedness; (D) the amount by which Indebtedness of the
Company is reduced on the Company's balance sheet upon the conversion or
exchange (other than by a Subsidiary of the Company) subsequent to the Issue
Date, of any Indebtedness of the Company convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less the amount
of any cash, or the fair value of any other property, distributed by the
Company upon such conversion or exchange); and (E) an amount equal to the sum
of (i) the net reduction in Investments in Unrestricted Subsidiaries resulting
from dividends, repayments of loans or advances or other transfers of assets,
in each case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated
a Restricted Subsidiary; provided, however, that the foregoing sum shall not
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified
Stock and other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees);
provided, however, that (A) such purchase or redemption shall be excluded in
the calculation of the amount of Restricted Payments
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and (B) the Net Cash Proceeds from such sale shall be excluded from the
calculation of amounts under clause (3)(B) of paragraph (a) above (but only to
the extent that such Net Cash Proceeds were used to purchase or redeem such
Capital Stock as provided in this clause (i)); (ii) any purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value of
Subordinated Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness of the Company which is
permitted to be Incurred pursuant to the covenant described under
"--Limitation on Indebtedness"; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments; (iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied with
this covenant; provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments; (iv) the repurchase of
shares of, or options to purchase shares of, common stock of the Company or
any of its Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted transferees
of such employees, former employees, directors or former directors), pursuant
to the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount of
such repurchases shall not exceed $1.0 million in any calendar year and $6.0
million in the aggregate; provided further, however, that such repurchases
shall be excluded in the calculation of the amount of Restricted Payments; (v)
amounts paid to holders of the Company's Convertible Exchangeable Preferred
Stock to the extent such amounts do not exceed the amount of dividends in
arrears through and including November 1, 1996 in respect of such Convertible
Exchangeable Preferred Stock; provided, however, that at the time of payment
of such amounts, no Default shall have occurred and be continuing (or result
therefrom); provided further, however, that the amount of such amounts shall
be excluded in the calculation of the amount of Restricted Payments; (vi)
dividends paid from time to time in respect of the Company's Convertible
Exchangeable Preferred Stock (other than amounts permitted by clause (v)
above); provided, however, that at the time of payment of such dividends, no
Default shall have occurred and be continuing (or result therefrom); provided
further, however, that the amount of such dividends shall be included in the
calculation of the amount of Restricted Payments; or (vii) other Restricted
Payments in an aggregate amount not to exceed $10.0 million; provided,
however, that such Restricted Payment shall be excluded in the calculation of
the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness owed to the Company or a Restricted Subsidiary,
(b) to make any loans or advances to the Company or a Restricted Subsidiary or
(c) to transfer any of its property or assets to the Company or a Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue Date; (ii) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an
agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
on or prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company) and outstanding on such date; (iii) any encumbrance
or restriction pursuant to an agreement effecting a Refinancing of
Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the extent
such provisions restrict the transfer of the lease or the property leased
thereunder; (v) in the case of clause (c) above,
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restrictions contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages; and (vi) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of
all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) In the event and to
the extent that the Net Available Cash received by the Company or any
Restricted Subsidiary from one or more Asset Dispositions occurring on or
after the Issue Date in any period of 12 consecutive months exceeds 10% of
Adjusted Consolidated Assets as of the beginning of such 12-month period, then
the Company shall (i) within 180 days (in the case of (A) below) or 360 days
(in the case of (B) below) after the date such Net Available Cash so received
exceeds such 10% of Adjusted Consolidated Assets (A) apply an amount equal to
such excess Net Available Cash to repay Senior Indebtedness or Indebtedness of
a Restricted Subsidiary, in each case owing to a Person other than the Company
or any Affiliate of the Company or (B) invest an equal amount, or the amount
not so applied pursuant to clause (A), in Additional Assets or a Permitted
Business Investment or (ii) apply such excess Net Available Cash (to the
extent not applied pursuant to clause (i)) as provided in the following
paragraphs of the covenant described hereunder. The amount of such excess Net
Available Cash required to be applied during the applicable period and not
applied as so required by the end of such period shall constitute "Excess
Proceeds".
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as
defined below) totals at least $10.0 million, the Company must, not later than
the fifteenth Business Day of such month, make an offer (an "Excess Proceeds
Offer") to purchase from the Holders on a pro rata basis an aggregate
principal amount of Notes equal to the Excess Proceeds (rounded down to the
nearest multiple of $1,000) on such date, at a purchase price equal to 100% of
the principal amount of such Notes, plus, in each case, accrued interest (if
any) to the date of purchase (the "Excess Proceeds Payment").
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in the event that such Excess Proceeds are received by the Company
under the covenant described hereunder and the Company is required to
repurchase Notes as described above. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
(b) In the event of the transfer of substantially all (but not all) the
property and assets of the Company as an entirety to a Person in a transaction
permitted by the covenant described under "--Merger and Consolidation", the
Successor Company (as defined therein) shall be deemed to have sold the
properties and assets of the Company not so transferred for purposes of the
covenant described hereunder, and shall comply with the provisions of the
covenant described hereunder with respect to such deemed sale as if it were an
Asset Disposition and the Successor Company shall be deemed to have received
Net Available Cash in an amount equal to the fair market value (as determined
in good faith by the Board of Directors) of the properties and assets not so
transferred or sold.
(c) In the event of an Asset Disposition by the Company or any Restricted
Subsidiary that consists of a sale of hydrocarbons and results in Production
Payments, the Company or such Restricted Subsidiary shall apply an amount
equal to the Net Available Cash received by the Company or such Restricted
Subsidiary to (i) reduce Senior Indebtedness of the Company or Indebtedness of
a Restricted Subsidiary, in each case owing to a Person other than the Company
or any Affiliate of the Company, within 180 days after the date such Net
Available Cash is so received, or (ii) invest in Additional Assets or a
Permitted Business Investment within 360 days after the date such Net
Available Cash is so received.
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Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $1.0 million, is set forth in
writing and has been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction or (3) if
such Affiliate Transaction involves an amount in excess of $10.0 million, has
been determined by a nationally recognized investment banking firm to be fair,
from a financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
sale of hydrocarbons or other mineral products or the entering into or
performance of Oil and Gas Hedging Contracts, gas gathering, transportation or
processing contracts or oil or natural gas marketing or exchange contracts, in
each case, in the ordinary course of business, so long as the terms of any
such transaction are approved by a majority of the members of the Board of
Directors who are disinterested with respect to such transaction as being the
most favorable of at least (x) two bids, quotes or proposals, at least one of
which is from a Person that is not an Affiliate of the Company (in the event
that the Company determines in good faith that it is able to obtain only two
bids, quotes or proposals with respect to such transaction) or (y) three bids,
quotes or proposals, at least two of which are from Persons that are not
Affiliates of the Company (in all other circumstances), (ii) the sale to an
Affiliate of the Company of Capital Stock of the Company that does not
constitute Disqualified Stock, (iii) transactions contemplated by any
employment agreement or other compensation plan or arrangement entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with industry practice, (iv) transactions between or
among the Company and its Restricted Subsidiaries, (v) Restricted Payments and
Permitted Investments that are permitted by the provisions of the Indenture
described above under the caption "--Limitation on Restricted Payments", (vi)
the transactions described in the Offering Memorandum under the caption
"Certain Transactions" and (vii) loans or advances to employees in the
ordinary course of business and approved by the Company's Board of Directors
in an aggregate principal amount not to exceed $1.0 million outstanding at any
one time.
Change of Control. (a) Upon the occurrence of a Change of Control, each
Holder shall have the right to require that the Company repurchase such
Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date), in accordance
with the terms contemplated in paragraph (b) below.
(b) Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on the relevant
record date to receive interest on the relevant interest payment date); (2)
the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to
this covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
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The Change of Control purchase feature is a result of negotiations between
the Company and the Placement Agents. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings. Restrictions on the ability of the Company to incur additional
Indebtedness are contained in the covenants described under "--Limitation on
Indebtedness", "--Limitation on Liens" and "--Limitation on Sale/Leaseback
Transactions". Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding.
Except for the limitations contained in such covenants, however, the Indenture
will not contain any covenants or provisions that may afford holders of the
Notes protection in the event of a highly leveraged transaction.
For purposes of clause (iii) of the definition of "Change of Control"
included in "--Certain Definitions" and in the Indenture, under New York law,
the governing law of the Indenture, there is no consistently predictable
measure of what constitutes the sale of "all or substantially all" of the
property of the Company. As a result, the Holders and the Company may not
agree on whether a particular transaction constitutes the sale of "all or
substantially all" of the property of the Company such that the Company would
be obligated under the Indenture to make an offer to purchase the Notes, in
which case the Holders may have the burden of proving that the transaction
constitutes the sale of "all or substantially all" of the property of the
Company.
The New Credit Agreement prohibits the Company from purchasing any Notes and
also provides that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a
default under the Credit Agreement. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to the Holders of
Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if
the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders of Notes following the occurrence of a Change of Control may be
limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
The provisions under the Indenture relating to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may
be waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
The Company will not be required to make an offer to purchase the Notes as a
result of a Change of Control if a third party (i) makes such offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture relating to the Company's obligations to make such an
offer and (ii) purchases all Notes validly tendered and not withdrawn under
such an offer.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, the Company and its Restricted Subsidiaries would own less
than 20% of the Voting Stock
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of such Restricted Subsidiary and have no greater economic interest in such
Restricted Subsidiary, (iii) if, immediately after giving effect to such
issuance, sale or other disposition, the Company and its Restricted
Subsidiaries would own greater than 80% of the Voting Stock of such Restricted
Subsidiary and have no lesser economic interest in such Restricted Subsidiary
or (iv) to the extent such shares represent directors' qualifying shares or
shares required by applicable law to be held by a Person other than the
Company or Restricted Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital
Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, to secure any Indebtedness that is not Senior
Indebtedness of the Company or such Restricted Subsidiary, other than
Permitted Liens, without effectively providing that the Notes or the
applicable Subsidiary Guaranty shall be secured equally and ratably with (or
prior to) the obligations so secured for so long as such obligations are so
secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "--Limitation on Indebtedness" and
(B) create a Lien on such property securing such Attributable Debt without
equally and ratably securing the Notes or the applicable Subsidiary Guaranty
pursuant to the covenant described under "--Limitation on Liens", (ii) the net
proceeds received by the Company or any Restricted Subsidiary in connection
with such Sale/Leaseback Transaction are at least equal to the fair value (as
determined by the Board of Directors) of such property and (iii) the Company
applies the proceeds of such transaction in compliance with the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock".
Future Guarantors. Promptly after the end of the first fiscal year in which
any Restricted Subsidiary (other than the Programs), at the end of such fiscal
year, has total net assets (as set forth on the balance sheet of such
Subsidiary prepared in accordance with GAAP) equal to or greater than the
greater of $2.5 million and one percent (1%) of Adjusted Consolidated Net
Tangible Assets, the Company shall cause such Restricted Subsidiary to issue a
Subsidiary Guaranty for the benefit of the holders of the Notes.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall
be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor
Company (if not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Subsidiary as a result of such transaction as having
been Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing, (iii)
immediately after giving effect to such transaction, the Successor Company
would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) or, if applicable, paragraph (b)(13), of the covenant described
under "--Limitation on Indebtedness", (iv) immediately after giving effect to
such transaction, the Successor Company shall have Adjusted Consolidated Net
Tangible Assets in an amount that is not less than the Adjusted Consolidated
Net Tangible Assets of the Company immediately prior to such transaction; and
(v) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture;
provided, however, that clauses (iii) and (iv) shall not be applicable to any
such transaction solely between the Company and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in
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the case of a conveyance, transfer or lease of all or substantially all its
assets shall not be released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or series
of transactions, all or substantially all its assets to any Person unless: (i)
the resulting, surviving or transferee Person shall expressly assume by a
guaranty agreement, in a form acceptable to the Trustee, all the obligations
of such Subsidiary Guarantor, if any, under its Subsidiary Guaranty; (ii)
immediately after giving effect to such transaction or transactions on a pro
forma basis (and, treating any Indebtedness which becomes an obligation of the
resulting, surviving or transferee Person as a result of such transaction as
having been issued by such Person at the time of such transaction), no Default
shall have occurred and be continuing; and (iii) the Company delivers to the
Trustee an Officer's Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such guaranty agreement, if any,
complies with the Indenture. Notwithstanding the foregoing, upon certain
consolidations, mergers, conveyances, transfers and leases, the Subsidiary
Guarantor and its successor or transferee shall be released from all of such
Subsidiary Guarantor's obligations under its Subsidiary Guaranty as described
in the definition of "Guarantee".
SEC Reports. Notwithstanding that the Company may not at any time be subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall file with the SEC and provide the Trustee and Noteholders with
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act (excluding however
information with respect to benefit plans and long-term compensation
arrangements) and applicable to a U.S. corporation subject to such Sections,
such information, documents and other reports to be so filed and provided at
the times specified for the filing of such information, documents and reports
under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "--Certain Covenants--Merger and Consolidation" above, (iv) the failure
by the Company to comply for 30 days after notice with any of its obligations
in the covenants described above under "--Certain Covenants", "--Limitation on
Indebtedness", "--Limitation on Restricted Payments", "--Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "--Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase
Notes), "--Limitation on Affiliate Transactions", "--Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries", "--Change of Control"
(other than a failure to purchase Notes), "--Limitation on Liens",
"--Limitation on Sale/Leaseback Transactions", "--Future Guarantors" or
"--SEC Reports", (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Significant Subsidiary (other than Limited Recourse
Indebtedness) is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $10.0 million
(the "cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10.0 million is rendered against the Company or a Significant
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision") or (ix) a Subsidiary Guaranty ceases to be in full
force and effect (other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guaranty if such default continues for a period of 10 days after
notice thereof to the Company. However, a default under clauses (iv), (v) and
(viii) will not constitute an Event of Default until the Trustee or the holders
of 25% in principal amount of the outstanding Notes notify the Company of the
default and the Company does not cure such default within the time specified
after receipt of such notice.
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If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes
unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
holder of a Note may pursue any remedy with respect to the Indenture or the
Notes unless (i) such holder has previously given the Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in principal
amount of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt thereof and the
offer of security or indemnity and (v) the holders of a majority in principal
amount of the outstanding Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any other holder of
a Note or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether
the signers thereof know of any Default that occurred during such fiscal year.
The Company also is required to deliver to the Trustee, within 30 days after
the occurrence thereof, written notice of any event which would constitute
certain Defaults, their status and what action the Company is taking or
proposes to take in respect thereto.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or noncompliance with any provisions may also
be waived with the consent of the holders of a majority in principal amount of
the Notes then outstanding. However, without the consent of each holder of an
outstanding Note affected thereby, no amendment may, among other things, (i)
reduce the amount of Notes whose holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note,
(iii) reduce the principal of or extend the Stated Maturity of any Note, (iv)
reduce the premium payable upon the redemption of any Note or change the time
at which any Note may be redeemed as described under "--Optional Redemption",
(v) make any Note payable in money other than that stated in the Note, (vi)
impair the right of any holder of the Notes to receive payment of principal of
and interest on such holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
holder's Notes, (vii) make any change in the amendment provisions which
require each holder's consent or in the waiver provisions, (viii) make any
change to the subordination provisions of the
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Indenture that would adversely affect the Noteholders or (ix) make any change
in any Subsidiary Guaranty that could adversely affect such holder.
Without notice to or the consent of any holder of the Notes, the Company and
Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to make any change to the
subordination provisions that would limit or terminate the benefits available
to any holder of Senior Indebtedness (or its Representative) to add guarantees
with respect to the Notes, to secure the Notes, to add to the covenants of the
Company for the benefit of the holders of the Notes or to surrender any right
or power conferred upon the Company, to make any change that does not
adversely affect the rights of any holder of the Notes or to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the Trust Indenture Act. However, no amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Company may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "--Defaults"
above and the limitations contained in clauses (iii) and (iv) under "--Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (vi), (vii) (with
respect only to Significant Subsidiaries) or (viii) under "--Defaults" above
or because of the failure of the Company to comply with clause (iii) or (iv)
under the first of paragraph of "--Certain Covenants--Merger and
Consolidation" above. If the Company exercises its legal defeasance option or
its covenant defeasance option each Subsidiary Guarantor, if any, will be
released from all its obligations with respect to its Subsidiary Guaranty.
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In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel
to the effect that holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal
Revenue Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the Indenture.
BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes initially will be represented by one permanent global
Exchange Note in definitive, fully registered form without interest coupons
(the "Global Exchange Note") and will be deposited with the Trustee as
custodian for, and registered in the name of, a nominee of DTC.
Ownership of beneficial interests in the Global Exchange 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 Exchange Note will be shown on, and the transfer of that ownership will
be effected only through, records maintained by DTC or its nominee (with
respect to interests of participants) and the records of participants (with
respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Exchange Notes represented by such
Global Exchange Note for all purposes under the Indenture and the Notes. No
beneficial owner of an interest in a Global Exchange Note will be able to
transfer that interest except in accordance with DTC's applicable procedures,
in addition to those provided for under the Indenture and, if applicable,
those of a participant through which the Exchange Note is held.
Payments of the principal of, and interest on, the Global Exchange Note will
be made to DTC or its nominee, as the case may be, as the registered owner
thereof. Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Exchange Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Exchange
Note as shown on the
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records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in the Global Exchange Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by a
holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Exchange Note is credited and
only in respect of such portion of the aggregate principal amount of an
Exchange Note as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Notes, DTC
will exchange the applicable Global Exchange Note for Certificated Notes,
which it will distribute to its participants.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Note among
participants of DTC, it is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
The Indenture requires that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the account specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, or if there is an Event of Default under the Notes,
the Company will issue Certificated Notes in exchange for the Global Exchange
Note.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States federal
income tax consequences of the purchase, ownership and disposition of the
Notes to initial purchasers of Outstanding Notes who are United States Holders
(as defined below) and the principal United States federal income and estate
tax consequences of the purchase, ownership, exchange and disposition of the
Notes to initial purchasers of Outstanding Notes who are Foreign Holders (as
defined below). This discussion was prepared by representatives of the Company
and is based on currently existing provisions of the Code, existing, temporary
and proposed Treasury regulations promulgated thereunder, and administrative
and judicial interpretations thereof, all as in effect or proposed on the date
hereof and all of which are subject to change, possibly with retroactive
effect, or different interpretations. This discussion does not address the tax
consequences to subsequent purchasers of Notes and is limited to purchasers of
Outstanding Notes who hold the Notes as capital assets, within the meaning of
section 1221 of the Code. This discussion also does not address the tax
consequences to Foreign Holders that are subject to United States federal
income tax on a net basis on income realized with respect to a Note because
such income is effectively connected with the conduct of a U.S. trade or
business. Such Foreign Holders are generally taxed in a similar manner to
United States Holders, but certain special rules do apply. Moreover, this
discussion is for general information only and does not address all of the tax
consequences that may be relevant to particular initial purchasers of
Outstanding Notes in light of their personal circumstances or to certain types
of initial purchasers of Outstanding Notes (such as certain financial
institutions, insurance companies, tax-exempt entities, dealers in securities
or persons who have hedged the risk of owning a Note).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of a Note
that is, for United States federal income tax purposes, (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof or (c) an estate or trust the income of which is
subject to United States federal income taxation regardless of source.
Payment of Interest on Notes. Interest paid or payable on a Note will be
taxable to a United States Holder as ordinary interest income, generally at
the time it is received or accrued, in accordance with such holder's regular
method of accounting for United States federal income tax purposes.
Sale, Exchange or Retirement of the Notes. The exchange of an Outstanding
Note by a United States Holder for an Exchange Note should not constitute a
taxable exchange. For purposes of determining gain or loss on the subsequent
sale or exchange of the Exchange Notes, a Holder's basis in the Exchange Notes
should be the same as the Holder's basis in the Outstanding Notes exchanged
therefor. Holders should be considered to have held the Exchange Notes from
the time of their original acquisition of the Outstanding Notes.
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, a United States Holder generally will recognize taxable
gain or loss equal to the difference between the sum of cash plus the fair
market value of all other property received on such disposition (except to the
extent such cash or property is attributable to accrued but unpaid interest,
which will be taxable as ordinary income) and such United States Holder's
adjusted tax basis in the Note. A United States Holder's adjusted tax basis in
a Note generally will equal the cost of the Note to such United States Holder,
less any principal payments received by such United States Holder.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the
time of such disposition, the United States Holder's holding period for the
Note is more than one year.
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Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on a Note, and to proceeds of the sale or
redemption of a Note before maturity. The Company, its agent, a broker, the
Trustee or any paying agent, as the case may be, will be required to withhold
from any payment that is subject to backup withholding a tax equal to 31% of
such payment if a United States Holder fails to furnish his taxpayer
identification number (social security or employer identification number),
certify that such number is correct, certify that such holder is not subject
to backup withholding or otherwise comply with the applicable requirements of
the backup withholding rules. Certain United States Holders, including all
corporations, are not subject to backup withholding and information reporting
requirements. Any amounts withheld under the backup withholding rules from a
payment to a United States Holder will be allowed as a credit against such
United States Holder's United States federal income tax and may entitle the
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service ("IRS").
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder of a Note that is,
for United States federal income tax purposes, (a) a nonresident alien
individual, (b) a foreign corporation, (c) a nonresident alien fiduciary of a
foreign estate or trust or (d) a foreign partnership.
Payment of Interest on Notes. In general, payments of interest received by a
Foreign Holder will not be subject to a United States federal withholding tax,
provided that (i)(a) the Foreign Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote, (b) the Foreign Holder is not a controlled
foreign corporation that is related to the Company actually or constructively
through stock ownership, (c) the Foreign Holder is not a bank receiving
interest described in Section 881(c)(3)(A) of the Code, and (d) either (I) the
beneficial owner of the Note, under penalties of perjury, provides the Company
or its agent with such beneficial owner's name and address and certifies on
IRS Form W-8 (or a suitable substitute form) that it is not a United States
Holder or (II) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "financial institution") holds the Note and provides a
statement to the Company or its agent under penalties of perjury in which it
certifies that such an IRS Form W-8 (or a suitable substitute) has been
received by it from the beneficial owner of the Notes or qualifying
intermediary and furnishes the Company or its agent a copy thereof or (ii) the
Foreign Holder is entitled to the benefits of an income tax treaty under which
interest on the Notes is exempt from United States withholding tax and the
Foreign Holder or such Foreign Holder's agent provides a properly executed IRS
Form 1001 claiming the exemption. Payments of interest not exempt from United
States federal withholding tax as described above will be subject to such
withholding tax at the rate of 30% (subject to reduction under an applicable
income tax treaty).
Sale, Exchange or Retirement of the Notes. The exchange of an Outstanding
Note by a Foreign Holder for an Exchange Note should not constitute a taxable
exchange. For purposes of determining gain or loss on the subsequent sale or
exchange of the Exchange Notes, a Holder's basis in the Exchange Notes should
be the same as the Holder's basis in the Outstanding Notes exchanged therefor.
Holders should be considered to have held the Exchange Notes from the time of
their original acquisition of the Outstanding Notes. Moreover, a Foreign
Holder generally will not be subject to United States federal income tax (and
generally no tax will be withheld) with respect to gain realized on the sale,
exchange, redemption, retirement at maturity or other disposition of a Note
unless the Foreign Holder is an individual who is present in the United States
for a period or periods aggregating 183 or more days in the taxable year of
the disposition and, generally, either has a "tax home" or an "office or other
fixed place of business" in the United States.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made
by the Company or a paying agent to Foreign Holders if the certification
described above under "--United States Federal Income Taxation of Foreign
Holders--Payment of Interest on Notes" is received, provided that the payor
does not have actual knowledge that the holder is a United States Holder. If
any payments of principal and interest are made to the beneficial owner of a
Note by or
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through the foreign office of a foreign custodian, foreign nominee or other
foreign agent of such beneficial owner, or if the foreign office of a foreign
"broker" (as defined in applicable Treasury regulations) pays the proceeds of
the sale of a Note or a coupon to the seller thereof, backup withholding and
information reporting will not apply. Information reporting requirements (but
not backup withholding) will apply, however, to a payment by a foreign office
of a broker that is a United States person, that derives 50% or more of its
gross income for certain periods from the conduct of a trade or business in
the United States, or that is a "controlled foreign corporation" (generally, a
foreign corporation controlled by certain United States shareholders) with
respect to the United States unless the broker has documentary evidence in its
records that the holder is a Foreign Holder and certain other conditions are
met or the holder otherwise establishes an exemption. Payment by a United
States office of a broker is subject to both backup withholding at a rate of
31% and information reporting unless the holder certifies under penalties of
perjury that it is a Foreign Holder or otherwise establishes an exemption.
The procedures described above for withholding tax on interest payments, and
some of the associated backup withholding and information reporting rules, are
currently the subject of new proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules. The proposed regulations, if adopted in their current form,
would not substantially change the treatment of Foreign Holders described
above, except that a Form W-8 generally would be required for certification
purposes.
Federal Estate Taxes. Subject to applicable estate tax treaty provisions,
Notes held at the time of death (or Notes transferred before death but subject
to certain retained rights or powers) by an individual who at the time of
death is a Foreign Holder will not be included in such Foreign Holder's gross
estate for United States federal estate tax purposes provided that the
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
or hold the Notes in connection with a U.S. trade or business.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that
it will deliver a prospectus in connection with any resale of those Exchange
Notes. The Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Outstanding Notes where the Outstanding Notes were
acquired by the broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any resale. In
addition, until , 1997, all dealers effecting transactions in
the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of methods of resale, at market prices prevailing at the time of
resale, at prices related to those prevailing market prices or negotiated
prices. Any such resale may be made directly to the purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any other broker-dealer or the purchasers of any Exchange
Notes. Any broker-dealer that resells the Exchange Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
those persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by 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.
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For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests those documents in the
Letter of Transmittal. The Company has agreed to pay certain expenses incident
to the Exchange Offer (including the expenses of one counsel for the Holders
of the Notes), other than commissions or concession of any brokers or dealers,
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
on receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
request the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to the broker-dealer), the broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct the misstatement or omission and has furnished copies of the amended
or supplemental Prospectus to the broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the 90-day
period referred to above by the number of days during the period from and
including the date of the giving of the notice to and including when broker-
dealers shall have received copies of the supplemented or amended Prospectus
necessary to permit resales of the Exchange Notes.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes are being passed
upon for the Company by Fulbright & Jaworski L.L.P.
EXPERTS
In connection with the Contour Transaction, the Company dismissed Ernst &
Young LLP ("E&Y") as its principal accountant, effective February 15, 1996. On
the same date, the Company engaged Deloitte & Touche LLP ("D&T") as its
principal accountant to audit its financial statements. The change in
accountants was approved by the audit committee of the Company's board of
directors, contingent upon the closing of the Contour Transaction. Neither of
E&Y's reports on the Company's financial statements for the years ended
December 31, 1994 and 1993 contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. During the last two years and the interim period prior
to the change in accountants, (i) the Company had no disagreements with E&Y on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, (ii) E&Y did not advise the Company
of any "reportable event" as defined in Regulation S-K under the Securities
Exchange Act of 1934 and (iii) the Company did not consult with D&T on any
accounting, auditing, financial reporting or any other matters.
D&T audited the accounts and financial statements of the Company for the
year ended December 31, 1995 included in this Prospectus, and E&Y audited the
accounts and financial statements of the Company for the years ended December
31, 1994 and 1993 included in this Prospectus. The Company has been informed
by each of D&T and E&Y that neither firm nor any of its respective partners or
employees has any financial interest, direct or indirect, in the Company or in
any of its subsidiaries and that during its association, neither firm nor any
of its respective partners has had any connection with the Company or any of
its subsidiaries in the capacity of promoter, underwriter, voting trustee,
director, officer or other employee.
The consolidated financial statements of Kelley Oil & Gas Corporation as of
December 31, 1995 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report thereon appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
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The consolidated financial statements of Kelley Oil & Gas Corporation for
the years ended December 31, 1994 and 1993 included in this Prospectus have
been audited by Ernst & Young LLP, independent auditors, as stated in their
report thereon appearing herein and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Kelley Oil & Gas Partners, Ltd. for
the years ended December 31, 1994 and 1993 included in this Prospectus have
been audited by Ernst & Young LLP, independent auditors, as stated in their
report thereon appearing herein and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
INDEPENDENT PETROLEUM ENGINEERS
The estimated reserve evaluations and related calculations of H. J. Gruy &
Associates, Inc., independent petroleum engineers, have been included herein
in reliance upon the authority of such firm as an expert in petroleum
engineering.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to
the securities offered by this Prospectus. Certain of the information
contained in the Registration Statement is omitted from this Prospectus, and
reference is hereby made to the Registration Statement and exhibits and
schedules relating thereto for further information with respect to the Company
and the securities offered by this Prospectus. The Company is subject to
certain periodic reporting and other informational requirements of the
Exchange Act, and, in accordance therewith, will file certain reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information are available for inspection at, and copies
of these materials may be obtained on payment of the fees prescribed therefor
by the rules and regulations of the Commission from the Commission at its
principal offices located at Judiciary Plaza, 450 Fifth Street, Room 1024,
Washington, D.C. 20549, and at the Regional Offices of the Commission located
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at 7 World Trade Center, Suite 1300, New York, New
York 10048. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be
filed with the Commission to the Trustee and the holders of the Outstanding
Notes and the Exchange Notes. The Company has agreed that, notwithstanding
that it may not remain subject to the periodic reporting requirements of the
Exchange Act, it will nonetheless continue to furnish information that would
be required by Section 13 of the Exchange Act to be filed by the Company
(excluding information with respect to benefit plans and long-term
compensation arrangements) to the Trustee and the holders of the Outstanding
Notes or Exchange Notes as if it were subject to those periodic reporting
requirements.
In addition, the Company has agreed that for so long as any of the Notes are
outstanding and are "restricted securities" within the meaning of Rule
144(a)(3) under the Securities Act, it will make available to any prospective
purchaser of the Notes or beneficial owner of the Notes in connection with any
sale thereof the information required by Rule 144A(d)(4) under the Securities
Act until such time as the Company has either exchanged the Outstanding Notes
for the Exchange Notes or until such time as the holders thereof have disposed
of the Outstanding Notes pursuant to an effective registration statement filed
by the Company.
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INCORPORATION OF CERTAIN DOCUMENTS
All documents filed by the Company pursuant to the Exchange Act, after the
date of this Prospectus and before the termination of the Registration
Statement of which this Prospectus is a part with respect to registration of
the Exchange Notes, shall be deemed to be incorporated by reference in this
Prospectus and be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained in this
Prospectus, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference, modifies or replaces such statement.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, on
written or oral request of that person, a copy of any or all of the documents
incorporated by reference herein, other than exhibits to those documents,
unless those exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates. Written or oral requests for
copies of these materials should be directed to: Kelley Oil & Gas Corporation,
601 Jefferson, Suite 1100 Houston, Texas 77002, Attention: Investor Relations,
telephone (713) 652-5200.
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GLOSSARY
BBL. One stock tank barrel, or 42 U.S. Gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet of natural gas.
BCFE. One billion cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"BEHIND PIPE" Hydrocarbons in a potentially producing horizon penetrated by
a wellbore, the production of which has been postponed pending the production
of hydrocarbons from another formation penetrated by the wellbore. These
hydrocarbons are classified as proved but non-producing reserves.
3-D SEISMIC. (Three-Dimensional Seismic) Seismic reflections from the
subsurface used to map strata in three dimensions.
"DEVELOPMENT COSTS" The costs incurred in preparing proved reserves for
production, i.e., costs incurred to obtain access to proved reserves and to
provide facilities for extracting, treating, gathering, and storing oil and
gas, but not including exploration costs.
"DEVELOPMENT WELL" A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"ESTIMATED FUTURE NET REVENUES" are the estimated net revenues (cash flows)
expected to be derived upon production and sale from proved oil and gas
reserves at a date indicated. Estimated future net revenues are computed after
giving effect to estimated future development and production costs at a date
indicated and assuming the continuation of existing economic conditions. The
calculation does not take into account the effect of various cash outlays,
including general and administrative costs and interest expense, and does not
give effect to estimated future income taxes.
"EXPLORATION COSTS" Costs incurred in exploring property. Exploration
involves identifying areas that may warrant examination and examining specific
areas, including drilling exploratory wells.
"GROSS ACRES" The total number of acres in which a working interest is
owned.
"GROSS WELLS" The total number of wells in which a working interest is
owned.
"LEASE OPERATING EXPENSES" The expenses of lifting oil and gas from a
producing formation to the surface, and the transportation and marketing
thereof, constituting part of the current operating expenses of a working
interest, and also including labor, superintendence, supplies, repairs,
maintenance, allocated overhead costs, ad valorem taxes and other expenses
incidental to production, but not including severance taxes or capital costs.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet of natural gas.
MCFE. One thousand cubic feet of natural gas equivalent (converting one
barrel of oil to six Mcf of natural gas based on commonly accepted rough
equivalency of energy content).
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million British Thermal Units.
MMCF. One million cubic feet of natural gas.
MMCFE. One million cubic feet of natural gas equivalent (see Mcfe for
equivalency).
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"NET ACRES" The sum of acres determined by adding the products of gross
acres in which there is an interest multiplied by the fractional working
interests of Kelley therein.
"NET WELLS" The sum of the fractional working interests owned by Kelley in
gross wells.
NYMEX. New York Mercantile Exchange.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES" An estimate of the present
value of the estimated future net revenues is calculated by discounting
estimated future net revenues at an annual rate of 10%, in accordance with SEC
practice, to determine their "present value". The present value is shown to
indicate the effect of time on the value of the revenue stream and should not
be construed as being the fair market value of the properties. Estimates of
future net cash revenues are made using oil and natural gas prices and costs
at the date indicated and held constant for the life of the reserves.
"PRODUCING WELL" or "PRODUCTIVE WELL" A well that is producing oil or
natural gas or that is capable of producing commercial quantities without
further capital expenditure.
"PRODUCTION EXPENSES" Lease operating expenses plus severance taxes.
"PROVED DEVELOPED RESERVES" Proved developed reserves are those quantities
of crude oil, natural gas and natural gas liquids that, upon analysis of
geological and engineering data, that can be expected with reasonable
certainty to be recoverable in the future from known oil and natural gas
reservoirs under existing economic and operating conditions. This
classification includes those: (a) which are expected to be recovered from
currently open and producing zones under continuation of existing equipment
and operating methods (proved developed producing reserves); and (b) which
consist of (i) reserves from wells that have been completed and tested but are
not yet producing due to lack of market or minor completion problems that
reasonably can be expected to be corrected, and (ii) reserves currently behind
pipe in existing wells which reasonably can be expected to be productive due
to both the well log characteristics and analogous production in the immediate
vicinity of the well (proved developed nonproducing reserves).
"PROVED RESERVES" Proved reserves are those estimated quantities of crude
oil, natural gas and other hydrocarbon liquids which, by analysis of
geological and engineering data, can be estimated with reasonable certainty to
be commercially recoverable in future years from known reservoirs and under
current economic conditions, operating methods and government regulations.
"PROVED UNDEVELOPED RESERVES" Proved undeveloped reserves are reserves that
are expected to be recovered from (a) new wells on undrilled acreage, (b)
deepening existing wells to a different reservoir or (c) where a relatively
large expenditure is required to (i) recomplete an existing well or (ii)
install production or transportation facilities for primary or improved
recovery projects.
"RESERVES TO PRODUCTION RATIO" Calculated by dividing the total proved
reserves as of a specific date by production for the twelve-month period
immediately preceding such date. This term is sometimes referred to as
"average reserve life" (in years) or "estimated reserve life" (in years) by
industry participants or followers.
"WORKING INTEREST" The interest in an oil and gas property (normally a
leasehold interest) that gives the owner the right to drill, produce and
conduct oil and gas operations on the property and to a share of production,
subject to all royalties, overriding royalties and other burdens and to all
costs of exploration, development and operations and all risks in connection
therewith.
112
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES:
Independent Auditors' Reports............................................ F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and unaudited
at September 30, 1996................................................... F-4
Consolidated Statements of Loss for the years ended December 31, 1993,
1994 and 1995 and unaudited for the nine months ended September 30, 1995
and 1996................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and unaudited for the nine months ended
September 30, 1995 and 1996............................................. F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1993, 1994 and 1995 and unaudited for the
nine months ended September 30, 1996.................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Unaudited Pro Forma Statement of Loss for the year ended December 31,
1995 ................................................................... F-30
Notes to Unaudited Pro Forma Financial Statement of Loss................. F-31
KELLEY OIL & GAS PARTNERS, LTD.:
Independent Auditors' Report............................................. F-32
Consolidated Balance Sheets at December 31, 1993 and 1994................ F-33
Consolidated Statements of Loss for the years ended December 31, 1993 and
1994 and unaudited for the period from January 1, 1995 through
February 7, 1995........................................................ F-34
Consolidated Statements of Cash Flows for the years ended December 31,
1993 and 1994 and unaudited for the period from January 1, 1995 through
February 7, 1995........................................................ F-35
Consolidated Statements of Changes in Partners' Equity for the years
ended December 31, 1993 and 1994 and unaudited for the period from
January 1, 1995 through February 7, 1995................................ F-36
Notes to Consolidated and Interim Financial Statements................... F-37
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kelley Oil & Gas Corporation
We have audited the accompanying consolidated balance sheet of Kelley Oil &
Gas Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of loss, cash flows, and stockholders' equity
(deficit) for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kelley Oil & Gas Corporation
and subsidiaries at December 31, 1995, and the results of their operations and
their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995 the
Company changed its method of accounting for the impairment of long-lived
assets to conform with Statement of Financial Accounting Standards No. 121.
DELOITTE & TOUCHE LLP
Houston, Texas
March 28, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kelley Oil & Gas Corporation
We have audited the accompanying consolidated balance sheet of Kelley Oil &
Gas Corporation and Subsidiaries (the "Company") as of December 31, 1994, and
the related consolidated statements of loss, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Kelley Oil & Gas Corporation and Subsidiaries at December 31, 1994, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Company
changed its method of accounting for oil and gas production activities.
Ernst & Young LLP
Houston, Texas
March 6, 1995
F-3
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents.................. $ 9,268 6,352 2,531
Accounts receivable........................ 11,059 13,753 16, 207
Accounts receivable--drilling programs..... 7,330 2,035 2,413
Prepaid expenses and other current assets.. 222 557 1,694
-------- -------- --------
Total current assets...................... 27,879 22,697 22,845
-------- -------- --------
Oil and gas properties, successful efforts
method:
Unproved properties, net.................. 1,430 13,050 13,342
Properties subject to amortization........ 129,883 287,970 330,091
Pipelines and other transportation assets,
at cost................................... 2,652 4,723 4,689
Furniture, fixtures and equipment.......... 1,665 1,233 1,468
-------- -------- --------
135,630 306,976 349,590
Less: Accumulated depreciation, depletion
and amortization.......................... (60,718) (178,334) (194,088)
-------- -------- --------
Total property and equipment.............. 74,912 128,642 155,502
-------- -------- --------
Other non-current assets (net of
accumulated amortization)................. 3,722 3 1,074
-------- -------- --------
TOTAL ASSETS............................... $106,513 151,342 179,421
======== ======== ========
LIABILITIES:
Accounts payable and accrued expenses...... $ 5,696 19,500 28,695
Accounts payable--drilling programs........ 15,924 12,430 11,212
Current maturities of long-term bank debt.. 2,471 -- --
-------- -------- --------
Total current liabilities................. 24,091 31,930 39,907
-------- -------- --------
Long-term bank debt........................ 26,480 22,000 7,000
Senior notes............................... -- 95,926 96,796
Convertible subordinated debentures........ 5,097 21,694 22,605
Convertible subordinated notes............. 5,665 25,360 26,948
-------- -------- --------
TOTAL LIABILITIES......................... 61,333 196,910 193,256
-------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1.50 par value, 10,000,
20,000 and 20,000 shares authorized at
December 31, 1994 and 1995 and September
30, 1996, respectively; 5,163, 4,304 and
1,746 shares issued and outstanding at
December 31, 1994 and 1995 and September
30, 1996, respectively (liquidation value
$53,750, $66,532 and $47,074,
respectively)............................. 7,743 6,456 2,618
Common stock, $.01 par value, 35,000,
100,000 and 200,000 shares authorized at
December 31, 1994 and 1995 and September
30, 1996, respectively; 17,685, 44,041 and
98,288 shares issued and outstanding at
December 31, 1994 and 1995 and September
30, 1996, respectively.................... 177 440 983
Additional paid-in capital................. 98,647 225,804 273,088
Retained deficit........................... (60,366) (278,268) (290,524)
-------- -------- --------
46,201 (45,568) (13,835)
Less: deferred employee compensation....... (1,021) -- --
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)...... 45,180 (45,568) (13,835)
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)................................. $106,513 151,342 179,421
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------------
1993 1994 1995 1995 1996
-------- ------- -------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Oil and gas revenues..... $ 19,711 15,487 36,042 26,284 40,201
Gas marketing revenues,
net..................... 1,353 1,335 956 677 1,078
Gain on sale of oil and
gas properties.......... -- -- 777 777 --
Interest and other
income.................. 1,506 1,416 986 727 938
-------- ------- -------- ------- -------
Total revenues......... 22,570 18,238 38,761 28,465 42,217
-------- ------- -------- ------- -------
Production expenses...... 3,993 3,760 10,835 7,739 7,638
Exploration costs........ 14,226 7,404 23,387 10,523 4,216
General and
administrative
expenses................ 4,079 5,172 7,030 4,346 6,950
Interest expense and
other debt expenses..... 6,638 4,571 21,956 15,137 18,376
Restructuring expense.... -- 1,814 1,115 -- 2,000
Depreciation, depletion
and amortization........ 18,857 20,474 35,591 23,704 15,293
Impairment of oil and gas
properties.............. -- -- 150,138 -- --
-------- ------- -------- ------- -------
Total expenses......... 47,793 43,195 250,052 61, 449 54,473
-------- ------- -------- ------- -------
Loss before income
taxes................... (25,223) (24,957) (211,291) (32,984) (12,256)
Income taxes............. -- -- -- -- --
-------- ------- -------- ------- -------
Net loss................. (25,223) (24,957) (211,291) (32,984) (12,256)
Less: cumulative
preferred stock
dividends............... 894 2,905 6,607 (4,867) --
-------- ------- -------- ------- -------
NET LOSS APPLICABLE TO
COMMON STOCK............ $(26,117) (27,862) (217,898) (37,851) (12,256)
======== ======= ======== ======= =======
Loss per share:
Primary and assuming
full dilution:
Net loss............. $ (1.63) (1.58) (5.31) (.94) (.14)
======== ======= ======== ======= =======
Average common and common
equivalent shares
outstanding:
Primary and assuming
full dilution......... 15,967 17,653 41,032 40,141 87,368
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................. $(25,223) (24,957) (211,291) (32,984) (12,256)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation, depletion
and amortization....... 18,857 20,474 35,591 23,704 15,293
Impairment of oil and
gas properties......... -- -- 150,138
Gain on sale of oil and
gas properties......... -- -- (777) (777) (77)
Dry hole costs.......... 11,773 4,751 18,152
Amortization of
debenture and note
costs.................. 91 29 1,019
Debenture conversion
costs.................. 2,490 1,449 --
Accretion of debt
discount............... -- -- 1,866
Accretion of note
discount............... 75 111 717
Restructuring expense... -- -- --
Changes in operating
assets and liabilities:
Decrease (increase) in
accounts receivable.... 10,502 (1,896) 9,419 11,979 (3,115)
Decrease (increase) in
prepaid expenses and
other current assets... 282 116 38 41 (1,137)
Decrease (increase) in
other non-current
assets................. 1,723 (2,274) 3,075 1,971 (1,629)
Increase (decrease) in
accounts payable and
accrued expenses....... (1,132) (2,128) (14,988) (13,365) 4,794
-------- ------- -------- -------- -------
Net cash provided by (used
in) operating
activities............... 19,438 (4,325) (7,041) (1,361) 8,062
-------- ------- -------- -------- -------
INVESTING ACTIVITIES:
Investment in property and
equipment................ (38,602) (42,323) (47,005) (32,295) (41,402)
Cash received in
consolidation............ -- -- 1,596 1,596 --
Proceeds from sale of oil
and gas properties....... -- -- 6,836 6,807 --
Proceeds from sale of
equipment................ 82 265 584 403 530
-------- ------- -------- -------- -------
Net cash used in investing
activities............... (38,520) (42,058) (37,989) (23,489) (40,872)
-------- ------- -------- -------- -------
FINANCING ACTIVITIES:
Proceeds from long term
borrowings............... 21,785 34,302 37,100 15,100 29,000
Principal payments on
long-term borrowings..... (5,462) (19,000) (100,000) (100,000) (44,000)
Proceeds from sale of
senior notes............. -- -- 99,629 99,629 --
Proceeds from sale of
preferred stock.......... -- 32,503 -- -- --
Proceeds from sale of
common stock............. 297 123 16,319 16,319 48,052
Dividends paid on
preferred stock.......... (894) (2,905) (6,607) (4,867) --
Note offering costs....... -- -- (4,327) (4,289) --
Syndication costs charged
to equity................ -- -- -- (5) (4,063)
Debenture conversion
costs.................... (356) (79) -- -- --
-------- ------- -------- -------- -------
Net cash provided by
financing activities..... 15,370 44,944 42,114 21,887 28,989
-------- ------- -------- -------- -------
Increase (decrease) in
cash and cash
equivalents.............. (3,712) (1,439) (2,916) (2,963) (3,821)
Cash and cash equivalents,
beginning of period...... 14,419 10,707 9,268 9,268 6,352
-------- ------- -------- -------- -------
Cash and cash equivalents,
end of period............ $ 10,707 9,268 6,352 6,305 2,531
======== ======= ======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED COMMON PAID IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT)
--------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Stockholders' equity at January 1, 1993.. $ 5,055 147 30,296 (6,387)
Issuance of 2,821 shares of common stock
upon conversion of debentures........... -- 28 27,046 --
Issuance of 88 shares of common stock.... -- 1 296 --
Preferred stock cash dividends........... -- -- -- (894)
Net loss................................. -- -- -- (25,223)
------- --- ------- --------
BALANCE AT DECEMBER 31, 1993........... 5,055 176 57,638 (32,504)
------- --- ------- --------
Issuance of 1,380 shares of preferred
stock, $1.50 par value.................. 2,070 -- 30,433 --
Issuance of 413 shares of preferred stock
in exchange for debentures, $1.50 par
value................................... 618 -- 10,454 --
Issuance of 66 shares of common stock.... -- 1 122 --
Preferred stock cash dividends........... -- -- -- (2,905)
Net loss................................. -- -- -- (24,957)
------- --- ------- --------
BALANCE AT DECEMBER 31, 1994........... 7,743 177 98,647 (60,366)
------- --- ------- --------
Additional paid in capital from issuance
of preferred and common stock in
consolidation........................... -- -- 108,632 --
Issuance of 650 shares of preferred
stock, $1.50 par value, in
consolidation........................... 975 -- -- --
Issuance of 20,622 shares of common stock
in consolidation........................ -- 206 -- --
Issuance of 4,000 shares of common stock
in private placement.................... -- 40 15,960 --
Conversion of 1,508 shares of preferred
stock to 1,508 shares of common stock... (2,262) 15 2,247 --
Issuance of 225 shares of common stock... -- 2 318 --
Syndication costs........................ -- -- -- (4)
Preferred stock cash dividends........... -- -- -- (6,607)
Net loss................................. -- -- -- (211,291)
------- --- ------- --------
BALANCE AT DECEMBER 31, 1995........... 6,456 440 225,804 (278,268)
------- --- ------- --------
Issuance of 48,000 shares of common stock
in Contour Transaction.................. -- 480 47,520 --
Conversion of 697 shares of preferred
stock to 4,355 shares of common stock... (1,045) 44 1,002 --
Conversion of 1,862 shares of preferred
stock to 1,862 shares of common stock... (2,793) 19 2,774 --
Issuance of 30 shares of common stock.... -- -- 52 --
Syndication costs........................ -- -- (4,064) --
Net loss................................. -- -- -- (12,256)
------- --- ------- --------
BALANCE AT SEPTEMBER 30, 1996
(unaudited)........................... $ 2,618 983 273,088 290,524
======= === ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Kelley Oil & Gas Corporation (the "Company" or "KOGC") was
incorporated in Delaware in September 1994 for the purpose of effecting a
consolidation (the "Consolidation") of the equity interests in Kelley Oil
Corporation, a Delaware corporation ("Kelley Oil"), and Kelley Oil & Gas
Partners, Ltd., a Texas limited partnership ("Kelley Partners") of which
Kelley Oil was the managing general partner. The Consolidation was completed
on February 7, 1995 upon approval by investors in Kelley Oil and Kelley
Partners. As a result of the Consolidation, Kelley Oil became a wholly owned
subsidiary of the Company, and Kelley Partners became a 99.99% owned
subsidiary partnership. The Company's operations, conducted through Kelley Oil
and its subsidiaries, include the development of oil and gas properties and
the purchase, sale and transportation of natural gas. In March 1996, Kelley
Partners was merged into the Company (the "Partnership Merger"). See Note 2--
Affiliated Programs and Managed Properties.
Accounting Treatment of the Consolidation. In the Consolidation, each
outstanding unit of limited partner interest ("Units") in Kelley Partners
owned by investors other than Kelley Oil and its subsidiaries ("Public
Unitholders") was converted into 1.2188 shares of KOGC's common stock ("Common
Stock") or, at the election of each Public Unitholder, .609 of a share of
Common Stock and .127 of a share of KOGC's $2.625 convertible exchangeable
preferred stock ("Preferred Stock"). Stockholders of Kelley Oil received
equivalent securities of the Company on a one for one basis. Kelley Oil's
19.9% ownership interest in Kelley Partners was not converted into the
Company's Common or Preferred Stock, since that ownership interest was
reflected in the valuation of Kelley Oil and the consideration allocated to
its stockholders. At the time of the Consolidation, the KOGC capital stock
received by Kelley Oil's stockholders represented a majority of the total
voting power of the combined capital stock issued by the Company in the
Consolidation. Accordingly, the Consolidation has been treated as a purchase
by the Company of the Public Unitholders' interests in Kelley Partners. As a
result of the purchase accounting treatment of the Consolidation, the
Company's consolidated financial statements through December 31, 1994 reflect
only Kelley Oil's historical results, and its financial statements for 1995
reflect Kelley Oil's historical results through the date of the Consolidation,
with results of combined operations recorded thereafter.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its corporate subsidiaries, all of which are
wholly owned, and KOGC's proportionate interests in Kelley Partners, its
operating partnership, Kelley Operating Company, Ltd. ("Kelley Operating"),
and development drilling programs sponsored by Kelley Oil to conduct drilling
operations on properties of Kelley Operating ("DDPs"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly
different from the Company's share of production. Revenues from the purchase,
sale and transportation of natural gas are recognized upon completion of the
sale and when transported volumes are delivered. In addition, gas marketing
revenues and cost of gas sold have been presented on a net basis for the
periods presented and are reflected in "Gas marketing revenues, net" on the
Consolidated Statements of Loss.
Oil and Gas Properties. The Company's interests in its oil and gas
properties are held directly by the Company, Kelley Operating, Kelley Oil and
Petrofunds, Inc. (a subsidiary of the Company). All of these properties are
located in the United States.
Under the successful efforts method adopted by KOGC, the costs of successful
wells, development dry holes and productive leases are capitalized and
amortized on a unit-of-production basis over the life of the related reserves.
Cost centers for amortization purposes are determined on a field-by-field
basis. Estimated future abandonment and site restoration costs, net of
anticipated salvage values, are taken into account in depreciation, depletion
and amortization. Exploratory drilling costs are initially capitalized pending
determination of proved
F-8
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reserves but are charged to expense if no proved reserves are found. Other
exploration costs, including geological and geophysical expenses, leasehold
expiration costs and delay rentals, are expensed as incurred. Unproved
properties are periodically assessed for impairment in value, with any
impairment charged to expense.
Property Impairment under FAS 121. In the fourth quarter of 1995, the
Company implemented the Financial Accounting Standards Board's Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("FAS 121"). Under FAS 121, certain assets are
required to be reviewed periodically for impairment whenever circumstances
indicate their carrying amount exceeds their fair value and may not be
recoverable. As a result of its continuing operating losses and a decline in
its proved reserves at January 1, 1996 from year-earlier pro forma levels, the
Company performed an assessment of the carrying value of its oil and gas
properties indicating an impairment should be recognized as of year end. Under
this analysis, the fair value for KOGC's proved oil and gas properties was
estimated on a depletable unit basis using escalated pricing and present value
discount factors reflecting risk assessments. The fair value of the Company's
unproved properties was predicated on current acreage cost estimates. Based on
this analysis, the Company recognized noncash impairment charges against the
carrying values of its proved and unproved oil and gas properties under FAS
121 aggregating $83.4 million and $66.7 million, respectively, at December 31,
1995.
Pipelines and Other Transportation Assets. The costs of pipelines and other
transportation assets are depreciated using the straight-line method over the
estimated useful lives of the related assets.
Furniture, Fixtures and Equipment. Furniture, fixtures and equipment are
recorded at cost and depreciated using the straight-line method over the
estimated useful life of five years. Maintenance and repairs are charged to
expense.
Restructuring. On December 29, 1994, Kelley Oil implemented a restructuring
focused on staff reductions of approximately 25% intended to streamline
management and administrative functions and reduce general and administrative
expenses. An additional management realignment was implemented in the fourth
quarter of 1995. Non-recurring charges of $1.8 million and $1.1 million were
taken in the fourth quarters of 1994 and 1995, respectively, to account for
these measures. In the second quarter of 1996, the Company incurred a $2.0
million (unaudited) restructuring charge, associated with management
realignment and termination settlements. Of this amount $.3 million
(unaudited) was paid in the second quarter with the balance of $1.7 million
(unaudited) included in accounts payable and accrued expenses on the balance
sheet. Management anticipates an additional restructuring charge will be
incurred by the end of 1996.
Loss per Share. Primary loss per share reflects net loss less preferred
stock dividends divided by the average number of common shares and equivalents
outstanding during the respective years. Common shares issuable under stock
options and upon conversion of convertible subordinated debentures and
convertible preferred stock are added to average common shares and equivalents
outstanding when dilutive.
Income Taxes. Under the Statement of Financial Accounting Standards No. 109
("SFAS 109"), the tax effect of each item in the consolidated statements of
loss is recognized in the current period regardless of when the tax is paid.
Taxes on amounts that affect financial and taxable income in different periods
are reported as deferred income taxes. These temporary differences relate
primarily to (i) intangible drilling and development costs associated with oil
and gas properties capitalized and amortized based upon units of production
for financial reporting purposes and expensed as incurred for tax reporting
purposes and (ii) differences in financial reporting provisions for
depreciation and amortization and that of income tax reporting. See Note 6--
Income Taxes.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased
to be cash equivalents. Included in cash and cash equivalents at December 31,
1994 was a $.2 million certificate of deposit pledged to support Kelley Oil's
guaranty of ESOP borrowings. See Note 3--Long Term Debt.
F-9
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial Instruments. The Company's financial instruments consist of cash
and cash equivalents, receivables, payables and debt. As of December 31, 1995,
the estimated fair value of the Company's debt approximated its carrying
value. The estimated fair values at December 31, 1995 were determined using
the Black-Scholes pricing model based on quoted market prices and the
borrowing rates available for debt with similar terms and maturities.
Derivative Financial Instruments. From time to time, the Company has entered
into transactions in derivative financial instruments covering future natural
gas production principally as a hedge against natural gas price declines.
Realized and unrealized gains and losses are recorded in other assets or
liabilities until the underlying natural gas is produced and sold, at which
time those gains and losses are included in oil and gas revenues. See Note
12--Hedging Activities.
Other Non-Current Assets. Other non-current assets consist of debt issue
costs, goodwill and other intangible assets. Goodwill is amortized on a
straight-line basis over 10 years for the Company and 15 years for Concorde
Gas, Inc., an indirect wholly owned subsidiary of the Company ("CGI"). In
1995, the Company recognized impairments of goodwill aggregating $.7 million
associated with acquisition costs for CGI and Wincan, Inc., an indirect wholly
owned subsidiary of the Company. In addition, the Company wrote off prepaid
financing costs of $1.7 million in connection with a related bank debt
refinancing. Accumulated amortization at December 31, 1993 and 1994 was $.9
million and $1.2 million, respectively.
Concentration of Credit Risk. Substantially all of KOGC's receivables are
due from a limited number of natural gas transmission companies and other gas
purchasers. To date, this concentration has not had a material adverse effect
on the consolidated financial condition of the Company.
Stock Based Compensation. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("FAS 123"), effective for the Company
on January 1, 1996. FAS 123 permits, but does not require, a fair value based
method of accounting for employee stock option plans, resulting in
compensation expense being recognized in the results of operations when stock
options are granted. The Company plans to continue the use of its current
intrinsic value based method of accounting for stock option plans where no
compensation expense is recognized. However, as required by FAS 123, the
Company will provide pro forma disclosure of net income and earnings per share
in the notes to the consolidated financial statements as if the fair value
based method of accounting had been applied.
Risks and Uncertainties. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Changes in Presentation. Certain financial statement items in 1993 and 1994
have been reclassified to conform to the 1995 presentation.
Interim Presentation (Unaudited). The accompanying consolidated financial
statements of Kelley Oil & Gas Corporation (the "Company" or "KOGC") have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement in all material respects of the
results for the interim periods presented. The results of operations for the
nine months ended September 30, 1996 are not necessarily indicative of results
to be expected for the full year.
F-10
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain financial statement items in the interim 1995 period have been
reclassified to conform to the interim 1996 presentation.
NOTE 2--AFFILIATED PROGRAMS AND MANAGED PROPERTIES
Kelley Partners. From Kelley Oil's inception in April 1983 until January
1986, its principal business was managing certain public and private drilling
programs (the "Original Drilling Programs") in return for management fees and
overhead reimbursements. Kelley Partners became actively engaged in business
in January 1986 following the consummation of an exchange offer (the "KLY
Exchange") for interests in the Original Drilling Programs.
General Partner Interests in Kelley Partners and Kelley Operating. Through
its ownership in Kelley Oil, the Company had a 1.99% general partner interest
in Kelley Partners, and David L. Kelley, the former Chairman and Chief
Executive Officer of Kelley Oil, had a .01% general partner interest. The
general partner interests in Kelley Partners were retained by Kelley Oil and
Mr. Kelley after the Consolidation and were eliminated in the Partnership
Merger. In connection with the Partnership Merger, Kelley Partners' 98%
limited partner interest in Kelley Operating was transferred to Kelley Oil,
and Petrofunds, Inc., an indirect wholly owned subsidiary of the Company, was
substituted for Mr. Kelley as special general partner of Kelley Operating. In
accordance with a severance arrangement, Mr. Kelley received a payment of
$70,000 from Kelley Oil in March 1996 attributable to his terminated interests
in Kelley Partners and Kelley Operating. Kelley Oil has remained the managing
general partner of Kelley Operating, with a general partner interest of 1.99%.
DDPs. Kelley Oil's activities were expanded after the KLY Exchange to
include the management of Kelley Partners and DDPs (collectively, the "Kelley
Group"). In accordance with the partnership agreement of Kelley Partners,
Kelley Oil sponsored one DDP in each year from 1987 through 1992 (the "1987
DDP" through the "1992 DDP") and a seventh DDP in 1994 (the "1994 DDP"). See
Note 9--DDPs.
Units Issued in Exchange Offers. Each year from 1990 through 1994, Kelley
Partners issued Units in an exchange offer (each, a "DDP Exchange") for
interests in a DDP. Information on the last two DDP Exchanges is presented in
the following table.
SUMMARY INFORMATION ON DDP EXCHANGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1990 1991
---------- ---------
DDP DDP DDP
EXCHANGE DATA EXCHANGE EXCHANGE
- ------------- ---------- ---------
<S> <C> <C>
Total DDP equity (including GPs)......................... $ 30,702 35,833
Kelley Oil investment.................................... $ 20,999 25,850
Kelley Oil ownership interest............................ 68.4% 72.1%
Effective date of DDP Exchange........................... 7/1/93 7/1/94
Total DDP Exchange value................................. $ 27,289 18,748
Market price per Unit.................................... $ 18.93 7.55
Units issued by Kelley Partners.......................... 1,443,845 2,486,755
DDP distributions plus DDP Exchange value................ $ 50,662 36,306
Units issued to Kelley Oil............................... 986,261 1,791,293
</TABLE>
Primarily as a result of Units received in DDP Exchanges, Kelley Oil and its
subsidiaries owned a total of 3.9 million Units in Kelley Partners as of
December 31, 1994, representing approximately 16.58% of the Units
F-11
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding at that time. In the Consolidation, Kelley Oil retained its Units
in Kelley Partners, and KOGC acquired all outstanding Units held by the Public
Unitholders.
Reimbursements from Affiliated Programs and Managed Properties. Kelley Oil
is reimbursed for direct expenses paid on behalf of its subsidiary
partnerships and other working interest owners of properties operated by
Kelley Oil, and for all appropriate administrative and overhead expenses
incurred in connection with the management and administration of each of these
affiliated programs and managed properties. Included in these amounts are
reimbursements for allocated administrative and overhead expenses, net of
intercompany eliminations, aggregating $2.0 million, $1.9 million and $1.6
million in 1993, 1994 and 1995, respectively. Reimbursements for direct costs
associated with lease acquisition, exploration and drilling activities during
1993, 1994 and 1995 aggregated $9.8 million, $9.9 million and $6.1 million,
respectively.
Other Reimbursements. The Company is reimbursed for direct costs incurred
and advanced in connection with financing and acquisitions on behalf of the
Group. These reimbursements aggregated $2.1 million and $1.3 million in 1993
and 1994, respectively, and are recorded as a reduction of general and
administrative expenses. No reimbursements were made for these costs in 1995.
NOTE 3--LONG-TERM DEBT
Direct and Indirect Long-Term Debt. The Company's long-term debt at December
31, 1994 and 1995 is comprised of the following items of direct and guaranteed
indebtedness of Kelley Oil plus indirect debt representing its proportionate
interest in long-term debt of affiliated partnerships. See Note 5--
Stockholders' Equity (Deficit) and Note 8--Employee Stock Ownership Plan.
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
-------- -------
<S> <C> <C>
Bank credit facilities......................................... $ 27,931 22,000
ESOP bank term loans........................................... 1,021 --
Proportionate interest KLY Subordinated Debt................... 10,761 47,054
Senior Notes................................................... -- 95,926
-------- -------
39,713 164,980
Less current maturities...................................... 2,471 --
-------- -------
$ 37,242 164,980
======== =======
</TABLE>
Bank Credit Facilities. Prior to the Consolidation, Kelley Oil maintained a
revolving credit facility of up to $15 million with a commercial bank, bearing
interest at a floating rate equal to bank's prime and requiring payments of
interest only until the scheduled maturity on July 1, 1996. In May 1994,
Kelley Oil repaid its borrowings under the facility from part of the proceeds
from a public offering of its $2.625 convertible exchangeable preferred stock
("KOIL $2.625 Preferred Stock"). In August 1994, the 1992 DDP was added as a
borrower under the facility, and the borrowing base was reduced to $6 million,
all of which was advanced to the 1992 DDP to fund part of its drilling
expenditures in excess of contributed capital. Borrowings under the facility
were secured by the pledge of substantially all the assets of the 1992 DDP and
Kelley Oil, other than its Units in Kelley Partners. At December 31, 1994, the
Company's proportionate interest in bank borrowings by the 1992 DDP was
approximately $5 million.
Kelley Oil maintained a second credit facility with a commercial lender
prior to the Consolidation, providing for loans up to $10 million, subject to
monthly borrowing base redeterminations on the basis of the
F-12
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market value of Kelley Oil's Units in Kelley Partners collateralizing the
facility. The facility provided for payments of interest at 1/2% above a
specified prime until July 23, 1998, when borrowings under the facility were
scheduled to be converted to a term loan payable over two years. As of
December 31, 1994, $9 million was outstanding under this facility.
As of December 31, 1994, Kelley Partners had outstanding bank debt $69.9
million and publicly held subordinated debt in the outstanding face amount of
$61.2 million. The Company's proportionate interest in the subordinated debt
and revolving bank debt of Kelley Partners at December 31, 1994 aggregated
$12.2 million and $13.9 million, respectively.
In connection with the Consolidation, KOGC completed a refinancing in
February 1995 for the outstanding bank debt of Kelley Partners, Kelley Oil and
the 1992 DDP. The refinancing was provided by Kelley Partners' prior lending
banks under a $70 million revolving credit facility (the "Prior Credit
Facility") and a $20 million term loan facility (the "Term Facility"). The
borrowers under the facilities were Kelley Operating and Kelley Oil. Kelley
Partners, KOGC and its other subsidiary partnerships were guarantors.
Borrowings of $90 million under the two facilities were used to refinance
Kelley Partners' bank debt of $69.9 million, Kelley Oil's debt of $9 million
under one of its credit facilities and borrowings of $6 million by the 1992
DDP, with the balance of $5.1 million used to fund payables of Kelley Partners
and KOGC, including part of the expenses for the Consolidation. Borrowings
under the Prior Credit Facility were reduced by $10 million in February 1995
from part of the proceeds of an equity private placement by KOGC.
Interest was payable on borrowings under the Prior Credit Facility at a
floating rate equal to 1/2% above the agent bank's prime rate or, at the
election of the Company, 2 1/2% above a quoted Libor rate, together with a
quarterly commitment fee initially equal to 5/8% per annum of the unused
borrowing base. Interest was payable on borrowings under the Term Facility at
a floating rate initially equal to 3 1/2% above the agent bank's prime rate.
In June 1995, proceeds from a public offering of KOGC's 13 1/2% Senior Notes
due June 15, 1999 in the aggregate principal amount of $100 million (the
"Senior Notes") were used to repay all outstanding borrowings under the two
facilities, and the Term Facility was terminated. The agreement covering the
Prior Credit Facility was amended at that time to (i) reduce the credit limit
to $40 million, (ii) reduce the interest rate to the agent bank's prime rate
or, at the election of the Company, a rate ranging from 1 1/4% to 1 3/4% above
a quoted Libor rate, together with a quarterly commitment fee equal to 3/8%
per annum of the unused borrowing base, (iii) eliminate all financial
covenants other than a working capital maintenance requirement and a
limitation on accounts payable above a specified level and (iv) conform the
borrowing base limitations with debt restrictions under the indenture for the
Senior Notes, resulting in a reduction of the borrowing base to $35 million.
In January 1996, the agreement covering the Prior Credit Facility was
further amended to (i) reduce the credit limit to $35 million, (ii) generally
limit the use of future borrowings to reduce trade payables, (iii) increase
the interest rate to 2% above the agent's prime rate and (iv) add certain
financial covenants. The financial covenants added to the Prior Credit
Facility included a current ratio test that KOGC would have been unable to
satisfy at the initial measuring date on May 15, 1996 without a substantial
equity infusion.
In February 1996, KOGC repaid outstanding bank borrowings of $30 million
with proceeds from an equity infusion and replaced the Prior Credit Facility
with a $35 million revolving credit facility from a new bank group (the
"Credit Facility"). Interest on borrowings under the Credit Facility is
payable at a rate equal to (i) the higher of 1/2% above the agent bank's prime
rate or 1% above the federal funds rate in effect from time to time or (ii) at
the Company's election, 1 1/2% above a quoted Libor rate, together with a
quarterly commitment fee equal to 3/8% per annum of the unused portion of the
available borrowing base. The agreement for the Credit Facility requires the
payment of interest only until March 15, 1999, when all borrowings will be
repayable, subject to mandatory prepayment with net proceeds from asset sales
in excess of related borrowing base reductions.
F-13
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The borrowers under the Credit Facility are Kelley Operating and Kelley Oil.
KOGC and its other subsidiary partnerships are guarantors. Borrowings under
the Credit Facility are secured by mortgages on all of the oil and gas and
pipeline assets of the Company and its subsidiaries, together with a security
interest in production proceeds from oil and gas sales. The agreement covering
the Credit Facility prohibits the payment of dividends, requires the consent
of the lenders for third-party borrowings or extraordinary transactions and
provides financial covenants of KOGC including a maximum ratio of total funded
debt to earnings before interest, taxes and noncash charges ranging from 6.0
to 1.0 in 1996 to 3.5 to 1.0 after September 30, 1997 and a minimum cash
interest coverage ratio ranging from 1.1 to 1.0 in 1996 to 2.0 to 1.0 after
September 30, 1997.
ESOP Loans. The Company maintains the ESOP to purchase and hold qualifying
securities for the accounts of its employees. To finance the purchase of those
securities, the ESOP obtained term loans maturing in portions through June 28,
1997, bearing interest at rates of prime plus 1% and 85% of that rate and
secured at December 31, 1994 by .2 million shares of KOIL ESOP Preferred
Stock. The ESOP term loans were guaranteed by Kelley Oil and aggregated $1.0
million as of December 31, 1994. The balance of the ESOP debt was repaid in
1995.
KLY Subordinated Debt. Prior to the Partnership Merger, Kelley Partners had
outstanding 8 1/2% Convertible Subordinated Debentures due April 1, 2000 in
the aggregate principal amount of $26.9 million ("8 1/2% Debentures") and 7
7/8% Convertible Subordinated Notes due 1999 in the aggregate principal amount
at maturity of $34.4 million (the "7 7/8% Notes"). Under the terms of the
Consolidation, the 8 1/2% Debentures and 7 7/8% Notes became convertible into
the Company's Common Stock or a combination of Common and Preferred Stock
instead of Units based on the exchange ratios for the Units in the
Consolidation. In connection with the Partnership Merger, the 8 1/2%
Debentures and 7 7/8% Notes became direct obligations of KOGC.
Senior Notes. In June 1995, KOGC issued $100 million principal amount of its
Senior Notes and applied its net proceeds from the offering primarily to repay
outstanding bank debt of $90 million and fund drilling operations. The Senior
Notes are senior unsecured obligations of the Company, guaranteed by Kelley
Oil, Kelley Operating and, prior to the Partnership Merger, by Kelley
Partners. The indenture for the Senior Notes generally limits additional
borrowings by the Company and its subsidiaries to the greater of 12 1/2% of
adjusted consolidated net tangible assets or $30 million for working capital
purposes plus $5 million per year for capital expenditures. The Company's
ability to borrow the additional $5 million per year for capital expenditures
and to pay dividends on its Preferred Stock is conditioned upon the absence of
declines in oil and gas reserves from estimated volumes at December 31, 1995.
That condition was not satisfied for 1996. The Senior Note indenture also
contains a number of other covenants that include limitations on mergers and
asset transfers, dividend and other payments and use of proceeds from asset
sales.
Debenture Conversions and Exchanges. During 1993, a total of 2,485,446
shares of Kelley Oil's common stock ("KOIL Common Stock") were issued upon
conversion of $21.9 million principal amount of its 11 1/2% Convertible
Subordinated Debentures due September 1, 2002 (the "KOIL 11 1/2% Debentures")
at a temporarily reduced conversion price. A noncash charge of $2.1 million
was recognized to account for those conversions, together with an additional
charge of $.4 million for related transaction costs. In August 1994, Kelley
Oil offered the remaining holders of KOIL 11 1/2% Debentures and Kelley Oil's
outstanding 8% Convertible Subordinated Debentures due September 1, 2001
(collectively, the "KOIL Debentures") shares of KOIL $2.625 Preferred Stock in
exchange for their KOIL Debentures. A total of .4 million shares of KOIL
$2.625 Preferred Stock were issued during September 1994 in exchange for all
of the outstanding KOIL Debentures. Each share of KOIL $2.625 Preferred Stock
was converted into one share of the Company's Preferred Stock in the
Consolidation.
Interest Payments. Cash payments attributable to interest on all
indebtedness, excluding the ESOP loans, aggregated $4.7 million, $3.0 million
and $14.2 million for the years ended December 31, 1993, 1994 and 1995,
respectively. In addition, the ESOP paid interest on its indebtedness
aggregating $.2 million, $.1 million and $57,000 during 1993, 1994 and 1995,
respectively.
F-14
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt Maturities. At December 31, 1995, outstanding borrowings of $22 million
under the Prior Credit Facility were scheduled for repayment on January 31,
1997. After giving effect to the February 1996 refinancing of the Prior Credit
Facility, the Company had no debt maturities prior to 1999, with aggregate
debt maturities in 1999 and 2000 of $134.4 million and $26.9 million,
respectively.
NOTE 4--LEASES
The Company leases office space, computer equipment and automobiles under
operating leases expiring May 14, 1998 with options to renew. Rental expenses
related to these leases for the years ended December 31, 1993, 1994 and 1995
were $2.2 million, $2.3 million and $1.9 million, respectively. For the
balance of the lease terms minimum rentals are as follows:
(IN THOUSANDS)
<TABLE>
<S> <C>
1996............................................................... $1,402
1997............................................................... 1,155
1998............................................................... 476
------
Total............................................................ $3,033
======
</TABLE>
In December 1995, the Company adopted a plan to change its policy of
providing automobiles and related expense reimbursements to key employees in
order to lower associated costs. Under the plan, KOGC canceled its automobile
leases in February 1996 and provided employees the option to purchase the cars
at 90% of the 1996 NADA loan value. The foregoing table reflects the reduction
in KOGC's obligations under its car leases resulting from this change in its
automobile policy.
NOTE 5--STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Private Placement. In February 1995, KOGC completed an
institutional private placement of 4 million shares of its Common Stock.
Proceeds of $16 million from the private placement were used to fund drilling
activities and for working capital. Pending application, $10 million of the
proceeds were used to reduce borrowings under the Prior Credit Facility.
Contour Stock Purchase. In February 1996, the Company issued 48 million
shares of its Common Stock at $1.00 per share to Contour Production Company
L.L.C. ("Contour") upon the closing of a Stock Purchase Agreement between KOGC
and Contour (the "Contour Transaction"). The newly issued shares represent
49.8% of KOGC's voting power. In connection with the Contour Transaction, the
Company (i) entered into an Option Agreement with Contour (the "Contour Option
Agreement"), (ii) obtained consents from its principal stockholders, subject
to compliance with applicable securities law, to amend its Certificate of
Incorporation to increase its authorized Common Stock from 100 million shares
to 200 million shares, (iii) entered into employment agreements with John F.
Bookout, President of Contour, and three other new executives named by him,
(iv) adopted a Nonqualified Stock Option Plan for the new executives other
than Mr. Bookout, (v) amended its existing Incentive Stock Option Plans, (vi)
reduced the size of its board of directors (the "Board") to seven members and
reconstituted the Board with three continuing directors and four designees of
Contour and (vii) replaced the Prior Credit Facility with the new Credit
Facility.
Contour Option. Under the Contour Option Agreement, the Company granted
Contour an option (the "Contour Option") to purchase up to 27 million shares
(the "Maximum Option Number") of Common Stock at $1.00 per share (subject to
antidilution adjustments) upon satisfaction of certain conditions, including
the absence of any KOGC debt repurchase or redemption obligations as a result
of the purchase (a "Debt Event"). A Debt Event would occur upon (i) a "Change
of Control" as defined in the indenture for the Senior Notes, (ii)
F-15
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a "Change in Control" as defined in the indenture for the 7 7/8% Notes or
(iii) a "Redemption Event" as defined in the indenture for the 8 1/2%
Debentures. A Debt Event with respect to either series of Notes or the 8 1/2%
Debentures would entitle each holder of the affected securities to require the
repurchase or redemption of the holder's securities. Contour is required to
exercise the Contour Option for the Maximum Option Number within 30 days after
it concludes in its sole discretion that a Debt Event would not occur as a
result of the purchase. While the exercise of the Contour Option would not
cause a Debt Event under the indenture for the 8 1/2% Debentures, waivers from
the holders of the Senior Notes and 7 7/8% Notes or amendments to the Debt
Event provisions of their indentures will require consents from holders of a
majority in aggregate principal amount of each series of Notes.
Preferred Stock. In May 1994, Kelley Oil completed a public offering of 1.4
million shares of KOIL $2.625 Preferred Stock at $25 per share. The shares
were convertible into KOIL Common Stock at a conversion price of $7.20 per
share and exchangeable after April 1995 at Kelley Oil's option for its 10 1/2%
Convertible Subordinated Debentures due 2004. Net proceeds from the public
offering aggregated $32.5 million, of which $19.0 million was used to repay
outstanding borrowings under Kelley Oil's credit facilities and the balance
was applied primarily to finance ongoing drilling operations through its
investment in the 1994 DDP. In September 1994, an additional .4 million shares
of KOIL $2.625 Preferred Stock were issued in exchange for outstanding KOIL
Debentures. During 1994, Kelley Oil paid quarterly dividends on outstanding
KOIL $2.625 Preferred Stock at the rate of $.65625 per share, aggregating $2.0
million. Each outstanding share of KOIL $2.625 Preferred Stock was converted
in the Consolidation into one share of KOGC's Preferred Stock, which has the
same terms as the KOIL $2.625 Preferred Stock except for expanded voting
rights.
The Company issued .6 million shares of its Preferred Stock to Public
Unitholders in the Consolidation, resulting in a total of 2.4 million
outstanding shares of Preferred Stock after giving effect to the shares issued
to holders of KOIL $2.625 Preferred Stock. During 1995, KOGC paid quarterly
dividends on its outstanding Preferred Stock at the rate of $.65625 per share,
aggregating $6.0 million. In January 1996, the Company suspended the payment
of the quarterly Preferred Stock dividend scheduled for February 1, 1996 to
conserve cash. Future dividends on the Preferred Stock are prohibited under
the agreement covering the Credit Facility. Although no interest is payable on
Preferred Stock arrearages, the terms of the Preferred Stock enable holders,
voting separately as a class, to elect two additional directors to the Board
at each meeting of stockholders at which directors are to be elected during
any period when Preferred Stock dividends are in arrears in an aggregate
amount equal to at least six quarterly dividends, whether or not consecutive.
Each share of Preferred Stock is convertible, at the holder's option, into
3.4722 shares of Common Stock, equivalent to a conversion price of $7.20 per
share of Common Stock relative to the $25 per share liquidation preference of
the Preferred Stock (the "Preferred Conversion Price"). Under the terms of the
Certificate of Designation governing the Preferred Stock, the Contour
Transaction triggered a special conversion right under which the Preferred
Conversion Price was reduced to $4.00 for a period of 45 days commencing March
12, 1996.
ESOP Preferred Stock. From 1987 through 1992, a total of 3.4 million shares
of KOIL ESOP Preferred Stock in four separate series were issued to the ESOP
for a total of $8.9 million. Each share of KOIL ESOP Preferred Stock had
voting rights equivalent to one share of KOIL Common Stock. The KOIL ESOP
Preferred Stock was convertible into KOIL Common Stock, at any time at the
option of the ESOP, at the rate of one share of KOIL Common Stock for each
share of KOIL ESOP Preferred Stock. During 1994, Kelley Oil paid quarterly
dividends on outstanding KOIL ESOP Preferred Stock at rates ranging from
$.0375 per share to $.25 per share, aggregating $.9 million for the year,
which were used to service ESOP loans. In January 1995, a total of 1.1 million
shares of KOIL ESOP Preferred Stock were converted into the same number of
shares of KOIL Common Stock upon distribution to employees affected by the
year-end restructuring.
F-16
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The outstanding shares of KOIL ESOP Preferred Stock were converted in the
Consolidation into four equivalent series of the Company's cumulative
convertible preferred stock ("ESOP Preferred Stock"), which ranks junior in
dividend and liquidation rights to the Company's Preferred Stock. Each share
of ESOP Preferred Stock is convertible into one share of Common Stock. During
1995, KOGC paid quarterly dividends on outstanding ESOP Preferred Stock at
rates ranging from $.0375 per share to $.25 per share, aggregating $.6 million
for the year. Dividends on the ESOP Preferred Stock during the first three
quarters of 1995 were used to service ESOP loans, which were repaid in full at
the end of the third quarter. A dividend paid in the fourth quarter of 1995
plus the ESOP contribution for the quarter were invested in a certificate of
deposit. As of December 31, 1995, 1.9 million shares of ESOP Preferred Stock
were outstanding. Future dividends on ESOP Preferred Stock are prohibited
under the agreement covering the Credit Facility. See Note 3--Long Term Debt.
Incentive Stock Option Plans. Kelley Oil maintained Incentive Stock Option
Plans (the "Plans") adopted in 1987 (the "1987 Plan") and 1991 (the "1991
Plan"), each providing for the grant of options to purchase up to .5 million
shares of KOIL Common Stock to key employees. Under the 1987 Plan, options to
purchase a total of .2 million shares of the KOIL Common Stock at an average
exercise price of $1.10 per share were granted during 1988, and options to
purchase a total of .3 million shares of KOIL Common Stock at an exercise
price of $2.00 per share were granted in 1989. Under the 1991 Plan, options to
purchase a total of .2 million shares of KOIL Common Stock were granted in
1991 at an exercise price of $7 5/8 per share and repriced to the extent
outstanding at $4 1/8 per share in February 1995. The 1987 Plan and the 1991
Plan (collectively, the "Prior Plans") were assumed by KOGC in the
Consolidation.
The Board adopted a third Incentive Stock Option Plan in May 1995 (the "1995
Plan"), providing for the grant of options to purchase up to 1.5 million
shares of Common Stock to key employees. Under the 1995 Plan, options to
purchase a total of 1.1 million shares of Common Stock at $2 3/8 per share
were granted in October 1995, and options to purchase a total of .4 million
shares of Common Stock at $1 3/4 per share were granted in November 1995. The
1995 Plan was approved by principal stockholders of the Company in February
1996, together with an amendment to Prior Plans and the 1995 Plan
(collectively, the "ISO Plans") extending the period during which terminated
employee may exercise vested options to three years after termination of
employment.
The option price for options granted under the ISO Plans is fixed by the
Compensation Committee of the Board (the "Committee") at the fair market value
of the underlying stock at the time of the grant. Each option granted under
the ISO Plans is exercisable during the term of the optionee's employment for
up to ten years from the date of grant. During 1993 and 1994, options to
purchase a total of .1 million and .1 million shares, respectively, of KOIL
Common Stock were exercised at prices ranging from $1.10 to $7 5/8. Options to
purchase a total of .2 million shares of Common Stock were exercised during
1995 at prices ranging from $1.10 to $2.00.
Nonqualified Stock Option Plan. The Board adopted a Nonqualified Stock
Option Plan (the "NSO Plan") in January 1996 in accordance with the terms of
the Contour Purchase Agreement, which provides for the grant of options to
purchase an aggregate of 2.5 million shares of Common Stock at an exercise
price of $1.00 per share to new senior executives designated by Mr. Bookout.
Options vesting over three years were issued to those executives for all of
the covered shares under the NSO Plan at the closing under the Contour
Purchase Agreement in February 1996. The NSO Plan is administered by the
Committee, which has authority to prohibit an option exercise if it determines
that the purchase would result in a Debt Event. The NSO Plan was approved by
principal stockholders of the Company in February 1996.
F-17
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax with the income tax provision under SFAS 109:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Loss before income taxes.......................... $(25,223) (24,957) (211,291)
Income tax benefit computed at statutory rates.... (8,576) (8,485) (71,839)
Increase in valuation allowance................. 8,456 7,524 71,236
Permanent differences:
Nondeductible expenses.......................... 82 922 567
Amortization.................................... 33 33 33
Other-net....................................... 5 6 3
-------- ------- --------
Tax benefit..................................... $ -- -- --
======== ======= ========
</TABLE>
Federal income taxes paid for the year ended December 31, 1993 were $50,000.
No federal income taxes were paid for the years ended December 31, 1994 and
1995.
Deferred Income Taxes. Deferred income tax provisions for the years ended
December 31, 1993, 1994 and 1995 result from the following temporary
differences:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Temporary differences
related to oil & gas
properties:
Intangible drilling
costs.................. $5,034 4,985 6,387
Depreciation and
depletion.............. (5,082) (5,540) (58,276)
Exploration and dry hole
costs.................. (4,837) (2,517) (8,508)
Lease rentals........... 180 260 ----
Leasehold write-offs.... 1,106 1,152 1,611
Partnership income...... (661) (419) ----
Net operating loss
carryforward benefit..... (4,195) (5,418) (12,434)
Valuation allowance....... 8,456 7,524 71,236
Other..................... (1) (27) (16)
------ ------ -------
Total deferred tax
benefit................ $ -- -- --
====== ====== =======
</TABLE>
F-18
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
KOGC's deferred tax position reflects the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax liabilities and assets are as
follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depletion, depreciation and
capitalization methods on oil and gas properties.. $7,184 5,093 --
Deferred tax assets:
Book over tax depletion, depreciation and
capitalization methods on oil and gas properties.. -- -- 53,312
Net operating loss carryforwards................... 16,928 22,346 35,181
Charitable contribution carryforwards.............. 126 142 138
Alternative minimum tax credit carryforwards....... 21 21 21
Valuation allowance................................ (9,891) (17,416) (88,652)
------ ------- -------
Total deferred tax assets.......................... 7,184 5,093 --
------ ------- -------
Net deferred tax liability........................... $ -- -- --
====== ======= =======
</TABLE>
Net Operating Loss Carryforwards and Alternative Minimum Tax Credits. As of
December 31, 1995, the Company had cumulative net operating loss carryforwards
("NOL") for federal income tax purposes of approximately $100 million and net
operating loss carryforwards for alternative minimum tax purposes of
approximately $64 million. Due to the 1995 ownership change in KOGC in
connection with the Consolidation, future utilization of the net operating
loss carry forwards may be limited by Internal Revenue Code section 382. KOGC
also had approximately $21,000 of alternative minimum tax credit
carryforwards, which have no expiration date. These carryforwards will be
available for use by KOGC through the expiration dates indicated below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALTERNATIVE NET
MINIMUM TAX OPERATING LOSS
NOL CARRYFORWARDS CARRYFORWARDS
----------------- --------------
<S> <C> <C>
2000........................................... $ -- 206
2001........................................... -- 26
2002........................................... -- 1,343
2003........................................... -- 234
2004........................................... -- 1,500
2005........................................... -- --
2006........................................... -- 14,540
2007........................................... 4,831 16,483
2008........................................... 11,002 12,163
2009........................................... 14,685 16,250
2010........................................... 33,662 37,182
------- ------
Total........................................ $64,180 99,927
======= ======
</TABLE>
F-19
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--RELATED PARTY TRANSACTIONS
Lafayette Gas Intrastate. The Company earned approximately $.1 million
through CGI in each of 1993 and 1994 for managing the pipeline facilities of
an affiliated joint venture, Lafayette Gas Intrastate. These fees were
discontinued after 1994. The Company's proportionate interests in gas sales by
the Kelley Group for resale through Lafayette Gas Intrastate were $.3 million,
$.3 million and $.5 million for the years ended December 31, 1993, 1994 and
1995, respectively.
Interest on DDP Commitments. During 1993, 1994 and 1995, Kelley Oil paid or
accrued interest at a market rate in the amounts, net of intercompany
elimination, of $.1 million, $.1 million and $.2 million, respectively, on
deferred subscription commitments to DDPs. See Note 9--DDPs.
NOTE 8--EMPLOYEE STOCK OWNERSHIP PLAN
Kelley Oil established the ESOP effective January 1, 1984 for the benefit of
substantially all of its employees. Kelley Oil guaranteed the ESOP loans
referred to in Note 3--Long-Term Debt (collectively, the "ESOP Loans") and
recorded deferred employee compensation balances in a like amount, which were
deducted from stockholders' equity. Prior to 1996, Kelley Oil made
contributions to the ESOP for covered employees in amounts up to 15% of their
annual salaries up to a specified level. Contribution expense is recognized
using the cash payments method. Cumulative expense under this method is
greater than 80% of the cumulative expense that would have been recognized
under the shares allocated method before deduction of dividends. Contributions
and dividend payments on the KOIL ESOP Preferred Stock and ESOP Preferred
Stock were used to make scheduled payments of principal and interest on the
ESOP Loans, which were repaid in full during 1995. For the years ended
December 31, 1993, 1994 and 1995, Kelley Oil paid to the ESOP contributions of
$1.1 million, $1.2 million and $.7 million, respectively, plus dividends of
$.9 million, $.9 million and $.6 million, respectively. As the term loans were
repaid, a corresponding portion of the stock pledged to secure the loans was
released and allocated among the participants' accounts. As of December 31,
1995, the ESOP owned 1.9 million shares of ESOP Preferred Stock and .5 million
shares of Common Stock, all of which were allocated to participants' accounts.
See Note 5--Stockholders' Equity (Deficit).
F-20
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--DDPS
Structure of Development Partnerships. Kelley Oil and Mr. Kelley are the
general partners of the DDPs, with general partner interests of 3.94% and
.02%, respectively, for which they contributed a proportionate amount of
capital. In addition, Kelley Oil had undertaken to purchase for its own
investment account all units in DDPs that were not subscribed preemptively by
Unitholders of Kelley Partners. The DDPs have no officers, directors or
employees and utilize the management and staff of Kelley Oil for all
management and administrative functions. Interests in the first five DDPs
sponsored between 1987 and 1991 were acquired in separate DDP Exchanges by
Kelley Partners each year from 1990 through 1994. See Note 2--Affiliated
Programs and Managed Properties.
The 1994 DDP. In February 1994, the 1994 DDP completed a public offering of
20.9 million units of its limited and general partner interests at $3.00 per
unit. As of March 15, 1996, Kelley Oil owned 19.2 million units (91.85%) in
the 1994 DDP, together with its 3.94% general partner interest, and officers
and directors of Kelley Oil owned 47,100 units (.23%). Kelley Oil's
subscription for units in the 1994 DDP, together with its 3.94% general
partner interest, represented a commitment aggregating $60.1 million or 92.15%
of the 1994 DDP's total committed capital (the "KOIL Share"), with other
unitholders committing for the balance or 7.85% of the 1994 DDP's total
committed capital (the "Outside Share"), payable in each case 10% on
subscription and the balance through the end of November 1994. As of December
31, 1995, Kelley Oil had contributed $31.3 million to the 1994 DDP.
The 1994 DDP's partnership agreement provides that any contributions of the
partners not used or committed to be used for drilling activities during the
two-year period from the commencement of operations through February 29, 1996
(the "Commitment Period") shall be distributed to the partners on a pro rata
basis as a return of capital. Based on the amount of committed capital
actually used and committed to drilling activities by the end of the
Commitment Period, Kelley Oil determined the adjusted level of committed
partnership capital at $60.7 million in accordance with the 1994 DDP's
partnership agreement, and the 1994 DDP then distributed the Outside Share of
uncommitted capital to its unitholders other than Kelley Oil aggregating $.3
million in March 1996 as a return of capital. Because the KOIL Share of
committed capital exceeded its capital contributions at that time, Kelley Oil
did not receive a distribution of uncommitted capital. Kelley Oil intends to
contribute the unfunded portion of its commitment, currently aggregating $17.2
million after giving effect to the reduction in the 1994 DDP's committed
capital, together with interest, as funds are needed for completion of the
1994 DDP's drilling program.
The 1992 DDP. During November 1992, the 1992 DDP completed a public offering
of 16.0 million units of limited and general partner interests at $3.00 per
unit. As of March 15, 1996, Kelley Oil owned 13.4 million units (83.72%) in
the 1992 DDP, together with its 3.94% general partner interest, and officers
and directors of Kelley Oil owned 51,500 units (.32%). As of December 31,
1995, the 1992 DDP was indebted to Kelley Oil for loans and reimbursement
obligations aggregating $8.1 million.
NOTE 10--COMMITMENTS AND CONTINGENCIES
During 1995, the Company entered into change of control agreements with 16
employees entitling them to severance benefits in the event their employment
is terminated under certain circumstances within two years after a change of
control, as defined in the agreements. For this purpose, the February 1996
closing under the Contour Purchase Agreement constituted a change of control.
See Note 5--Stockholders' Equity. The severance benefits amount to salary
continuation for 12 to 24 months, depending on seniority of the covered
employees, based on their highest compensation rate during the two years prior
to termination. The Company's anticipated liability under these agreements as
of February 29, 1996 was $2.7 million.
F-21
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is involved from time to time in various claims and lawsuits
incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material effect on the financial
statements of the Company.
NOTE 11--LITIGATION SETTLEMENT
Following Kelley Oil's announcement of the initial proposal for the
Consolidation in August 1994, four separate lawsuits were filed against Kelley
Oil and its directors relating to the Consolidation and the 1991 DDP Exchange.
In November 1994, Kelley Oil entered into a memorandum of understanding with
the plaintiffs in three of the lawsuits, providing for a proposed settlement
based on a revised Consolidation proposal negotiated by a special committee of
Kelley Oil's nonmanagement directors and the settling plaintiffs. A
stipulation and agreement of compromise, settlement and release reflecting the
terms of the proposed settlement was filed in the United States District Court
for the Southern District of Texas on November 23, 1994. At a hearing held on
the same date, the court approved the consolidation of all four lawsuits and
the certification of a Unitholder class requested by the settling parties. On
March 3, 1995, following a hearing on the fairness of the settlement, the
court entered a final order approving the settlement, dismissing the
consolidated lawsuits with prejudice and reducing the award of attorneys' fees
and disbursements contemplated by the stipulation to $1.5 million payable $.3
million in cash and the balance in Common Stock. The Company believes a
pending appeal by the non-settling plaintiff is without merit.
NOTE 12--HEDGING ACTIVITIES
The Company periodically uses forward sales contracts and derivative
financial instruments covering natural gas to reduce exposure to downward
price fluctuations on natural gas production. For the first nine months of
1996, through a combination of natural gas swap agreements and forward sales
contracts, approximately 69.4% (unaudited) of Kelley's anticipated natural gas
production was affected by hedging transactions at an average NYMEX quoted
price of $2.17 (unaudited) per MMBTU before transaction and transportation
costs on gas delivered under forward sales contracts. Approximately 57.6%
(unaudited) of Kelley's anticipated natural gas production for the balance of
1996 had been hedged through swap agreements or forward sales contracts at an
average NYMEX quoted price of $2.25 (unaudited) per MMBTU before transaction
and transportation costs on gas delivered under forward sales contracts. The
natural gas swap agreements generally provide for the Company to receive or
make counterparty payments on the differential between a fixed price and a
variable indexed price for natural gas. No significant realized gains or
losses were deferred at December 31, 1994 or 1995.
The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. The Company has not
experienced counterparty nonperformance on these agreements and does not
anticipate any in future periods.
F-22
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--PRO FORMA DATA FOR THE CONSOLIDATION AND THE CONTOUR TRANSACTION
(UNAUDITED)
The Consolidation. The Consolidation was recorded as of February 7, 1995 for
financial accounting purposes. The following table presents unaudited pro
forma results of the Company's operations for the years ended December 31,
1994 and 1995 as if the Consolidation had occurred on January 1, 1994. The pro
forma financial information does not purport to represent what the Company's
results of operations actually would have been had the Consolidation occurred
on such date or to project the Company's results of operations for or at any
future period or date.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1995
------- --------
<S> <C> <C>
Revenues (net).......... $43,986 41,276
Net loss applicable to
common and common
equivalent shares...... (53,236) (218,549)
Net loss per share...... (1.39) (5.07)
</TABLE>
The Contour Transaction. The Company issued 48 million shares of Common
Stock at $1.00 per share to Contour in February 1996 in connection with the
Contour Transaction. See Note 5--Stockholders' Equity (Deficit). The following
table reflects the unaudited pro forma results of the Company's operations for
the years ended December 31, 1994 and 1995 as well as the nine months ended
September 30, 1996 as if the Contour Transaction had occurred on January 1,
1994.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Net loss applicable to common and common
equivalent shares.......................... $(51,436) (217,389) (11,939)
Net loss per share.......................... (.60) (2.39) (.13)
</TABLE>
NOTE 14--SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas
Producing Activities."
F-23
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalized Costs. Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and gas producing activities,
all of which are conducted within the continental United States, are
summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Unevaluated properties............................ $ 1,749 1,430 13,050
Properties subject to amortization................ 92,830 129,883 287,970
------- ------- --------
Capitalized costs................................. 94,579 131,313 301,020
Accumulated depreciation, depletion and
amortization..................................... (38,846) (59,108) (173,996)
------- ------- --------
Net capitalized costs............................. $55,733 72,205 127,024
======= ======= ========
</TABLE>
Costs Incurred. Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
Property acquisition costs:(1)(2)
Proved................................................. $ 4,393 7,035 126,577
Unproved............................................... 163 309 88,539
Exploration costs........................................ 13,389 8,760 9,521
Development costs........................................ 22,254 28,034 31,730
------- ------ -------
Total costs incurred................................... $40,199 44,138 256,367
======= ====== =======
</TABLE>
- --------
(1) Includes general and administrative costs directly related to acquisition,
exploration and development of oil and gas properties of $3.0 million,
$2.9 million and $3.2 million incurred in the years ended December 31,
1993, 1994 and 1995, respectively.
(2) Includes assets acquired in the Consolidation aggregating $207 million for
the year ended December 31, 1995.
Results of Operations. Results of operations for the Company's oil and gas
producing activities are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Oil and gas revenues............................... $ 19,711 15,487 36,042
Gain on sale of oil and gas properties............. -- -- 777
Production costs................................... (3,993) (3,760) (10,835)
Exploration and dry hole costs..................... (14,226) (7,404) (23,387)
Depreciation, depletion and amortization........... (18,424) (19,997) (34,355)
Impairment of oil and gas properties............... -- -- (150,138)
-------- ------- --------
Results of operations.............................. $(16,932) (15,674) (181,896)
======== ======= ========
</TABLE>
F-24
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reserves. Results of operations from oil and gas producing activities are
determined using actual historical revenues, production costs (including
production related taxes), exploration and dry hole costs and depreciation,
depletion and amortization of the capitalized costs subject to amortization.
General and administrative expenses and interest expense are excluded from
this determination of results of operations. Income tax benefit is computed by
applying the statutory tax rates to earnings before income tax expense with
recognition of tax credits and allowances relating to oil and gas producing
activities. No income tax benefit was recognized during the reported periods.
The Company's net ownership interests in estimated quantities of proved oil
and gas reserves and changes in net proved reserves, all of which are located
in the continental United States, are summarized below.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS LIQUIDS NATURAL GAS
(MBBLS) (MMCF)
------------------------- ------------------------
1993 1994 1995 1993 1994 1995
------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year....... 1,837 1,114 1,236 69,804 64,875 93,612
Revisions of previous
estimates.............. (913) 75 (558) (23,177) 16,055 (27,006)
Dilutive effect of
offerings.............. (210) -- -- (5,030) -- --
Purchases of oil and gas
properties............. -- -- 1,756 -- -- 127,962
Revisions of purchased
oil and gas
properties............. -- -- (766) -- -- (37,021)
Extensions and
discoveries............ 602 218 156 30,605 19,379 66,864
Sale of oil and gas
properties............. -- -- (118) -- -- (10,388)
Production.............. (202) (171) (319) (7,327) (6,697) (17,750)
------- ------- ------- ------- ------ -------
End of year............. 1,114 1,236 1,387 64,875 93,612 196,273
======= ======= ======= ======= ====== =======
Proved developed reserves
at end of year........... 602 674 1,197 30,092 48,482 111,287
======= ======= ======= ======= ====== =======
</TABLE>
The reported changes in net proved reserves during 1995 include downward
year-end revisions on developed and undeveloped south Louisiana properties
aggregating 11.6 Bcfe and 39.6 Bcfe, respectively, and a mid-year divestiture
of nonstrategic properties accounting for approximately 11.1 Bcfe. These
declines were partially offset by 13.6 Bcfe of reserve additions from
successful drilling in north Louisiana and the addition of 52.2 Bcfe from 36
proved undeveloped locations in core north Louisiana fields. As a result of
its continuing operating losses and a net decline of 35.9 Bcfe in its proved
reserves at December 31, 1995 from year-earlier pro forma levels, the Company
performed an assessment of the carrying value of its oil and gas properties
under FAS 121 indicating an impairment should be recognized as of year end.
See Note 1--Summary of Significant Accounting Policies. Based on this
analysis, KOGC recognized noncash impairment charges against the carrying
values of its proved and unproved oil and gas properties under FAS 121
aggregating $83.4 million and $66.7 million, respectively, at December 31,
1995.
F-25
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Standardized Measure. The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to the Company's ownership interests in proved
oil and gas reserves as of year-end is shown below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Future cash inflows.............................. $176,876 175,052 431,351
Future production costs.......................... (26,442) (34,472) (76,021)
Future development costs......................... (17,556) (22,914) (36,524)
Future income tax expenses....................... (16,480) (6,016) (8,577)
-------- ------- --------
Future net cash flows............................ 116,398 111,650 310,229
10% annual discount for estimating timing of cash
flows........................................... (44,608) (40,810) (139,177)
-------- ------- --------
Standardized measure of discounted future net
cash flows...................................... $ 71,790 70,840 171,052
======== ======= ========
</TABLE>
Future cash inflows are computed by applying year-end prices of oil and gas
to year-end quantities of proved oil and gas reserves. Future production and
development costs are computed primarily by the Company's petroleum engineers
by estimating the expenditures to be incurred in developing and producing the
Company's proved oil and gas reserves at the end of the year, based on year-
end costs and assuming continuation of existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for
operating loss carryforwards and tax credits. A discount factor of 10% was
used to reflect the timing of future net cash flows. The standardized measure
of discounted future net cash flows is not intended to represent the
replacement cost or fair market value of the Company's oil and gas properties.
The standardized measure of discounted future net cash flows as of December
31, 1993, 1994 and 1995 was calculated using prices in effect as of those
dates, which averaged $13.80, $15.65 and $19.73, respectively, per barrel of
oil and $2.49, $1.66 and $2.06, respectively, per Mcf of natural gas.
F-26
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Change in Standardized Measure. Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
-------- ------- -------
<S> <C> <C> <C>
Changes due to current year
operations:
Sales of oil and gas, net
of production costs...... $(15,718) (11,727) (25,207)
Sale of oil and gas
properties............... -- -- (5,884)
Extensions and
discoveries.............. 34,382 16,290 62,407
Dilutive effect of equity
offerings................ (12,404) -- --
Purchases of oil and gas
properties............... -- -- 90,660
Future development costs
incurred................. 8,460 7,242 10,216
Changes due to revisions in
standardized variables:
Prices and production
costs.................... (4,877) (20,609) 21,055
Revisions of previous
quantity estimates....... (44,258) 3,432 (22,223)
Revisions of purchased oil
and gas properties....... -- -- (28,199)
Estimated future
development costs........ (3,411) (1,949) 17,676
Income taxes.............. 17,041 6,104 (893)
Accretion of discount..... 9,029 7,179 7,145
Production rates (timing)
and other................ (6,746) (6,912) (26,541)
-------- ------- -------
Net increase
(decrease)............. (18,502) (950) 100,212
Beginning of year......... 90,292 71,790 70,840
-------- ------- -------
End of year............... $ 71,790 70,840 171,052
======== ======= =======
</TABLE>
Sales of oil and gas, net of production costs, are based on historical pre-
tax results. Extensions and discoveries, purchases of minerals in place and
the changes due to revisions in standardized variables are reported on a pre-
tax discounted basis, while the accretion of discount is presented after tax.
Extensions and discoveries include proved undeveloped reserves attributable to
Kelley Oil's interests in drill sites assigned to DDPs but do not give effect
to the Consolidation prior to 1995.
NOTE 15--EQUITY INFUSION (UNAUDITED)
In February 1996, the Company issued 48 million shares of its Common Stock
at $1.00 per share to Contour Production Company L.L.C. ("Contour") upon the
closing of a Stock Purchase Agreement between KOGC and Contour (the "Contour
Transaction"). The newly issued shares represented 49.8% of KOGC's voting
power at the time of the Contour Transaction. In connection with the Contour
Transaction, the Company granted Contour an option (the "Contour Option") to
purchase up to 27 million shares (the "Maximum Option Number") of Common Stock
at $1.00 per share (subject to antidilution adjustments) upon satisfaction of
certain conditions, including the absence of any KOGC debt repurchase or
redemption obligations as a result of the purchase (a "Debt Event"). Contour
is required to exercise the Contour Option for the Maximum Option Number
within 30 days after it concludes in its sole discretion that a Debt Event
would not occur as a result of the purchase.
A Debt Event would occur upon (i) a "Change of Control" as defined in the
indenture for the Company's 13 1/2% Senior Notes due 1999 (the "Senior
Notes"), (ii) a "Change in Control" as defined in the indenture for the
Company's 7 7/8% Convertible Subordinated Notes due 1999 (the "7 7/8% Notes")
or (iii) a "Redemption Event" as defined in the indenture for the Company's
8 1/2% Convertible Subordinated Debentures due 2000 (the
F-27
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"8 1/2% Debentures"). A Debt Event would entitle each holder of the affected
securities to require the repurchase or redemption of the holder's securities.
While the current exercise of the Contour Option would not cause a Debt Event
under the indenture for the 8 1/2% Debentures, it would require waivers or
consents from the holders of a majority in aggregate principal amount of the
Senior Notes and 7 7/8% Notes.
NOTE 16--PREFERRED AND ESOP PREFERRED STOCK CONVERSIONS (UNAUDITED)
Under the terms of the Certificate of Designation governing the Company's
$2.625 Convertible Exchangeable Preferred Stock (the "Public Preferred
Stock"), the Contour Transaction triggered a special conversion right under
which the conversion price was reduced to $4.00 for a period of 45 days
commencing March 13, 1996. In April 1996, .7 million shares of Preferred Stock
were converted into 4.4 million shares of the Company's Common Stock.
In January 1996, the Company suspended the payment of the quarterly Public
Preferred Stock dividend scheduled for February 1, 1996. Future dividends on
the Public Preferred Stock are prohibited under the agreement covering the
Company's credit facility. As of June 30, 1996, $2.3 million or $1.31 per
share in dividends were in arrears, increasing the total liquidation value to
$45.9 million.
The Company had four outstanding series of Cumulative Convertible Preferred
Stock ("ESOP Preferred Stock"), which ranked junior in dividend and
liquidation rights to the Public Preferred Stock. In June 1996, each of the
outstanding 1.9 million shares of ESOP Preferred Stock was redeemed for one
share of the Company's Common Stock.
NOTE 17--EMPLOYEE STOCK OPTIONS (UNAUDITED)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which established financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
and services from nonemployees. FAS 123 requires, among other things, that
compensation cost be calculated for fixed stock options at the grant date by
determining fair value using an option-pricing model. The Company has the
option of recognizing the compensation cost over the vesting period as an
expense in the consolidated statement of operations or making pro forma
disclosures in the notes to financial statements reflecting the effects on net
earnings as if the compensation cost had been recognized in the consolidated
statement of operations. In February 1996 in conjunction with the Contour
Transaction, the Company granted options to purchase 2.5 million shares of
Common Stock at $1.00 per share. The Company adopted FAS 123 in 1996 and will
make the required pro forma disclosures in the notes to its annual financial
statements.
NOTE 18--RESTRUCTURING EXPENSE (UNAUDITED)
In the second quarter of 1996, the Company incurred a $2 million
restructuring charge associated primarily with staff reductions and related
severance settlements of 12 employees and various reorganization costs, of
which $.5 million has been paid through September 30, 1996. These charges
along with charges incurred in prior periods are included in accounts payable
and accrued expenses on the balance sheet in the amount of $1.8 million, of
which $.1 million is associated with restructuring charges incurred in prior
periods.
F-28
<PAGE>
KELLEY OIL & GAS CORPORATION
UNAUDITED PRO FORMA FINANCIAL STATEMENT
The accompanying Unaudited Pro Forma Statement of Loss of Kelley Oil & Gas
Corporation (the "Company") sets forth certain pro forma financial information
with respect to the consolidation (the "Consolidation") of Kelley Oil & Gas
Partners, Ltd. ("Kelley Partners") and Kelley Oil Corporation ("Kelley Oil")
and the Refinancing (as defined in this Offering Memorandum). The Unaudited
Pro Forma Statement of Loss for the year ended December 31, 1995 presents the
results of operations of the Company as if the Consolidation and the
Refinancing had been consummated on January 1, 1995 and June 15, 1995 (the
issue date of the Notes), respectively. Capitalized terms not otherwise
defined herein have the meanings ascribed to them in the Prospectus of which
this Unaudited Pro Forma Statement of Loss is a part.
The Consolidation has been accounted for as a purchase of the Public
Unitholders' interests in Kelley Partners by the Company through Kelley Oil,
whose stockholders received a majority of the total voting securities issued
in the Consolidation. The purchase price was allocated on the basis of fair
value attributable to proved and unproved properties.
Future results may vary significantly from the amounts reflected in the
following information due to economic factors, production or price
differences, future activities of the Company and other matters. The pro forma
financial information presented below is unaudited and gives effect to the
Consolidation and the Refinancing as of January 1, 1994. The pro forma
financial information does not purport to represent what the Company's results
of operations actually would have been had the Consolidation and the
Refinancing occurred on such date or to project the Company's results of
operations for or at any future period or date. Although the Consolidation
resulted in a reduction of general and administrative costs, no pro forma
adjustments have been reflected because cost reduction plans were not been
completed at the time of the Consolidation. The Unaudited Pro Forma Financial
Statements should be read in conjunction with the Notes to the Unaudited Pro
Forma Statement of Loss and the Consolidated Financial Statements and related
Notes of the Company included herein.
F-29
<PAGE>
KELLEY OIL & GAS CORPORATION
UNAUDITED PRO FORMA STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<TABLE>
<CAPTION>
KELLEY
PARTNERS
PERIOD FROM THE
KELLEY OIL JANUARY 1, THE COMPANY COMPANY PRO
YEAR ENDED 1995 TO ADJUSTMENTS PRO FORMA FORMA AFTER
DECEMBER 31, FEBRUARY 7, FOR THE BEFORE REFINANCING THE
1995 1995 CONSOLIDATION REFINANCING ADJUSTMENTS REFINANCING
------------ ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues.. $ 36,042 3,129 (621)(A) 38,550 -- 38,550
Pipeline and gas
marketing
revenues, net........ 956 3 (1)(A) 958 -- 958
Gain on sale of oil
and gas properties... 777 -- -- 777 -- 777
Interest and other
income............... 986 6 (1)(A) 991 -- 991
--------- ------ ------ -------- ---- --------
Total revenues...... 38,761 3,138 (623)(A) 41,276 -- 41,276
--------- ------ ------ -------- ---- --------
Production expenses... 10,835 781 (155)(A) 11,461 -- 11,461
Exploration costs..... 23,387 410 (70)(A) 23,727 -- 23,727
General and
administrative
expenses, net........ 7,030 459 (91)(A) 7,398 -- 7,398
Interest and other
debt expense......... 21,956 1,006 (199)(A) 22,763 (604)(B) 22,159
Restructuring
expenses............. 1,115 -- -- 1,115 -- 1,115
Impairment of oil and
gas properties....... 150,138 -- -- 150,138 -- 150,138
Depreciation,
depletion and
amortization......... 35,591 2,997 (2,398)(C) 36,190 -- 36,190
--------- ------ ------ -------- ---- --------
Total costs and
expenses........... 250,052 5,653 (2,913) 252,792 (604) 252,188
--------- ------ ------ -------- ---- --------
Net loss................ $(211,291) (2,515) 2,290 (211,516) 604 (210,912)
Less:
Cumulative preferred
stock
dividends, net....... 6,607 -- 426 (D) 7,033 -- 7,033
--------- ------ ------ -------- ---- --------
Net loss applicable to
units, common stock,
and common stock
equivalent shares
outstanding(E)......... (217,898) (2,515) 1,864 (218,549) 604 (217,945)
========= ====== ======== ========
Net loss limited
partners............... -- (2,415) --
Net loss general
partners............... -- (100) --
Net loss per
share/limited partners
unit................... (5.31) (0.11) (5.07) (5.05)
Average units, common
stock and equivalent
shares outstanding(F).. 41,032 23,352 43,123 43,123
========= ====== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Loss.
F-30
<PAGE>
KELLEY OIL & GAS CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF LOSS
(A) To eliminate Kelley Oil's average proportionate interest in Kelley
Partners' revenues and expenses during 1995.
(B) As adjusted to give effect to the Refinancing. To adjust for the
refinancing as if it occurred on January 1, 1996, historical interest expense
for the nine months ended September 30, 1996 would decrease by $0.8 million or
$.01 per share. On a pro forma basis at September 30, 1996, the Company's
long-term debt and stockholders' deficit would be $176.8 million and $31.0
million, respectively. See "Capitalization".
(C) To recalculate depreciation, depletion and amortization for the year
ended December 31, 1995, on a combined versus historical basis using the unit
of production method.
(D) To reflect pro forma dividends on the Public Preferred Stock at a per
share annual rate of $2.625, aggregating $.4 million for the year ended
December 31, 1995.
(E) Net losses were incurred for the year ended December 31, 1995, on a
historical and pro forma basis. In addition, the tax basis of the Company's
assets exceeded the financial accounting basis of its assets. Accordingly, no
provision for income taxes is recognized for the year ended December 31, 1995,
and no deferred tax liability existed at year end. The net deferred tax assets
on a pro forma basis for the year ended December 31, 1995 are fully offset by
a valuation allowance.
(F) Pro forma average primary shares of Common Stock outstanding reflect a
total of 20.6 million shares of Common Stock issued to the Public Unitholders
in the Consolidation. Pro forma fully-diluted information is not presented
because the effects are antidilutive.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Kelley Oil & Gas Partners, Ltd.
We have audited the consolidated balance sheets of Kelley Oil & Gas
Partners, Ltd. (a Texas limited partnership) as of December 31, 1993 and 1994,
and the related accompanying statements of loss, partners' equity and cash
flows for each of the two years in the period ended December 31, 1994. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Kelley Oil & Gas Partners, Ltd. at December 31, 1993 and 1994, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements in 1994, the
Partnership changed its method of accounting for oil and gas producing
activities.
Ernst & Young LLP
Houston, Texas
March 6, 1995
F-32
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
---------- --------
(RESTATED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents:.............................. $ 1,011 $ 897
Accounts receivable - trade............................. 2,102 1,612
Accounts receivable - affiliates........................ 5,203 4,745
Prepaid assets.......................................... 426 --
Other current assets.................................... 633 287
-------- --------
Total current assets.................................. 9,375 7,541
-------- --------
Oil and gas properties, successful efforts method:
Unevaluated, net...................................... 8,168 7,199
Properties subject to amortization.................... 312,434 375,058
Pipelines and other transportation assets, at cost...... 7,962 7,910
-------- --------
328,564 390,167
-------- --------
Less: Accumulated depreciation, depletion and
amortization........................................... (154,066) (192,378)
-------- --------
Total oil and gas properties and pipeline assets,
net.................................................. 174,498 197,789
-------- --------
Other assets............................................ 253 184
-------- --------
TOTAL ASSETS.......................................... $184,126 $205,514
======== ========
LIABILITIES:
Accounts payable and accrued expenses - trade........... $ 6,462 $ 10,257
Accounts payable - affiliates........................... 702 12,423
Notes payable - current................................. -- 4,430
-------- --------
Total current liabilities............................. 7,164 27,110
-------- --------
Notes payable-long-term................................. 23,000 65,470
Convertible subordinated debentures..................... 25,437 25,664
Convertible subordinated notes.......................... 27,622 28,520
Minority interest....................................... 9 --
-------- --------
TOTAL LIABILITIES..................................... 83,232 146,764
-------- --------
PARTNERS' EQUITY:
Limited Partners' equity, 20,864, 23,352 and 23,352
Units outstanding at December 31, 1993, 1994 and
February 7, 1995....................................... 107,376 67,589
General Partners' equity (deficit)...................... (6,482) (8,839)
-------- --------
TOTAL PARTNERS' EQUITY................................ 100,894 58,750
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY.................. $184,126 $205,514
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995
------------------ THROUGH
1993 1994 FEBRUARY 7, 1995
---------- ------- ----------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Oil and gas sales:
Affiliates.............. $ 27,618 24,242 3,129
Other................... 6,359 6,468 --
-------- ------- ------
33,977 30,710 3,129
Pipeline revenues......... 3,781 3,819 3
Other income.............. 62 219 6
-------- ------- ------
Total revenues.......... 37,820 34,748 3,138
-------- ------- ------
Cost of gas sold.......... 3,503 3,833 --
Lease operating expenses.. 8,681 8,719 594
Severance taxes........... 1,494 1,613 187
Exploration costs......... 15,404 12,712 410
General and administrative
expenses................. 2,764 3,239 459
Interest and other debt
expense.................. 7,112 8,736 1,006
Accretion of discount..... 601 659 --
Depreciation, depletion
and amortization......... 30,452 37,851 2,997
-------- ------- ------
Total costs and
expenses............... 70,011 77,362 5,653
-------- ------- ------
NET LOSS.................. $(32,191) (42,614) (2,515)
======== ======= ======
NET LOSS ALLOCABLE TO
LIMITED PARTNERS......... $(30,917) (40,926) (2,415)
======== ======= ======
NET LOSS ALLOCABLE TO
GENERAL PARTNERS......... $ (1,274) (1,688) (100)
======== ======= ======
NET LOSS PER UNIT......... $ (1.75) (1.85) (.11)
======== ======= ======
Average Units
outstanding.............. 17,637 22,118 23,352
======== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995
------------------ THROUGH
1993 1994 FEBRUARY 7, 1995
---------- ------- ----------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................. $(32,191) (42,614) (2,515)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation, depletion and
amortization........................... 30,452 37,851 2,997
Dry hole and impairment costs........... 8,102 5,052 (15)
Amortization of debenture and note
offering costs......................... 478 479 40
Accretion of note discount.............. 601 659 59
Changes in operating assets and
liabilities net of effects of exchange
offers:
Decrease (increase) in accounts
receivable............................. 3,411 2,227 (461)
Decrease (increase) in prepaid and other
current assets......................... (491) 772 (86)
Decrease (increase) in other non-current
assets................................. (253) 69 4
Increase (decrease) in accounts payable
and accrued expenses................... (9,349) 7,497 2,618
-------- ------- ------
Net cash provided by operating
activities............................... 760 11,992 2,641
-------- ------- ------
INVESTING ACTIVITIES:
Purchases of property and equipment....... (36,072) (42,529) (1,963)
Sales (purchases) of pipeline and other
transportation assets.................... (1,316) 52 --
Cash received in exchange offers.......... 1,897 1,310 --
Sale of other non-current assets.......... 389 461 30
-------- ------- ------
Net cash used in investing activities..... (35,102) (40,706) (1,933)
-------- ------- ------
FINANCING ACTIVITIES:
Proceeds from long term borrowings........ 51,000 46,900 --
Principal payments on long term
borrowings............................... (40,000) -- --
Minority interest in subsidiaries......... (4) -- --
Capital contributed by partners........... 51,739 -- --
Distributions to partners................. (21,906) (16,910) --
Syndication costs charged to equity....... (6,728) (1,377) (9)
Note offering costs....................... (202) (13) --
-------- ------- ------
Net cash provided by (used in) financing
activities............................... 33,899 28,600 (9)
-------- ------- ------
Increase (decrease) in cash and cash
equivalents.............................. (443) (114) 699
Cash and cash equivalents, beginning of
period................................... 1,454 1,011 897
-------- ------- ------
Cash and cash equivalents, end of period.. $ 1,011 897 1,596
======== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-35
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNERS TOTAL
-------- -------- -------
<S> <C> <C> <C>
Partners' equity (deficit) at January 1, 1993..... $ 85,494 (4,341) 81,153
-------- ------ -------
Capital contributed............................... 79,028 -- 79,028
Issuance of 102,560 Units upon conversion of
subordinated notes and debentures................ 1,538 -- 1,538
Syndication costs................................. (6,728) -- (6,728)
Distributions..................................... (21,039) (867) (21,906)
Net loss.......................................... (30,917) (1,274) (32,191)
-------- ------ -------
Partners' equity (deficit) at December 31, 1993... $107,376 (6,482) 100,894
-------- ------ -------
Capital contributed............................... 18,757 -- 18,757
Syndication costs................................. (1,377) -- (1,377)
Distributions..................................... (16,241) (669) (16,910)
Net loss.......................................... (40,926) (1,688) (42,614)
-------- ------ -------
Partners' equity (deficit) at December 31, 1994... $ 67,589 (8,839) 58,750
-------- ------ -------
Capital contributed............................... 0 0 0
Syndication costs................................. (9) 0 (9)
Distributions..................................... 0 0 0
Net loss.......................................... (2,415) (100) (2,515)
-------- ------ -------
Partners' equity (deficit) at February 7, 1995.... $ 65,165 (8,939) 56,226
======== ====== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-36
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Kelley Oil & Gas Partners, Ltd., a Texas limited partnership
("Kelley Partners"), was formed to acquire through an exchange offer (the "KLY
Exchange") the oil and gas properties in 21 programs (the "Original Programs")
managed or sponsored by Kelley Oil Corporation ("Kelley Oil") and its
affiliates or predecessors. Upon consummation of the KLY Exchange in January
1986, Kelley Partners issued its units representing limited partner interests
("Units") to participants in exchange for their interests in the Original
Programs.
Kelley Oil is the managing general partner of Kelley Partners, and David L.
Kelley, the Chairman and Chief Executive Officer of Kelley Oil, is the special
general partner of Kelley Partners. Kelley Oil and Mr. Kelley have general
partner interests of 1.99% and 0.01%, respectively, in Kelley Partners.
Kelley Partners operates through Kelley Operating Company, Ltd., a Texas
limited partnership ("Kelley Operating"). Kelley Partners contributes the
assets received by it in exchange offers and other financings to Kelley
Operating in exchange for a 98% limited partner interest in Kelley Operating.
Kelley Oil and David L. Kelley are the general partners of Kelley Operating
with interests of 1.99% and 0.01%, respectively.
The general partner interests of Kelley Oil and Mr. Kelley in Kelley
Partners and Kelley Operating aggregate 3.96% on a combined basis. As of
December 31, 1994, Kelley Oil and its subsidiaries also owned 3.9 million
Units or approximately 16.6% of the then outstanding Units in Kelley Partners,
which they received in the KLY Exchange for their interests in certain of the
Original Programs and in various subsequent exchange offers. In addition, as
of December 31, 1994, Kelley Oil's officers and directors owned 591,020 Units
in Kelley Partners.
In February 1995, Unitholders in Kelley Partners voted to approve a
consolidation of the equity ownership of Kelley Partners and Kelley Oil (the
"Consolidation") into Kelley Oil & Gas Corporation ("KOGC"). Pursuant to the
Consolidation, each Unit held by investors other than Kelley Oil and its
subsidiaries was converted into 1.2188 shares of KOGC's common stock ("KOGC
Common Stock") or, at the election of the holder, .609 of a share of KOGC
Common Stock and .127 of a share of KOGC's $2.625 convertible exchangeable
preferred stock ("KOGC Preferred Stock"). Stockholders of Kelley Oil also
received capital stock of KOGC in the Consolidation. As a result of the
Consolidation, Kelley Oil became a wholly owned subsidiary of KOGC, and Kelley
Partners became a 99.98% owned subsidiary partnership of KOGC. Following the
Consolidation, Mr. Kelley continues to own a .01% general partner interest in
both Kelley Partners and Kelley Operating, and Kelley Partners' publicly held
subordinated debt remains outstanding. See Note 4--Equity and Debt Offerings.
Kelley Partners and Kelley Operating have no officers, directors or
employees. The officers and employees of Kelley Oil perform the management and
administrative functions of Kelley Partners and Kelley Operating. Kelley
Partners and Kelley Operating reimburse Kelley Oil for all direct costs
incurred in managing their operations and all indirect costs (principally
general and administrative expenses) allocable to the partnerships.
Basis of Presentation. The accompanying consolidated financial statements
include Kelley Partners and Lafayette Gas Intrastate, a joint venture in which
Kelley Partners owns a 99.99% interest. All significant intercompany
transactions and accounts have been eliminated upon consolidation. The
financial statements of Kelley Partners include the combined financial
position, results of operations, cash flows and changes in partners' equity of
Kelley Partners and Kelley Operating. Management believes that presenting the
financial statements of Kelley Partners and Kelley Operating on a combined
basis is more meaningful because it provides a more comprehensive view of the
financial position and results of operations attributable to the assets
contributed by Kelley Partners to Kelley Operating.
F-37
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition. Kelley Partners recognizes oil and gas revenue from its
interests in producing wells as oil and gas from those wells is produced and
sold. Oil and gas sold is not significantly different from Kelley Partners'
share of production.
Cash and Cash Equivalents. Kelley Partners considers all highly liquid
investments with a maturity date of three months or less when purchased to be
cash equivalents.
Derivative Financial Instruments. From time to time, Kelley Oil has entered
into transactions in derivative financial instruments covering future natural
gas production on behalf of Kelley Partners principally as a hedge against
natural gas price declines. Realized and unrealized gains and losses are
recorded in other assets or liabilities until the underlying natural gas is
produced and sold, at which time those gains and losses are included in oil
and gas revenues. See Note 10--Hedging Activities.
Income Taxes. Kelley Partners is a partnership and, as a result, the income
or loss of Kelley Partners for federal income tax purposes is includable in
the tax returns of the individual partners. Accordingly, no recognition has
been given to income taxes in the accompanying financial statements.
Oil and Gas Properties. Oil and gas properties are located in the United
States. During the third quarter of 1994, Kelley Partners changed from the
full cost method to the successful efforts method of accounting for its oil
and gas operations. Although the full cost method continues to be generally
accepted, the Financial Accounting Standards Board has expressed a preference
for the successful efforts method. Under current conditions, management
believes the successful efforts method provides a more appropriate measure of
its oil and gas operations. The accompanying consolidated balance sheet as of
December 31, 1993 and related consolidated statements of loss, partners'
equity and cash flows for the years ended December 31, 1992 and 1993 have been
restated to reflect the new method.
Under the successful efforts method, the costs of successful wells,
development dry holes and productive leases are capitalized and amortized on a
unit-of-production basis over the life of the related reserves. Cost centers
for amortization purposes are determined on a field-by-field basis. Estimated
future abandonment and site restoration costs, net of anticipated salvage
values, are taken into account in depreciation, depletion and amortization.
Unproved properties with significant acquisition costs are periodically
assessed for impairment in value, with any impairment charged to expense.
Exploratory drilling costs are initially capitalized pending determination
of proved reserves but are charged to expense if no proved reserves are found.
Other exploration costs, including geological and geophysical expenses,
leasehold expiration costs and delay rentals, are expensed as incurred.
The successful efforts method also imposes limitations on the carrying or
book value of proved oil and gas properties and requires an impairment
provision or noncash charge against earnings for any quarter in which their
carrying value exceeds the standardized measure of undiscounted future net
cash flows from proved oil and gas reserves based on prices received for oil
and gas production as of the end of that quarter or a subsequent date prior to
publication of financial results for the quarter.
F-38
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Adoption of the successful efforts accounting method resulted in changes to
previously reported net loss and net loss per Unit as follows:
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
Net loss previously reported...................................... $(41,272)
Adjustment for the effect of the change in accounting method...... 9,081
--------
Net loss as restated............................................ $(32,191)
========
Net loss per Unit previously reported............................. $ (2.25)
Adjustment for the effect of the change in accounting method...... .50
--------
Net loss per Unit as restated................................... $ (1.75)
========
</TABLE>
If the full cost method of accounting had been retained, Kelley Partners
would have reported a net loss for 1994 of $96.4 million or $4.19 per Unit.
Results under the full cost method would have included the effect of full cost
ceiling writedowns of approximately $86.5 million in 1994. As a result of the
accounting change, net property, plant and equipment and partners' equity were
each increased by $58.5 million as of December 31, 1994 compared to the
amounts that would have been reflected after the writedown under the full cost
method as of that date.
Pipelines and Other Transportation Assets. The costs of pipelines and other
transportation assets are depreciated using the straight-line method over the
estimated useful lives of the related assets.
Syndication and Organization Costs. Costs and expenses incurred by Kelley
Partners in connection with syndication and organization have been charged to
partners' equity.
Net Loss Per Unit. Net loss per Unit is computed based on the weighted
average number of Units outstanding during the period divided into the net
loss allocable to the Unitholders.
Concentration of Credit Risk. Substantially all of Kelley Partners'
receivables are due from the marketing subsidiary of Kelley Oil, which
purchases natural gas for resale to a limited number of natural gas
transmission companies and other gas purchasers. See Note 8--Related Party
Transactions.
Fair Value of Financial Instruments. The carrying value of cash, receivables
and accounts payable approximates their fair value. The fair value of
Convertible Subordinated Notes and Debentures are disclosed in Note 4--Equity
and Debt Offerings.
NOTE 2--DISTRIBUTION POLICY
Net Available Cash. Prior to the Consolidation, the Partnership Agreement of
Kelley Partners required that cash distributions be no less than 75% of its
net available cash on a quarterly basis. For these purposes, net available
cash is generally defined as the net operating revenues of Kelley Partners and
Kelley Operating (determined on a combined basis) after payment of certain
expenses, including interest expenses, and after giving effect to such
reserves as Kelley Oil may determine to be required for the business of Kelley
Partners and Kelley Operating, but before repayment of principal or
development, acquisition and exploration costs. Net available cash is
determined for Kelley Partners and Kelley Operating on a combined basis as if
both were one entity and generally corresponds to the sum of net income (loss)
and exploration and dry hole costs plus depreciation, depletion and
amortization and other noncash charges. Net available cash is not intended to
correspond to net cash provided by operating activities computed under
generally accepted accounting principles.
F-39
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Cash Distributions. The following table sets forth, for the periods
indicated, Kelley Partners' cash distributions per Unit. Cash distributions
were paid in the quarter indicated and relate to operations in the preceding
quarter.
<TABLE>
<CAPTION>
1993 1994
----- ----
<S> <C> <C>
First quarter........................................................ $ .32 .30
Second quarter....................................................... .30 .20
Third quarter........................................................ .30 .20
Fourth quarter....................................................... .30 .07
----- ---
Totals............................................................... $1.22 .77
===== ===
</TABLE>
Kelley Partners paid a quarterly distribution of $.02 per Unit on February
27, 1995 relating to operations in the fourth quarter of 1994. Following the
Consolidation, the Partnership Agreements of Kelley Partners and Kelley
Operating were amended to eliminate the distribution requirements.
NOTE 3--EXCHANGE OFFERS
Development Partnerships. Kelley Partners has developed its proved
undeveloped reserves through its direct participation in development drilling
activities in conjunction with development drilling partnerships sponsored by
Kelley Oil ("DDPs"). Prior to the Consolidation, Unitholders owning 100 or
more Units in Kelley Partners could, at their option, participate directly in
DDPs through a special development privilege. On behalf of Kelley Partners,
Kelley Oil sponsored one DDP in each year from 1987 through 1992 (the "1987
DDP" through the "1992 DDP"), together with a DDP that commenced operations in
February 1994 (the "1994 DDP"). Kelley Partners receives a 20% reversionary
interest after payout of the DDPs in exchange for its assignment of drilling
rights to the DDPs.
1990 DDP Exchange. In October 1993, Kelley Partners completed an exchange
offer for interests of investors and the general partners in the 1990 DDP. The
exchange value of the net assets of the 1990 DDP, as determined by Kelley Oil,
aggregated approximately $27.3 million as of July 1, 1993, the effective date
of the 1990 DDP Exchange, or $2.6665 for each unit in the 1990 DDP. The
exchange was accounted for using the purchase method. Effective July 1, 1993,
the results of operations of the 1990 DDP were included in the results of
operations of Kelley Partners. Pursuant to the 1990 DDP Exchange, Kelley
Partners incurred syndication expenses and assumed the liabilities of the 1990
DDP aggregating $11.3 million and acquired all of the oil and gas interests
and related assets of the 1990 DDP, effective as of July 1, 1993, in exchange
for 1.4 million Units in Kelley Partners, of which Kelley Oil received a total
of 1.0 million Units for its general partner interest and units in the 1990
DDP, and officers and directors of Kelley Oil received a total of 66,135 Units
in exchange for their units in the 1990 DDP.
1991 DDP Exchange. In October 1994, Kelley Partners completed an exchange
offer for interests of investors and the general partners in the 1991 DDP. The
exchange value of the net assets of the 1991 DDP, as determined by Kelley Oil,
aggregated approximately $18.7 million as of July 1, 1994, the effective date
of the 1991 DDP Exchange, or $1.5696 for each unit in the 1991 DDP. The
exchange was accounted for using the purchase method. Effective July 1, 1994,
the results of operations of the 1991 DDP were included in the results of
operations of Kelley Partners. Pursuant to the 1991 DDP Exchange, Kelley
Partners incurred syndication expenses and assumed the liabilities of the 1991
DDP aggregating $8.1 million and acquired all of the oil and gas interests and
related assets of the 1991 DDP, effective as of July 1, 1994, in exchange for
2.5 million Units in Kelley Partners, of which Kelley Oil received a total of
1.8 million Units for its general partner interest and units in the 1991 DDP,
and officers and directors of Kelley Oil received a total of 69,450 Units in
exchange for their units in the 1991 DDP.
F-40
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
If the 1991 DDP Exchange had been effective as of January 1, 1994, revenues
would have increased on an unaudited pro forma basis to $39.0 million and net
loss, net loss allocable to limited partners, net loss allocable to general
partners and net loss per Unit would have decreased on an unaudited pro forma
basis to $42.2 million, $40.5 million and $1.7 million and $1.74,
respectively, for the year ended December 31, 1994. On an unaudited pro forma
basis after giving effect to the 1991 DDP Exchange for the year ended December
31, 1993, revenues, net loss, million, net loss allocable to limited partners,
net loss allocable to general partners and net loss per Unit would be $50.8
million, $29.5 million, $28.3 million $1.2 million and $1.41, respectively.
NOTE 4--EQUITY AND DEBT OFFERINGS
1993 Unit Offering. In September 1993, Kelley Partners completed an
underwritten public offering of 3.0 million Units at a purchase price of
$15.75 per Unit, with an additional .3 million Units issued at the same price
upon exercise of the underwriters' overallotment option (the "Public
Offering"). Net proceeds from the Public Offering aggregated $47.3 million.
Total Changes in Units Outstanding. The following table sets forth a summary
of changes in Units outstanding:
<TABLE>
<S> <C>
Units outstanding at January 1, 1993........................... 16,033,009
----------
1990 DDP Exchange, effective July 1, 1993...................... 1,443,845
Public Offering, September 30 and October 12, 1993............. 3,285,000
Note and debenture conversions................................. 102,560
----------
Units outstanding at December 31, 1993....................... 20,864,414
----------
Debenture conversions.......................................... 476
1991 DDP Exchange, effective July 1, 1994...................... 2,486,755
----------
Units outstanding at December 31, 1994......................... 23,351,645
==========
</TABLE>
1990 Debenture Offering. On April 27, 1990, Kelley Partners completed an
underwritten public offering of its 8 1/2% Convertible Subordinated Debentures
due April 1, 2000 ("KLY 8 1/2% Debentures") in the aggregate principal amount
of $26.9 million. Prior to the Consolidation, the KLY 8 1/2% Debentures were
convertible into Units at a conversion rate of 42.533 Unit per $1,000
principal amount. To reflect the exchange ratios for the Units in the
Consolidation, the conversion feature of the KLY 8 1/2% Debentures was
adjusted to 51.864 shares of KOGC Common Stock per $1,000 principal amount or,
at the election of the holder, 25.932 shares of KOGC Common Stock and 5.411
shares of KOGC Preferred Stock per $1,000 principal amount. The KLY 8 1/2%
Debentures are redeemable upon the occurrence of specified events and are
subordinated in right of payment to the prior payment in full of all senior
debt of Kelley Partners. The estimated fair value of the KLY 8 1/2% Debentures
at December 31, 1994 was approximately $21.9 million based on their quoted
price on the American Stock Exchange.
1992 Note Offering. On December 15, 1992, Kelley Partners completed an
underwritten public offering of its 7 7/8% Convertible Subordinated Notes due
1999 in the aggregate principal amount at maturity of $36.2 million (the "KLY
7 7/8% Notes"). The KLY 7 7/8% Notes were offered at an original issue
discount of 17.11% and were convertible into Units prior to the Consolidation
at the rate of 58.470 Units per $1,000 face amount of KLY 7 7/8% Notes. The
conversion rate is subject to antidilution adjustments upon certain events,
including distributions on Units during any twelve-month period, commencing
October 1, 1992, in an aggregate amount exceeding Kelley Partners' total net
available cash for that period. The conversion rate of the KLY 7 7/8% Notes
was increased under their antidilution provisions to account for distributions
in excess of net available cash for that period. To reflect the exchange
ratios for the Units in the Consolidation, the conversion feature of the KLY
F-41
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
7 7/8% Notes was adjusted to 71.263 shares of KOGC Common Stock per $1,000
face amount or, at the election of the holder, 35.632 shares of KOGC Common
Stock and 7.435 shares of KOGC Preferred Stock per $1,000 face amount.
The KLY 7 7/8% Notes may not be called for redemption by Kelley Partners
prior to maturity but are redeemable at the option of the holders under
certain events involving a change of control in Kelley Partners. The KLY 7
7/8% Notes rank equally with the KLY 8 1/2% Debentures and are subordinated in
right of payment to the prior payment in full of all senior debt of Kelley
Partners. Net proceeds from the KLY 7 7/8% Note offering were $28.2 million.
The estimated fair value of the KLY 7 7/8% Notes at December 31, 1994 was
approximately $30.9 million based on a comparison to the market value of the
KLY 8 1/2% Debentures, adjusted for differences in interest rates, maturity
and discount factors.
NOTE 5--PIPELINE OPERATIONS
Kelley Partners owns certain natural gas pipeline facilities in Louisiana
(the "Pipeline Facilities"). Under a contract with the City of Lafayette,
Kelley Partners received facilities fees prior to May 1993 equal to the direct
construction costs of the portion of the Pipeline Facilities serving an
electrical generating plant owned by the City. These fees aggregated
approximately $.6 million in 1992 and $.3 million in 1993. After May 1993,
transportation charges were billed to the City at a level based on a rate of
return on the depreciated pipeline cost.
NOTE 6--BUSINESS SEGMENTS
During 1993 and 1994, Kelley Partners' business segments conducted the
following activities:
Oil and gas--domestic oil and gas producing activities
Gas transmission--purchase, sale and transportation of natural gas
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME IDENTIFIABLE CAPITAL AND
REVENUES (LOSS)(1) ASSETS EXPENDITURES AMORTIZATION
-------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1993
(RESTATED):
Oil and gas........... $33,977 (21,569) 177,580 62,854 29,966
Gas transmission...... 3,781 (207) 6,546 1,316 486
Other................. 62 -- -- -- --
------- ------- ------- ------ ------
Consolidated.......... $37,820 (21,776) 184,126 64,170 30,452
======= ======= ======= ====== ======
December 31, 1994:
Oil and gas........... $30,710 (29,659) 200,142 61,655 37,325
Gas transmission...... 3,819 (540) 5,372 (52) 526
Other................. 219 -- -- -- --
------- ------- ------- ------ ------
Consolidated.......... $34,748 (30,199) 205,514 61,603 37,851
======= ======= ======= ====== ======
</TABLE>
- --------
(1) Operating income (loss), which approximates gross profit, is computed as
operating revenues less cost of gas sold, lease operating expenses,
severance taxes, exploration and dry hole costs and depreciation,
depletion and amortization.
F-42
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Intersegment revenue, which has been eliminated, is comprised of interest
aggregating $.2 million and $0 and oil and gas sales to affiliates aggregating
$27.6 million and $24.2 million for the years ended December 31, 1993 and
1994, respectively. See Note 8--Related Party Transactions.
Oil and gas revenues include $.3 million and $.1 million in 1993 and 1994,
respectively, for rebates related to a settlement with a gas purchaser.
NOTE 7--NOTES PAYABLE
Credit Facilities. Prior to the Consolidation, Kelley Partners and Kelley
Operating were parties to a credit agreement with Bank of Montreal, as agent
for participating banks, providing for a revolving credit/term loan facility
of up to $75 million (the "Prior Credit Facility"). Borrowings under the Prior
Credit Facility were limited to a borrowing base increased to $70 million in
December 1994. Interest was payable on borrowings under the Prior Credit
Facility at a floating rate equal to 1/2% above the bank's prime rate or, at
the election of Kelley Partners, 2% above a quoted Libor rate, together with a
commitment fee of 1/2% per annum of the unused portion of the borrowing base.
The credit agreement provided for payments of interest only until the
scheduled conversion date of July 1, 1995, when any borrowings under the Prior
Credit Facility in excess of 25% of the prevailing borrowing base were
scheduled to be repaid and the balance of the facility converted into a term
loan payable over four years in equal quarterly installments. Kelley Partners
obtained advances under the Prior Credit Facility aggregating $46.9 million
during 1994 primarily for financing its ongoing lease acquisition and drilling
activities. As of December 31, 1994, $69.9 million was outstanding under the
Prior Credit Facility.
In connection with the Consolidation, KOGC completed a refinancing for the
outstanding bank debt of Kelley Partners and Kelley Oil. The refinancing was
provided by Kelley Partners' prior lending banks under a $70 million revolving
credit facility (the "Credit Facility") and a $20 million term loan facility
(the "Term Facility"). The borrowers under the facilities are Kelley Operating
and Kelley Oil. Kelley Partners, KOGC and its other subsidiary partnerships
are guarantors. Borrowings of $90 million under the two facilities were used
to refinance Kelley Partners' bank debt of $69.9 million, Kelley Oil's bank
debt of $9 million and borrowings of $6 million by the 1992 DDP, with the
balance of $5.1 million used to fund payables of Kelley Partners and KOGC,
including part of the expenses for the Consolidation. Borrowings under the
Credit Facility were reduced by $10 million in February 1995 from part of the
proceeds of an equity private placement by KOGC.
Interest is payable on borrowings under the Credit Facility at a floating
rate equal to 1/2% above the agent bank's prime rate or, at the election of
Kelley Partners, 2 1/2% above a quoted Libor rate, together with a commitment
fee of 5/8% per annum of the unused portion of the borrowing base, which is
subject to adjustments based on semiannual evaluations of the KOGC's oil and
gas reserves. The agreement for the Credit Facility requires the payment of
interest only until January 1, 1997, when all borrowings under the facility
will be repayable, subject to annual extensions at the lenders' discretion if
all borrowings under the Term Facility have been repaid. The Term Facility is
amortizable 10% on July 31, 1995 and 15% every three months thereafter, with a
final payment due on January 31, 1997, subject to prepayment from proceeds of
any equity offering after February 9, 1995. Interest is payable on borrowings
under the Term Facility at a floating rate equal to 3 1/2% above the agent
bank's prime rate, increased by 1% every six months after the closing.
Borrowings under the Credit Facility and Term Facility are prepayable
without penalty or premium and are secured by mortgages on all of the oil and
gas and pipeline assets of Kelley Partners, Kelley Operating, KOGC and its
subsidiaries, together with a security interest in production proceeds from
oil and gas sales. The agreements covering the facilities require the consent
of the lenders for third-party borrowings or extraordinary transactions and
provide financial covenants of KOGC including a restriction on total funded
debt to capital of .7 to 1.0, a minimum fixed charge coverage ratio of 1.25 to
1.0, a minimum interest coverage ratio of 2.35 to 1.0, current ratio of 1.0 to
1.0 and restrictions on capital expenditures under specified circumstances.
F-43
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Aggregate Maturities. Assuming that the scheduled January 31, 1997 maturity
date for the Credit Facility is not extended, aggregate maturities of the
Credit Facility, Term Facility, the KLY 8 1/2% Debentures and the KLY 7 7/8%
Notes for the next five years and thereafter, after giving effect to the
Consolidation, are as follows: $4.4 million in 1995, $10.6 million in 1996,
$54.8 million in 1997, $0 in 1998, $34.4 million in 1999 and $26.9 million
thereafter. See Note 4--Equity and Debt Offerings.
Interest Payments. Interest paid during the years ended December 31, 1992,
1993 and 1994 aggregated $3.3 million, $6.6 million and $8.2 million,
respectively.
NOTE 8--RELATED PARTY TRANSACTIONS
Reimbursements. Kelley Oil is reimbursed for its direct costs and an
allocable portion of its general and administrative expenses incurred as
managing general partner of Kelley Partners.
Advances to Affiliated DDPs. Kelley Partners advanced approximately $1.9
million to the 1994 DDP, $1.2 million to the 1992 DDP and $.6 million to the
1991 DDP prior to the closings of their respective offerings to fund
syndication costs and drilling activities. The entire amounts were repaid with
interest at a market rate following the closings of the offerings.
Sales to Affiliates. Substantially all gas produced by Kelley Partners and
the DDPs (collectively, the "Kelley Group") is covered by gas marketing
agreements with Concorde Gas Marketing, Inc., an indirect wholly owned
subsidiary of Kelley Oil ("CGM"). Under the agreements, CGM is responsible for
purchasing gas for resale, administering gas sales, marketing gas not taken by
purchasers under gas purchase contracts and performing related services,
including gas transportation arrangements, oversight of gas gathering
operations, revenue receipt and disbursement functions, administrative
filings, recordkeeping and inspection, testing and monitoring functions.
During 1994, CGM received from the Kelley Group and unrelated customers either
fees or a marketing differential at the rate of $.05 per MMBTU of gas sold and
delivered under these arrangements. For 1995, the marketing fee was modified
to 2% of the resale price for marketed natural gas. The Company believes that
similar arrangements are customary among natural gas producers and their
marketing affiliates. For the years ended December 31, 1993 and 1994, sales to
CGM under the agreements were $27.6 million and $24.2 million, respectively,
and CGM earned total fees on marketing differentials from the Kelley Group of
$1.1 million and $1.6 million in 1993 and 1994, respectively. See Note 9--
Sales to Major Customers.
Purchases from Affiliates. Gas purchases from the Kelley Group for resale
through Lafayette Gas Intrastate, a joint venture through which Kelley
Partners owns the Pipeline Facilities, were approximately $3.3 million and
$3.6 million for the years ended December 31, 1993 and 1994, respectively.
Direct Costs and Allocated Overhead. Overhead allocated to Kelley Partners
by Kelley Oil relating to general and administrative expenses for the years
ended December 31, 1993 and 1994 were $2.0 million and $2.0 million,
respectively.
Kelley Oil is reimbursed by Kelley Partners for direct costs incurred and
advanced in connection with financings and acquisitions by Kelley Partners.
These reimbursements aggregated $.6 million for Kelley Partners' share of
Consolidation expenses, $.3 million for the 1991 DDP Exchange, $.6 million for
the 1993 Public Offering, $1.1 million for the 1990 DDP Exchange, and $.3
million for the Note offering.
Kelley Oil has also been reimbursed for costs directly associated with lease
acquisition, exploration and development activities. These costs aggregated
$4.5 million and $5.3 million for the years ended December 31, 1993 and 1994,
respectively. Kelley Partners capitalized $1.9 million and $1.9 million of
allocated direct costs to oil and gas properties for the years ended December
31, 1993 and 1994, respectively.
F-44
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
An indirect wholly owned subsidiary of Kelley Oil was reimbursed
approximately $.1 million in each of 1993 and 1994 for its direct costs in
managing the Pipeline Facilities. See Note 5--Pipeline Operations.
NOTE 9--SALES TO MAJOR CUSTOMERS
Sales to customers in excess of 10% of total oil and gas sales are as
follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1993 1994
---------- ------
(RESTATED)
<S> <C> <C>
Concorde Gas Marketing.................................. $27,618(1) 24,242(1)
Falco S & D Inc......................................... 4,125 4,330
</TABLE>
- --------
(1) During 1993 and 1994, CGM purchased approximately 20% and 22%,
respectively, of its total oil and gas purchases for resale to LIG
Chemical Company. Other customers accounting for 10% or more of CGM's
resales during 1993 and 1994 were Pontchartrain Natural Gas System (24%
and 23%, respectively), Fina Natural Gas Company (13% and 10%,
respectively), and during 1994, Associated Natural Gas Inc. (18%).
NOTE 10--HEDGING ACTIVITIES
The Partnership's production is sold on its behalf principally by Kelley
Oil, which periodically uses forward sales contracts and derivative financial
instruments covering natural gas to reduce exposure to downward price
fluctuations on natural gas production. As of December 31, 1994, through a
combination of natural gas swap agreements and forward sales contracts,
between 20% and 50% of anticipated natural gas production for the first nine
months of 1995 was hedged at prices above prevailing futures prices for each
contract month. Subsequent arrangements were made at similar prices for
approximately 50% of anticipated natural gas production for the full year. The
natural gas swap agreements generally provide for the Partnership to receive
or make counterparty payments on the differential between a fixed price and a
variable indexed price for natural gas. No significant realized gains or
losses were deferred at December 31, 1994. The Partnership did not have any
hedged positions at December 31, 1993.
The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. The Partnership has not
experienced counterparty nonperformance on these agreements and does not
anticipate any in future periods.
NOTE 11--INTERIM PRESENTATION
General. The accompanying consolidated financial statements of Kelley Oil &
Gas Partners, Ltd. ("Kelley Partners" or the "Partnership") have been prepared
in accordance with generally accepted accounting principles and, in the
opinion of management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the results for the interim
periods presented. The accounting policies followed by the Partnership are set
forth in Note 1 to Kelley Partners' audited financial statements included
elsewhere in this Prospectus.
Consolidation. On February 7, 1995, ownership of the equity interests in
Kelley Partners and Kelley Oil Corporation, its managing general partner
("Kelley Oil"), was consolidated (the "Consolidation") into Kelley Oil & Gas
Corporation ("KOGC"). In the Consolidation, Units in Kelley Partners held by
investors other than Kelley Oil and its subsidiaries (the "Public
Unitholders") were converted into common and preferred stock of
F-45
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
KOGC, and Kelley Partners became a 99.98% owned subsidiary partnership of
KOGC. Following the Consolidation, the historical carrying values of Kelley
Partners' oil and gas properties and publicly held subordinated debt were
adjusted to conform with KOGC's cost basis for those assets and liabilities in
the Consolidation, reflecting their estimated fair market values at February
7, 1995 based on the market value of the common and preferred stock issued to
the Public Unitholders.
As a result of this accounting approach, commonly referred to as "pushdown
accounting," the following adjustments were made to reflect Kelley Partners'
assets and liabilities at fair market value and the net effect on limited
partners' equity at February 7, 1995:
(IN THOUSANDS)
<TABLE>
<S> <C>
Increase (decrease) in:
Purchased unproved properties.................................... $ 85,182
Properties subject to amortization............................... (225,698)
Pipelines and other transportation assets........................ (4,274)
Accumulated depreciation, depletion and amortization............. (195,405)
Convertible subordinated debentures.............................. (5,103)
Convertible subordinated notes................................... (5,110)
Limited partners' equity......................................... 60,828
</TABLE>
If the Consolidation had not taken place, Kelley Partners' depletion,
depreciation and amortization for the quarter ended March 31, 1995 would have
increased by approximately $1.9 million, with a corresponding increase in its
net loss for the quarter.
Change to Successful Efforts Accounting Method. During the third quarter of
1994, Kelley Partners changed from the full cost method to the successful
efforts method of accounting for its oil and gas operations. As a result of
the change in accounting method, Kelley Partners' previously reported net loss
of $.9 million for the quarter ended March 31, 1994 has been restated to a net
loss of $6.8 million.
F-46
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This section provides information required by Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Capitalized costs and accumulated depreciation, depletion and amortization
relating to oil and gas producing activities, all of which are conducted within
the continental United States, are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1993 1994
---------- --------
(RESTATED)
<S> <C> <C>
Unevaluated properties.................................... $ 8,168 7,199
Evaluated properties subject to amortization.............. 312,434 375,058
-------- --------
Capitalized costs......................................... 320,602 382,257
Accumulated depreciation, depletion and amortization...... (151,669) (189,454)
-------- --------
Net capitalized costs..................................... $168,933 192,803
======== ========
</TABLE>
Costs incurred in oil and gas acquisition, exploration and development
activities are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1993 1994
---------- ------
(RESTATED)
<S> <C> <C>
Property acquisition costs:(1)
Proved...................................................... $35,247 41,994
Unproved.................................................... 1,310 1,850
Exploration costs............................................. 14,208 4,522
Development costs............................................. 27,494 26,001
------- ------
Total costs incurred........................................ $78,259 74,367
======= ======
</TABLE>
- --------
(1) Includes assets acquired through exchange offers aggregating $34.9 million
and $24.2 million for years ended December 31, 1993 and 1994, respectively.
F-47
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Results of operations for oil and gas producing activities are summarized
below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1993 1994
---------- -------
(RESTATED)
<S> <C> <C>
Oil and gas revenues........................................ $ 33,977 30,710
Production costs............................................ (10,175) (10,332)
Exploration and dry hole costs.............................. (15,404) (12,712)
Depreciation, depletion and amortization.................... (29,960) (37,325)
-------- -------
Results of operations....................................... $(21,562) (29,659)
======== =======
</TABLE>
Results of operations from oil and gas producing activities are determined
using actual historical revenues, production costs (including production
related taxes), exploration and dry hole costs and depreciation, depletion and
amortization of the capitalized costs subject to amortization. General and
administrative expenses and interest expense are excluded from this
determination of results of operations.
Kelley Partners' net ownership interests in estimated quantities of proved
oil and gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS LIQUIDS NATURAL GAS
(MBBLS) (MMCF)
------------------------- ----------------
1993 1994 1993 1994
------------ ----------- ------- -------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year............... 2,681 1,861 173,324 149,817
Minerals in place received in
DDP Exchanges.................. 492 345 17,439 9,236
Purchases of reserves in place.. -- 52 -- 11,463
Revisions of previous
estimates...................... (1,478) 149 (58,261) (7,628)
Extensions and discoveries...... 456 145 31,043 11,644
Production...................... (290) (331) (13,728) (13,777)
------------ ----------- ------- -------
End of year..................... 1,861 2,221 149,817 160,755
============ =========== ======= =======
Proved developed reserves at end
of year.......................... 1,351 1,546 100,090 106,467
============ =========== ======= =======
</TABLE>
F-48
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
The table of the Standardized Measure of Discounted Future Net Cash Flows
relating to Kelley Partners' ownership interests in proved oil and gas
reserves as of year end is shown below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1993 1994
-------- -------
<S> <C> <C>
Future cash inflows......................................... $385,520 295,374
Future production costs..................................... (67,241) (67,923)
Future development costs.................................... (35,345) (34,333)
-------- -------
Future net cash flows....................................... 282,934 193,118
10% annual discount for estimating timing of cash flows..... (135,679) (78,106)
-------- -------
Standardized measure of discounted future net cash flows.... $147,255 115,012
======== =======
</TABLE>
Future cash inflows are computed by applying year-end prices of oil and gas
to year-end quantities of proved oil and gas reserves. Future production and
development costs are computed by Kelley Oil's petroleum engineers by
estimating the expenditures to be incurred in developing and producing Kelley
Partners' proved oil and gas reserves at the end of the year, based on year-
end costs and assuming continuation of existing economic conditions.
A discount factor of 10% was used to reflect the timing of future net cash
flows. The standardized measure of discounted future net cash flows is not
intended to represent the replacement cost or fair market value of Kelley
Partners' oil and gas properties.
The standardized measure of discounted future net cash flows as of December
31, 1993 and 1994 was calculated using prices in effect as of those dates,
which averaged $13.80 and $15.65, respectively, per barrel of oil and $2.40
and $1.62, respectively, per Mcf of natural gas.
F-49
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED AND INTERIM FINANCIAL STATEMENTS--(CONTINUED)
Changes in standardized measure of future net cash flows relating to proved
oil and gas reserves are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1993 1994
-------- -------
<S> <C> <C>
Changes due to current year operations:
Sales of oil and gas, net of production costs............. $(23,802) (20,378)
Extensions and discoveries................................ 27,565 9,803
Minerals in place received in DDP Exchanges, net of future
development and production costs......................... 30,331 18,699
Purchases of reserves in place............................ -- 10,074
Development costs incurred during the year................ 15,162 8,709
Changes due to revisions in standardized variables:
Prices and production costs............................... (4,357) (48,334)
Revisions of previous quantity estimates.................. (95,042) (14,897)
Estimated future development costs........................ (3,217) (10,922)
Accretion of discount....................................... 20,073 14,725
Production rates (timing) and other......................... (20,188) 278
-------- -------
Net increase (decrease)..................................... (53,475) (32,243)
Beginning of year........................................... 200,730 147,255
-------- -------
End of year................................................. $147,255 115,012
======== =======
</TABLE>
Sales of oil and gas, net of production costs, are based on historical
results. Extensions and discoveries, minerals in place received in exchange
offers, purchases of reserves in place, the changes due to revisions in
standardized variables and the accretion of discount are reported on a
discounted basis. Revisions of previous quantity estimates include reductions
in proved undeveloped reserves attributable to drill sites assigned to DDPs.
F-50
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1993 1993 1993 1993
---------- ---------- ------------- ------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Operating revenues............. $8,275 $9,650 $9,742 $10,091
Operating loss(1).............. (799) (1,567) (5,994) (13,416)
Net loss....................... (3,283) (4,142) (8,833) (15,933)
Net loss per unit.............. (.20) (.25) (.48) (.73)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
---------- ---------- ------------- ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Operating revenues............. $9,983 $ 7,892 $ 8,661 $ 7,993
Operating loss(1).............. (4,209) (7,215) (9,300) (9,475)
Net loss....................... (6,803) (10,056) (12,354) (13,401)
Net loss per unit.............. (.31) (.46) (.51) (.55)
</TABLE>
- --------
(1) Operating income (loss), which approximates gross profit, is computed as
operating revenues less cost of gas sold, lease operating expenses,
severance taxes, exploration and dry hole costs and depreciation,
depletion and amortization.
F-51
<PAGE>
[LOGO OF KELLEY OIL APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Bylaws of Kelley Oil & Gas Corporation (the "Company")
provides for the Company's indemnification of officers, directors and
controlling persons to the full extent provided in the General Corporation Law
of Delaware (the "GCL"). Section 145 of the GCL provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed proceeding (other than a
proceeding by or in the right of the corporation) by reason of the fact that
he is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation in a similar position with
another entity, against expenses (including attorneys' fees), judgments, fines
and settlements incurred by him in connection with the proceeding if he acted
in good faith and in a manner reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Indemnification under Section 145 of the GCL is limited in a proceeding by or
in the right of the corporation to expenses (including attorneys' fees)
incurred in connection with the proceeding. In either case, no indemnification
shall be made if the indemnified person has been adjudged to be liable for
negligence or misconduct in the performance of this duty to the corporation,
unless, and to the extent the Delaware court of Chancery or other court in
which the proceeding was brought, despite the adjudication of liability
determines such person is entitled to indemnity.
Section 145 of the GCL provides that the indemnity obligations of a
corporation shall only arise if authorized by (i) a majority of a quorum of
directors who are not a party to the proceeding, (ii) independent legal
counsel to the corporation if a quorum of directors is not obtainable, (iii)
independent legal counsel to the corporation if a quorum if directors is
obtainable and the directors direct counsel to make the determination or (iv)
the stockholders. The board of directors of the corporation may authorize
expenses in connection with a proceeding to be paid in advance of the final
disposition upon receipt of an undertaking by the person on whose behalf the
expenses are to be paid to repay the expenses in the event he is not entitled
to indemnity.
Pursuant to Section 102(b) of the GCL, the Certificate of Incorporation of
the Company provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) in connection with certain illegal dividend
payments and stock redemptions or (iv) for any transaction from which the
director derived an improver personal benefit.
Delaware corporations also are authorized under the GCL to obtain insurance
to protect officers and directors from certain liabilities, including
liabilities against which the corporation cannot indemnify its directors and
officers. The Company currently has no directors' and officers' liability
insurance in effect.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<C> <S>
2.1 Agreement and Plan of Consolidation among the Registrant, Kelley Oil
Corporation, Kelley Oil & Gas Partners, Ltd. ("Kelley Partners") and
the other parties named therein (incorporated by reference to Exhibit
2.1 to the Registrant's Registration Statement (the "Consolidation
Registration Statement") on Form S-4 (Reg No. 33-84338) filed
September 26, 1994, as amended).
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Consolidation Registration Statement).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<C> <S>
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant dated December 20, 1994 (incorporated by reference to
Exhibit 3.2 to the Consolidation Registration Statement).
3.3 Certificate of Correction to Certificate of Incorporation of the
Registrant dated February 12, 1996 (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
3.4 Certificate of Designation of $2.625 Convertible Exchangeable
Preferred Stock of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 10, 1995).
3.5 Certificate of Designations of Cumulative Convertible Preferred Stock
of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K (File No. 0-25214) dated
February 10, 1995).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit 3.5 to
the Consolidation Registration Statement).
4.1 Indenture dated as of October 15, 1996, among the Registrant, as
issuer, Kelley Oil Corporation and Kelley Operating Company, Ltd., as
guarantors, and United States Trust Company of New York, relating to
the Registrant's 10 3/8% Senior Subordinated Notes Due 2006
(incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.2 Registration Agreement, dated October 25, 1996, between the Registrant
and Morgan Stanley & Co. Incorporated, for itself and the other
several Purchasers named therein (incorporated by reference to Exhibit
4.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-
25214) for the quarterly period ended September 30, 1996).
4.3 Amended and Restated Credit Agreement among Kelley Oil & Gas
Corporation, Kelley Oil Corporation, and Kelley Operating Company,
Ltd., as Borrowers, Concorde Gas Marketing, Inc., Kelley Partners 1992
Development Drilling Joint Venture, Kelley Partners 1994 Development
Drilling Joint Venture, Kelley Partners 1992 Development Drilling
Program, and Kelley Partners 1994 Development Drilling Program, as
Guarantors, Texas Commerce Bank National Association, as Agent, Chase
Securities Inc., as Arranger and Syndication Agent, and the Lenders
Signatory thereto, dated as of December 12, 1996.
4.4 Form of the Registrant's 10 3/8% Senior Subordinated Note Due 2006,
Series A (incorporated by reference to Exhibit 4.4 to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
*4.5 Form of the Registrant's 10 3/8% Senior Subordinated Note Due 2006,
Series B.
4.6 Certificate representing Common Stock of the Registrant (incorporated
by reference to Exhibit 4.1 to the Consolidation Registration
Statement).
4.7 Certificate representing $2.625 Convertible Exchangeable Preferred
Stock of the Registrant (incorporated by reference to Exhibit 4.2 to
the Consolidation Registration Statement).
4.8 Supplemental Indenture dated February 7, 1995 among the Registrant,
Kelley Partners and United States Trust Company of New York, relating
to Kelley Partners' 8 1/2% Convertible Subordinated Debentures (the "8
1/2% Debentures") due 2000 (incorporated by reference to Exhibit 4.1
to the Registrant's Current Report on Form 8-K (File No. 0-25214)
dated February 10, 1995).
4.9 Supplemental Indenture dated March 29, 1996 between the Registrant and
United States Trust Company of New York, relating to the 8 1/2%
Debentures (incorporated by reference to Exhibit 4.4 to the
Registrant's Annual Report on Form 10-K (File No. 0-25214) for the
year ended December 31, 1995).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<C> <S>
4.10 Supplemental Indenture dated February 7, 1995 among the Registrant,
Kelley Partners and United States Trust Company of New York, relating
to Kelley Partners' 7 7/8% Convertible Subordinated Notes (the "7 7/8%
Notes") due 1999 (incorporated by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K (File No. 0-25214) dated
February 10, 1995).
4.11 Supplemental Indenture dated March 29, 1996 between the Registrant and
United States Trust Company of New York, relating to the 7 7/8% Notes
(incorporated by reference to Exhibit 4.6 to the Registrant's Annual
Report on Form 10-K (File No. 0-25214) for the year ended December 31,
1995).
4.12 Indenture dated as of June 15, 1995 among the Registrant, as issuer,
Kelley Partners, Kelley Operating Company, Ltd. and Kelley Oil
Corporation, as guarantors, and Chemical Bank, as trustee, relating to
the Registrant's 13 1/2% Senior Notes due 1999 (incorporated by
reference to Exhibit 4.5 to the Registrant's Registration Statement on
Form S-3 (Reg. No. 33-92214) dated June 9, 1995).
4.13 Supplemental Indenture dated as of October 28, 1996, among the
Registrant, as issuer, Kelley Operating Company, Ltd. and Kelley Oil
Corporation, as guarantors, and The Chase Manhattan Bank (formerly
Chemical Bank), as trustee, relating to the Registrant's 13 1/2%
Senior Notes Due 1999 (incorporated by reference to Exhibit 4.3 to the
Registrant's Quarterly Report on Form 10-Q (File No. 0-25214) for the
quarterly period ended September 30, 1996).
4.14 Option Agreement dated as of February 15, 1996 between the Registrant
and Contour Production Company L.L.C. (incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
*5.1 Opinion of Fulbright & Jaworski L.L.P. regarding the legality of the
Exchange Notes.
10.1 Amended and Restated Employee Stock Ownership Plan of Kelley Oil
effective as of January 1, 1989 (incorporated by reference to Exhibit
10.15 to Kelley Oil's Annual Report on Form 10-K (File No.
0-17585) for the year ended December 31, 1991).
10.2 1987 Incentive Stock Option Plan (the "1987 Plan") of Kelley Oil
(incorporated by reference to Kelley Oil's Annual Report on Form 10-K
(File No. 0-17585) for the year ended December 31, 1988).
10.3 1991 Incentive Stock Option Plan (the "1991 Plan") of Kelley Oil
(incorporated by reference to Exhibit 10.3 to Kelley Oil's Annual
Report 10-K (File No. 0-175850 for the year ended December 31, 1991).
10.4 1995 Incentive Stock Option Plan of the Registrant (the "1995 Plan")
(incorporated by reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K (File No. 0-25214) for the year ended December 31,
1995.
10.5 Amendment to the 1987 Plan, 1991 Plan and 1995 Plan (incorporated by
reference to Exhibit 10.5 to the Registrant's Current Report on Form
8-K (File No. 0-25214) dated February 15, 1996).
10.6 1996 Nonqualified Stock Option Plan of the Registrant (incorporated by
reference to Exhibit 10.4 to the Registrant's Current Report on Form
8-K (File No. 0-25214) dated February 15, 1996).
10.7 Employment Agreement dated as of February 15, 1996 between the
Registrant and John F. Bookout, Jr. (incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K
(File No. 0-25214) dated February 15, 1996).
10.8 Form of Employment Agreements dated as of February 15, 1996 between
the Registrant and each of Dallas Laumbach, William Rankin and William
Albrecht (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K (File No. 0-25214) dated
February 15, 1996).
*12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant (incorporated by reference to the
Registrant's Quarterly Report on
Form 10-Q (File No. 0-17585) for the quarter ended September 30,
1991).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<C> <S>
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst &Young LLP.
*23.3 Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1)
23.4 Consent of H.J. Gruy & Associates, Inc.
24.1 Powers of Attorney (included on page II-6).
25.1 Statement of Eligibility Under Trust Indenture Act of 1939 of a
Corporation Designated to Act as Trustee on Form T-1.
99.1 Form of Letter of Transmittal and related documents.
</TABLE>
- -------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on December 20, 1996.
KELLEY OIL & GAS CORPORATION
John F. Bookout
By:__________________________
John F. Bookout
President and Chief
Executive Officer
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned constitutes and
appoints John F. Bookout and Thomas E. Baker, and each of them, either one of
whom may act without joinder of the other, his true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or
all pre- and post-effective amendments to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, and each of them, or the substitute or substitutes of any
or all of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 21st day of November, 1996 by
the following persons in the capacities indicated.
John F. Bookout William C. Rankin
- ----------------------------- -----------------------------
John F. Bookout William C. Rankin Senior
President, Chief Executive Vice President and Chief
Officer and Director Financial Officer (Principal
(Principal Executive Financial Officer)
Officer)
John J. Conklin, Jr.
Lawrence G. Marble -----------------------------
- ----------------------------- John J. Conklin, Jr.
Lawrence G. Marble Director
Controller
(Principal Accounting
Officer)
William J. Murray
Ralph P. Davidson -----------------------------
- ----------------------------- William J. Murray
Ralph P. Davidson Director
Director
Michael B. Rothfeld
Ogden M. Phipps -----------------------------
- ----------------------------- Michael B. Rothfeld
Ogden M. Phipps Director
Director
Ward W. Woods
-----------------------------
Ward W. Woods
Director
<PAGE>
EXHIBIT 4.3
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
AMONG
KELLEY OIL & GAS CORPORATION,
KELLEY OIL CORPORATION,
AND
KELLEY OPERATING COMPANY, LTD.,
AS BORROWERS,
CONCORDE GAS MARKETING, INC.,
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING JOINT VENTURE,
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING JOINT VENTURE,
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM,
AND
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM,
AS GUARANTORS,
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
AS AGENT,
CHASE SECURITIES INC.,
AS ARRANGER AND SYNDICATION AGENT,
AND
THE LENDERS SIGNATORY HERETO
DATED AS OF DECEMBER 12, 1996
$125,000,000 REVOLVING CREDIT FACILITY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above................................................................ 1
Section 1.02 Certain Defined Terms.............................................................. 1
Section 1.03 Accounting Terms and Determinations................................................ 19
ARTICLE II
COMMITMENTS
Section 2.01 Loans and Letters of Credit........................................................ 19
Section 2.02 Borrowings, Continuations and Conversions, Letters of Credit....................... 20
Section 2.03 Changes of Commitments............................................................. 22
Section 2.04 Fees............................................................................... 22
Section 2.05 Several Obligations................................................................ 23
Section 2.06 Notes.............................................................................. 23
Section 2.07 Prepayments........................................................................ 23
Section 2.08 Borrowing Base..................................................................... 24
Section 2.09 Assumption of Risks................................................................ 26
Section 2.10 Obligation to Reimburse and to Prepay.............................................. 26
Section 2.11 Lending Offices.................................................................... 28
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans................................................................. 29
Section 3.02 Interest........................................................................... 29
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 Payments........................................................................... 30
Section 4.02 Pro Rata Treatment................................................................. 30
Section 4.03 Computations....................................................................... 30
Section 4.04 Non-receipt of Funds by the Agent.................................................. 31
Section 4.05 Setoff, Sharing of Payments, Etc................................................... 31
Section 4.06 Taxes.............................................................................. 32
</TABLE>
-i-
<PAGE>
<TABLE>
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<S> <C>
Section 4.07 Disposition of Proceeds............................................................ 35
Section 4.08 Joint and Several.................................................................. 35
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 Additional Costs, Etc.............................................................. 36
Section 5.02 Limitation on Eurodollar Loans..................................................... 38
Section 5.03 Illegality......................................................................... 38
Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03........................... 38
Section 5.05 Compensation....................................................................... 39
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Initial Funding.................................................................... 40
Section 6.02 Initial and Subsequent Loans and Letters of Credit................................. 41
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 Existence.......................................................................... 42
Section 7.02 Financial Condition................................................................ 43
Section 7.03 Litigation......................................................................... 43
Section 7.04 No Breach.......................................................................... 43
Section 7.05 Authority.......................................................................... 44
Section 7.06 Approvals.......................................................................... 44
Section 7.07 Use of Loans....................................................................... 44
Section 7.08 ERISA.............................................................................. 44
Section 7.09 Taxes.............................................................................. 45
Section 7.10 Title, Etc......................................................................... 46
Section 7.11 No Material Misstatements.......................................................... 46
Section 7.12 Investment Company Act............................................................. 47
Section 7.13 Public Utility Holding Company Act................................................. 47
Section 7.14 Subsidiaries and Partnerships...................................................... 47
Section 7.15 Location of Business and Offices................................................... 47
Section 7.16 Defaults........................................................................... 47
Section 7.17 Environmental Matters.............................................................. 47
Section 7.18 Compliance with the Law............................................................ 49
Section 7.19 Insurance.......................................................................... 49
Section 7.20 Hedging Agreements................................................................. 49
</TABLE>
-ii-
<PAGE>
<TABLE>
Page
-----------
<S> <C>
Section 7.21 Restriction on Liens............................................................... 50
Section 7.22 Solvency........................................................................... 50
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 Financial Statements............................................................... 50
Section 8.02 Litigation......................................................................... 52
Section 8.03 Maintenance, Etc................................................................... 52
Section 8.04 Environmental Matters.............................................................. 54
Section 8.05 Further Assurances................................................................. 54
Section 8.06 Performance of Obligations......................................................... 55
Section 8.07 Reserve Reports.................................................................... 55
Section 8.08 Title Information.................................................................. 56
Section 8.09 Additional Collateral.............................................................. 56
Section 8.10 ERISA Information and Compliance................................................... 57
Section 8.11 Restricted Subsidiaries to be Obligors............................................. 57
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 Debt............................................................................... 58
Section 9.02 Liens.............................................................................. 59
Section 9.03 Investments, Loans and Advances.................................................... 59
Section 9.04 Dividends, Distributions and Redemptions........................................... 60
Section 9.05 Sales and Leasebacks............................................................... 61
Section 9.06 Nature of Business................................................................. 61
Section 9.07 Limitation on Leases............................................................... 61
Section 9.08 Mergers, Etc....................................................................... 61
Section 9.09 Proceeds of Notes.................................................................. 61
Section 9.10 ERISA Compliance................................................................... 62
Section 9.11 Sale or Discount of Receivables.................................................... 63
Section 9.12 Ratio of Total Senior Funded Debt to EBITDA........................................ 63
Section 9.13 Interest Coverage Ratio............................................................ 63
Section 9.14 Sale of Oil and Gas Properties..................................................... 64
Section 9.15 Environmental Matters.............................................................. 64
Section 9.16 Transactions with Affiliates....................................................... 64
Section 9.17 Subsidiaries and Partnerships...................................................... 64
Section 9.18 Negative Pledge Agreements......................................................... 65
Section 9.19 Partnership Agreement.............................................................. 65
Section 9.20 Subordinated Debt and Senior Subordinated Notes.................................... 65
Section 9.21 Gas Imbalances..................................................................... 65
</TABLE>
-iii-
<PAGE>
<TABLE>
Page
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<S> <C>
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default................................................................. 66
Section 10.02 Remedies.......................................................................... 68
ARTICLE XI
THE AGENT
Section 11.01 Appointment, Powers and Immunities................................................ 69
Section 11.02 Reliance by Agent................................................................. 70
Section 11.03 Defaults.......................................................................... 70
Section 11.04 Rights as a Lender................................................................ 70
Section 11.05 INDEMNIFICATION................................................................... 70
Section 11.06 Non-Reliance on Agent and other Lenders........................................... 71
Section 11.07 Action by Agent................................................................... 71
Section 11.08 Resignation or Removal of Agent................................................... 71
Section 11.09 CSI............................................................................... 72
ARTICLE XII
MISCELLANEOUS
Section 12.01 Waiver............................................................................ 72
Section 12.02 Notices........................................................................... 72
Section 12.03 Payment of Expenses, Indemnities, Etc............................................. 72
Section 12.04 Amendments, Etc................................................................... 74
Section 12.05 Successors and Assigns............................................................ 74
Section 12.06 Assignments and Participations.................................................... 75
Section 12.07 Invalidity........................................................................ 76
Section 12.08 Counterparts...................................................................... 76
Section 12.09 References........................................................................ 76
Section 12.10 Survival.......................................................................... 77
Section 12.11 Captions.......................................................................... 77
Section 12.12 No Oral Agreements................................................................ 77
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION......................................... 77
Section 12.14 Interest.......................................................................... 78
Section 12.15 Confidentiality................................................................... 79
Section 12.16 Effectiveness..................................................................... 80
Section 12.17 Prior Debt Security Instruments................................................... 80
</TABLE>
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<PAGE>
Exhibit A - Form of Note
Exhibit B - Form of Borrowing, Continuation and Conversion Request
Exhibit C - Form of Compliance Certificate
Exhibit D - List of Security Instruments
Exhibit E - Form of Assignment Agreement
Exhibit F - List of Maximum Credit Amounts
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.09 - Taxes
Schedule 7.10(a)- Titles, etc.
Schedule 7.14 - Subsidiaries and Partnerships
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Hedging Agreements
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
Schedule 9.16 - Transactions with Affiliates
-v-
<PAGE>
THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 12,
1996 is among: KELLEY OIL & GAS CORPORATION, a Delaware corporation (the
"Parent"), KELLEY OIL CORPORATION, a Delaware corporation ("KOC"), KELLEY
OPERATING COMPANY, LTD., a limited partnership formed under the laws of the
State of Texas ("Kelley Operating"; the Parent, KOC and Kelley Operating,
collectively, the "Borrowers"); CONCORDE GAS MARKETING, INC., a Delaware
corporation ("Concorde"), 92 JV (as defined in Section 1.02), 94 JV (as defined
in Section 1.02), 92 DDP (as defined in Section 1.02) and 94 DDP (as defined in
Section 1.02); each of the lenders that is a signatory hereto or which becomes a
signatory hereto as provided in Section 12.06 (individually, together with its
successors and assigns, a "Lender" and, collectively, the "Lenders"); TEXAS
COMMERCE BANK NATIONAL ASSOCIATION (in its individual capacity, "TCB," as agent
for the Lenders (in such capacity, together with its successors in such
capacity, the "Agent")); and CHASE SECURITIES INC. (in its individual or any
other capacity, "CSI").
R E C I T A L S
---------------
A. The Borrowers have requested that the Lenders amend, extend and
rearrange all of the Prior Debt (as hereafter defined) and provide certain loans
to and extensions of credit on behalf of the Borrowers for general business
purposes; and
B. The Lenders have agreed to amend, extend and rearrange the Prior Debt
and to make such loans and extensions of credit subject to the terms and
conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans, extensions of credit and commitments hereinafter
referred to, the parties hereto agree to amend and restate the Prior Credit
Agreement (as hereafter defined) as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above. As used in this Agreement, the
terms "Agent," "Borrowers," "CSI," "Kelley Operating," "Concorde," "KOC,"
"Guarantors," "Lender," "Lenders," "Parent," and "TCB," shall have the meanings
indicated above.
Section 1.02 Certain Defined Terms. As used herein, the following
terms shall have the following meanings (all terms defined in this Article I or
in other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):
"92 DDP" shall mean Kelley Partners 1992 Development Drilling Program,
a Texas limited partnership.
"94 DDP" shall mean Kelley Partners 1994 Development Drilling Program,
a Texas limited partnership.
<PAGE>
"92 JV" shall mean Kelley Partners 1992 Development Drilling Joint
Venture, a general partnership formed under the laws of the State of Texas,
pursuant to the Joint Venture Agreement dated November 27, 1992 between 92
DDP and Kelley Operating, as amended.
"94 JV" shall mean Kelley Partners 1994 Development Drilling Joint
Venture, a general partnership formed under the laws of the State of Texas,
pursuant to the Joint Venture Agreement dated February 28, 1994 between 94
DDP and Kelley Operating, as amended.
"Additional Costs" shall have the meaning assigned such term in
Section 5.01(a).
"Affected Loans" shall have the meaning assigned such term in Section
5.04.
"Affiliate" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such
first Person, (ii) any director or officer of such first Person or of any
Person referred to in clause (i) above and (iii) if any Person in clause
(i) above is an individual, any member of the immediate family (including
parents, spouse and children) of such individual and any trust whose
principal beneficiary is such individual or one or more members of such
immediate family and any Person who is controlled by any such member or
trust. For purposes of this definition, any Person which owns directly or
indirectly 10% or more of the securities having ordinary voting power for
the election of directors or other governing body of a corporation or 10%
or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be deemed to
"control" (including, with its correlative meanings, "controlled by" and
"under common control with") such corporation or other Person. For the
purposes of Section 9.16, shareholders and Affiliates of BSC that would not
be Affiliates of any of the Obligors or any of their Subsidiaries other
than by reason of being shareholders or Affiliates of BSC, and that neither
in fact participate in the management of any of BSC, BP Co., the Obligors
or any of their Subsidiaries, nor are controlled by BSC or BP Co., or any
of their respective Affiliates who in fact participate in the management of
any of BSC, BP Co., the Obligors or any of their Subsidiaries, shall not be
deemed to be Affiliates of the Obligors or any of their Subsidiaries.
"Agreement" shall mean this Credit Agreement, as the same may from
time to time be amended or supplemented.
"Aggregate Commitments" at any time shall equal the amount calculated
in accordance with Section 2.03.
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<PAGE>
"Aggregate Maximum Credit Amounts" at any time shall equal the sum of
the Maximum Credit Amounts of the Lenders ($125,000,000) as the same may be
reduced pursuant to Section 2.03(b).
"Applicable Lending Office" shall mean, for each Lender and for each
Type of Loan, the lending office of such Lender (or an Affiliate of such
Lender) designated for such Type of Loan on the signature pages hereof or
such other offices of such Lender (or of an Affiliate of such Lender) as
such Lender may from time to time specify to the Agent and the Borrowers as
the office by which its Loans of such Type are to be made and maintained.
"Applicable Margin" shall mean (i) 0.0% per annum with respect to Base
Rate Loans and (ii) with respect to Eurodollar Loans, the applicable per
annum percentage set forth at the appropriate intersection in the table
shown below, based on the Borrowing Base Utilization as in effect from time
to time:
Borrowing Base Utilization Applicable Margin
-------------------------- -----------------
Less than or equal
to 33% 1.00%
Greater than 33%, but
less than or equal
to 66% 1.25%
Greater than 66% 1.50%
Each change in the Applicable Margin resulting from a change in the
Borrowing Base Utilization shall take effect at the time of such change in
the Borrowing Base Utilization.
"Assignment" shall have the meaning assigned such term in Section
12.06(b).
"Base Rate" shall mean, with respect to any Base Rate Loan, for any
day, the higher of (i) the Federal Funds Rate for any such day plus 1/2 of
1% or (ii) the Prime Rate for such day. Each change in any interest rate
provided for herein based upon the Base Rate resulting from a change in the
Base Rate shall take effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
upon the Base Rate.
"Bessemer" shall mean Bessemer Holdings, L.P., a Delaware limited
partnership.
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<PAGE>
"Borrowing Base" shall mean at any time an amount equal to the amount
determined in accordance with Section 2.08.
"Borrowing Base Utilization" shall mean the result, expressed as a
percentage, determined by dividing (i) the sum of (a) the aggregate amount
of all Loans outstanding plus (b) the LC Exposure by (ii) the Borrowing
Base then in effect.
"BP Co." shall mean Bessemer Partners & Co.
"BSC" shall mean Bessemer Securities Corporation.
"Business Day" shall mean any day other than a Saturday or Sunday or a
day on which commercial banks are authorized or required to close in New
York, New York or Houston, Texas and, where such term is used in the
definition of "Quarterly Date" and, when used in connection with a
borrowing or continuation of, a payment or prepayment of principal of or
interest on, or a conversion of or into, or the Interest Period for, a
Eurodollar Loan or a notice by the Borrowers with respect to any such
borrowing or continuation, payment, prepayment, conversion or Interest
Period, any such day which is also a day on which dealings in Dollar
deposits are carried out in the London interbank market.
"Change of Control" shall mean (i) Bessemer or its Affiliates shall
cease to beneficially own (within the meaning of Rule 13d-3 of the SEC
under the Exchange Act), directly or indirectly, at least 20% (on a fully
diluted basis) of the total of all equity interests in the Parent and at
least 20% of the combined voting power of all securities of the Parent
entitled to vote in the election of directors; (ii) any Person or two or
more Persons acting in concert (other than Bessemer or its Affiliates)
shall have acquired beneficial ownership (within the meaning of Rule 13d-3
of the SEC under the Exchange Act), directly or indirectly, of Voting Stock
of the Parent (or other securities convertible into such Voting Stock),
representing a greater percentage of the combined voting power of all
Voting Stock of the Parent than the percentage of the combined voting power
of all Voting Stock of the Parent owned directly, or indirectly through
Bessemer or its Affiliates; or (iii) any Person or two or more Persons
acting in concert (other than Bessemer or its Affiliates) shall have
acquired by contract or otherwise, or shall have entered into a contract or
arrangement that, upon consummation, will result in its or their
acquisition of, the power to exercise directly or indirectly, a controlling
influence over the management or policies of the Parent.
"Closing Date" shall mean December 12, 1996.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time and any successor statute.
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<PAGE>
"Commitment" shall mean, for any Lender, its obligation to make Loans
up to the lesser of such Lender's Maximum Credit Amount or the Lender's
Percentage Share of the then effective Borrowing Base and to participate in
the Letters of Credit as provided in Section 2.01(b).
"Consolidated Net Income" shall mean with respect to the Parent and
its Consolidated Subsidiaries, for any period, the aggregate of the net
income (or loss) of the Parent and its Consolidated Subsidiaries after
allowances for taxes for such period, determined on a consolidated basis in
accordance with GAAP; provided, however, that there shall be excluded from
such net income (to the extent otherwise included therein) the following:
(i) the net income of any Person in which the Parent or any Consolidated
Subsidiary has an interest (which interest does not cause the net income of
such other Person to be consolidated with the net income of the Parent and
its Consolidated Subsidiaries in accordance with GAAP), except to the
extent of the amount of dividends or distributions actually paid in such
period by such other Person to the Parent or to a Consolidated Subsidiary,
as the case may be; (ii) the net income (but not loss) of any Consolidated
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions or transfers or loans by that Consolidated Subsidiary
is not at the time permitted by operation of the terms of its charter or
any agreement, instrument or Governmental Requirement applicable to such
Consolidated Subsidiary, or is otherwise restricted or prohibited in each
case determined in accordance with GAAP; (iii) the net income (or loss) of
any Person acquired in a pooling-of-interests transaction for any period
prior to the date of such transaction; (iv) any extraordinary gains or
losses, including gains or losses attributable to Property sales not in the
ordinary course of business; and (v) the cumulative effect of a change in
accounting principles and any gains or losses attributable to writeups or
writedowns of assets.
"Consolidated Subsidiaries" shall mean each Subsidiary of the Parent
or the Borrowers (whether now existing or hereafter created or acquired)
the financial statements of which shall be (or should have been)
consolidated with the financial statements of the Parent or the Borrowers
in accordance with GAAP.
"Contour" shall mean Contour Production Company L.L.C., a Delaware
limited liability company.
"DDP" shall mean either 92 DDP or 94 DDP or both 92 DDP and 94 DDP, as
the context requires.
"Debt" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or other similar instruments
(including principal, interest, fees and charges); (ii) all obligations of
such Person (whether contingent or otherwise) in respect of bankers'
acceptances, letters of credit, surety or other bonds
-5-
<PAGE>
and similar instruments; (iii) all obligations of such Person to pay the
deferred purchase price of Property or services (other than for borrowed
money and accounts payable arising in the ordinary course of business of
such Person); (iv) all obligations under leases which shall have been, or
should have been, in accordance with GAAP, recorded as capital leases in
respect of which such Person is liable (whether contingent or otherwise);
(v) all obligations under leases which require such Person or its Affiliate
to make payments over the term of such lease, including payments at
termination, which are substantially equal to at least eighty percent (80%)
of the purchase price of the Property subject to such lease plus interest
at an imputed rate of interest; (vi) all Debt and other obligations of
others secured by a Lien on any asset of such Person, whether or not such
Debt is assumed by such Person; (vii) all Debt and other obligations of
others guaranteed by such Person or in which such Person otherwise assures
a creditor against loss of the debtor or obligations of others; (viii) all
obligations or undertakings of such Person to maintain or cause to be
maintained the financial position or covenants of others or to purchase the
Debt or Property of others; (ix) the undischarged balance of any production
payment created by such Person or for the creation of which such Person
directly or indirectly received payment; (x) the net aggregate mark-to-
market value of all obligations of such Person under Hedging Agreements;
and (xi) obligations to deliver goods or services including Hydrocarbons in
consideration of advance payments.
"Default" shall mean an Event of Default or an event which with notice
or lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"EBITDA" shall mean, for any period, the sum of Consolidated Net
Income for such period plus the following expenses or charges to the extent
deducted from Consolidated Net Income in such period: interest, taxes,
depreciation, depletion, amortization (including amortization of deferred
financing costs), accretion of discount, Exploration Costs and other non
cash charges and minus any non cash income to the extent included in income
in such period.
"Effective Date" shall have the meaning assigned such term in Section
12.16.
"Engineering Reports" shall have the meaning assigned such term in
Section 2.08.
"Environmental Laws" shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all
jurisdictions in which the Obligors or any Subsidiary is conducting or at
any time has conducted business, or where any Property of the Obligors or
any Subsidiary is located, including without limitation, the Oil Pollution
Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of
-6-
<PAGE>
1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as
amended, the Occupational Safety and Health Act of 1970, as amended, the
Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the
Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as
amended, the Superfund Amendments and Reauthorization Act of 1986, as
amended, the Hazardous Materials Transportation Act, as amended, and other
environmental conservation or protection laws. The term "oil" shall have
the meaning specified in OPA, the terms "hazardous substance" and "release"
(or "threatened release") have the meanings specified in CERCLA, and the
terms "solid waste" and "disposal" (or "disposed") have the meanings
specified in RCRA; provided, however, that (i) in the event either OPA,
CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date
of such amendment and (ii) to the extent the laws of the state in which any
Property of the Obligors or any Subsidiary is located establish a meaning
for "oil," "hazardous substance," "release," "solid waste" or "disposal"
which is broader than that specified in either OPA, CERCLA or RCRA, such
broader meaning shall apply.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time and any successor statute.
"ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with any of the Obligors or any Subsidiary
would be deemed to be a "single employer" within the meaning of section
4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of
the Code.
"ERISA Event" shall mean (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of
any of the Obligors any Subsidiary or any ERISA Affiliate from a Plan
during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to
terminate a Plan or the treatment of a Plan amendment as a termination
under Section 4041 of ERISA, (iv) the institution of proceedings to
terminate a Plan by the PBGC or (v) any other event or condition that
constitutes grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, any Plan.
"Eurodollar Loans" shall mean Loans the interest rates on which are
determined on the basis of rates referred to in the definition of "Fixed
Eurodollar Rate".
"Event of Default" shall have the meaning assigned such term in
Section 10.01.
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<PAGE>
"Excepted Liens" shall mean: (i) Liens for taxes, assessments or
other governmental charges or levies not yet due or which are being
contested in good faith by appropriate action and for which appropriate
reserves (in the good faith judgment of the management of the Parent) have
been maintained; (ii) Liens in connection with workmen's compensation,
unemployment insurance or other social security, old age pension or public
liability obligations not yet due or which are being contested in good
faith by appropriate action and for which appropriate reserves (in the good
faith judgment of the management of the Parent) have been maintained in
accordance with GAAP; (iii) operators', vendors', carriers',
warehousemen's, repairmen's, mechanics', workmen's, materialmen's,
construction or other like Liens arising by operation of law in the
ordinary course of business or incident to the exploration, development,
operation and maintenance of Oil and Gas Properties or statutory landlord's
liens, each of which is in respect of obligations that have not been
outstanding more than 125 days or which are being contested in good faith
by appropriate proceedings and for which appropriate reserves (in the good
faith judgment of the management of the Parent) have been maintained in
accordance with GAAP; (iv) any Liens reserved in leases or farmout
agreements for rent or royalties and for compliance with the terms of the
farmout agreements or leases in the case of leasehold estates, to the
extent that any such Lien referred to in this clause does not materially
impair the use of the Property covered by such Lien for the purposes for
which such Property is held by the Obligors or any Subsidiary or materially
impair the value of such Property subject thereto; (v) encumbrances (other
than to secure the payment of borrowed money or the deferred purchase price
of Property or services), easements, restrictions, servitudes, permits,
conditions, covenants, exceptions or reservations in any rights of way or
other Property of the Obligors or any Subsidiary for the purpose of roads,
pipelines, transmission lines, transportation lines, distribution lines for
the removal of gas, oil, coal or other minerals or timber, and other like
purposes, or for the joint or common use of real estate, rights of way,
facilities and equipment, and defects, irregularities, zoning restrictions
and deficiencies in title of any rights of way or other Property which in
the aggregate do not materially impair the use of such rights of way or
other Property for the purposes of which such rights of way and other
Property are held by the Obligors or any Subsidiary or materially impair
the value of such Property subject thereto; (vi) deposits of cash or
securities to secure the performance of bids, trade contracts, leases,
statutory obligations and other obligations of a like nature incurred in
the ordinary course of business; (vii) Liens represented by the interest of
a tenant or subtenant under a lease or sublease entered into in the
ordinary course of business by an Obligor or a Subsidiary and not otherwise
in violation of this Agreement; and (viii) Liens permitted by the Security
Instruments.
"Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended.
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<PAGE>
"Existing Indenture" shall mean the indenture dated as of June 15,
1995, between the Parent and Chemical Bank, as Trustee, under which the
Existing Senior Unsecured Notes have been issued, as amended, supplemented
or otherwise modified.
"Existing Senior Unsecured Notes" shall mean the unsecured 13-1/2%
Senior Notes Due 1999 issued by the Parent under the terms and provisions
of the Existing Indenture, in the original aggregate principal amount of
$100,000,000, and maturing on June 15, 1999.
"Exploration Costs" shall mean uncapitalized exploration, land,
geophysical and dry hole costs.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight federal funds transactions with
a member of the Federal Reserve System arranged by federal funds brokers on
such day, as published by the Federal Reserve Bank of New York on the
Business Day next succeeding such day, provided that (i) if the date for
which such rate is to be determined is not a Business Day, the Federal
Funds Rate for such day shall be such rate on such transactions on the next
preceding Business Day as so published on the next succeeding Business Day,
and (ii) if such rate is not so published for any day, the Federal Funds
Rate for such day shall be the average rate charged to the Agent on such
day on such transactions as determined by the Agent.
"Financial Statements" shall mean the financial statement or
statements of the Obligors described or referred to in Section 7.02.
"Fixed Eurodollar Rate" shall mean the offered quotation, if any, to
first-class banks in the Eurodollar market by the Agent for Dollar deposits
of amounts in funds comparable to the principal amount of the Eurodollar
Loan to which such Fixed Eurodollar Rate is to be applicable with
maturities comparable to the Interest Period for which such Fixed
Eurodollar Rate will apply as of approximately 10:00 a.m. (Houston time)
two Business Days prior to the commencement of such Interest Period.
"Fixed Rate" shall mean, with respect to any Eurodollar Loan, a rate
per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
determined by the Agent to be equal to the quotient of (i) the Fixed
Eurodollar Rate for such Loan for the Interest Period for such Loan divided
by (ii) 1 minus the Reserve Requirement for such Loan for such Interest
Period.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
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<PAGE>
"Governmental Authority" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's
Property is located or which exercises valid jurisdiction over any such
Person or such Person's Property, and any court, agency, department,
commission, board, bureau or instrumentality of any of them including
monetary authorities which exercises valid jurisdiction over any such
Person or such Person's Property. Unless otherwise specified, all
references to Governmental Authority herein shall mean a Governmental
Authority having jurisdiction over, where applicable, the Obligors, their
Subsidiaries or any of their Properties or the Agent, any Lender or any
Applicable Lending Office.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license, authorization or other
directive or requirement (whether or not having the force of law),
including, without limitation, Environmental Laws, energy regulations and
occupational, safety and health standards or controls, of any Governmental
Authority.
"Guarantors" shall mean Concorde, 92 JV, 94 JV, 92 DDP, 94 DDP and any
other Person who becomes party to a Guaranty Agreement pursuant to the
terms of Section 8.11.
"Guaranty Agreement" shall mean an agreement executed by each of the
Guarantors in form and substance satisfactory to the Agent guarantying,
unconditionally, payment of the Indebtedness, as the same may be amended,
modified or supplemented from time to time.
"Hedging Agreements" shall mean any commodity, interest rate or
currency swap, rate cap, rate floor, rate collar, forward agreement or
other exchange or rate protection agreements or any option with respect to
any such transaction.
"Highest Lawful Rate" shall mean, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the
Notes or on other Indebtedness under laws applicable to such Lender which
are presently in effect or, to the extent allowed by law, under such
applicable laws which may hereafter be in effect and which allow a higher
maximum nonusurious interest rate than applicable laws now allow.
"Hydrocarbon Interests" shall mean all rights, titles, interests and
estates now or hereafter acquired in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral
fee interests, overriding royalty and royalty interests, net profit
interests and production payment interests, including any reserved or
residual interests of whatever nature.
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<PAGE>
"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom.
"Indebtedness" shall mean any and all amounts owing or to be owing by
the Borrowers to the Agent, the Issuing Bank, and/or Lenders in connection
with the Loan Documents and the Letter of Credit Agreements, and any
Hedging Agreements now or hereafter arising between the Borrowers and any
Lender permitted by the terms of this Agreement and all renewals,
extensions and/or rearrangements of any of the above.
"Indemnified Parties" shall have the meaning assigned such term in
Section 12.03(a).
"Indemnity Matters" shall have the meaning assigned such term in
Section 12.03(a).
"Indenture" shall mean the indenture dated as of October 29, 1996,
among the Parent, KOC, Kelley Operating and United States Trust Company of
New York, as Trustee, under which the Senior Subordinated Notes have been
issued, as amended, supplemented or otherwise modified.
"Initial Funding" shall mean the amendment, extension and
rearrangement of all of the Prior Debt pursuant to Section 6.01 hereof.
"Initial Reserve Report" shall mean the report prepared internally by
KOC with respect to the Oil and Gas Properties of the Obligors (net of
minority interests) as of October 1, 1996, a copy of which has been
delivered to the Lenders.
"Interest Period" shall mean, with respect to any Eurodollar Loan, the
period commencing on the date such Eurodollar Loan is made and ending on
the numerically corresponding day in the first, second, third or sixth
calendar month thereafter, as the Borrowers may select as provided in
Section 2.02 (or such longer period as may be requested by the Borrowers
and agreed to by the Lenders), except that each Interest Period which
commences on the last Business Day of a calendar month (or on any day for
which there is no numerically corresponding day in the appropriate
subsequent calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may end after
the Revolving Credit Termination Date; (ii) no Interest Period for any
Eurodollar Loan may end after the due date of any installment, if any,
provided for in Section 3.01 hereof to the extent that such Eurodollar Loan
would need to be prepaid prior to the end of such Interest Period in order
for such installment to be paid when due; (iii)
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<PAGE>
each Interest Period which would otherwise end on a day which is not a
Business Day shall end on the next succeeding Business Day (or, if such
next succeeding Business Day falls in the next succeeding calendar month,
on the next preceding Business Day); and (iv) no Interest Period shall have
a duration of less than one month and, if the Interest Period for any
Eurodollar Loans would otherwise be for a shorter period, such Loans shall
not be available hereunder.
"Issuing Bank" shall mean TCB or any other Lender agreed to among the
Borrowers and the Agent to issue Letters of Credit.
"JV" shall mean either 92 JV or 94 JV or both 92 JV and 94 JV, as the
context requires.
"January 1 Reserve Report" shall mean the Reserve Report with an as of
date of January 1 as described in Section 8.07.
"July 1 Reserve Report" shall mean the Reserve Report with an as of
date of July 1 as described in Section 8.07.
"LC Commitment" at any time shall mean $15,000,000.
"LC Exposure" at any time shall mean the difference between (i)
aggregate face amount of all undrawn and uncancelled Letters of Credit and
the aggregate of all amounts drawn under all Letters of Credit and not yet
reimbursed or funded pursuant to Section 2.10(a), minus (ii) the aggregate
amount of all cash securing outstanding Letters of Credit pursuant to
Section 2.10(b).
"Letter of Credit Agreements" shall mean the written agreements with
the Issuing Bank for any Letter of Credit, executed or hereafter executed
in connection with the issuance by the Issuing Bank of the Letters of
Credit, such agreements to be on the Issuing Bank's customary form for
letters of credit of comparable amount and purpose as from time to time in
effect or as otherwise agreed to by the Borrowers and the Issuing Bank.
"Letters of Credit" shall mean the letters of credit issued pursuant
to Section 2.01(b), and "Letter of Credit" shall mean any one of the
Letters of Credit.
"Lien" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute or contract, and whether
such obligation or claim is fixed or contingent, and including but not
limited to (i) the lien or security interest arising from a mortgage,
encumbrance, pledge, security agreement, conditional sale or trust receipt
or a lease, consignment or bailment for security purposes or (ii)
production payments and the like payable out of Oil and Gas Properties.
The term
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"Lien" shall include reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions, leases and other title
exceptions and encumbrances affecting Property. For the purposes of this
Agreement, the Obligors or any Subsidiary shall be deemed to be the owner
of any Property which it has acquired or holds subject to a conditional
sale agreement, or leases under a financing lease or other arrangement
pursuant to which title to the Property has been retained by or vested in
some other Person in a transaction intended to create a financing.
"Loan Documents" shall mean this Agreement, the Notes, the Security
Instruments and any Hedging Agreements now or hereafter arising between any
Obligor and any Lender or its Affiliate that is permitted by the terms of
this Agreement and all amendments, modifications and restatements of any of
the above.
"Loans" shall mean the loans as provided for by Section 2.01(a).
"Majority Lenders" shall mean, at any time while no Loans are
outstanding, Lenders having at least fifty-one percent (51%) of the
Aggregate Commitments and, at any time while Loans are outstanding, Lenders
holding at least fifty-one percent (51%) of the outstanding aggregate
principal amount of the Loans (without regard to any sale by a Lender of a
participation in any Loan under Section 12.06(c)).
"Material Adverse Effect" shall mean any material and adverse effect
on (i) the assets, liabilities, financial condition, business, operations
or affairs of the Parent, the Borrowers and their Subsidiaries taken as a
whole as at December 31, 1995, or (ii) the ability of the Parent, the
Borrowers and their Subsidiaries taken as a whole to carry out their
business as at the Closing Date or as proposed as of the Closing Date to be
conducted or meet their obligations under the Loan Documents on a timely
basis.
"Maximum Credit Amount" shall mean, as to each Lender, the amount set
forth opposite such Lender's name on Exhibit F under the caption "Maximum
Credit Amounts" (as the same may be reduced pursuant to Section 2.03(b)
hereof pro rata to each Lender based on its Percentage Share), as modified
from time to time to reflect any assignments permitted by Section 12.06(b).
"Mortgaged Property" shall mean the Property owned by the Obligors and
which is subject to the Liens existing and to exist under the terms of the
Security Instruments.
"Multiemployer Plan" shall mean a Plan defined as such in Section
3(37) or 4001(a)(3) of ERISA.
"Notes" shall mean the promissory note or notes (whether one or more)
of the Borrowers described in Section 2.06 hereof and being in the form of
Exhibit A
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hereto, together with any and all renewals, extensions for any period,
increases, rearrangements, substitutions or modifications thereof.
"Obligors" shall mean collectively, the Borrowers and the Guarantors.
"Oil and Gas Properties" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests;
all presently existing or future unitization, pooling agreements and
declarations of pooled units and the units created thereby (including
without limitation all units created under orders, regulations and rules of
any Governmental Authority) which may affect all or any portion of the
Hydrocarbon Interests; all operating agreements, contracts and other
agreements which relate to any of the Hydrocarbon Interests or the
production, sale, purchase, exchange or processing of Hydrocarbons from or
attributable to such Hydrocarbon Interests; all Hydrocarbons in and under
and which may be produced and saved or attributable to the Hydrocarbon
Interests, including all oil in tanks, the lands covered thereby and all
rents, issues, profits, proceeds, products, revenues and other incomes from
or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed
or incidental to the Hydrocarbon Interests; and all Properties, rights,
titles, interests and estates described or referred to above, including any
and all Property, real or personal, now owned or hereinafter acquired and
situated upon, used, held for use or useful in connection with the
operating, working or development of any of such Hydrocarbon Interests or
Property (excluding drilling rigs, automotive equipment or other personal
property which may be on such premises for the purpose of drilling a well
or for other similar temporary uses) and including any and all oil wells,
gas wells, injection wells or other wells, buildings, structures, fuel
separators, liquid extraction plants, plant compressors, pumps, pumping
units, field gathering systems, tanks and tank batteries, fixtures, valves,
fittings, machinery and parts, engines, boilers, meters, apparatus,
equipment, appliances, tools, implements, cables, wires, towers, casing,
tubing and rods, surface leases, rights-of-way, easements and servitudes
together with all additions, substitutions, replacements, accessions and
attachments to any and all of the foregoing.
"Option Agreement" shall have the meaning assigned in the Stock
Purchase Agreement dated as of January 23, 1996 between the Parent and
Contour Production Company.
"Other Taxes" shall have the meaning assigned such term in Section
4.06(b).
"Partnership Agreements" shall mean the respective written partnership
agreement or joint venture agreement of Kelley Operating, 92 DDP, 94 DDP,
92 JV and 94 JV, each as amended.
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"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions.
"Percentage Share" shall mean the percentage of the Aggregate
Commitments to be provided by a Lender under this Agreement as indicated on
Exhibit F, as modified from time to time to reflect any assignments
permitted by Section 12.06(b).
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization
or government or any agency, instrumentality or political subdivision
thereof, or any other form of entity.
"Plan" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored,
maintained or contributed to by any of the Obligors any Subsidiary or an
ERISA Affiliate or (ii) was at any time during the preceding six calendar
years sponsored, maintained or contributed to, by any of the Obligors, any
Subsidiary or an ERISA Affiliate.
"Post-Default Rate" shall mean, in respect of any principal of any
Loan or any other amount payable by the Borrowers under this Agreement, any
Note or any Security Instrument which is not paid when due (whether at
stated maturity, by acceleration or otherwise), a rate per annum during the
period commencing on the date of occurrence of an Event of Default until
such amount is paid in full or all Events of Default are cured or waived
equal to 2% per annum above the Base Rate as in effect from time to time
plus the Applicable Margin (if any), but in no event to exceed the Highest
Lawful Rate; provided, however, for a Eurodollar Loan, the "Post-Default
Rate" for such principal shall be, for the period commencing on the date of
occurrence of an Event of Default and ending on the earlier to occur of (i)
the last day of the Interest Period therefor or (ii) the Date all Events
of Default are cured or waived, 2% per annum above the interest rate for
such Loan as provided in Section 3.02(ii), but in no event to exceed the
Highest Lawful Rate.
"Prime Rate" shall mean the rate of interest from time to time
announced publicly by the Agent at the Principal Office as its prime
commercial lending rate. Such rate is set by the Agent as a general
reference rate of interest, taking into account such factors as the Agent
may deem appropriate, it being understood that many of the Agent's
commercial or other loans are priced in relation to such rate, that it is
not necessarily the lowest or best rate actually charged to any customer
and that the Agent may make various commercial or other loans at rates of
interest having no relationship to such rate.
"Principal Office" shall mean the principal office of the Agent,
presently located at 712 Main Street, Houston, Texas 77002.
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"Prior Credit Agreement" shall mean the Credit Agreement among the
Obligors, the Agent, CSI and the lenders party thereto dated February 14,
1996, as amended.
"Prior Debt" shall mean the outstanding Debt under the Prior Credit
Agreement.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Quarterly Dates" shall mean the last day of each January, April,
July, and October, in each year, the first of which shall be January 31,
1997; provided, however, that if any such day is not a Business Day, such
Quarterly Date shall be the next succeeding Business Day.
"Redetermination Date" shall have the meaning assigned such term in
Section 2.08(a).
"Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System (or any successor), as the same may be amended
or supplemented from time to time.
"Regulatory Change" shall mean, with respect to any Lender, any change
after the Closing Date in any Governmental Requirement (including
Regulation D) or the adoption or making after such date of any
interpretations, directives or requests applying to a class of lenders
(including such Lender or its Applicable Lending Office) of or under any
Governmental Requirement (whether or not having the force of law) by any
Governmental Authority charged with the interpretation or administration
thereof.
"Required Lenders" shall mean, at any time while no Loans are
outstanding, Lenders having at least eighty percent (80%) of the Aggregate
Commitments and, at any time while Loans are outstanding, Lenders holding
at least eighty percent (80%) of the outstanding aggregate principal amount
of the Loans (without regard to any sale by a Lender of a participation in
any Loan under Section 12.06(c)).
"Required Payment" shall have the meaning assigned such term in
Section 4.04.
"Reserve Report" shall mean each report, in form and substance
satisfactory to the Agent, setting forth, as of each January 1 and July 1
(or such other date in the event of an unscheduled redetermination): (i)
the oil and gas reserves attributable to the Obligor's Mortgaged Properties
together with a projection of the rate of production and future net income,
taxes, operating expenses and capital expenditures
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with respect thereto as of such date, based upon the pricing assumptions
consistent with SEC reporting requirements at the time and (ii) such other
information as the Agent may reasonably request.
"Reserve Requirement" shall mean, for any Interest Period for any
Eurodollar Loan, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the
Federal Reserve System in New York City with deposits exceeding one billion
Dollars against "Eurocurrency liabilities" (as such term is used in
Regulation D). Without limiting the effect of the foregoing, the Reserve
Requirement shall reflect any other reserves required to be maintained by
such member banks by reason of any Regulatory Change against (i) any
category of liabilities which includes deposits by reference to which the
Fixed Eurodollar Rate for Eurodollar Loans is to be determined as provided
in the definition of "Fixed Eurodollar Rate" or (ii) any category of
extensions of credit or other assets which include a Eurodollar Loan.
"Responsible Officer" shall mean, as to any Person, the Chief
Executive Officer, the President or any Vice President of such Person and,
with respect to financial matters, the term "Responsible Officer" shall
include the Chief Financial Officer, the Treasurer, the Controller, of such
Person. Unless otherwise specified, all references to a Responsible
Officer herein shall mean a Responsible Officer of KOC or KOGC, as
applicable.
"Restricted Subsidiary" shall have the meaning assigned to such term
in the Indenture.
"Revolving Credit Period" shall mean the period from the Closing Date
to and ending on the Revolving Credit Termination Date.
"Revolving Credit Termination Date" shall mean the fourth anniversary
date of the Closing Date, unless the Commitments are sooner terminated
pursuant to Section 2.03(b) or the principal of the Loans is accelerated
pursuant to Section 10.02.
"Scheduled Redetermination Date" shall have the meaning assigned such
term in Section 2.08(d).
"SEC" shall mean the Securities and Exchange Commission or any
successor Governmental Authority.
"Security Instruments" shall mean the Letters of Credit, the Letter of
Credit Agreements, the agreements or instruments described or referred to
in Exhibit D, and any and all other agreements or instruments now or
hereafter executed and delivered by the Obligors or any Subsidiary (other
than participation or similar agreements
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between any Lender and any other lender or creditor with respect to any
Indebtedness pursuant to this Agreement) pursuant to, or as security for
the payment or performance of the Prior Debt (but only to the extent
assigned to the Agent or the Lenders), the Indebtedness, the Notes or this
Agreement, or reimbursement obligations under the Letters of Credit, as
such agreements may be amended, supplemented or restated from time to time.
"Senior Subordinated Notes" shall mean the 10-3/8% unsecured senior
subordinated notes issued by the Parent under the terms and provisions of
the Indenture in the aggregate principal amount of $125,000,000 and
maturing on October 15, 2006.
"Subordinated Debt" shall mean the 8-1/2% Convertible Subordinated
Debentures due 2000 and 7-7/8% Convertible Subordinated Notes due 1999 of
the Parent, as assumed pursuant to the merger of Kelley Oil & Gas Partners,
Ltd. with and into the Parent under the Agreement and Plan of Merger dated
as of March 26, 1996.
"Subsidiary" of any Person shall mean (i) any corporation of which at
least a majority of the outstanding shares of stock having by the terms
thereof ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether or not at the time stock of
any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time
directly or indirectly owned or controlled by such Person or one or more of
its Subsidiaries or by such Person and one or more of its Subsidiaries, and
(ii) any partnership, association, joint venture or other unincorporated
entity which such Person or one or more of its Subsidiaries has more than a
50% equity or ownership interest at the time. Unless otherwise expressly
provided, all references herein to "Subsidiary" shall (x) mean a Subsidiary
of the Parent, including the Borrowers and (y) exclude all Unrestricted
Subsidiaries.
"Taxes" shall have the meaning assigned such term in Section 4.06(a).
"Transfer" shall have the meaning assigned such term in Section 9.14.
"Type" shall mean, with respect to any Loan, a Base Rate Loan or a
Eurodollar Loan.
"Unrestricted Subsidiaries" shall have the meaning assigned to such
term in the Indenture.
"Voting Stock" shall mean, with respect to any Person, capital stock
of such Person having general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees
of such Person (irrespective
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of whether or not at the time capital stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency).
Section 1.03 Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Agent or the Lenders hereunder shall be
prepared, in accordance with GAAP, applied on a basis consistent with the
audited financial statements of the Obligors referred to in Section 7.02 (except
for changes concurred with by the Parent's independent public accountants).
ARTICLE II
COMMITMENTS
Section 2.01 Loans and Letters of Credit.
(a) Loans. Each Lender severally agrees, on the terms of this Agreement,
to make Loans to the Borrowers during the period from and including (i) the
Closing Date or (ii) such later date that such Lender becomes a party to this
Agreement as provided in Section 12.06(b), to and up to, but excluding, the
Revolving Credit Termination Date in an aggregate principal amount at any one
time outstanding up to but not exceeding the amount of such Lender's Commitment
as then in effect; provided, however, that the aggregate principal amount of all
such Loans by all Lenders hereunder at any one time outstanding together with
the LC Exposure shall not exceed the Aggregate Commitments. Subject to the
terms of this Agreement, during the period from the Closing Date to and up to,
but excluding, the Revolving Credit Termination Date, the Borrowers may borrow,
repay and reborrow the amount described in this Section 2.01(a).
(b) Letters of Credit. During the period from and including the Closing
Date to but excluding the fifth day before the Revolving Credit Termination
Date, the Issuing Bank, as issuing bank for the Lenders, agrees to extend credit
for the account of either Borrower at any time and from time to time by issuing
renewing, extending or reissuing Letters of Credit; provided however, that the
LC Exposure at any one time outstanding shall not exceed the lesser of (i) the
LC Commitment and (ii) the Aggregate Commitments, as then in effect, minus the
aggregate principal amount of all Loans then outstanding. The Lenders shall
participate in such Letters of Credit according to their respective Percentage
Shares.
(c) Limitation on Types of Loans. Subject to the other terms and
provisions of this Agreement, at the option of the Borrowers, the Loans may be
Base Rate Loans or Eurodollar Loans; provided that, without the prior written
consent of the Majority Lenders, no more than five (5) Eurodollar Loans to any
one Lender may be outstanding at any time.
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Section 2.02 Borrowings, Continuations and Conversions, Letters of
Credit.
(a) Borrowings. The Borrowers shall give the Agent (which shall promptly
notify the Lenders) advance notice as hereinafter provided of each borrowing
hereunder, which shall specify the aggregate amount of such borrowing, the Type
and the date (which shall be a Business Day) of the Loans to be borrowed and (in
the case of Eurodollar Loans) the duration of the Interest Period therefor.
(b) Minimum Amounts. All Base Rate Loan borrowings shall be in amounts of
at least $1,000,000 or the remaining balance of the Aggregate Commitments, if
less, or any whole multiple of $500,000 in excess thereof, and all Eurodollar
Loans shall be in amounts of at least $2,000,000 or any whole multiple of
$500,000 in excess thereof.
(c) Notices. All borrowings, continuations and conversions shall require
advance written notice to the Agent (which shall promptly notify the Lenders) in
the form of Exhibit B hereto (or telephonic notice promptly confirmed by such a
written notice), which in each case shall be irrevocable, from the Borrowers to
be received by the Agent not later than 12:00 noon Houston time at least one
Business Day prior to the date of each Base Rate Loan borrowing and three
Business Days prior to the date of each Eurodollar Loan borrowing, continuation
or conversion. Without in any way limiting the Borrowers' obligation to confirm
in writing any telephonic notice, the Agent may act without liability upon the
basis of telephonic notice believed by the Agent in good faith to be from the
Borrowers prior to receipt of written confirmation. In each such case, the
Borrowers hereby waive the right to dispute the Agent's record of the terms of
such telephonic notice except in the case of gross negligence or willful
misconduct by the Agent.
(d) Continuation Options. Subject to the provisions made in this Section
2.02(d), the Borrowers may elect to continue all or any part of any Eurodollar
Loan beyond the expiration of the then current Interest Period relating thereto
by giving advance notice as provided in Section 2.02(c) to the Agent (which
shall promptly notify the Lenders) of such election, specifying the amount of
such Loan to be continued and the Interest Period therefor. In the absence of
such a timely and proper election, the Borrowers shall be deemed to have elected
to convert such Eurodollar Loan to a Base Rate Loan pursuant to Section 2.02(e).
All or any part of any Eurodollar Loan may be continued as provided herein,
provided that (i) any continuation of any such Loan shall be (as to each Loan as
continued for an applicable Interest Period) in amounts of at least $2,000,000
or any whole multiple of $500,000 in excess thereof and (ii) no Default shall
have occurred and be continuing. If a Default shall have occurred and be
continuing, each Eurodollar Loan shall be converted to a Base Rate Loan on the
last day of the Interest Period applicable thereto.
(e) Conversion Options. The Borrowers may elect to convert all or any part
of any Eurodollar Loan on the last day of the then current Interest Period
relating thereto to a Base Rate Loan by giving advance notice to the Agent
(which shall promptly notify the Lenders) of such election. Subject to the
provisions made in this Section 2.02(e), the
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Borrowers may elect to convert all or any part of any Base Rate Loan at any time
and from time to time to a Eurodollar Loan by giving advance notice as provided
in Section 2.02(c) to the Agent (which shall promptly notify the Lenders) of
such election. All or any part of any outstanding Loan may be converted as
provided herein, provided that (i) any conversion of any Base Rate Loan into a
Eurodollar Loan shall be (as to each such Loan into which there is a conversion
for an applicable Interest Period) in amounts of at least $2,000,000 or any
whole multiple of $500,000 in excess thereof and (ii) no Default shall have
occurred and be continuing. If a Default shall have occurred and be continuing,
no Base Rate Loan may be converted into a Eurodollar Loan.
(f) Advances. Not later than 12:00 noon Houston time on the date specified
for each borrowing hereunder, each Lender shall make available the amount of the
Loan to be made by it on such date to the Agent, to an account which the Agent
shall specify, in immediately available funds, for the account of the Borrowers.
The amounts so received by the Agent shall, subject to the terms and conditions
of this Agreement, be made available to the Borrowers by depositing the same, in
immediately available funds, in an account of the Borrowers, designated by the
Borrowers and maintained at the Principal Office.
(g) Letters of Credit. The Borrower shall give the Issuing Bank (which
shall promptly notify the Lenders of such request and their Percentage Share of
such Letter of Credit) advance notice to be received by the Issuing Bank not
later than 12:00 noon Houston time not less than three (3) Business Days prior
thereto of each request for the issuance and at least thirty (30) Business Days
prior to the date of the renewal or extension of a Letter of Credit hereunder
which request shall specify the amount of such Letter of Credit, the date (which
shall be a Business Day) such Letter of Credit is to be issued, renewed or
extended, the duration thereof, the name and address of the beneficiary thereof,
the form of the Letter of Credit and such other information as the Agent may
reasonably request all of which shall be reasonably satisfactory to the Agent.
Subject to the terms and conditions of this Agreement, on the date specified for
the issuance, renewal or extension of a Letter of Credit, the Agent shall issue
such Letter of Credit to the beneficiary thereof.
In conjunction with the issuance of each Letter of Credit, the Borrowers
shall execute a Letter of Credit Agreement. In the event of any conflict
between any provision of a Letter of Credit Agreement and this Agreement, the
Obligors, the Issuing Bank, the Agent and the Lenders hereby agree that the
provisions of this Agreement shall govern.
The Issuing Bank will send to the Borrowers, the Agent and each Lender,
immediately upon issuance of any Letter of Credit, or an amendment thereto, a
true and complete copy of such Letter of Credit, or such amendment thereto.
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Section 2.03 Changes of Commitments.
(a) The Aggregate Commitments shall at all times be equal to the lesser of
(i) the Aggregate Maximum Credit Amounts after adjustments resulting from
reductions pursuant to Section 2.03(b) hereof or (ii) the Borrowing Base as
determined from time to time.
(b) The Borrowers shall have the right to terminate or to reduce the amount
of the Aggregate Maximum Credit Amounts at any time or from time to time upon
not less than three (3) Business Days' prior notice to the Agent (which shall
promptly notify the Lenders) of each such termination or reduction, which notice
shall specify the effective date thereof and the amount of any such reduction
(which shall not be less than $2,000,000 or any whole multiple of $1,000,000 in
excess thereof) and shall be irrevocable and effective only upon receipt by the
Agent.
(c) The Aggregate Maximum Credit Amounts once terminated or reduced may not
be reinstated.
Section 2.04 Fees.
(a) The Borrowers shall pay to the Agent for the account of each Lender a
commitment fee on the daily average unused amount of the Aggregate Commitments
for the period from and including the Closing Date up to, but excluding, the
earlier of the date the Aggregate Commitments are terminated or the Revolving
Credit Termination Date at a rate per annum equal to the applicable per annum
percentage set forth at the appropriate intersection in the table shown below,
based on the Borrowing Base Utilization as in effect from time to time:
Borrowing Base Utilization Commitment Fee Percentage
-------------------------- -------------------------
Less than or equal
to 33% .30%
Greater than 33%, but
less than or equal
to 66% .325%
Greater than 66% .375%
Accrued commitment fees shall be payable quarterly in arrears on each Quarterly
Date and on the earlier of the date the Aggregate Commitments are terminated or
the Revolving Credit Termination Date.
(b) The Borrowers agree to pay the Agent, for the account of each Lender,
commissions for issuing the Letters of Credit on the daily average outstanding
of the
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maximum liability of the Issuing Bank existing from time to time under such
Letter of Credit (calculated separately for each Letter of Credit) at the rate
per annum equal to the Applicable Margin in effect from time to time for
Eurodollar Loans, provided that each Letter of Credit shall bear a minimum
aggregate commission (over the life of such Letter of Credit) of $500 and that
each Letter of Credit shall be deemed to be outstanding up to the full face
amount of the Letter of Credit until the Issuing Bank has received the canceled
Letter of Credit or a written cancellation of the Letter of Credit from the
beneficiary of such Letter of Credit in form and substance acceptable to the
Issuing Bank, or for any reductions in the amount of the Letter of Credit (other
than from a drawing), written notification from the Borrowers. Such commissions
are payable quarterly in arrears on each Quarterly Date and on the Revolving
Credit Termination Date.
(c) The Borrowers agree to pay the Agent, for the account of the Issuing
Bank, commissions for issuing the Letters of Credit on the daily average
outstanding of the maximum liability of the Issuing Bank existing from time to
time under such Letter of Credit (calculated separately for each Letter of
Credit) at the rate of 1/8% per annum, provided that each Letter of Credit shall
bear a minimum commission of $100 and shall be deemed to be outstanding as
provided in Section 2.04(b). Such aggregate commissions (over the life of such
Letter of Credit) are payable quarterly in arrears on each Quarterly Date and on
the Revolving Credit Termination Date. The commissions in this Section 2.04(c)
are in addition to the commissions in Section 2.04(b).
Section 2.05 Several Obligations. The failure of any Lender to make
any Loan to be made by it or to provide funds for disbursements or
reimbursements under Letters of Credit on the date specified therefor shall not
relieve any other Lender of its obligation to make its Loan or provide funds on
such date, but no Lender shall be responsible for the failure of any other
Lender to make a Loan to be made by such other Lender or to provide funds to be
provided by such other Lender.
Section 2.06 Notes. The Loans made by each Lender shall be evidenced
by a single promissory note of the Borrowers in substantially the form of
Exhibit A hereto, dated (i) the Closing Date or (ii) the effective date of an
Assignment pursuant to Section 12.06(b), payable to the order of such Lender in
a principal amount equal to its Maximum Credit Amount as originally in effect
and otherwise duly completed. The date, amount, Type, interest rate and
Interest Period of each Loan made by each Lender, and all payments made on
account of the principal thereof, shall be recorded by such Lender on its books
for its Notes, and, prior to any transfer, endorsed by such Lender on the
schedule attached to such Notes or any continuation thereof. Such records shall
be deemed conclusive absent manifest error.
Section 2.07 Prepayments.
(a) The Borrowers may prepay the Base Rate Loans upon not less than one (1)
Business Day's prior notice to the Agent (which shall promptly notify the
Lenders), which notice shall specify the prepayment date (which shall be a
Business Day) and the amount of
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the prepayment (which shall be at least $1,000,000 or the remaining aggregate
principal balance outstanding on the Notes) and shall be irrevocable and
effective only upon receipt by the Agent. The Borrower may prepay Eurodollar
Loans on the same condition as for Base Rate Loans and in addition such
prepayments of Eurodollar Loans shall be subject to the terms of Section 5.05
and shall be in an amount equal to all of the Eurodollar Loans for the Interest
Period prepaid.
(b) If, after giving effect to any termination or reduction of the
Aggregate Maximum Credit Amounts pursuant to Section 2.03(b), the outstanding
aggregate principal amount of the Loans plus the LC Exposure exceeds the
Aggregate Maximum Credit Amounts, the Borrowers shall (i) prepay the Loans on
the date of such termination or reduction in an aggregate principal amount equal
to the excess, and (ii) if any excess remains after prepaying all of the Loans,
pay to the Agent on behalf of the Lenders an amount equal to the excess to be
held as cash collateral as provided in Section 2.10(b) hereof.
(c) Subject to Section 2.07(d), upon any redetermination of the amount of
the Borrowing Base in accordance with Section 2.08, if the redetermined
Borrowing Base is less than the aggregate outstanding principal amount of the
Loans plus the LC Exposure, then the Borrowers shall prepay such excess within
180 days of the Agent's notice of the new Borrowing Base; provided that at least
50% of such excess shall have been prepaid within 90 days of the Agent's notice.
If a Borrowing Base deficiency remains after prepaying all of the Loans as
aforesaid because of LC Exposure, the Borrower shall pay to the Agent on behalf
of the Lenders an amount equal to such Borrowing Base deficiency to be held as
cash collateral as provided in Section 2.10(b) hereof.
(d) If, after a Transfer of any Oil and Gas Property to the extent allowed
by Section 9.14 and the reduction in the Borrowing Base pursuant to Section
2.08(d), the Borrowing Base is less than the aggregate outstanding principal
amount of the Loans, then the Borrowers shall promptly prepay the Loans with the
net proceeds received from such Transfer in an aggregate principal amount equal
to such excess.
(e) Prepayments permitted or required under this Section 2.07 shall be
without premium or penalty, except as required under Section 5.05 for prepayment
of Eurodollar Loans. Any prepayment made during the Revolving Credit Period on
the Loans may be reborrowed subject to the then effective Aggregate Commitments.
Section 2.08 Borrowing Base.
(a) The Borrowing Base shall be determined in accordance with Section
2.08(b) by the Agent with the concurrence of the Required Lenders and is subject
to redetermination in accordance with Section 2.08(d). Upon any redetermination
of the Borrowing Base, such redetermination shall remain in effect until the
next successive Redetermination Date. "Redetermination Date" shall mean the date
that the redetermined Borrowing Base becomes effective subject to the notice
requirements specified in Section 2.08(e) both for scheduled
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redeterminations and unscheduled redeterminations. So long as any of the
Commitments are in effect or any LC Exposure and Loans are outstanding
hereunder, this facility shall be governed by the then effective Borrowing Base.
During the period from and after the Closing Date until the Borrowing Base is
redetermined pursuant to Section 2.08(d) or adjusted pursuant to Section
8.08(b), the amount of the Borrowing Base shall be $57,500,000.
(b) Upon receipt of the reports required by Section 8.07 and such other
reports, data and supplemental information as may from time to time be
reasonably requested by the Agent (the "Engineering Reports"), the Agent will
redetermine the Borrowing Base. Such redetermination will be in accordance with
its normal and customary procedures, consistent with other similar credits of
Agent and Lenders, for evaluating oil and gas reserves and other related assets
as such exist at that particular time. Each Lender, in its sole discretion,
may make adjustments to the rates, volumes and prices and other assumptions set
forth therein in accordance with its normal and customary procedures for
evaluating oil and gas reserves and other related assets as such exist at that
particular time. The Agent shall propose to the Lenders a new Borrowing Base
within 15 days following receipt by the Agent and the Lenders of the Engineering
Reports in a timely and complete manner. After having received notice of such
proposal by the Agent, the Lenders shall have 15 days to agree or disagree with
such proposal. If at the end of the 15 days, any Lenders have not communicated
their approval or disapproval, such silence shall be deemed to be an approval.
If however, any of the Lenders notify Agent within such 15 days of their
disapproval, the Required Lenders and the Agent shall, within a reasonable
period of time, endeavor to agree on a new Borrowing Base. The Agent and the
Required Lenders must approve a new Borrowing Base. If no new Borrowing Base is
agreed, the existing Borrowing Base shall remain in place until such time as the
Required Lenders do agree.
(c) The Agent may exclude any Oil and Gas Property or portion of production
therefrom or any income from any other Property from the Borrowing Base, at any
time, because title information is not reasonably satisfactory, such Property is
not Mortgaged Property or such Property is not assignable.
(d) So long as the Commitments are in effect and until payment in full of
all Loans hereunder, on or before 30 days following the receipt of the Reserve
Reports required by Section 8.07(a) (each being a "Scheduled Redetermination
Date"), the Lenders shall redetermine the amount of the Borrowing Base in
accordance with Section 2.08(b). In addition, the Required Lenders may initiate
a redetermination of the Borrowing Base at any other time as they so elect;
provided, however, that the Required Lenders may initiate only one such
unscheduled redetermination during any consecutive twelve (12) month period by
specifying in writing to the Borrowers the date on which the Borrowers are to
furnish a Reserve Report in accordance with Section 8.07(b) and the date on
which such redetermination is to occur. Also, the Borrowers may request one
additional redetermination of the Borrowing Base during any consecutive twelve
(12) month period by supplying a Reserve Report in the form of the July 1
Reserve Report. The Agent and the Lenders will
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follow the same procedure as set forth in Section 2.08(b) for redetermining the
Borrowing Base. Further, if the Borrowers Transfer any Oil and Gas Property to
the extent allowed by Section 9.14, the Borrowing Base shall automatically be
reduced upon execution of such Transfer by an amount equal to the Borrowing Base
value (as determined by the Agent in its reasonable discretion) attributed in
the immediately preceding Borrowing Base to the Oil and Gas Property which is
the subject of such Transfer.
(e) The Agent shall promptly notify in writing the Borrowers and the
Lenders of the new Borrowing Base. Any redetermination of the Borrowing Base
shall not be in effect until written notice is received by the Borrowers.
Section 2.09 Assumption of Risks. The Borrowers assume all risks of
the acts or omissions of any beneficiary of any Letter of Credit or any
transferee thereof with respect to its use of such Letter of Credit. Neither
the Issuing Bank (except in the case of willful misconduct, gross negligence or
bad faith on the part of the Issuing Bank or any of its employees), its
correspondents, the Agent nor any Lender shall be responsible for the validity,
sufficiency or genuineness of certificates or other documents or any
endorsements thereon, even if such certificates or other documents should in
fact prove to be invalid, insufficient, fraudulent or forged; for errors,
omissions, interruptions or delays in transmissions or delivery of any messages
by mail, telex, or otherwise, whether or not they be in code; for errors in
translation or for errors in interpretation of technical terms; the validity or
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any Letter of Credit or the rights or benefits thereunder or
proceeds thereof, in whole or in part, which may prove to be invalid or
ineffective for any reason; the failure of any beneficiary or any transferee of
any Letter of Credit to comply fully with conditions required in order to draw
upon any Letter of Credit; or for any other consequences arising from causes
beyond the Issuing Bank's control or the control of the Issuing Bank's
correspondents. In addition, neither the Issuing Bank, the Agent nor any Lender
shall be responsible for any error, neglect, or default of any of the Issuing
Bank's correspondents; and none of the above shall affect, impair or prevent the
vesting of any of the Issuing Bank's, the Agent's or any Lender's rights or
powers hereunder or under the Letter of Credit Agreements, all of which rights
shall be cumulative. The Issuing Bank and its correspondents may accept
certificates or other documents that appear on their face to be in order,
without responsibility for further investigation of any matter contained therein
regardless of any notice or information to the contrary. In furtherance and not
in limitation of the foregoing provisions, the Borrowers agree that any action,
inaction or omission taken or not taken by the Issuing Bank or by any
correspondent for the Issuing Bank in good faith and without gross negligence in
connection with any Letter of Credit, or any related drafts, certificates,
documents or instruments, shall be binding on the Borrowers and shall not put
the Issuing Bank or its correspondents under any resulting liability to the
Borrowers.
Section 2.10 Obligation to Reimburse and to Prepay.
(a) If a disbursement by the Issuing Bank is made under any Letter of
Credit, the Borrowers shall pay to the Agent by noon Houston time on the
Business Day following notice (or if no notice is received by noon on a given
day, the second Business Day following
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such notice) of any such disbursement is received by the Borrowers, the amount
of each such disbursement made by the Issuing Bank under the Letter of Credit
(if such payment is not sooner effected as may be required under this Section
2.10 or under other provisions of the Letter of Credit), together with interest
on the amount disbursed from and including the date of disbursement until
payment in full of such disbursed amount at a varying rate per annum equal to
(i) the then applicable interest rate for Base Rate Loans through the first
Business Day after notice of such disbursement is received by the Borrowers and
(ii) thereafter, the Post-Default Rate for Base Rate Loans (but in no event to
exceed the Highest Lawful Rate) for the period from and including the second
Business Day following the date of such disbursement to and including the date
of repayment in full of such disbursed amount. Subject to the conditions
contained herein and availability, the Borrowers may satisfy their reimbursement
obligation to the Issuing Bank with respect to any disbursement by the Issuing
Bank under any Letter of Credit by borrowing a Loan, the proceeds of which Loan
will be used to reimburse the Issuing Bank for the amount of any disbursement
made by it under a Letter of Credit, together with interest thereon to the
extent provided in this Section 2.10(a). If the Borrowers shall fail to
reimburse or cause the Issuing Bank to be reimbursed directly on the Business
Day following notice by the Issuing Bank of any disbursement under a Letter of
Credit (or, if the Issuing Bank's notice to the Borrowers pursuant to this
Section 2.10(a) was received after noon Houston time on such date, or the
Business Day next following such date), and on the date of such notification
there shall not exist any Default under Sections 10.01(f) or (g), the Borrowers
shall be deemed to have requested that Loans be made and the Lenders shall make
the Loans on such date.
The obligations of the Borrowers under this Agreement with respect to each
Letter of Credit shall be absolute, unconditional and irrevocable and shall be
paid or performed strictly in accordance with the terms of this Agreement under
all circumstances whatsoever, including, without limitation, but only to the
fullest extent permitted by applicable law, the following circumstances: (i) any
lack of validity or enforceability of this Agreement, any Letter of Credit or
any of the Security Instruments; (ii) any amendment or waiver of (including any
default), or any consent to departure from this Agreement (except to the extent
permitted by any amendment or waiver), any Letter of Credit or any of the
Security Instruments; (iii) the existence of any claim, set-off, defense or
other rights which the Borrowers may have at any time against the beneficiary of
any Letter of Credit or any transferee of any Letter of Credit (or any Persons
for whom any such beneficiary or any such transferee may be acting), the Issuing
Bank, the Agent, any Lender or any other Person, whether in connection with this
Agreement, any Letter of Credit, the Security Instruments, the transactions
contemplated hereby or any unrelated transaction; (iv) any statement,
certificate, draft, notice or any other document presented under any Letter of
Credit proves to have been forged, fraudulent, insufficient or invalid in any
respect or any statement therein proves to have been untrue or inaccurate in any
respect whatsoever; (v) payment by the Issuing Bank under any Letter of Credit
against presentation of a draft or certificate which appears on its face to
comply, but does not comply, with the terms of such Letter of Credit; and (vi)
any other circumstance or happening whatsoever, whether or not similar to any of
the foregoing.
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Notwithstanding anything in this Agreement to the contrary, the Borrowers will
not be liable for payment or performance that results from the gross negligence
or willful misconduct of the Issuing Bank, except where the Borrowers, any
Obligor or any Subsidiary actually recovers the proceeds for itself or the
Issuing Bank of any payment made by the Issuing Bank in connection with such
gross negligence or willful misconduct.
(b) In the event of (i) the occurrence of any Event of Default and at the
request of the Agent, (ii) any payment or prepayment pursuant to Sections
2.07(b) (ii) or the last sentence of Section 2.07(c) or (iii) the maturity of
the Notes, whether by acceleration or otherwise, an amount equal to the LC
Exposure (or the excess in the case of Sections 2.07(b) and (c)) shall be deemed
to be forthwith due and owing by the Borrowers to the Issuing Bank, the Agent
and the Lenders as of the date of any such occurrence; and the Borrowers'
obligation to pay such amount shall be absolute and unconditional, without
regard to whether any beneficiary of any such Letter of Credit has attempted to
draw down all or a portion of such amount under the terms of a Letter of Credit,
and, to the fullest extent permitted by applicable law, shall not be subject to
any defense or be affected by a right of set-off, counterclaim or recoupment
which the Borrowers may now or hereafter have against any such beneficiary, the
Issuing Bank, the Agent, the Lenders or any other Person for any reason
whatsoever. Such payments shall be held by the Agent on behalf of the Issuing
Bank and the Lenders as cash collateral securing the LC Exposure in an account
or accounts at the Principal Office; and the Borrowers hereby grant to and by
their deposit with the Agent grants to the Agent a security interest in such
cash collateral. In the event of any such payment by the Borrowers of amounts
contingently owing under outstanding Letters of Credit and in the event that
thereafter drafts or other demands for payment complying with the terms of such
Letters of Credit are not made prior to the respective expiration dates thereof,
the Agent agrees, if no Event of Default has occurred and is continuing or if no
other amounts are outstanding under this Agreement, the Notes or the Security
Instruments, to promptly remit to the Borrowers amounts for which the contingent
obligations evidenced by the Letters of Credit have ceased.
(c) Each Lender severally and unconditionally agrees that it shall promptly
reimburse the Issuing Bank an amount equal to such Lender's Percentage Share of
any disbursement made by the Issuing Bank under any Letter of Credit that is not
reimbursed according to this Section 2.10.
Section 2.11 Lending Offices. The Loans of each Type made by each
Lender shall be made and maintained at such Lender's Applicable Lending Office
for Loans of such Type.
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ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans. The Borrowers will pay to the
Agent, for the account of each Lender, the principal payments required by this
Section 3.01. On the Revolving Credit Termination Date the Borrowers shall
repay the aggregate principal and accrued and unpaid interest under the Notes.
Section 3.02 Interest. The Borrowers will pay to the Agent, for the
account of each Lender, interest on the unpaid principal amount of each Loan
made by such Lender for the period commencing on the date such Loan is made to
but excluding the date such Loan shall be paid in full, at the following rates
per annum:
(i) if such a Loan is a Base Rate Loan, the Base Rate (as in effect
from time to time) plus the Applicable Margin, but in no event to exceed
the Highest Lawful Rate; and
(ii) if such a Loan is a Eurodollar Loan, for each Interest Period
relating thereto, the Fixed Rate for such Loan plus the Applicable Margin,
but in no event to exceed the Highest Lawful Rate.
Notwithstanding the foregoing, the Borrowers will pay to the Agent, for the
account of each Lender interest at the applicable Post-Default Rate on any
principal of any Loan made by such Lender, and (to the fullest extent permitted
by law) on any other amount payable by the Borrowers hereunder, under any
Security Instrument or under any Note held by such Lender to or for account of
such Lender, which shall not be paid in full when due after taking into account
applicable grace periods (whether at stated maturity, by acceleration or
otherwise), for the period commencing on the due date thereof after taking into
account applicable grace periods until the same is paid in full.
Accrued interest on Base Rate Loans shall be payable on each Quarterly Date
commencing on the first Quarterly Date after the Closing Date, and accrued
interest on each Eurodollar Loan shall be payable on the last day of the
Interest Period therefor and, if such Interest Period is longer than three
months at three-month intervals following the first day of such Interest Period,
except that interest payable at the Post-Default Rate shall be payable from time
to time on demand and interest on any Eurodollar Loan that is converted into a
Base Rate Loan (pursuant to Section 5.04) shall be payable on the date of
conversion (but only to the extent so converted).
Promptly after the determination of any interest rate provided for herein
or any change therein, the Agent shall notify the Lenders to which such interest
is payable and the Borrowers thereof. Each determination by the Agent of an
interest rate or fee hereunder shall, except in cases of manifest error, be
final, conclusive and binding on the parties.
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ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 Payments. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by the
Borrowers under this Agreement and the Notes and the Letter of Credit Agreements
shall be made in Dollars, in immediately available funds, to the Agent at such
account as the Agent shall specify by notice to the Borrowers from time to time,
not later than 11:00 a.m. Houston time on the date on which such payments shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). Such payments shall be
made without (to the fullest extent permitted by applicable law) defense, set-
off or counterclaim. Each payment to be made to the Agent under this Agreement
or any Note for account of a Lender shall be paid promptly to such Lender in
immediately available funds. If the due date of any payment under this
Agreement or any Note would otherwise fall on a day which is not a Business Day
such date shall be extended to the next succeeding Business Day and interest
shall be payable for any principal so extended for the period of such extension.
At the time of each payment to the Agent of any principal of or interest on any
borrowing, the Borrowers shall notify the Agent of the Loans to which such
payment shall apply. In the absence of such notice the Agent may specify the
Loans to which such payment shall apply, but to the extent possible such payment
or prepayment will be applied first to the Loans comprised of Base Rate Loans.
Section 4.02 Pro Rata Treatment. Except to the extent otherwise
provided herein each Lender agrees that: (i) each borrowing from the Lenders
under Section 2.01 shall be made from the Lenders pro rata in accordance with
their Percentage Share, each payment of commitment fee or other fees under
Section 2.04 expressly for the account of Lenders shall be made for account of
the Lenders pro rata in accordance with their Percentage Share, and each
termination or reduction of the amount of the Aggregate Maximum Credit Amounts
under Section 2.03(b) shall be applied to the Commitment of each Lender, pro
rata according to the amounts of its respective Commitment; (ii) each payment of
principal of Loans by the Borrowers shall be made for account of the Lenders pro
rata in accordance with the respective unpaid principal amount of the Loans held
by the Lenders; (iii) each payment of interest on Loans by the Borrowers shall
be made for account of the Lenders pro rata in accordance with the amounts of
interest due and payable to the respective Lenders; and (iv) each reimbursement
by the Borrowers of disbursements under Letters of Credit shall be made for
account of the Issuing Bank or, if funded by the Lenders, pro rata for the
account of the Lenders, in accordance with the amounts of reimbursement
obligations due and payable to each respective Lender.
Section 4.03 Computations. Interest on Eurodollar Loans and fees
other than with respect to Letters of Credit shall be computed on the basis of a
year of 360 days and actual days elapsed (including the first day but excluding
the last day) occurring in the period for which such interest or fee, as
applicable, is payable, unless such calculation would exceed the Highest Lawful
Rate, in which case interest shall be calculated on the per annum basis of a
year of 365 or 366 days, as the case may be. Interest on Base Rate Loans and
fees with respect to Letters of Credit shall be
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computed on the basis of a year of 365 or 366 days, as the case may be, and
actual days elapsed (including the first day but excluding the last day)
occurring in the period for which such interest or fee, as applicable, is
payable.
Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent
shall have been notified by a Lender or the Borrowers prior to the date on which
such notifying party is scheduled to make payment to the Agent (in the case of a
Lender) of the proceeds of a Loan or a payment under a Letter of Credit to be
made by it hereunder or (in the case of the Borrowers) a payment to the Agent
for account of one or more of the Lenders hereunder (such payment being herein
called the "Required Payment"), which notice shall be effective upon receipt,
that it does not intend to make the Required Payment to the Agent, the Agent may
assume that the Required Payment has been made and may, in reliance upon such
assumption (but shall not be required to), make the amount thereof available to
the intended recipient(s) on such date and, if such Lender or the Borrowers (as
the case may be) has not in fact made the Required Payment to the Agent, the
recipient(s) of such payment shall, within one Business Day of demand, repay to
the Agent the amount so made available together with interest thereon in respect
of each day during the period commencing on the date such amount was so made
available by the Agent until but excluding the date the Agent recovers such
amount at a rate per annum which, for any Lender as recipient, will be equal to
the Federal Funds Rate, and for the Borrowers as recipient, will be equal to the
Base Rate plus the Applicable Margin.
Section 4.05 Setoff, Sharing of Payments, Etc.
(a) Each Obligor agrees that, in addition to (and without limitation
of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise
have, upon the occurrence and during the continuance of an Event of Default, any
each Lender shall have the right and be entitled (after consultation with the
Agent), at its option, to offset balances held by it or by any of its Affiliates
for account of the Obligor at any of its offices, in Dollars or in any other
currency, against any principal of or interest on any of such Lender's Loans, or
any other amount payable to such Lender hereunder, which is not paid when due
(regardless of whether such balances are then due to such Obligor) in which case
it shall promptly notify such Obligor and the Agent thereof, provided that such
Lender's failure to give such notice shall not affect the validity thereof.
(b) If any Lender shall obtain payment of any principal of or interest
on any Loan made by it to the Borrowers under this Agreement (or reimbursement
as to any Letter of Credit) through the exercise of any right of set-off,
banker's lien or counterclaim or similar right or otherwise, and, as a result of
such payment, such Lender shall have received a greater percentage of the
principal or interest (or reimbursement) then due hereunder by the Borrowers to
such Lender than the percentage received by any other Lenders, it shall promptly
(i) notify the Agent and each other Lender thereof and (ii) purchase from such
other Lenders participations in the Loans (or participations in Letters of
Credit) made by such other Lenders (or in interest due thereon, as the case may
be) in such amounts, and make such other adjustments from time to time as shall
be equitable, to the end that all the Lenders
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shall share the benefit of such excess payment (net of any expenses which may be
incurred by such Lender in obtaining or preserving such excess payment) pro rata
in accordance with the unpaid principal and/or interest on the Loans held by
each of the Lenders (or reimbursements of Letters of Credit). To such end all
the Lenders shall make appropriate adjustments among themselves (by the resale
of participations sold or otherwise) if such payment is rescinded or must
otherwise be restored. Each Obligor agrees that any Lender so purchasing a
participation in the Loans made by other Lenders (or in interest due thereon, as
the case may be) may exercise all rights of set-off, banker's lien, counterclaim
or similar rights with respect to such participation as fully as if such Lender
were a direct holder of Loans (or Letters of Credit) in the amount of such
participation. Nothing contained herein shall require any Lender to exercise
any such right or shall affect the right of any Lender to exercise, and retain
the benefits of exercising, any such right with respect to any other
indebtedness or obligation of the Obligors. If under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a set-off to which this Section 4.05 applies, such Lender shall, to the extent
practicable, exercise its rights in respect of such secured claim in a manner
consistent with the rights of the Lenders entitled under this Section 4.05 to
share the benefits of any recovery on such secured claim.
Section 4.06 Taxes.
(a) Payments Free and Clear. Any and all payments by the Borrowers
hereunder shall be made, in accordance with Section 4.01, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender, the Issuing Bank and the Agent, taxes
imposed on its income, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the Agent, the Issuing
Bank or such Lender, as the case may be, is a citizen or resident or in which
such Lender has an Applicable Lending Office, (ii) the jurisdiction (or any
political subdivision thereof) in which the Agent, the Issuing Bank or such
Lender is organized, or (iii) any jurisdiction (or political subdivision
thereof) in which such Lender, the Issuing Bank or the Agent is presently doing
business which taxes are imposed solely as a result of doing business in such
jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "Taxes"). If the
Borrowers shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder to the Lenders, the Issuing Bank or the Agent (i) the sum
payable shall be increased by the amount necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 4.06) such Lender, the Issuing Bank or the Agent (as the case
may be) shall receive an amount equal to the sum it would have received had no
such deductions been made, (ii) the Borrowers shall make such deductions and
(iii) the Borrowers shall pay the full amount deducted to the relevant taxing
authority or other Governmental Authority in accordance with applicable law.
(b) Other Taxes. In addition, to the fullest extent permitted by
applicable law, the Borrowers agree to pay any present or future stamp or
documentary taxes or any other
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excise or property taxes, charges or similar levies that arise from any payment
made hereunder or from the execution, delivery or registration of, or otherwise
with respect to, this Agreement, any Assignment or any Security Instrument
(hereinafter referred to as "Other Taxes").
(c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE OBLIGORS WILL INDEMNIFY EACH LENDER, THE ISSUING BANK AND THE AGENT FOR
THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY
TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE
UNDER THIS SECTION 4.06) PAID BY SUCH LENDER, THE ISSUING BANK OR THE AGENT (ON
THEIR BEHALF OR ON BEHALF OF ANY LENDER), AS THE CASE MAY BE, AND ANY LIABILITY
(INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT
THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY
ASSERTED UNLESS THE PAYMENT OF SUCH TAXES WAS NOT CORRECTLY OR LEGALLY ASSERTED
AND SUCH LENDER'S PAYMENT OF SUCH TAXES OR OTHER TAXES WAS THE RESULT OF ITS
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY PAYMENT PURSUANT TO SUCH
INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE DATE ANY LENDER,
THE ISSUING BANK OR THE AGENT, AS THE CASE MAY BE, MAKES WRITTEN DEMAND
THEREFOR. IF ANY LENDER, THE ISSUING BANK OR THE AGENT RECEIVES A REFUND OR
CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH LENDER, THE ISSUING
BANK OR THE AGENT HAS RECEIVED PAYMENT FROM THE OBLIGORS IT SHALL PROMPTLY
NOTIFY THE OBLIGORS OF SUCH REFUND OR CREDIT AND SHALL, IF NO DEFAULT HAS
OCCURRED AND IS CONTINUING, PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE
OBLIGORS WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR CREDITED),
PROVIDED THAT THE OBLIGORS, UPON THE REQUEST OF SUCH LENDER, THE ISSUING BANK OR
THE AGENT, AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR
OTHER CHARGES) TO SUCH LENDER, THE ISSUING BANK OR THE AGENT IN THE EVENT SUCH
LENDER OR THE AGENT IS REQUIRED TO REPAY SUCH REFUND OR CREDIT.
(d) Lender Representations.
(i) Each Lender represents that it is either (i) a corporation
organized under the laws of the United States of America or any state thereof or
(ii) it is entitled to complete exemption from United States withholding tax
imposed on or with respect to any payments, including fees, to be made to it
pursuant to this Agreement (A) under an applicable provision of a tax convention
to which the United States of America is a party or (B) because it is acting
through a branch, agency or office in the United States of America and any
payment to be received by it hereunder is effectively connected with a trade or
business in the United States of America. Each Lender that is not a corporation
organized under the laws of the United States of America or any state thereof
agrees to provide to the Borrowers and the Agent on the Closing Date, or on the
date of its delivery of the Assignment pursuant to which it becomes a Lender,
and at such other times as required by United States law or as the
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Borrowers or the Agent shall reasonably request, two accurate and complete
original signed copies of either (A) Internal Revenue Service Form 4224 (or
successor form) certifying that all payments to be made to it hereunder will be
effectively connected with a United States trade or business (the "Form 4224
Certification") or (B) Internal Revenue Service Form 1001 (or successor form)
certifying that it is entitled to the benefit of a provision of a tax convention
to which the United States of America is a party which completely exempts from
United States withholding tax all payments to be made to it hereunder (the "Form
1001 Certification"). In addition, each Lender agrees that if it previously
filed a Form 4224 Certification, it will deliver to the Borrowers and the Agent
a new Form 4224 Certification prior to the first payment date occurring in each
of its subsequent taxable years; and if it previously filed a Form 1001
Certification, it will deliver to the Borrowers and the Agent a new
certification prior to the first payment date falling in the third year
following the previous filing of such certification. Each Lender also agrees to
deliver to the Borrowers and the Agent such other or supplemental forms as may
at any time be required as a result of changes in applicable law or regulation
in order to confirm or maintain in effect its entitlement to exemption from
United States withholding tax on any payments hereunder, provided that the
circumstances of such Lender at the relevant time and applicable laws permit it
to do so. If a Lender determines, as a result of any change in either (i) a
Governmental Requirement or (ii) its circumstances, that it is unable to submit
any form or certificate that it is obligated to submit pursuant to this Section
4.06, or that it is required to withdraw or cancel any such form or certificate
previously submitted, it shall promptly notify the Borrowers and the Agent of
such fact. If a Lender is organized under the laws of a jurisdiction outside
the United States of America, unless the Borrowers and the Agent have received a
Form 1001 Certification or Form 4224 Certification satisfactory to them
indicating that all payments to be made to such Lender hereunder are not subject
to United States withholding tax, the Borrowers shall be entitled to withhold
taxes from such payments at the applicable statutory rate and, if Borrowers have
been notified to such effect by a Lender, Borrowers shall withhold taxes from
such payments at the applicable statutory rate. Each Lender agrees to indemnify
and hold harmless from any United States taxes, penalties, interest and other
expenses, costs and losses incurred or payable by (i) the Agent as a result of
such Lender's failure to submit any form or certificate that it is required to
provide pursuant to this Section 4.06 or (ii) the Borrowers or the Agent as a
result of their reliance on any such form or certificate which such Lender has
provided to them pursuant to this Section 4.06.
(ii) For any period with respect to which a Lender has failed to
provide the Borrowers with the form required pursuant to this Section 4.06, if
any, (other than if such failure is due to a change in a Governmental
Requirement occurring subsequent to the date on which a form originally was
required to be provided), such Lender shall not be entitled to indemnification
under Section 4.06 with respect to taxes imposed by the United States which
taxes would not have been imposed but for
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such failure to provide such forms; provided, however, that should a Lender,
which is otherwise exempt from or subject to a reduced rate of withholding tax
becomes subject to taxes because of its failure to deliver a form required
hereunder, the Borrowers shall take such steps as such Lender shall reasonably
request to assist such Lender to recover such taxes at the expense of such
Lender.
(iii) Any Lender claiming any additional amounts payable pursuant to
this Section 4.06 shall use reasonable efforts (consistent with legal and
regulatory restrictions) to file any certificate or document requested by the
Borrowers or the Agent or to change the jurisdiction of its Applicable Lending
Office or to contest any tax imposed if the making of such a filing or change or
contesting such tax would avoid the need for or reduce the amount of any such
additional amounts that may thereafter accrue and would not, in the sole
determination of such Lender, be otherwise disadvantageous to such Lender.
Section 4.07 Disposition of Proceeds. The Security Instruments
contain an assignment by the Obligors unto and in favor of the Agent for the
benefit of the Lenders of all production and all proceeds attributable thereto
which may be produced from or allocated to the Mortgaged Property, and the
Security Instruments further provide in general for the application of such
proceeds to the satisfaction of the Indebtedness and other obligations described
therein and secured thereby. Notwithstanding the assignment contained in such
Security Instruments, until the occurrence of an Event of Default, the Lenders
agree that they will neither notify the purchaser or purchasers of such
production nor take any other action to cause such proceeds to be remitted to
the Lenders, but the Lenders will instead permit such proceeds to be paid to the
Obligors.
Section 4.08 Joint and Several.
(a) The Borrowers jointly and severally, hereby irrevocably and
unconditionally promise to pay and accept, not merely as surety but also as co-
debtors, joint and several liability for all of the Indebtedness and any other
obligations under the Notes, this Agreement and the Security Instruments, it
being the intention of the Borrowers that all the Indebtedness and any other
obligations under the Notes, this Agreement and the Security Instruments shall
be the joint and several obligations of the Borrowers without preference or
distinction among them.
(b) Each Borrower waives any right to require the Agent and/or the
Lenders to (i) proceed against the other Borrower or any other Person liable on
the Indebtedness, (ii) enforce its rights against the other Borrower (iii)
proceed or enforce their rights against or exhaust any security given to secure
the Indebtedness (iv) have the Borrowers joined with each other or with the
Guarantors in any suit arising out of this Credit Agreement and/or the
Indebtedness, or (v) pursue any other remedy in the Agent's or Lenders' powers
whatsoever. Neither the Agent nor the Lenders shall be required to mitigate
damages or take any action to reduce, collect or enforce the Indebtedness. Each
Borrower waives any defense arising by reason of any disability, lack of
corporate authority or power, or other defense of the other
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Borrower or any other guarantor of the Indebtedness, and shall remain liable
hereon regardless of whether the other Borrower or any other guarantor be found
not liable thereon for any reason. Until the Indebtedness shall have been paid
in full, no Borrower shall have any right of subrogation, and waives any right
to enforce any remedy which the Agent or any Lender now has or may hereafter
have against the other Borrower, and waives any benefit of any right to
participate in any security now or hereafter held by the Agent or the Lenders.
Whether and when to exercise any of the remedies of the Agent and the Lenders
under any of the Loan Documents shall be in the sole and absolute discretion of
the Agent and the Lenders, and any delay by the Agent or the Lenders in
enforcing any remedy, including delay in conducting a foreclosure sale, shall
not be a defense to either Borrower's liability under this Credit Agreement.
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 Additional Costs, Etc.
(a) Eurodollar Regulations, Etc. The Borrowers shall pay directly to
each Lender from time to time such amounts as such Lender may determine to be
necessary to compensate such Lender for any costs which it determines are
attributable to its making or maintaining of any Eurodollar Loans or issuing or
participating in Letters of Credit hereunder or its obligation to make any
Eurodollar Loans or issue or participate in any Letters of Credit hereunder, or
any reduction in any amount receivable by such Lender hereunder in respect of
any of such Eurodollar Loans, Letters of Creditor or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"Additional Costs"), resulting from any Regulatory Change which: (i) changes the
basis of taxation of any amounts payable to such Lender under this Agreement or
any Note in respect of any of such Eurodollar Loans or Letters of Credit (other
than taxes imposed on the overall net income of such Lender or of its Applicable
Lending Office for any of such Eurodollar Loans by the jurisdiction in which
such Lender has its principal office or Applicable Lending Office); or (ii)
imposes or modifies any reserve, special deposit, minimum capital, capital ratio
or similar requirements (other than the Reserve Requirement utilized in the
determination of the Fixed Rate for such Loan) relating to any extensions of
credit or other assets of, or any deposits with or other liabilities of such
Lender (including any of such Eurodollar Loans or any deposits referred to in
the definition of "Fixed Eurodollar Rate" in Section 1.02 hereof), or the
Commitment of such Lender or the Eurodollar interbank market; or (iii) imposes
any other condition affecting this Agreement or any Note (or any of such
extensions of credit or liabilities) or such Lender's Commitment. Each Lender
will notify the Agent and the Borrowers of any event occurring after the Closing
Date which will entitle such Lender to compensation pursuant to this Section
5.01(a) as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation, and will designate a different
Applicable Lending Office for the Loans of such Lender affected by
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such event if such designation will avoid the need for, or reduce the amount of,
such compensation and will not, in the sole opinion of such Lender, be
disadvantageous to such Lender. If any Lender requests compensation from the
Borrowers under this Section 5.01(a), the Borrowers may, by notice to such
Lender, suspend the obligation of such Lender to make additional Loans of the
Type with respect to which such compensation is requested until the Regulatory
Change giving rise to such request ceases to be in effect (in which case the
provisions of Section 5.04 shall be applicable).
(b) Regulatory Change. Without limiting the effect of the provisions
of Section 5.01(a), in the event that, by reason of any Regulatory Change
affecting any Lender, the Eurodollar interbank market or such Lender's position
in such market, any Lender either (i) incurs Additional Costs based on or
measured by the excess above a specified level of the amount of a category of
deposits or other liabilities of such Lender which includes deposits by
reference to which the interest rate on Eurodollar Loans is determined as
provided in this Agreement or a category of extensions of credit or other assets
of such Lender which includes Eurodollar Loans or (ii) becomes subject to
restrictions on the amount of such a category of liabilities or assets which it
may hold, then, if such Lender so elects by notice to the Borrowers, the
obligation of such Lender to make additional Eurodollar Loans shall be suspended
until such Regulatory Change or other circumstances ceases to be in effect (in
which case the provisions of Section 5.04 shall be applicable).
(c) Capital Adequacy. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrowers shall
pay directly to any Lender from time to time on request such amounts as such
Lender may reasonably determine to be necessary to compensate such Lender or its
parent or holding company for any costs which it determines are attributable to
the maintenance by such Lender or its parent or holding company (or any
Applicable Lending Office), pursuant to any Governmental Requirement following
any Regulatory Change, of capital in respect of its Commitment, its Notes or its
Loans, or any interest held by it in any Letter of Credit, such compensation to
include, without limitation, an amount equal to any reduction of the rate of
return on assets or equity of such Lender or its parent or holding company (or
any Applicable Lending Office) to a level below that which such Lender or its
parent or holding company (or any Applicable Lending Office) could have achieved
but for such Governmental Requirement. Such Lender will notify the Borrowers
that it is entitled to compensation pursuant to this Section 5.01(c) as promptly
as practicable after it determines to request such compensation.
(d) Compensation Procedure. Any Lender notifying the Borrowers of the
incurrence of additional costs under this Section 5.01 shall in such notice to
the Borrowers and the Agent set forth in reasonable detail the basis and amount
of its request for compensation. Determinations and allocations by each Lender
for purposes of this Section 5.01 of the effect of any Regulatory Change
pursuant to Section 5.01(a) or (b), or of the effect of capital maintained
pursuant to Section 5.01(c), on its costs or rate of return of maintaining Loans
or its obligation to make Loans or issue Letters of Credit, or on amounts
receivable by it in respect of Loans or Letters of Credit, and of the amounts
required to
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compensate such Lender under this Section 5.01, shall be conclusive and binding
for all purposes, provided that such determinations and allocations are made on
a reasonable basis. No request for additional compensation under this Section
5.01 shall cover a period commencing earlier than 90 days prior to such request.
Any request for additional compensation under this Section 5.01 shall be paid by
the Borrowers within thirty (30) days of the receipt by the Borrowers of the
notice described in this Section 5.01(d).
(e) Removal of Lender. The Borrowers shall be entitled to remove any
Lender under this Agreement if such Lender has requested any additional
compensation under this Section 5.01 by giving the Agent and the Lenders at
least ten (10) days prior written notice provided that a replacement bank
assumes such Lender's Commitment and otherwise complies with the provisions of
Section 12.06 hereof or the Commitments are reduced by a corresponding amount.
Section 5.02 Limitation on Eurodollar Loans. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any Fixed
Eurodollar Rate for any Interest Period:
(i) the Agent determines (which determination shall be conclusive,
absent manifest error) that quotations of interest rates for the relevant
deposits referred to in the definition of "Fixed Eurodollar Rate" in
Section 1.02 are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining rates of interest for
Eurodollar Loans as provided herein; or
(ii) the Agent determines (which determination shall be conclusive,
absent manifest error) that the relevant rates of interest referred to in
the definition of "Fixed Eurodollar Rate" in Section 1.02 upon the basis of
which the rate of interest for Eurodollar Loans for such Interest Period is
to be determined are not sufficient to adequately cover the cost to the
Lenders of making or maintaining Eurodollar Loans;
then the Agent shall give the Borrowers prompt notice thereof, and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make additional Eurodollar Loans.
Section 5.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain Eurodollar
Loans hereunder, then such Lender shall promptly notify the Borrowers thereof
and such Lender's obligation to make Eurodollar Loans shall be suspended until
such time as such Lender may again make and maintain Eurodollar Loans (in which
case the provisions of Section 5.04 shall be applicable).
Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and
5.03. If the obligation of any Lender to make Eurodollar Loans shall be
suspended pursuant to Sections 5.01, 5.02 or 5.03 ("Affected Loans"), all
Affected Loans which would otherwise be made by such Lender shall be made
instead as Base Rate Loans (and, if an event referred to in Section 5.01(b) or
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Section 5.03 has occurred and such Lender so requests by notice to the
Borrowers, all Affected Loans of such Lender then outstanding shall be
automatically converted into Base Rate Loans on the date specified by such
Lender in such notice) and, to the extent that Affected Loans are so made as (or
converted into) Base Rate Loans, all payments of principal which would otherwise
be applied to such Lender's Affected Loans shall be applied instead to its Base
Rate Loans.
Section 5.05 Compensation. The Borrowers shall pay to each Lender
within thirty (30) days of receipt of written request of such Lender (which
request shall set forth, in reasonable detail, the basis for requesting such
amounts and which shall be conclusive and binding for all purposes provided that
such determinations are made on a reasonable basis), such amount or amounts as
shall compensate it for any loss, cost, expense or liability which such Lender
determines in good faith are attributable to:
(i) any payment, prepayment or conversion of a Eurodollar Loan
properly made by such Lender or the Borrowers for any reason (including,
without limitation, the acceleration of the Loans pursuant to Section
10.01) on a date other than the last day of the Interest Period for such
Loan; or
(ii) any failure by the Borrowers for any reason (including but not
limited to, the failure of any of the conditions precedent specified in
Article VI to be satisfied) to borrow, continue or convert a Eurodollar
Loan from such Lender on the date for such borrowing, continuation or
conversion specified in the relevant notice given pursuant to Section
2.02(c).
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest at
the Fixed Rate for such Loan which would have accrued on the principal amount so
paid, prepaid or converted or not borrowed for the period from the date of such
payment, prepayment or conversion or failure to borrow to the last day of the
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan which would have commenced on the date specified
for such borrowing) over (ii) the interest component of the amount such Lender
would have bid in the London interbank market for Dollar deposits of leading
banks in amounts comparable to such principal amount and with maturities
comparable to such period (as reasonably determined by such Lender). Any
request for compensation under this Section 5.05 shall be made within 90 days of
the event giving rise to such claim.
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ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Initial Funding.
The obligation of the Lenders to make the Initial Funding is subject
to the receipt by the Agent and the Lenders of all fees payable pursuant to
Section 2.04 on or before the Closing Date and the receipt by the Agent of the
following documents and satisfaction of the other conditions provided in this
Section 6.01, each of which shall be satisfactory to the Agent in form and
substance:
(a) A certificate of the Secretary or an Assistant Secretary of KOC
setting forth (i) resolutions of its board of directors with respect to the
authorization of each of the Borrowers to execute and deliver the Loan Documents
to which it is a party and to enter into the transactions contemplated in those
documents, (ii) the officers of KOC (y) who are authorized to sign the Loan
Documents to which a Borrower is a party and (z) who will, until replaced by
another officer or officers duly authorized for that purpose, act as its
representative for the purposes of signing documents and giving notices and
other communications in connection with this Agreement and the transactions
contemplated hereby, (iii) specimen signatures of the authorized officers, and
(iv) the articles or certificate of incorporation and bylaws or Partnership
Agreement, as applicable, of the Borrowers, certified as being true and
complete. The Agent and the Lenders may conclusively rely on such certificate
until the Agent receives notice in writing from the Borrowers to the contrary.
(b) A certificate of the Secretary or an Assistant Secretary of each
of the Guarantors or the Guarantors' general partner, as applicable, setting
forth (i) resolutions of its board of directors with respect to the
authorization of each of the Guarantor's to execute and deliver the Loan
Documents to which it is a party and to enter into the transactions contemplated
in those documents, (ii) the officers of the Guarantors or the Guarantors'
general partner (y) who are authorized to sign the Loan Documents to which a
Guarantor is a party and (z) who will, until replaced by another officer or
officers duly authorized for that purpose, act as its representative for the
purposes of signing documents and giving notices and other communications in
connection with this Agreement and the transactions contemplated hereby, (iii)
specimen signatures of the authorized officers, and (iv) the articles or
certificate of incorporation and bylaws or Partnership Agreement, as
applicable, of the Guarantors, certified as being true and complete. The Agent
and the Lenders may conclusively rely on such certificate until they receive
notice in writing from the Guarantor to the contrary.
(c) Certificates of the appropriate state agencies with respect to the
existence, qualification and good standing of the Obligors.
(d) The Notes, duly completed and executed.
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(e) The Security Instruments, including those described on Exhibit D,
duly completed and executed in sufficient number of counterparts for recording,
if necessary.
(f) Favorable opinions of Thomas E. Baker, general counsel of Parent,
and of Hargrove, Pesnell & Wyatt, special counsel to the Obligors, in form and
substance reasonably satisfactory to the Agent and the Lenders, as to such
matters incident to the transactions herein contemplated as the Agent and the
Lenders may reasonably require.
(g) A certificate of insurance coverage of the Borrowers evidencing
that the Borrowers are carrying insurance in accordance with Section 7.19 hereof
and certifying that such coverage is usual and customary for similar companies
operating in the oil and gas business and complies with the requirements of the
Loan Documents.
(h) The Security Instruments and accompanying financing statements
covering the Mortgaged Property shall have been properly executed and delivered
to the Agent for subsequent filing and recording, as applicable, in the
appropriate offices to establish and perfect the Liens and security interests
created thereby.
(i) The Agent shall have been furnished with appropriate UCC search
certificates reflecting no prior liens or security interests except for liens
being released with the proceeds of the Initial Funding or securing the
Indebtedness.
(j) Payment of $99,565,000 on the Existing Senior Unsecured Notes.
(k) Issuance of the Senior Subordinated Notes.
(l) Such other documents as the Agent or any Lender or special counsel
to the Agent may reasonably request.
Section 6.02 Initial and Subsequent Loans and Letters of Credit. The
obligation of the Lenders to make Loans to the Borrowers upon the occasion of
each borrowing hereunder and to issue, renew, extend or reissue Letters of
Credit for the account of the Borrowers (including the Initial Funding) is
subject to the further conditions precedent that, as of the date of such Loans
and after giving effect thereto: (i) no Default shall have occurred and be
continuing; (ii) no Material Adverse Effect shall have occurred and be
continuing; and (iii) the representations and warranties made by the Obligors in
Article VII and in the Security Instruments shall be true on and as of the date
of the making of such Loans or issuance, renewal, extension or reissuance of a
Letter of Credit with the same force and effect as if made on and as of such
date and following such new borrowing, except to the extent such representations
and warranties are expressly limited to an earlier date or the Majority Lenders
may expressly consent in writing to the contrary. Each request for a borrowing
or issuance, renewal, extension or reissuance of a Letter of Credit by the
Borrowers hereunder shall constitute a certification by the Borrowers to the
effect set forth in the preceding sentence and a representation by the Borrowers
that such borrowing or issuance, renewal, extension or reissuance of a Letter of
Credit is permitted to be incurred under the Indenture (both as of the date of
such
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notice and, unless the Borrowers otherwise notify the Agent, prior to the date
of and immediately following such borrowing or issuance, renewal, extension or
reissuance of a Letter of Credit as of the date thereof).
Section 6.03 Conditions Relating to Letters of Credit. In addition to
the satisfaction of all other conditions precedent set forth in this Article VI,
the issuance, renewal, extension or reissuance of the Letters of Credit referred
to in Section 2.01(b) hereof is subject to the following conditions precedent:
(a) At least three (3) Business Days prior to the date of the issuance
and at least thirty (30) Business Days prior to the date of the renewal,
extension or reissuance of each Letter of Credit, the Agent shall have received
a written request for a Letter of Credit.
(b) Each of the Letters of Credit shall (i) contain such terms and
provisions as are reasonably required by the Issuing Bank (not inconsistent with
the terms of this Agreement), (ii) be for the account of the Borrowers and (iii)
expire not later than the earlier of (A) one year from the date of issuance,
renewal, extension or reissuance or (B) five (5) days before the Revolving
Credit Termination Date.
(c) The Borrowers shall have duly and validly executed and delivered
to the Issuing Bank a Letter of Credit Agreement pertaining to the Letter of
Credit.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Each of the Obligors represents and warrants to the Agent and the
Lenders that (each representation and warranty herein is given as of the Closing
Date and shall be deemed repeated and reaffirmed on the dates of each borrowing
and issuance, renewal, extension or reissuance of a Letter of Credit as provided
in Section 6.02):
Section 7.01 Existence.
(a) Corporate Existence. Each of KOC, Concorde and the Parent: (i) is
a corporation duly organized, legally existing and in good standing under
the laws of the jurisdiction of its incorporation; (ii) has all requisite
corporate power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and
carry on its business as now being or as proposed to be conducted; and
(iii) is qualified to do business in all jurisdictions in which the nature
of the business conducted by it makes such qualification necessary and
where failure so to qualify would have a Material Adverse Effect.
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(b) Partnership Existence. Each of Kelley Operating, 92 JV, 94 JV, 92
DDP and 94 DDP: (i) is a partnership duly organized, legally existing and
in good standing under the laws of the jurisdiction of its formation; (ii)
has all requisite power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and
carry on its business as now being or as proposed to be conducted; and
(iii) is qualified to do business in all jurisdictions in which the nature
of the business conducted by it makes such qualification necessary and
where failure so to qualify would have a Material Adverse Effect.
Section 7.02 Financial Condition. The unaudited consolidated balance
sheet of the Parent and its Consolidated Subsidiaries (including Unrestricted
Subsidiaries, if any) as at September 30, 1996 and the related consolidated
statements of income (or loss), and cash flows of the Borrower and its
Consolidated Subsidiaries (including Unrestricted Subsidiaries, if any) for the
nine month period ended on said date, heretofore furnished to each of the
Lenders are complete and correct and fairly presents the consolidated financial
condition of the Parent and its Consolidated Subsidiaries (including
Unrestricted Subsidiaries, if any) as at said dates and the results of its
operations, all in accordance with GAAP, as applied on a consistent basis.
Neither the Parent nor any Subsidiary has on the Closing Date any material Debt,
contingent liabilities, liabilities for taxes, unusual forward or long-term
commitments or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in the Financial
Statements or in Schedule 7.02. Since December 31, 1995, there has been no
change or event having a Material Adverse Effect which is continuing other than
as shown on Schedule 7.02. Each Obligor other than the Parent is a Consolidated
Subsidiary of the Parent.
Section 7.03 Litigation. Except as disclosed to the Lenders in
Schedule 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Obligors threatened in writing
against or affecting the Obligors or any Subsidiary which involves the
possibility of any judgment or liability against the Obligors or any Subsidiary
not fully covered by insurance (except for normal deductibles), and which would
have a Material Adverse Effect.
Section 7.04 No Breach. Neither the execution and delivery of the
Loan Documents nor compliance with the terms and provisions thereof will
conflict with or result in a breach of, or require any consent which has not
been obtained as of the Closing Date under, the respective charter or by-laws of
the Obligors or any Subsidiary, or any material Governmental Requirement or any
material agreement or instrument to which any Obligor or any Subsidiary is a
party or by which it is bound or to which it or its Properties are subject, or
constitute a default under any such material agreement or instrument, or result
in the creation or imposition of any Lien upon any of the revenues or assets of
the Obligors or any Subsidiary pursuant to the terms of any such material
agreement or instrument other than the Liens created by the Loan Documents.
Without limiting the foregoing, (i) the consummation of the transactions
contemplated by the Loan Documents will not constitute (A) a "Change of Control"
as defined in the indenture relating to the Parent's 13-1/2% Senior Unsecured
Notes due June 15, 1999 (the "13-1/2% Indenture"), (B) a "Change in Control" as
defined in the indenture relating to the 7-7/8% Convertible Subordinated Notes
of the Parent due December 15,
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1999 (the "7-7/8% Indenture") or (C) a "Redemption Event" as defined in the
indenture relating to the 8-1/2% Convertible Subordinated Debentures of the
Parent due April 1, 2000 (the "8-1/2% Indenture"; and together with the 13-1/2%
Indenture and the 7-7/8% Indenture, the "Public Indentures") and (ii) no default
or event of default has occurred or is continuing under any of the Public
Indentures and no holder has the right to require acceleration, redemption or
repurchase (with or without notice or the lapse of time, or both) of any
indebtedness outstanding under any Public Indenture. The transactions
contemplated by the Loan Documents (including the issuance of the shares to
Contour pursuant to the Option Agreement) have been approved by a majority of
the board of directors of the Parent, and by reason of such approval the
consummation of the transactions contemplated by the Loan Documents (including
the immediate issuance to Contour pursuant to the Option Agreement of shares)
shall not constitute a "Redemption Event" as defined in the 8-1/2% Indenture.
Section 7.05 Authority. Each Obligor and each Subsidiary has all
necessary power (corporate or otherwise) and authority to execute, deliver and
perform its obligations under the Loan Documents to which it is a party; and the
execution, delivery and performance by each Obligor and each Subsidiary of the
Loan Documents to which it is a party, have been duly authorized by all
necessary action (corporate or otherwise) on its part; and the Loan Documents
constitute the legal, valid and binding obligations of each Obligor and each
Subsidiary parties thereto, enforceable in accordance with their terms, except
as limited by bankruptcy, insolvency, or other laws of general application
relating to the enforcement of creditor's rights generally.
Section 7.06 Approvals. Except as have already been obtained, filed
or made, as applicable, no authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority are necessary for the
execution, delivery or performance by the Obligors or any Subsidiary of the Loan
Documents or for the validity or enforceability thereof, except for the
recording and filing of the Security Instruments as required by this Agreement.
Section 7.07 Use of Loans. The proceeds of the Initial Funding shall
be used to amend, extend and rearrange the Prior Debt of the Obligors. The
proceeds of subsequent Loans shall be used for general business purposes of the
Borrowers. None of the Obligors is engaged princi pally, or as one of its
important activities, in the business of extending credit for the purpose,
whether immediate, incidental or ultimate, of buying or carrying margin stock
(within the meaning of Regulation G, U or X of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan hereunder will
be used to buy or carry any margin stock.
Section 7.08 ERISA.
(a) Each Obligor, each Subsidiary and each ERISA Affiliate has complied in
all material respects with ERISA and, where applicable, the Code regarding each
Plan.
(b) Each Plan is, and has been, maintained in substantial compliance with
ERISA and, where applicable, the Code.
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(c) No act, omission or transaction has occurred which could result in
imposition on any of the Obligors, any Subsidiary or any ERISA Affiliate
(whether directly or indirectly) of (i) either a civil penalty assessed pursuant
to section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43
of Subtitle D of the Code or (ii) breach of fiduciary duty liability damages
under section 409 of ERISA.
(d) No Plan (other than a defined contribution plan) or any trust created
under any such Plan has been terminated since September 2, 1974. No liability
to the PBGC (other than for the payment of current premiums which are not past
due) by any of the Obligors, any Subsidiary or any ERISA Affiliate has been or
is expected by any of the Obligors, any Subsidiary or any ERISA Affiliate to be
incurred with respect to any Plan. No ERISA Event with respect to any Plan has
occurred.
(e) Full payment when due has been made of all amounts which any of the
Obligors, any Subsidiary or any ERISA Affiliate is required under the terms of
each Plan or applicable law to have paid as contributions to such Plan, and no
accumulated funding deficiency (as defined in section 302 of ERISA and section
412 of the Code), whether or not waived, exists with respect to any Plan.
(f) The actuarial present value of the benefit liabilities under each Plan
which is subject to Title IV of ERISA does not, as of the end of each Obligor's
most recently ended fiscal year, exceed the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA) of
such Plan allocable to such benefit liabilities. The term "actuarial present
value of the benefit liabilities" shall have the meaning specified in section
4041 of ERISA.
(g) None of the Obligors, any Subsidiary or any ERISA Affiliate sponsors,
maintains, or contributes to an employee welfare benefit plan, as defined in
section 3(1) of ERISA, including, without limitation, any such plan maintained
to provide benefits to former employees of such entities, that may not be
terminated by the Obligors, a Subsidiary or any ERISA Affiliate in its sole
discretion at any time without any material liability.
(h) None of the Obligors, any Subsidiary or any ERISA Affiliate sponsors,
maintains or contributes to, or has at any time in the preceding six calendar
years, sponsored, maintained or contributed to, any Multiemployer Plan.
(i) None of the Obligors, any Subsidiary or any ERISA Affiliate is required
to provide security under section 401(a)(29) of the Code due to a Plan amendment
that results in an increase in current liability for the Plan.
Section 7.09 Taxes. Except as set out in Schedule 7.09, each Obligor
and its Subsidiaries has filed all United States Federal income tax returns and
all other tax returns which are required to be filed by them and have paid all
material taxes due pursuant to such returns or pursuant to any assessment
received by any Obligor or any Subsidiary. The charges, accruals and reserves
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on the books of each Obligor and its Subsidiaries in respect of taxes and other
governmental charges are, in the opinion of each Obligor, adequate. No tax lien
has been filed and, to the knowledge of the Obligors, no claim is being asserted
with respect to any such tax, fee or other charge.
Section 7.10 Title, Etc.
(a) Except as set out in Schedule 7.10, each of the Obligors and its
Subsidiaries has good and defensible title to its material (individually or in
the aggregate) Properties, free and clear of all Liens except Liens permitted by
Section 9.02. Except as set forth in Schedule 7.10, after giving full effect to
the Excepted Liens and such other Liens permitted by Section 9.02, each Borrower
and JV owns the net interests in production attributable to the lands and leases
reflected in the most recently delivered Reserve Report and the owner ship of
such Properties shall not in any material respect obligate such Persons to bear
the costs and expenses relating to the maintenance, development and operations
of each such Property in an amount in excess of the working interest of each
Property set forth in the most recently delivered Reserve Report. All
information contained in the most recently delivered Reserve Report is true and
correct in all material respects as of the date thereof to the knowledge of the
Obligors. As of the Closing Date, KOC owns a 84.34% partnership interests in
the 92 DDP and a 92.15% partnership interests in the 94 DDP.
(b) All leases and agreements reasonably necessary for the conduct of the
business of the Obligors and their Subsidiaries are valid and subsisting, in
full force and effect and there exists no default or event or circumstance
thereunder which with the giving of notice or the passage of time or both would
give rise to a default under any such lease or leases, which would affect in any
material respect the conduct of the business of the Obligors and their
Subsidiaries.
(c) The rights, properties and other assets presently owned, leased or
licensed by the Obligors and their Subsidiaries including, without limitation,
all easements and rights of way, include all rights, Properties and other assets
reasonably necessary to permit the Obligors and their Subsidiaries to conduct
their business in all material respects in the same manner as their business has
been conducted prior to the Closing Date.
(d) All of the assets and Properties of the Obligors and their Subsidiaries
which are reasonably necessary for the operation of their business are in good
working condition subject to normal wear and tear, as applicable, and are
maintained in accordance with prudent business standards.
Section 7.11 No Material Misstatements. No written information,
statement, exhibit, certificate, document or report furnished to the Agent and
the Lenders (or any of them) by the Obligors or any Subsidiary in connection
with the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make the
statement contained therein not materially misleading in the light of the
circumstances in which made and with respect to the Obligors and their
Subsidiaries taken as a whole. As of the Closing
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Date, there is no fact peculiar to the Obligors or any Subsidiary which has a
Material Adverse Effect or in the future is reasonably likely to have (so far as
any Obligor can now foresee) a Material Adverse Effect and which has not been
set forth in this Agreement or the other documents, certificates and statements
furnished to the Agent by or on behalf of the Obligors or any Subsidiary prior
to, or on, the Closing Date in connection with the transactions contemplated
hereby.
Section 7.12 Investment Company Act. None of the Obligors nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 Public Utility Holding Company Act. None of the
Obligors nor any Subsidiary is a "holding company," or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," or a "public utility" within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
Section 7.14 Subsidiaries and Partnerships. Except as set forth on
Schedule 7.14, as of the Closing Date the Obligors have no Subsidiaries nor
interests in any partnerships. Schedule 7.14 sets forth as of the Closing Date
the complete corporate structure of the Parent and the Obligors. Except as
indicated on Schedule 7.14, there exist no Unrestricted Subsidiaries. To the
extent any Unrestricted Subsidiaries are created or designated, the Obligors
shall promptly notify the Agent thereof, and the Agent will revise Schedule 7.14
to reflect such new Unrestricted Subsidiary and distribute a copy thereof to
each of the parties to this Agreement. Upon distribution of such revised
Schedule 7.14, such revised Schedule 7.14 shall be deemed to be a part of this
Agreement in replacement of the existing Schedule 7.14.
Section 7.15 Location of Business and Offices. Each Obligor's
principal place of business and chief executive offices as of the Closing Date
are located at the address stated below its signature on the signature pages of
this Agreement. The principal place of business and chief executive office of
each Subsidiary as of the Closing Date are located at the addresses stated on
Schedule 7.14.
Section 7.16 Defaults. None of the Obligors nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default under any material agreement or instrument to which any
Obligor or any Subsidiary is a party or by which any Obligor or any Subsidiary
is bound which default would have a Material Adverse Effect. No Default
hereunder has occurred and is continuing.
Section 7.17 Environmental Matters. Except (i) as provided in
Schedule 7.17 or (ii) as would not have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such actions would
not have a Material Adverse Effect):
(a) Neither any Property of any Obligor or any Subsidiary nor the
operations conducted thereon violate any Environmental Laws;
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(b) Without limitation of clause (a) above, no Property of any Obligor or
any Subsidiary nor the operations currently conducted thereon or, to the best
knowledge of any of the Obligors, by any prior owner or operator of such
Property or operation, are in violation of or subject to any existing, pending
or, to our knowledge, threatened action, suit, investigation, inquiry or
proceeding by or before any Governmental Authority or to any remedial
obligations under Environmental Laws;
(c) All notices, permits, licenses or similar authorizations, if any,
required pursuant to Environmental Laws to be obtained or filed in connection
with the operation or use of the Property of any Obligor and each Subsidiary
have been duly obtained or filed, and the Obligors and each Subsidiary are in
compliance with the terms and conditions of all such notices, permits, licenses
and similar authorizations;
(d) All hazardous substances, solid waste, and oil and gas exploration and
production wastes, if any, generated at the Property of any Obligor or any
Subsidiary have in the past been transported, treated and disposed of in
accordance with Environmental Laws and so as not to pose an imminent and
substantial endangerment to public health or welfare or the environment, and, to
the best knowledge of each Obligor, all such transport carriers and treatment
and disposal facilities have been and are operating in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are not the
subject of any existing, pending or, to our knowledge, threatened action,
investigation or inquiry by any Governmental Authority in connection with any
Environmental Laws;
(e) The Obligors have taken all steps reasonably necessary to determine and
have determined that no hazardous substances, solid waste, or oil and gas
exploration and production wastes, have been disposed of or otherwise released
and there has been no threatened release of any hazardous substances on or to
any Property of the Obligors or any Subsidiary except, in each case, in
compliance with Environmental Laws and so as not to pose an imminent and
substantial endangerment to public health or welfare or the environment;
(f) To the extent applicable, all Property of each Obligor and each
Subsidiary currently satisfies all material design, operation, and equipment
requirements imposed by the OPA or scheduled as of the Closing Date to be
imposed by OPA during the term of this Agreement, and the Obligors do not have
any reason to believe that such Property, to the extent subject to OPA, will not
be able to maintain compliance with such OPA requirements during the term of
this Agreement; and
(g) None of the Obligors nor any Subsidiary has any known contingent
liability in connection with any release or threatened release of any oil,
hazardous substance or solid waste into the environment.
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Section 7.18 Compliance with the Law. None of the Obligors nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Except for such acts or failures to act as would not have a Material Adverse
Effect, the Oil and Gas Properties (and properties unitized therewith) have been
maintained, operated and developed in a good and workmanlike manner and in
conformity with all applicable laws and all rules, regulations and orders of all
duly constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Interests and other contracts and agreements forming a part of the
Oil and Gas Properties; specifically in this connection, (i) after the Closing
Date, no Oil and Gas Property is subject to having allowable production reduced
below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Closing Date and (ii) none of the wells
comprising a part of the Oil and Gas Properties (or properties unitized
therewith) are deviated from the vertical more than the maximum permitted by
applicable laws, regulations, rules and orders, and such wells are, in fact,
bottomed under and are producing from, and the well bores are wholly within, the
Oil and Gas Properties (or in the case of wells located on properties unitized
therewith, such unitized properties).
Section 7.19 Insurance. As of the Closing Date, Schedule 7.19
attached hereto contains an accurate and complete description of all material
policies of property damage, liability, workmen's compensation and other forms
of insurance owned or held by the Obligors and each Subsidiary. All such
policies are in full force and effect, all premiums with respect thereto
covering all periods up to and including the date of the closing have been paid,
and no notice of cancellation or termination has been received with respect to
any such policy. Such policies are sufficient for compliance with all
requirements of law and of all agreements to which the Obligors or any
Subsidiary is a party; are valid, outstanding and enforceable policies; provide
adequate insurance coverage in at least such amounts and against at least such
risks (but including in any event public liability) as are usually insured
against in the same general area by companies engaged in the same or a similar
business for the assets and operations of the Obligors and each Subsidiary; will
remain in full force and effect through the respective dates set forth in
Schedule 7.19 without the payment of additional premiums; and will not in any
way be adversely affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. Schedule 7.19 identifies all
material risks, if any, which the Obligors and its Subsidiaries and their
respective Board of Directors or officers have designated as being self insured.
None of the Obligors nor any Subsidiary has been refused any insurance with
respect to its assets or operations, nor has its coverage been limited below
usual and customary policy limits, by an insurance carrier to which it has
applied for any such insurance or with which it has carried insurance during the
last three years.
Section 7.20 Hedging Agreements. Schedule 7.20 sets forth, as of a
date within four (4) Business Days of the Closing Date, a true and complete list
of all Hedging Agreements (including commodity price swap agreements, forward
agreements or contracts of sale which provide for prepayment for deferred
shipment or delivery of oil, gas or other commodities) of each Obligor
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and each Subsidiary, the material terms thereof (including the type, term,
effective date, termination date and notional amounts or volumes), the net mark
to market value thereof, all credit support agreements relating thereto
(including any margin required or supplied), and the counterparty to each such
agreement.
Section 7.21 Restriction on Liens. None of the Obligors nor any of
their Subsidiaries is a party to any agreement or arrangement (other than this
Agreement, the Indenture and the Security Instruments), or subject to any order,
judgment, writ or decree, which either restricts or purports to restrict its
ability to grant Liens to other Persons on or in respect of their respective
assets or Properties (other than assets represented by such agreements or
arrangement).
Section 7.22 Solvency. Each Obligor (i) is not insolvent as of the
date hereof and will not be rendered insolvent as a result of the Loan Document,
(ii) is not engaged in business or a transaction, or about to engage in a
business or a transaction, for which any property or assets remaining with such
Obligor is unreasonably small capital, and (iii) it does not intend to incur, or
believes it will incur, debts that will be beyond its ability to pay as such
debts mature.
ARTICLE VIII
AFFIRMATIVE COVENANTS
Each of the Obligors covenants and agrees that, so long as any of the
Commitments are in effect and until payment in full of all Loans hereunder, all
interest thereon and all other amounts payable by the Obligors hereunder:
Section 8.01 Financial Statements. The Obligors shall deliver, or
shall cause to be delivered, to the Agent with sufficient copies of each for the
Lenders:
(a) As soon as available and in any event within 90 days after the end of
each fiscal year of the Parent, the audited consolidated statements of income,
stockholders' equity, changes in financial position and cash flows of the Parent
and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) for such
fiscal year, and the related consolidated balance sheets of the Parent and its
Consolidated Subsidiaries (including Unrestricted Subsidiaries) as at the end of
such fiscal year, setting forth (i) as to each account affected thereby, all
eliminating entries for Unrestricted Subsidiaries as a group and (ii) the
resulting consolidated figures for the Parent and the Restricted Subsidiaries,
and setting forth in each case in comparative form the corresponding figures for
the preceding fiscal year, and accompanied by the related opinion of independent
public accountants of recognized national standing acceptable to the Agent which
opinion shall state that said financial statements fairly present the
consolidated financial condition and results of operations of the Parent and its
Consolidated Subsidiaries (including Unrestricted Subsidiaries) as at the end
of, and for, such fiscal year and that such financial statements have been
prepared in accordance with GAAP except for such changes in such principles with
which the independent public
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accountants shall have concurred and such opinion shall not contain a "going
concern" or like qualification or exception, and a certificate of such
accountants stating that, in making the examination necessary for their opinion,
they obtained no knowledge, except as specifically stated, of any Default.
(b) As soon as available and in any event within 45 days after the end of
each of the first three fiscal quarterly periods of each fiscal year of the
Parent, consolidated statements of income (or loss), changes in financial
position and cash flows and consolidating statements of income of the Parent and
its Consolidated Subsidiaries (including Unrestricted Subsidiaries) for such
period and for the period from the beginning of the respective fiscal year to
the end of such period, and the related consolidated and consolidating balance
sheets as at the end of such period, setting forth (i) as to each account
affected thereby, all eliminating entries for Unrestricted Subsidiaries as a
group and (ii) the resulting consolidated and consolidating figures for the
Parent and the Restricted Subsidiaries, and setting forth in each case in
comparative form the corresponding figures for the corresponding period in the
preceding fiscal year, accompanied by the certificate of a Responsible Officer,
which certificate shall state that said financial statements fairly present the
consolidated and consolidating financial condition and results of operations of
the Parent and its Consolidated Subsidiaries (including Unrestricted
Subsidiaries) in accor dance with GAAP, as at the end of, and for, such period
(subject to normal year-end adjust ments).
(c) Promptly after any of the Obligors knows that any Default or any
Material Adverse Effect has occurred, a notice of such Default or Material
Adverse Effect, describing the same in reasonable detail and the action the
Obligors propose to take with respect thereto.
(d) Promptly upon receipt thereof, a copy of each management letter
submitted to any of the Obligors or any Subsidiary by independent accountants in
connection with any annual, interim or special audit made by them of the books
of the Obligors and its Subsidiaries, and a copy of any response by the Obligors
or any Subsidiary of the Obligors, or the Board of Directors or general partner
of any of the Obligors or any Subsidiary of the Obligors, to such management
letter.
(e) Promptly upon its becoming available, each financial statement, report,
notice or proxy statement sent by any of the Obligors to stockholders, partners
or unit-holders generally and each regular or periodic report and any
registration statement, prospectus or written communication (other than
transmittal letters) in respect thereof filed by any of the Obligors with or
received by any of the Obligors in connection therewith from any securities
exchange or the SEC or any successor agency.
(f) Promptly after the furnishing thereof, copies of any statement, report
or notice furnished to or any Person pursuant to the terms of any indenture,
loan or credit or other similar agreement, other than this Agreement and not
otherwise required to be furnished to the Lenders pursuant to any other
provision of this Section 8.01.
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(g) At the time the January 1 Reserve Report is delivered to the Agent and
the Lenders, the Obligors shall provide a one-year financial projection for the
Parent and its Subsidiaries in form and substance acceptable to the Agent
including projected revenues, expenses and capital expenditures.
(h) From time to time such other information regarding the business,
affairs or financial condition of any of the Obligors or any Subsidiary
(including, without limitation, any Plan or Multiemployer Plan and any reports
or other information required to be filed under ERISA) as any Lender or the
Agent may reasonably request.
(i) Concurrently with the delivery of the Financial Statements required by
Section 8.01(a) and (b), a report, in form and substance satisfactory to the
Agent, setting forth as of the last Business Day of such calendar quarter a true
and complete list of all Hedging Agreements (including commodity price swap
agreements, forward agreements or contracts of sale which provide for prepayment
for deferred shipment or delivery of oil, gas or other commodities) of the
Obligors and each Subsidiary, the material terms thereof (including the type,
term, effective date, termination date and notional amounts or volumes), the net
mark to market value therefor, any new credit support agreements relating
thereto not listed on Schedule 7.20, any margin required or supplied under any
credit support document, and the counterparty to each such agreement.
The Obligors will furnish to the Agent, at the time each set of financial
statements is furnished pursuant to paragraph (a) or (b) above, a certificate
substantially in the form of Exhibit C hereto executed by a Responsible Officer
of each Obligor (i) certifying as to the matters set forth therein and stating
that no Default has occurred and is continuing (or, if any Default has occurred
and is continuing, describing the same in reasonable detail), and (ii) setting
forth in reasonable detail the computations necessary to determine whether the
Obligors are in compliance with Sections 9.12 and 9.13 as of the end of the
respective fiscal quarter or fiscal year.
Section 8.02 Litigation. The Obligors shall promptly give to the
Agent notice of all legal or arbitral proceedings, and of all proceedings before
any Governmental Authority affecting the Obligors or any Subsidiary, except
proceedings which, if adversely determined, would not have a Material Adverse
Effect.
Section 8.03 Maintenance, Etc.
(a) Each of the Obligors shall: preserve and maintain its corporate or
partnership existence, as applicable (except as permitted by Section 9.08), and
all of its material rights, privileges and franchises; keep books of record and
account in which full, true and correct entries will be made of all dealings or
transactions in relation to its business and activities; comply with all
Governmental Requirements if failure to comply with such requirements will have
a Material Adverse Effect; pay and discharge all taxes, assessments and
governmental charges or levies imposed on it or on its income or profits or on
any of its Property prior to the date on which penalties attach thereto, except
for any such tax,
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assessment, charge or levy the payment of which is being contested in good faith
and by proper proceedings and against which adequate reserves in the good faith
judgment of the management of Obligors are being maintained; upon reasonable
notice, permit representa tives of the Agent or any Lender, during normal
business hours, to examine, copy and make extracts from its books and records,
to inspect its Properties, and to discuss its business and affairs with its
officers, all to the extent reasonably requested by such Lender or the Agent (as
the case may be); keep, or cause to be kept, insured by financially sound and
reputable insurers all Property of a character usually insured by Persons
engaged in the same or similar business similarly situated against loss or
damage of the kinds and in the amounts customarily insured against by such
Persons and carry such other insurance as is usually carried by such Persons
including, without limitation, sudden and accidental seepage and pollution
insurance to the extent reasonably available; and pay all of its accounts
payable in the ordinary course of its business but not later than 120 days past
the invoice or billing date, unless such payables are being contested in good
faith by appropriate proceedings and if reserves adequate (in the good faith
judgment of management of the Parent) under GAAP shall have been established
therefor.
(b) Contemporaneously with the delivery of the financial statements
required by Section 8.01(a) to be delivered for each year, the Obligors will
furnish or cause to be furnished to the Agent and the Lenders a certificate of
insurance coverage from the insurer in form and substance satisfactory to the
Agent and, if requested, will furnish the Agent and the Lenders copies of the
applicable policies.
(c) Each of the Obligors will and will cause each Subsidiary to, at its own
expense, do or cause to be done all things reasonably necessary to preserve and
keep in good repair, working order and efficiency in accordance with industry
practice all of its Oil and Gas Properties and other material Properties
including, without limitation, all equipment, machinery and facilities, and from
time to time will make all the reasonably necessary repairs, renewals and
replacements so that at all times the state and condition of its Oil and Gas
Properties and other material Properties will be fully preserved and maintained
in accordance with industry practice, except to the extent a portion of such
Properties is no longer capable of producing Hydrocarbons in economically
reasonable amounts. Each Obligor will and will cause each Subsidiary in
accordance with industry practice to: (i) pay and discharge, or make reasonable
and customary efforts to cause to be paid and discharged, all delay rentals,
royalties, expenses and indebtedness accruing under the leases or other
agreements affecting or pertaining to its Oil and Gas Properties, (ii) perform
or make reasonable and customary efforts to cause to be performed, in accordance
with industry standards, the obligations required by each and all of the
assignments, deeds, leases, sub-leases, contracts and agreements affecting its
interests in its Oil and Gas Properties and other material Properties, (iii) do
and cause each Subsidiary to do all other things necessary to keep unimpaired,
except for Liens described in Section 9.02, its rights with respect thereto and
prevent any forfeiture thereof or a default thereunder, except to the extent a
portion of such Properties is no longer capable of producing Hydrocarbons in
economically reasonable amounts and except for dispositions permitted by Section
9.14 hereof. Each Obligor will and
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will cause each Subsidiary to operate its Oil and Gas Properties and other
material Properties or cause or make reasonable and customary efforts to cause
such Oil and Gas Properties and other material Properties to be operated in a
careful and efficient manner in accordance with the practices of the industry
and in compliance in all material respects with all applicable material
contracts and agreements and in compliance in all material respects with all
Governmental Requirements.
Section 8.04 Environmental Matters.
(a) The Obligors will and will cause each Subsidiary to establish and
implement such procedures as may be reasonably necessary to continuously
determine and assure that any failure of the following does not have a Material
Adverse Effect: (i) all Property of the Obligors and their Subsidiaries and the
operations conducted thereon and other activities of the Obligors and their
Subsidiaries are in compliance with and do not violate the requirements of any
Environmental Laws, (ii) no oil, hazardous substances or solid wastes are
disposed of or otherwise released on or to any Property owned by any such party
except in compliance with Environmental Laws, (iii) no hazardous substance will
be released on or to any such Property in a quantity equal to or exceeding that
quantity which requires reporting pursuant to Section 103 of CERCLA, and (iv) no
oil, oil and gas exploration and production wastes or hazardous substance is
released on or to any such Property so as to pose an imminent and substantial
endangerment to public health or welfare or the environment.
(b) The Obligors will promptly notify the Agent and the Lenders in writing
of any threatened action, investigation or inquiry by any Governmental Authority
of which the Obligors have knowledge in connection with any Environmental Laws,
excluding routine testing, corrective action and any action, investigation or
inquiry which is not material.
(c) The Obligors will and will cause each Subsidiary to provide
environmental audits and tests in accordance with American Society of Testing
and Materials standards as required to be obtained by the Agent or the Lenders
by any Governmental Authority in connection with any future acquisitions of Oil
and Gas Properties or other material Properties.
Section 8.05 Further Assurances. The Obligors will and will cause
each Subsidiary to cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments and this
Agreement upon the request of the Agent. The Obligors at their expense will and
will cause each Subsidiary to promptly execute and deliver to the Agent upon
request all such other documents, agreements and instruments to comply with or
accomplish the covenants and agreements of any of the Obligors or any
Subsidiary, as the case may be, in the Security Instruments and this Agreement,
or to further evidence and more fully describe the collateral intended as
security for the Notes, or to correct any omissions in the Security Instruments,
or to state more fully the security obligations set out herein or in any of the
Security Instruments, or to perfect, protect or preserve any Liens created
pursuant to any of the Security Instruments, or to
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make any recordings, to file any notices or obtain any consents, all as may be
necessary or appropriate in connection therewith.
Section 8.06 Performance of Obligations. The Obligors will pay the
Notes according to the reading, tenor and effect thereof; and the Obligors will
and will cause each Subsidiary to do and perform every act and discharge all of
the obligations to be performed and discharged by them under the Loan Documents,
at the time or times and in the manner specified after taking into account any
applicable grace period.
Section 8.07 Reserve Reports.
(a) Not later than March 31 of each year commencing March 31, 1997, the
Borrowers shall furnish to the Agent and the Lenders a Reserve Report. The
January 1 Reserve Report of each year shall be either prepared by certified
independent petroleum engineers or consultants acceptable to the Agent or
prepared by or under the supervision of the chief engineer of the Borrowers and
audited by H.J. Gruy & Associates, Inc. or other certified independent petroleum
engineers or independent petroleum consultant(s) acceptable to the Agent. Not
later than September 30 of each year, the Borrowers shall furnish to the Agent
and the Lenders the July 1 Reserve Report prepared by or under the supervision
of the chief engineer of the Borrowers who shall certify such Reserve Report to
be true and accurate to the best of his knowledge and to have been prepared in
accordance with the procedures used in the immediately proceeding January 1
Reserve Report.
(b) In the event of an unscheduled redetermination, the Borrowers shall
furnish to the Agent and the Lenders a Reserve Report prepared by or under the
supervision of the chief engineer of the Borrowers who shall certify such
Reserve Report to be true and accurate to the best of his knowledge and to have
been prepared in accordance with the procedures used in the immediately
preceding Reserve Report. For any unscheduled redetermination requested by the
Lenders pursuant to Section 2.08(d), the Borrowers shall provide such Reserve
Report with an "as of" date as required by the Majority Lenders as soon as
possible, but in any event no later than 45 days following the receipt of the
request by the Agent.
(c) With the delivery of each Reserve Report, the Borrowers shall provide
to the Agent and the Lenders, a certificate from a Responsible Officer
certifying that, to the best of his knowledge and in all material respects: (i)
the information contained in the Reserve Report and any other information
delivered in connection therewith is true and correct, (ii) except as set forth
on an exhibit to the certificate, on a net basis there are no material gas
imbalances, take or pay or other prepayments with respect to its Oil and Gas
Properties evaluated in such Reserve Report which would require such Persons to
deliver Hydrocarbons produced from such Oil and Gas Properties at some future
time without then or thereafter receiving full payment therefor, (iii) none of
their Oil and Gas Properties have been sold since the date of the last Borrowing
Base determination except as set forth on an exhibit to the certificate, which
certificate shall list all of its Oil and Gas Properties sold and in such
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detail as reasonably required by the Majority Lenders, and (iv) except as set
forth on a schedule attached to the certificate, all of the Oil and Gas
Properties evaluated by such Reserve Report are Mortgaged Property.
Section 8.08 Title Information.
(a) Within 15 days after the delivery to the Agent and the Lenders of each
Reserve Report (including the Initial Reserve Report) required by Section
8.07(a), the Borrowers will deliver title information in form and substance
acceptable to the Agent covering enough of the Oil and Gas Properties evaluated
by such Reserve Report, so that the Agent shall have received together with
title information previously delivered to the Agent, satisfactory title
information on at least 50% of the value of the Oil and Gas Properties evaluated
by, such Reserve Report that are classified as proved undeveloped and 80% of the
value of the Oil and Gas Properties evaluated by such Reserve Report that are
classified as proved developed.
(b) To the extent that Majority Lenders are not satisfied with title to any
Property, such unacceptable Property shall not count towards the percentage
requirements in Section 8.08(a), and the Agent may send a notice to the
Borrowers and the Lenders that the then outstanding Borrowing Base shall be
reduced by an amount as determined by all of the Lenders to cause the Borrowers
to be in compliance with the requirement to provide acceptable title information
on the required percentages of the value of the Oil and Gas Properties. This
new Borrowing Base shall become effective immediately after receipt of such
notice.
Section 8.09 Additional Collateral.
(a) Each Obligor shall cause all of its Oil and Gas Properties and other
Properties included in the most recently delivered Reserve Report (except for
Properties expressly excluded from the Borrowing Base redetermination by the
Borrowers) at all times to be subject to a Lien as security for the
Indebtedness; except for such Properties that, in the Agent's determination, the
cost of perfecting a Lien in such Properties is disproportionate to the benefit
of such collateral to the Lenders. Such Lien will be created and perfected by
and in accordance with the provisions of deeds of trust, security agreements and
financing statements, or other Security Instruments, all in form and substance
satisfactory to the Agent in its sole discretion and in sufficient executed (and
acknowledged where necessary or appropriate) counterparts for recording
purposes.
(b) Concurrently with the granting of the Lien or other action referred to
in Section 8.07(a) above, the Obligors will provide to the Agent title
information in form and substance satisfactory to the Agent in its sole
discretion with respect to the Obligor's interests in such Oil and Gas
Properties.
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(c) Also, promptly after the filing of any new Security Instrument in
any state, upon the reasonable request of the Agent, the Obligors will provide
to the Agent an opinion addressed to the Agent for the benefit of the Lenders in
form and substance satisfactory to the Agent in its sole discretion from counsel
acceptable to Agent, stating that the Security Instrument is valid, binding and
enforceable in accordance with its terms and in legally sufficient form for such
jurisdiction.
Section 8.10 ERISA Information and Compliance. The Obligors will
promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to
promptly furnish to the Agent with sufficient copies to the Lenders (i) promptly
after the filing thereof with the United States Secretary of Labor, the Internal
Revenue Service or the PBGC, copies of each annual and other report with respect
to each Plan or any trust created thereunder, (ii) immediately upon becoming
aware of the occurrence of any ERISA Event or of any "prohibited transaction,"
as described in section 406 of ERISA or in section 4975 of the Code, in
connection with any Plan or any trust created thereunder, a written notice
signed by a Responsible Officer specifying the nature thereof, what action any
of the Obligors, the Subsidiary or the ERISA Affiliate is taking or proposes to
take with respect thereto, and, when known, any action taken or proposed by the
Internal Revenue Service, the Department of Labor or the PBGC with respect
thereto, and (iii) immediately upon receipt thereof, copies of any notice of the
PBGC's intention to terminate or to have a trustee appointed to administer any
Plan. With respect to each Plan (other than a Multiemployer Plan), the Obligors
will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full
and in a timely manner, without incurring any late payment or underpayment
charge or penalty and without giving rise to any lien, all of the contribution
and funding requirements of section 412 of the Code (determined without regard
to subsections (d), (e), (f) and (k) thereof) and of section 302 of ERISA
(determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay,
or cause to be paid, to the PBGC in a timely manner, without incurring any late
payment or underpayment charge or penalty, all premiums required pursuant to
sections 4006 and 4007 of ERISA.
Section 8.11 Restricted Subsidiaries to be Obligors. Concurrent
with the delivery of financial statements pursuant to Sections 8.01(a) and (b),
the Obligors will notify the Agent of each Restricted Subsidiary then existing
that has total net assets equal to or greater than $500,000. At any time after
the Agent has received notice pursuant to the preceding sentence, upon request
of the Agent, any such Restricted Subsidiary shall become a Guarantor under this
Agreement and shall promptly execute and deliver to the Agent a Guaranty
Agreement.
ARTICLE IX
NEGATIVE COVENANTS
Each of the Obligors covenants and agrees that, so long as any of the
Commitments are in effect and until payment in full of Loans hereunder, all
interest thereon and all other amounts payable by the Obligors hereunder,
without the prior written consent of the Majority Lenders:
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Section 9.01 Debt. None of the Obligors nor any Subsidiary will
incur, create, assume or suffer to exist any Debt, except:
(a) the Notes or other Indebtedness or any guaranty of or suretyship
arrangement for the Notes or other Indebtedness;
(b) Debt of the Obligors and the Subsidiaries existing on the Closing Date
which is disclosed in Schedule 9.01, and any renewals or extensions (but not
increases) thereof;
(c) Debt associated with bonds or surety obligations required by
Governmental Requirements in connection with the operation of the Oil and Gas
Properties;
(d) the Subordinated Debt, provided that only the Parent remains the sole
obligor for such Debt;
(e) Debt evidenced by the Senior Subordinated Notes and guarantees of such
Debt by the Obligors or other Subsidiaries as required by the Indenture;
(f) Hedging Agreements covering oil and gas production of the Obligors or
any Subsidiary; provided, however, that (A) such Hedging Agreements related to
oil production shall not, either individually or in the aggregate, cover more
than seventy-five percent (75%) of estimated production of oil of the Obligors
for each individual period covered by the Hedging Agreements and no such Hedging
Agreement shall exceed a term of 24 months, (B) such Hedging Agreements related
to natural gas production shall, not either individually or in the aggregate
cover, more than seventy-five percent (75%) of estimated production of natural
gas of the Obligors for each individual period covered by the Hedging Agreements
and no such Hedging Agreement shall exceed a term of 24 months, and (C) the
Obligors may purchase "floors" to cover 100% of estimated oil and/or gas
production;
(g) Hedging Agreements entered into in the ordinary course of business for
the purpose of hedging the Obligors' and the Subsidiaries' interest rate or
currency exposure and not for the purpose of speculation;
(h) Debt consisting of indemnities, obligations to make purchase price
adjustments or other similar obligations, and guaranties in respect thereof,
incurred or assumed in connection with the disposition of any assets of the
Borrowers, the Obligors or any of their Subsidiaries;
(i) Guaranties issued by the Borrowers, by the Obligors or by any of their
respective Subsidiaries in the ordinary course of business of obligations of
other Persons in connection with current oil and gas drilling, oil and gas
production, oil and gas transportation, crude oil purchasing, oil and gas
exploration or other similar programs or operations; provided that all such
amounts guaranteed in the aggregate shall not exceed $750,000 outstanding at any
one time; and
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(j) Debt under capital leases (as required to be reported on the financial
statements of the Obligors pursuant to GAAP), Debt under leases described in
clause (v) of the definition of Debt, and other funded Debt (including purchase
money debt), not to exceed $2,500,000 in the aggregate at any time outstanding
for all such capital leases and other funded Debt.
(k) Production payments, provided that (i) the net present value of the
reserves related to such production payments does not exceed 30% of the total
assets of the Obligors and (ii) no production payments owed by any Obligors
burden any Properties which are included in the determination of the Borrowing
Base.
Section 9.02 Liens. None of the Obligors nor any Subsidiary will
create, incur, assume or permit to exist any Lien on any of its Properties (now
owned or hereafter acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens securing leases or Debt allowed under Section 9.01(j) but only on
the Property under lease or the purchase of which was financed with such Debt
(or with Debt directly or indirectly refinanced by such Debt);
(d) Liens disclosed on Schedule 9.02; and
(e) Liens on cash or securities of the Obligors securing the Debt described
in Section 9.01(c) or Section 9.01(f).
Section 9.03 Investments, Loans and Advances. None of the Obligors
nor any Subsidiary will make or permit to remain outstanding any loans or
advances to or investments in any Person, except that the foregoing restriction
shall not apply to:
(a) investments, loans or advances reflected in the Financial Statements or
which are disclosed to the Lenders in Schedule 9.03;
(b) accounts receivable arising in the ordinary course of business;
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each case
maturing within one year from the date of creation thereof;
(d) commercial paper maturing within one year from the date of creation
thereof rated no lower than A2 or P2, as such rating is set forth from time to
time, by Standard & Poors or Moody's Investors Service, Inc., respectively;
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(e) deposits maturing within one year from the date of creation thereof
with, including certificates of deposit issued by, any Lender or any office
located in the United States of any other bank or trust company which is
organized under the laws of the United States or any state thereof, has capital,
surplus and undivided profits aggregating at least $100,000,000.00 (as of the
date of such Lender's or bank or trust company's most recent financial reports)
and has a short term deposit rating of no lower than A2 or P2, as such rating is
set forth from time to time, by Standard & Poors or Moody's Investors Service,
Inc., respectively;
(f) deposits in money market funds investing greater than 90% in
investments described in Section 9.03(c), 9.03(d) or 9.03(e);
(g) investments by the Borrowers in direct ownership interests in
additional Oil and Gas Properties and gas gathering systems related thereto;
(h) investments, loans or advances among the Obligors to be used for
purposes not prohibited by this Agreement; and
(i) other investments, loans or advances not to exceed $1,500,000 in the
aggregate at any time.
Section 9.04 Dividends, Distributions and Redemptions. The Obligors
will not declare or pay any dividend, purchase, redeem or otherwise acquire for
value any of its stock including, without limitation, common and preferred stock
now or hereafter outstanding, return any capital to its stockholders or make any
distribution of its assets to its stockholders, except that:
(a) the Parent may make stock dividends;
(b) each Obligor (other than the Parent) and each Subsidiary (exclusive of
the JV's and DDP's) may make distributions or pay dividends (other than in the
case of a distribution or dividend to a Borrower) provided that no Borrowing
Base deficiency exists and no Default or Event of Default exists or would result
from such payment or distribution;
(c) each JV and DDP may make distributions;
(d) the Parent may pay a one time dividend on its $2.625 Convertible
Exchangeable Preferred Stock of the Parent or, in lieu thereof, pay a fee or
make a distribution to the shareholders of such $2.625 Convertible Exchangeable
Preferred Stock, in either case, in an amount not to exceed $4,600,000 and to be
paid on or before May 1, 1997, provided that, (i) no Default or Event of Default
has occurred and is continuing (or would result therefrom), (ii) no Borrowing
Base deficiency exists, and (iii) such distribution or dividend is not
prohibited under the Indenture (without the necessity of amending the Indenture
or obtaining a waiver thereto to specifically allow for such distribution or
dividend); and
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(e) any Obligor may make distributions or pay dividends to any Unrestricted
Subsidiary, provided that, (i) no Default or Event of Default has occurred and
is continuing (or would result therefrom), (ii) no Borrowing Base deficiency
exists, and (iii) such distribution or dividend is not prohibited under the
Indenture (without the necessity of amending the Indenture or obtaining a waiver
thereto to specifically allow for such distribution or dividend).
Section 9.05 Sales and Leasebacks. None of the Obligors nor any
Subsidiary will enter into any arrangement, directly or indirectly, with any
Person whereby any of the Obligors or any Subsidiary shall sell or transfer any
of its Property, whether now owned or hereafter acquired, and whereby any of the
Obligors or any Subsidiary shall then or thereafter rent or lease as lessee such
Property or any part thereof or other Property which any of the Obligors or any
Subsidiary intends to use for substantially the same purpose or purposes as the
Property sold or transferred.
Section 9.06 Nature of Business. None of the Obligors nor any
Subsidiary will allow any material change to be made in the character of its
business as carried on as of the Closing Date.
Section 9.07 Limitation on Leases. Neither the Obligors nor any
Subsidiary will create, incur, assume or suffer to exist any obligation for the
payment of rent or hire of Property of any kind whatsoever (real or personal
leases but excluding capital leases and leases of Hydrocarbon Interests), under
leases or lease agreements which would cause the aggregate amount of all
payments made by the Obligors and its Subsidiaries pursuant to such leases or
lease agreements to exceed $1,750,000 in any period of twelve consecutive
calendar months during the life of such leases.
Section 9.08 Mergers, Etc. None of the Obligors nor any Subsidiary
will merge into or with or consolidate with any other Person, or sell, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its Property or assets to any other Person, except
that any Obligor or Subsidiary may merge with another Obligor or Subsidiary;
provided that (i) none of the Lenders are adversely affected by such merger,
(ii) no Default or Event of Default shall exist and be continuing immediately
before or after such merger, (iii) the Subordinated Debt and Senior Subordinated
Notes shall be subordinated to the Indebtedness after such merger, (iv) the Loan
Documents will be amended to reflect such merger in form satisfactory to the
Majority Lenders, and (v) such merger shall be permitted by the terms of the
indentures under which the Subordinated Debt and Senior Subordinated Notes were
issued.
Section 9.09 Proceeds of Notes. The Obligors will not permit the
proceeds of the Notes to be used for any purpose other than those permitted by
Section 7.07. None of the Obligors nor any Person acting on behalf of any of
the Obligors has taken or will take any action which might cause any of the Loan
Documents to violate Regulation G, U or X or any other regulation of the Board
of Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in each
case as now in effect or as the same may hereinafter be in effect.
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Section 9.10 ERISA Compliance. The Obligors will not at any time:
(a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in,
any transaction in connection with which any of the Obligors, any Subsidiary or
any ERISA Affiliate could be subjected to either a civil penalty assessed
pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43
of Subtitle D of the Code;
(b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate,
any Plan in a manner, or take any other action with respect to any Plan, which
could result in any liability to any of the Obligors, any Subsidiary or any
ERISA Affiliate to the PBGC;
(c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to
make, full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, any of the Obligors, a
Subsidiary or any ERISA Affiliate is required to pay as contributions thereto;
(d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to permit
to exist, any accumulated funding deficiency within the meaning of section 302
of ERISA or section 412 of the Code, whether or not waived, with respect to any
Plan;
(e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the
actuarial present value of the benefit liabilities under any Plan maintained by
any of the Obligors, any Subsidiary or any ERISA Affiliate which is regulated
under Title IV of ERISA to exceed the current value of the assets (computed on a
plan termination basis in accordance with Title IV of ERISA) of such Plan
allocable to such benefit liabilities. The term "actuarial present value of the
benefit liabilities" shall have the meaning specified in section 4041 of ERISA;
(f) Contribute to or assume an obligation to contribute to, or permit any
Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any Multiemployer Plan;
(g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an
interest in any Person that causes such Person to become an ERISA Affiliate with
respect to any of the Obligors, any Subsidiary or any ERISA Affiliate if such
Person sponsors, maintains or contributes to, or at any time in the six-year
period preceding such acquisition has sponsored, maintained, or contributed to,
(1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of
ERISA under which the actuarial present value of the benefit liabilities under
such Plan exceeds the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan allocable
to such benefit liabilities;
(h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201
or 4204 of ERISA;
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(i) Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
such entities in their sole discretion at any time without any material
liability; or
(j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan
resulting in an increase in current liability such that any of the Obligors, any
Subsidiary or any ERISA Affiliate is required to provide security to such Plan
under section 401(a)(29) of the Code.
Section 9.11 Sale or Discount of Receivables. None of the Obligors
nor any Subsidiary will discount or sell (with or without recourse) any of its
notes receivable or accounts receivable.
Section 9.12 Ratio of Total Senior Funded Debt to EBITDA. The Parent
and its Consolidated Subsidiaries will not permit their ratio of (i) Total
Funded Senior Debt as at the relevant fiscal quarter end to (ii) EBITDA for the
period of four (4) consecutive fiscal quarters ending on such date to be greater
than the ratio corresponding to the applicable fixed quarter ends set forth
below:
RATIO FISCAL QUARTER END
- ------------ -------------------------------------------
3.0 to 1.0 all fiscal quarter ends until and
including 12/31/97
2.5 to 1.0 all fiscal quarter ends after 12/31/97
"Total Senior Funded Debt" shall mean any Debt for borrowed money,
including without limitation, the Indebtedness, and any notes, bonds or
debentures issued by any Obligor unless such Debt is expressly subordinated to
the Indebtedness on terms satisfactory to the Lenders, plus capital leases.
Section 9.13 Interest Coverage Ratio. The Parent will not permit its
Interest Coverage Ratio as of the end of any fiscal quarter of the Parent
(calculated quarterly at the end of each fiscal quarter) to be less than the
ratio corresponding to the applicable fiscal quarter ends set forth below:
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Ratio Fiscal Quarter End
----------- -------------------------------------
1.1 to 1.0 all fiscal quarter ends during 1996
1.25 to 1.0 fiscal quarter ending 3/31/97
1.50 to 1.0 fiscal quarter ending 6/30/97
1.75 to 1.0 fiscal quarter ending 9/30/97
2.00 to 1.0 all fiscal quarter ends after 9/30/97
"Interest Coverage Ratio" shall mean the ratio of (i) EBITDA for the period of
four consecutive fiscal quarters ending on such date to (ii) cash interest
payments made for such four fiscal quarters of the Parent and its Consolidated
Subsidiaries.
Section 9.14 Sale of Oil and Gas Properties. The Borrowers will not
sell, assign, farm-out, convey or otherwise transfer (a "Transfer") any Oil and
Gas Property or any interest in any Oil and Gas Property, except the Transfer of
(i) Hydrocarbons in the ordinary course of business, (ii) during each period
between Scheduled Redetermination Dates, Oil and Gas Properties having an
aggregate market value not exceeding 10% of the Borrowing Base then in effect
and, upon the Borrowers' written request and upon the application of proceeds
for any prepayments required by Section 2.07(d), the Agent will release its
Liens covering any interests in Oil and Gas Properties included in such
Transfer, and (iii) Oil and Gas Properties which are (a) not included in the
most recent Reserve Report, (b) not reasonably expected by Borrowers to be
included in the next Reserve Report required by Section 8.07, and (c) located
outside of the Sibley, Sailes, West Bryceland and Ada fields in north Louisiana
and, upon the Borrowers' written request, the Agent will release its Liens, if
any, covering any interest in Oil and Gas Properties included in such Transfer.
Section 9.15 Environmental Matters. None of the Obligors nor any
Subsidiary will cause or permit any of its Property to be in violation of, or do
anything or permit anything to be done which will subject any such Property to
any remedial obligations under any Environmental Laws, assuming disclosure to
the applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such Property where such violations or
remedial obligations would have a Material Adverse Effect.
Section 9.16 Transactions with Affiliates. None of the Obligors nor
any Subsidiary will enter into any transaction, including, without limitation,
any purchase, sale, lease or exchange of Property or the rendering of any
service, with any Affiliate unless such transactions are otherwise permitted
under this Agreement, are in the ordinary course of its business and are upon
fair and reasonable terms no less favorable to it than it would obtain in a
comparable arm's length transaction with a Person not an Affiliate. The
foregoing restrictions shall not apply to transactions with Bessemer and its
Affiliates set forth in Schedule 9.16; provided that no cash or other Property
(other than securities of the Parent) shall be paid by any Obligor or any
Subsidiary to Bessemer or any of its Affiliates in connection with such
transactions during the continuation of an Event of Default.
Section 9.17 Subsidiaries and Partnerships. The Obligors shall not,
and shall not permit any Subsidiary to, create any additional Subsidiaries or
partnerships. The Obligors shall not
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and shall not permit any Subsidiary to sell any stock of a Subsidiary or any
interest in a partnership. The Obligors shall not permit any Subsidiary to issue
any stock except to the Obligors and except in compliance with Section 9.03.
Section 9.18 Negative Pledge Agreements. None of the Obligors nor
any Subsidiary will create, incur, assume or suffer to exist any agreement or
arrangement (other than this Agreement, the Indenture and the Security
Instruments) which in any way prohibits or restricts the granting, conveying,
creation or imposition of any Lien on any of its Property (other than Property
represented by such agreement or arrangement) or restricts any Subsidiary from
paying dividends to the Obligors, or which requires the consent of or notice to
other Persons in connection therewith.
Section 9.19 Partnership Agreement. The Obligors will not amend or
permit to be amended the Partnership Agreements in any way which would
materially adversely effect the Lenders, without the prior written consent of
the Majority Lenders.
Section 9.20 Subordinated Debt and Senior Subordinated Notes.
(a) The Parent will not (i) amend, supplement or modify the Subordinated
Debt, the Senior Subordinated Notes or the indentures under which such Debt was
issued or (ii) accept any waivers in connection with any defaults under such
instruments or Debt without the written consent of the Lenders, unless such
amendments, supplements, modifications or waivers do not, individually or in the
aggregate, materially and adversely affect the Lenders.
(b) The Parent will not exercise its right to exchange its $2.625
Convertible Exchangeable Preferred Stock into 10 1/2% Convertible Subordinated
Debentures due April 30, 2004.
(c) The Parent will not prepay, purchase, repurchase, redeem, defease or
covenant defease the Subordinated Debt or the Senior Subordinated Notes or the
indentures under which such Debt was issued, except (i) in shares of the
Parent's stock, (ii) if no Default or Event of Default exists or would result
therefrom, prior to October 15, 1999 the Parent may redeem in the aggregate up
to 35% of the original principal amount of the Senior Subordinated Notes with
the proceeds of one or more equity offerings pursuant to the terms of the
Indenture, and (iii) if (A) no Default or Event of Default exists, (B) no
Borrowing Base deficiency exists, (C) Contour has exercised its option to
purchase the remaining $27,000,000 in common stock of the Parent pursuant to the
Option Agreement and (D) the following prepayment occurs within 90 days after
the occurrence of the stock purchase described in clause (C), the Parent may
prepay the 7-7/8% Convertible Subordinated Notes due 1999, provided that, the
proceeds received by the Parent from the stock purchase described in clause (C)
are fully utilized for such prepayment.
Section 9.21 Gas Imbalances. None of the Obligors will incur or allow
to exist, as at the end of any fiscal quarter, gas imbalances, take or pay or
other prepayments with respect to any
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Obligor's Oil and Gas Properties which would require an Obligor to deliver
Hydrocarbons produced from its Oil and Gas Properties at some future time
without then or thereafter receiving full payment therefor exceeding 500 million
cubic feet of gas in the aggregate for all Obligors.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default. One or more of the following
events shall constitute an "Event of Default":
(a) the Borrowers shall (i) default in the payment or prepayment when due
of any principal of any Loan, or (ii) default, and such default shall continue
for five or more days, in the payment when due of any reimbursement obligation
for a disbursement made under any Letter of Credit, any interest or any fees or
other amount payable by them hereunder or under any Loan Document; or
(b) any of the Obligors or any Subsidiary shall default in the payment when
due of any principal of or interest on any of its other Debt aggregating
$1,000,000 or more, or any event specified in any note, agreement, indenture or
other document evidencing or relating to any such Debt shall occur if the effect
of such event is to cause or to permit the holder or holders of such Debt (or a
trustee or agent on behalf of such holder or holders) to cause, such Debt to
become due or to be redeemed or repurchased prior to its stated maturity; or
(c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by any of the Obligors or any Subsidiary,
or any certificate furnished to any Lender or the Agent pursuant to the
provisions hereof or any Security Instrument, shall prove to have been false or
misleading as of the time made or furnished in any material and adverse respect;
or
(d) the Obligors shall default in the performance of any of their
obligations under Article IX (other than Sections 9.10 and 9.15) or any other
Article of this Agreement other than under Article VIII; or the Obligors shall
default in the performance of any of their obligations under Article VIII,
Sections 9.10 and 9.15 or any Security Instrument (other than the payment of
amounts due which shall be governed by Section 10.01(a)) and such default shall
continue unremedied for a period of thirty (30) days (five (5) days for defaults
under Sections 9.10 and 9.15) after the earlier to occur of (i) notice thereof
to the Obligors by the Agent or any Lender (through the Agent), or (ii) the
Obligors otherwise becoming aware of such default; or
(e) any of the Obligors shall admit in writing its inability to, or be
generally unable to, pay its Debts as such Debts become due; or
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(f) any of the Obligors shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or readjustment of debts,
(v) fail to controvert in a timely and appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Federal Bankruptcy Code, or (vi) take any corporate or partnership action for
the purpose of effecting any of the foregoing; or
(g) a proceeding or case shall be commenced, without the application or
consent of any of the Obligors, in any court of competent jurisdiction, seeking
(i) the liquidation, reorganization, dissolution or winding-up of such Obligor,
or the composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of such Obligor of all or
any substantial part of its assets, or (iii) similar relief in respect of such
Obligor under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of 60 days; or (iv) an order for relief against such
Obligor shall be entered in an involuntary case under the Federal Bankruptcy
Code; or
(h) a judgment or judgments for the payment of money in excess of $100,000
in the aggregate shall be rendered by a court against any of the Obligors or any
Subsidiary and the same shall not be discharged (or provision shall not be made
for such discharge), or a stay of execution thereof shall not be procured,
within thirty (30) days from the date of entry thereof and such Obligor or such
Subsidiary shall not, within said period of 30 days, or such longer period
during which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal; or
(i) the Security Instruments after delivery thereof shall for any reason,
except to the extent permitted by the terms thereof, cease to be in full force
and effect and valid, binding and enforceable in accordance with their terms, or
cease to create a valid and perfected Lien of the priority required thereby on
any of the collateral purported to be covered thereby, except to the extent
permitted by the terms of this Agreement or resulting from any act or omission
by the Agent, or any of the Obligors shall so state in writing; or
(j) a Change of Control shall occur; or
(k) the occurrence of any event which requires mandatory prepayment or
repurchase, in whole or in part, of the Senior Subordinated Notes or the
Subordinated Debt.
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Section 10.02 Remedies.
(a) In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01, the Agent may and, upon request of the
Majority Lenders, shall, by notice to the Borrowers, cancel the Commitments
and/or declare the principal amount then outstanding of, and the accrued
interest on, the Loans and all other amounts payable by the Borrowers hereunder
and under the Notes (including without limitation the payment of cash collateral
to secure the LC Exposure as provided in Section 2.10(b)) to be forthwith due
and payable, whereupon such amounts shall be immediately due and payable without
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby expressly
waived by the Borrowers.
(b) In the case of the occurrence of an Event of Default referred to in
clauses (e), (f) or (g) of Section 10.01, the Commitments shall be automatically
canceled and the principal amount then outstanding of, and the accrued interest
on, the Loans and all other amounts payable by the Borrowers hereunder and under
the Notes (including without limitation the payment of cash collateral to secure
the LC Exposure as provided in Section 2.10(b) hereof) shall become
automatically immediately due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other formalities of
any kind, all of which are hereby expressly waived by the Borrowers.
(c) Except for any Minority Proceeds, all proceeds received after maturity
of the Notes, whether by acceleration or otherwise, and all proceeds received
from the exercise of any remedies after the occurrence and during the
continuance of an Event of Default shall be applied first to reimbursement of
expenses and indemnities provided for in this Agreement and the Security
Instruments; second to accrued interest on the Notes; third to fees; fourth pro
rata to principal outstanding on the Notes and other Indebtedness; fifth to
serve as cash collateral to be held by the Agent to secure the LC Exposure; and
any excess shall be paid to the Borrowers or as otherwise required by any
Governmental Requirement.
(d) "Minority Proceeds" shall mean the amount of proceeds from time to
time equal to the Minority Percentage of any proceeds received by the Agent or
any Lender from the Mortgaged Property owned by either 92 JV or 94 JV by
exercise of any rights or remedies under the Security Instruments after the
Allocable Indebtedness of 92 JV or 94 JV, as applicable, has been paid in full.
The Minority Proceeds shall not be applied as provided in Section 10.02(c) but
shall be paid to 92 JV or 94 JV, as the case may be to the extent of the
ownership of such proceeds, or as otherwise required by any Governmental
Requirement. Unless KOC provides the Agent with a determination of how much of
any proceeds are Minority Proceeds in such detail as reasonably required by the
Agent on or before the receipt of such proceeds, the Agent may apply all such
proceeds as provided in Section 10.02(c). In addition to such other information
reasonably requested by the Agent, KOC must provide the detail of the ownership
of such proceeds including the ownership of the underlying Oil and Gas Property
and the then current Allocable Indebtedness and Minority Percentage for each of
92 JV and 94 JV. The Lenders will return any Minority Proceeds received by any
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of them, if they are notified by the Borrowers promptly after the Borrowers
determine that Minority Proceeds have been paid to the Lenders and if the other
information required by this Section 10.02(d) has been provided as required
hereby. "DDP's Share" shall mean for 92 JV or 94 JV the percentage required to
be distributed at that time by the 92 JV to the 92 DDP or by the 94 JV to the 94
DDP, respectively. "Minority Percentage" shall mean for 92 JV or 94 JV the
product of the DDP's Share times the percentage required to be distributed at
that time by the 92 DDP or 94 DDP Partnership Agreement, as applicable, to
partners of 92 DDP or 94 DDP, respectively, that are not an Obligor or an
Affiliate of an Obligor. "Allocable Indebtedness" shall mean for 92 JV or 94 JV
the amount of the outstanding Indebtedness or Prior Debt the proceeds of which
were advanced by a Borrower to or used by a Borrower to pay Debt of, 92 JV or 94
JV, as the case may be.
ARTICLE XI
THE AGENT
Section 11.01 Appointment, Powers and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder and
under the Security Instruments with such powers as are specifically delegated to
the Agent by the terms of this Agreement and the Security Instruments, together
with such other powers as are reasonably incidental thereto. The Agent (which
term as used in this sentence and in Section 11.05 and the first sentence of
Section 11.06 shall include reference to its Affiliates and its and its
Affiliates' officers, directors, employees, attorneys, accountants, experts and
agents): (i) shall have no duties or responsibilities except those expressly
set forth in this Agreement, and shall not by reason of this Agreement be a
trustee or fiduciary for any Lender; (ii) makes no representation or warranty to
any Lender and shall not be responsible to the Lenders for any recitals,
statements, representations or warranties contained in this Agreement, or in any
certificate or other document referred to or provided for in, or received by any
of them under, this Agreement, or for the value, validity, effectiveness,
genuineness, execution, legality, enforceability or sufficiency of this
Agreement, any Note or any other document referred to or provided for herein or
for any failure by the Obligors or any other Person (other than the Agent) to
perform any of its obligations hereunder or thereunder or for the existence,
value, perfection or priority of any collateral security or the financial or
other condition of the Obligors, its Subsidiaries or any other obligor or
guarantor; (iii) except pursuant to Section 11.07 shall not be required to
initiate or conduct any litigation or collection proceedings hereunder; and (iv)
shall not be responsible for any action taken or omitted to be taken by it
hereunder or under any other document or instrument referred to or provided for
herein or in connection herewith including its own ordinary negligence, except
for its own gross negligence or willful misconduct. The Agent may employ
agents, accountants, attorneys and experts and shall not be responsible for the
negligence or misconduct of any such agents, accountants, attorneys or experts
selected by it in good faith or any action taken or omitted to be taken in good
faith by it in accordance with the advice of such agents, accountants, attorneys
or experts. The Agent may deem and treat the payee of any Note as the holder
thereof for all purposes hereof unless and until a written notice of the
assignment or transfer thereof permitted hereunder shall have been filed with
the Agent.
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Section 11.02 Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any thereof by
telephone, telex, telecopier, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper Person
or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Agent.
Section 11.03 Defaults. The Agent shall not be deemed to have
knowledge of the occurrence of a Default (other than the non-payment of
principal of or interest on Loans or of fees or failure to reimburse for Letter
of Credit drawings) unless the Agent has received notice from a Lender or the
Borrowers specifying such Default and stating that such notice is a "Notice of
Default." In the event that the Agent receives such a notice of the occurrence
of a Default, the Agent shall give prompt notice thereof to the Lenders. In the
event of a payment Default, the Agent shall give each Lender prompt notice of
each such payment Default.
Section 11.04 Rights as a Lender. With respect to its Commitments
and the Loans made by it and its participation in the issuance of Letters of
Credit, TCB (and any successor acting as Agent) in its capacity as a Lender
hereunder shall have the same rights and powers hereunder as any other Lender
and may exercise the same as though it were not acting as the Agent, and the
term "Lender" or "Lenders" shall, unless the context otherwise indicates,
include the Agent in its individual capacity. TCB (and any successor acting as
Agent) and its Affiliates may (without having to account therefor to any Lender)
accept deposits from, lend money to and generally engage in any kind of banking,
trust or other business with the Obligors (and any of its Affiliates) as if it
were not acting as the Agent, and TCB and its Affiliates may accept fees and
other consideration from the Obligors for services in connection with this
Agreement or otherwise without having to account for the same to the Lenders.
Section 11.05 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY THE
AGENT AND THE ISSUING BANK RATABLY IN ACCORDANCE WITH THEIR PERCENTAGE SHARES
FOR THE INDEMNITY MATTERS AS DESCRIBED IN SECTION 12.03 TO THE EXTENT NOT
INDEMNIFIED OR REIMBURSED BY THE BORROWERS UNDER SECTION 12.03, BUT WITHOUT
LIMITING THE OBLIGATIONS OF THE BORROWERS UNDER SAID SECTION 12.03 AND FOR ANY
AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE
WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR
THE ISSUING BANK IN ANY WAY RELATING TO OR ARISING OUT OF: (I) THIS AGREEMENT,
THE SECURITY INSTRUMENTS OR ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO
HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY, BUT EXCLUDING, UNLESS A DEFAULT
HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES
INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER OR (II) THE
ENFORCEMENT OF ANY OF THE TERMS OF THIS AGREEMENT, ANY SECURITY INSTRUMENT OR OF
ANY SUCH OTHER DOCUMENTS; WHETHER OR NOT ANY OF THE FOREGOING SPECIFIED IN THIS
SECTION 11.05 ARISES FROM THE SOLE OR CONCURRENT NEGLIGENCE OF THE AGENT OR THE
ISSUING BANK, PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING
TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE
PARTY TO BE INDEMNIFIED.
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Section 11.06 Non-Reliance on Agent and other Lenders. Each Lender
acknowledges and agrees that it has, independently and without reliance on the
Agent or any other Lender, and based on such documents and information as it has
deemed appropriate, made its own credit analysis of the Obligors and its
decision to enter into this Agreement, and that it will, independently and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own analysis and decisions in taking or not taking action under this Agreement.
The Agent shall not be required to keep itself informed as to the performance or
observance by the Obligors of this Agreement, the Notes, the Security
Instruments or any other document referred to or provided for herein or to
inspect the properties or books of the Obligors. Except for notices, reports
and other documents and information expressly required to be furnished to the
Lenders by the Agent hereunder, the Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of the Obligors (or any
of its Affiliates) which may come into the possession of the Agent or any of its
Affiliates. In this regard, each Lender acknowledges that Vinson & Elkins
L.L.P. is acting in this transaction as special counsel to the Agent only,
except to the extent otherwise expressly stated in any legal opinion or any Loan
Document. Each Lender will consult with its own legal counsel to the extent
that it deems necessary in connection with the Loan Documents and the matters
contemplated therein.
Section 11.07 Action by Agent. Except for action or other matters
expressly required of the Agent hereunder, the Agent shall in all cases be fully
justified in failing or refusing to act hereunder unless it shall (i) receive
written instructions from a majority of the Lenders specifying the action to be
taken, and (ii) be indemnified to its satisfaction by the Lenders against any
and all liability and expenses which may be incurred by it by reason of taking
or continuing to take any such action. The instructions of a majority of the
Lenders and any action taken or failure to act pursuant thereto by the Agent
shall be binding on all of the Lenders. If a Default has occurred and is
continuing, the Agent shall take such action with respect to such Default as
shall be directed by a majority of the Lenders in the written instructions (with
indemnities) described in this Section 11.07, provided that, unless and until
the Agent shall have received such directions, the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interests of the Lenders.
In no event, however, shall the Agent be required to take any action which
exposes the Agent to personal liability or which is contrary to this Agreement
and the Security Instruments or applicable law.
Section 11.08 Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent may
resign at any time by giving notice thereof to the Lenders and the Borrowers,
and the Agent may be removed at any time with or without cause by a majority of
the Lenders. Upon any such resignation or removal, a majority of the Lenders
shall have the right to appoint a successor Agent. If no successor Agent shall
have been so appointed by a majority of the Lenders and shall have accepted such
appointment within thirty (30) days after the retiring Agent's giving of notice
of resignation or a majority of the Lenders' removal of the retiring Agent, then
the retiring Agent may, on behalf of the Lenders, appoint a successor Agent.
Upon the acceptance of such appointment hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges
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and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder. After any retiring Agent's
resignation or removal hereunder as Agent, the provisions of this Article XI and
Section 12.03 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as the Agent.
Section 11.09 CSI. CSI shall not have any rights, powers,
obligation, liabilities, responsibilities, or duties under any Loan Document.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Waiver. No failure on the part of the Agent or any
Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under any of the Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under any of the Loan Documents preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Section 12.02 Notices. All notices and other communications provided
for herein and in the Security Instruments (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the Security
Instruments) shall be given or made by telex, telecopy, telegraph, cable,
courier or U.S. Mail or in writing and telexed, telecopied, telegraphed, cabled,
mailed or delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or in the Security
Instruments or, as to any party, at such other address as shall be designated by
such party in a notice to each other party. Except as otherwise provided in
this Agreement or in the Security Instruments, all such communications shall be
deemed to have been duly given when transmitted by telex or telecopier,
delivered to the telegraph or cable office or personally delivered or, in the
case of a mailed notice, three (3) Business Days after the date deposited in the
mails, postage prepaid, in each case given or addressed as aforesaid.
Section 12.03 Payment of Expenses, Indemnities, Etc.
(a) THE OBLIGORS AGREE (I) TO PAY OR REIMBURSE EACH LENDER, THE AGENT AND
CSI FOR ALL THEIR REASONABLE OUT-OF-POCKET COSTS AND EXPENSES INCURRED IN
CONNECTION WITH THE DEVELOPMENT, SYNDICATION, PREPARATION AND EXECUTION OF, AND
ANY AMENDMENT, SUPPLEMENT OR MODIFICATION TO, THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS AND ANY OTHER DOCUMENTS PREPARED IN CONNECTION HEREWITH OR THEREWITH,
AND THE CONSUMMATION AND ADMINISTRATION OF THE TRANSACTIONS CONTEMPLATED HEREBY
AND THEREBY, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF (A) COUNSEL TO THE AGENT AND (B) THE AGENT CUSTOMARILY CHARGED
BY IT IN CONNECTION WITH SYNDICATED CREDITS, (II) TO PAY OR REIMBURSE EACH
LENDER, THE
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AGENT AND CSI FOR ALL THEIR COSTS AND EXPENSES INCURRED IN CONNECTION WITH THE
ENFORCEMENT OR PRESERVATION OF ANY RIGHTS UNDER THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS AND ANY SUCH OTHER DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE
REASONABLE FEES AND DISBURSEMENTS OF COUNSEL TO EACH LENDER AND OF COUNSEL TO
THE AGENT, (III) TO PAY, INDEMNIFY, HOLD EACH LENDER, THE AGENT AND CSI (AND
THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS)("INDEMNIFIED
PARTIES") HARMLESS FROM, ANY AND ALL RECORDING AND FILING FEES AND ANY AND ALL
LIABILITIES WITH RESPECT TO, OR RESULTING FROM ANY DELAY IN PAYING, STAMP,
EXCISE AND OTHER TAXES, IF ANY, WHICH MAY BE PAYABLE OR DETERMINED TO BE PAYABLE
IN CONNECTION WITH THE EXECUTION AND DELIVERY OF, OR CONSUMMATION OR
ADMINISTRATION OF ANY OF THE TRANSACTIONS CONTEMPLATED BY, OR ANY AMENDMENT,
SUPPLEMENT OR MODIFICATION OF, OR ANY WAIVER OR CONSENT UNDER OR IN RESPECT OF,
THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ANY SUCH OTHER DOCUMENTS, AND (IV)
TO PAY, INDEMNIFY, AND HOLD EACH INDEMNIFIED PARTY HARMLESS FROM AND AGAINST ANY
AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES (INCLUDING, WITHOUT
LIMITATION, CONSEQUENTIAL DAMAGES), PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE AS A RESULT OF, ARISING OUT OF
OR IN ANY WAY RELATED TO THE EXECUTION, DELIVERY, ENFORCEMENT, PERFORMANCE AND
ADMINISTRATION OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE USE OR THE
PROPOSED USE OF PROCEEDS, CONTEMPLATED BY THIS AGREEMENT OR IN CONNECTION WITH
ANY SUCH OTHER DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY OF THE FOREGOING
RELATING TO THE VIOLATION OF, NONCOMPLIANCE WITH OR LIABILITY UNDER, ANY
ENVIRONMENTAL LAW APPLICABLE TO THE PAST, PRESENT, OR FUTURE OPERATIONS OF THE
OBLIGORS, OR APPLICABLE TO THE OBLIGORS' PAST, PRESENT, OR FUTURE OWNERSHIP OF
ANY PROPERTY (ALL OF THE FOREGOING IN THIS CLAUSE (IV), COLLECTIVELY, THE
"INDEMNITY MATTERS"), INCLUDING INDEMNITY MATTERS ARISING BY REASON OF THE
ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY, PROVIDED THAT THE OBLIGORS SHALL
HAVE NO OBLIGATION UNDER THIS CLAUSE (IV) TO ANY INDEMNIFIED PARTY WITH RESPECT
TO INDEMNIFIED LIABILITIES ARISING FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF SUCH PERSON.
(b) No Indemnified Party may settle any claim to be indemnified without the
consent of the indemnitor, such consent not to be unreasonably withheld;
provided, that it shall not be reasonable for the indemnitor to withhold consent
to any settlement that an Indemnified Party proposes, if the indemnitor does not
have the financial ability to pay all its obligations outstanding and asserted
against the indemnitor at that time, including the maximum potential claims
against the Indemnified Party to be indemnified pursuant to this Section 12.03.
(c) In the case of any indemnification hereunder, the Agent or Lender, as
appropriate shall give notice to the Obligors of any such claim or demand being
made against the Indemnified Party and the Obligors shall have the non-exclusive
right to join in the defense against any such claim or demand provided that if
the Obligors provide a defense,
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the Indemnified Party shall bear its own cost of defense unless there is a
conflict between the Obligors and such Indemnified Party.
(d) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT
IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE
INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON
ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED
PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT
SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS FOUND TO HAVE OCCURRED BY
REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE
INDEMNIFIED PARTY.
(e) The Obligors' obligations under this Section 12.03 shall survive any
termination of this Agreement and the payment of the Notes and shall continue
thereafter in full force and effect.
(f) The Obligors shall pay any amounts due under this Section 12.03 within
thirty (30) days of the receipt by the Obligors of notice of the amount due.
Section 12.04 Amendments, Etc. Any provision of this Agreement or
any Security Instrument may be amended, modified or waived with the Obligors'
and the Majority Lenders' prior written consent; provided that (i) no amendment,
modification or waiver which extends the maturity of the Loans, increases the
Aggregate Maximum Credit Amounts, modifies the Borrowing Base, forgives the
principal amount of any Indebtedness outstanding under this Agreement, releases
any of the collateral (other than pursuant to Section 9.15 or as otherwise
expressly provided by this Agreement), reduces the interest rate applicable to
the Loans or the fees payable to the Lenders generally, affects Section 2.03(a),
this Section 12.04 or Section 12.06(a) or modifies the definition of "Majority
Lenders" shall be effective without consent of all Lenders; (ii) no amendment,
modification or waiver which increases the Maximum Credit Amount of any Lender
shall be effective without the consent of such Lender; and (iii) no amendment,
modification or waiver which modifies the rights, duties or obligations of the
Agent shall be effective without the consent of the Agent.
Section 12.05 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
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Section 12.06 Assignments and Participations.
(a) The Borrowers may not assign their rights or obligations hereunder or
under the Notes or any Letters of Credit without the prior consent of all of the
Lenders and the Agent.
(b) Any Lender may, upon the written consent of the Agent and, and if no
Event of Default has occurred and is continuing, the Borrowers (which consent
will not be unreasonably withheld), assign to one or more assignees all or a
portion of its rights and obligations under this Agreement pursuant to an
Assignment Agreement substantially in the form of Exhibit F (an "Assignment")
provided, however, that (i) any such assignment shall be in the amount of at
least $5,000,000 or such lesser amount to which the Borrowers and the Agent have
consented and (ii) the assignee shall pay to the Agent a processing and
recordation fee of $2,500 for each assignment. Any such assignment will become
effective upon the execution and delivery to the Agent of the Assignment and the
consent of the Agent and the Borrowers. Promptly after receipt of an executed
Assignment, the Agent shall send to the Borrowers a copy of such executed
Assignment. Upon receipt of such executed Assignment, the Borrowers will, at
their own expense, execute and deliver new Notes to the assignor and/or
assignee, as appropriate, in accordance with their respective interests as they
appear. Upon the effectiveness of any assignment pursuant to this Section
12.06(b), the assignee will become a "Lender," if not already a "Lender," for
all purposes of this Agreement and the Security Instruments. The assignor shall
be relieved of its obligations hereunder to the extent of such assignment (and
if the assigning Lender no longer holds any rights or obligations under this
Agreement, such assigning Lender shall cease to be a "Lender" hereunder except
that its rights under Sections 4.06, 5.01, 5.05 and 12.03 shall not be
affected). The Agent will prepare on the last Business Day of each month during
which an assignment has become effective pursuant to this Section 12.06(b), a
new Exhibit G giving effect to all such assignments effected during such month,
and will promptly provide the same to the Borrowers and each of the Lenders.
(c) Each Lender may transfer, grant or make participations in all or any
part of such Lender's interests hereunder pursuant to this Section 12.06(c) to
any Person, provided that: (i) such Lender shall remain a "Lender" for all
purposes of this Agreement and the transferee of such participation shall not
constitute a "Lender" hereunder; and (ii) no participant under any such
participation shall have rights to approve any amendment to or waiver of any of
the Loan Documents except to the extent such amendment or waiver would (x)
extend the Revolving Credit Termination Date, (y) reduce the interest rate
(other than as a result of waiving the applicability of any post-default
increases in interest rates) or fees applicable to any of the Commitments or
Loans or Letters of Credit in which such participant is participating, or
postpone the payment of any thereof, or (z) release all or substantially all of
the collateral (except as expressly provided in the Security Instruments)
supporting any of the Commitments or Loans or Letters of Credit in which such
participant is participating. In the case of any such participation, the
participant shall not have any rights under this Agreement or any of the
Security Instruments (the participant's rights against the granting
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<PAGE>
Lender in respect of such participation to be those set forth in the agreement
with such Lender creating such participation), and all amounts payable by the
Borrowers hereunder shall be determined as if such Lender had not sold such
participation, provided that such participant shall be entitled to receive
additional amounts under Article V on the same basis as if it were a Lender and
be indemnified under Section 12.03 as if it were a Lender. In addition, each
agreement creating any participation must include an agreement by the
participant to be bound by the provisions of Section 12.15.
(d) The Lenders may furnish any information concerning the Borrowers in the
possession of the Lenders from time to time to assignees and participants
(including prospective assignees and participants); provided that, such Persons
agree (prior to any such information being furnished) to be bound by the
provisions of Section 12.15 hereof.
(e) Notwithstanding anything in this Section 12.06 to the contrary, any
Lender may assign and pledge all or any of its Notes to any Federal Reserve Bank
or the United States Treasury as collateral security pursuant to Regulation A of
the Board of Governors of the Federal Reserve System and any operating circular
issued by such Federal Reserve System and/or such Federal Reserve Bank. No such
assignment and/or pledge shall release the assigning and/or pledging Lender from
its obligations hereunder.
(f) Notwithstanding any other provisions of this Section 12.06, no transfer
or assignment of the interests or obligations of any Lender or any grant of
participations therein shall be permitted if such transfer, assignment or grant
would require the Borrowers to file a registration statement with the SEC or to
qualify the Loans under the "Blue Sky" laws of any state.
Section 12.07 Invalidity. In the event that any one or more of the
provisions contained in any of the Loan Documents or the Letters of Credit, the
Letter of Credit Agreements shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of the Notes, this Agreement or any
Security Instrument.
Section 12.08 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 12.09 References. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section shall be deemed to refer to the applicable
Section of this Agreement unless otherwise stated herein. Any reference herein
to an exhibit or schedule shall be deemed to refer to the applicable exhibit or
schedule attached hereto unless otherwise stated herein.
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Section 12.10 Survival. The obligations of the parties under Section
4.06, Article V, and Sections 11.05 and 12.03 shall survive the repayment of the
Loans and the termination of the Commitments. To the extent that any payments
on the Indebtedness or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Indebtedness so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent's and the Lenders' Liens, security interests,
rights, powers and remedies under this Agreement and each Security Instrument
shall continue in full force and effect. In such event, each Security
Instrument shall be automatically reinstated and the Obligors shall take such
action as may be reasonably requested by the Agent and the Lenders to effect
such reinstatement.
Section 12.11 Captions. Captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
Section 12.12 No Oral Agreements. The Loan Documents embody the
entire agreement and understanding between the parties and supersede all other
agreements and understandings between such parties relating to the subject
matter hereof and thereof. The Loan Documents represent the final agreement
between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(A) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT THAT UNITED
STATES FEDERAL LAW PERMITS ANY LENDER TO CHARGE INTEREST AT THE RATE ALLOWED BY
THE LAWS OF THE STATE WHERE SUCH LENDER IS LOCATED. TEX. REV. CIV. STAT. ANN.
ART. 5069, CH. 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS SHALL
BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, EACH OBLIGOR HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT
PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS. EACH OBLIGOR HEREBY IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT
PRECLUDE THE AGENT OR ANY
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LENDER FROM OBTAINING JURISDICTION OVER ANY OF THE OBLIGORS IN ANY COURT
OTHERWISE HAVING JURISDICTION.
(C) EACH OBLIGOR HEREBY IRREVOCABLY DESIGNATES KELLEY OIL CORPORATION
LOCATED AT 601 JEFFERSON, SUITE 1100, HOUSTON, TEXAS 77002, AS THE DESIGNEE,
APPOINTEE AND AGENT OF SUCH OBLIGOR TO RECEIVE, FOR AND ON BEHALF OF SUCH
OBLIGOR, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION
OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS. IT IS UNDERSTOOD THAT A COPY
OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED TO SUCH OBLIGOR
AT ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW, BUT THE FAILURE OF SUCH
OBLIGOR TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH
PROCESS. EACH OBLIGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF
ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH
OBLIGOR AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE THREE (3) DAYS
AFTER SUCH MAILING.
(D) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE OBLIGORS IN ANY
OTHER JURISDICTION.
Section 12.14 Interest. It is the intention of the parties hereto
that each Lender shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated hereby would be usurious as to any
Lender under laws applicable to it (including the laws of the United States of
America and the State of New York or any other jurisdiction whose laws may be
mandatorily applicable to such Lender notwithstanding the other provisions of
this Agreement), then, in that event, notwithstanding anything to the contrary
in any of the Loan Documents or any agreement entered into in connection with or
as security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan Documents or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be canceled automatically and if
theretofore paid shall be credited by such Lender on the principal amount of the
Indebtedness (or, to the extent that the principal amount of the Indebtedness
shall have been or would thereby be paid in full, refunded by such Lender to the
Borrowers); and (ii) in the event that the maturity of the Notes is accelerated
by reason of an election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to any Lender may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically by such Lender as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by such Lender on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Indebtedness shall have been or would
thereby be paid in full, refunded by such Lender to the
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Borrowers). All sums paid or agreed to be paid to any Lender for the use,
forbearance or detention of sums due hereunder shall, to the extent permitted by
law applicable to such Lender, be amortized, prorated, allocated and spread
throughout the full term of the Loans evidenced by the Notes until payment in
full so that the rate or amount of interest on account of any Loans hereunder
does not exceed the maximum amount allowed by such applicable law. If at any
time and from time to time (i) the amount of interest payable to any Lender on
any date shall be computed at the Highest Lawful Rate applicable to such Lender
pursuant to this Section 12.14 and (ii) in respect of any subsequent interest
computation period the amount of interest otherwise payable to such Lender would
be less than the amount of interest payable to such Lender computed at the
Highest Lawful Rate applicable to such Lender, then the amount of interest
payable to such Lender in respect of such subsequent interest computation period
shall continue to be computed at the Highest Lawful Rate applicable to such
Lender until the total amount of interest payable to such Lender shall equal the
total amount of interest which would have been payable to such Lender if the
total amount of interest had been computed without giving effect to this Section
12.14.
Section 12.15 Confidentiality. In the event that the Borrowers
provide to the Agent or the Lenders written confidential information belonging
to the Borrowers, if the Borrowers shall denominate such information in writing
as "confidential", the Agent and the Lenders shall thereafter maintain such
information in confidence in accordance with reasonable standards of care and
diligence and not use or exploit such information for any purpose other than the
transaction contemplated hereunder. This obligation of confidence shall not
apply to such portions of the information which (i) are in the public domain,
(ii) hereafter become part of the public domain without the Agent or the Lenders
breaching their obligation of confidence to the Borrowers, (iii) are previously
known by the Agent or the Lenders from some source other than the Borrowers,
(iv) are hereafter developed by the Agent or the Lenders without using the
Borrowers' information, (v) are hereafter obtained by or available to the Agent
or the Lenders from a third party who owes no obligation of confidence to the
Borrowers with respect to such information or through any other means other than
through disclosure by the Borrowers, (vi) are disclosed with the Borrowers'
consent, (vii) must be disclosed either pursuant to any Governmental Requirement
or to Persons regulating the activities of the Agent or the Lenders, or (viii)
as may be required by law or regulation or order of any Governmental Authority
in any judicial, arbitration or governmental proceeding. Further, the Agent or a
Lender may disclose any such information to any other Lender, any independent
petroleum engineers or consultants, any independent certified public
accountants, any legal counsel employed by such Person in connection with this
Agreement or any Security Instrument, including without limitation, the
enforcement or exercise of all rights and remedies thereunder, or any assignee
or participant (including prospective assignees and participants) in the Loans;
provided, however, that the Agent or Lender imposes on the Person to whom such
information is disclosed the same obligation to maintain the confidentiality of
such information as is imposed upon it hereunder. Notwithstanding anything to
the contrary provided herein, this obligation of confidence shall cease three
(3) years from the date the information was furnished, unless the Borrowers
request in writing at least thirty (30) days prior to the expiration of such
three year period, to maintain the confidentiality of such information for an
additional three year period. The Borrowers waive any and all other rights it
may have to confidentiality as against the Agent and
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the Lenders arising by contract, agreement, statute or law except as expressly
stated in this Section 12.15.
Section 12.16 Effectiveness. This Agreement shall be effective on
the Closing Date (the "Effective Date").
Section 12.17 Prior Debt Security Instruments. In the event that any
of the terms, conditions, covenants, representations, or warranties contained in
any of the Security Instruments assigned to the Lender by the Prior Debt holders
are inconsistent or conflict with the terms of this Agreement, the terms of this
Agreement shall control for all purposes.
Section 12.18 Release of Security Instruments. Upon payment in full
of the Indebtedness and termination of the Commitment and this Credit Agreement,
the Agent and the Lenders shall promptly cause satisfaction and release of the
Security Instruments to be entered upon the record at the expense of the
Borrowers and shall execute and deliver or cause to be executed and delivered
such instruments of satisfaction and release as may be appropriate to effecuate
same.
[SIGNATURES BEGIN NEXT PAGE]
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The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
BORROWERS: KELLEY OPERATING COMPANY, LTD.
- ---------
By: Kelley Oil Corporation,
its Managing General Partner
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
KELLEY OIL CORPORATION
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
S-1
<PAGE>
KELLEY OIL & GAS CORPORATION
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
GUARANTORS: CONCORDE GAS MARKETING, INC.
- -----------
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
S-2
<PAGE>
KELLEY PARTNERS 1992
DEVELOPMENT DRILLING JOINT
VENTURE
By: Kelley Partners 1992 Development
Drilling Program, the Managing
Joint Venturer
By: Kelley Oil Corporation,
its Managing General Partner
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
S-3
<PAGE>
KELLEY PARTNERS 1994
DEVELOPMENT DRILLING JOINT
VENTURE
By: Kelley Partners 1994 Development
Drilling Program, the Managing
Joint Venturer
By: Kelley Oil Corporation,
its Managing General Partner
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
S-4
<PAGE>
KELLEY PARTNERS 1992
DEVELOPMENT DRILLING PROGRAM
By: Kelley Oil Corporation,
its Managing General Partner
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
KELLEY PARTNERS 1994
DEVELOPMENT DRILLING PROGRAM
By: Kelley Oil Corporation,
its Managing General Partner
/s/ STEPHEN M. SMITH
By:_____________________________
Stephen M. Smith
Treasurer
Address for Notices:
Kelley Oil Corp.
601 Jefferson, Suite 1100
Houston, Texas 77002
Telecopier No.: (713) 654-2553
Telephone No.: (713) 654-2510
Attention: Chief Financial Officer
S-5
<PAGE>
LENDER AND AGENT: TEXAS COMMERCE BANK NATIONAL
- ---------------- ASSOCIATION, individually and
as Agent
/s/ GLENN P. CARSON
By:______________________________
Glenn P. Carson
Name:____________________________
Vice President
Title:___________________________
Lending Office for Base Rate and
Eurodollar Loans (Borrowing Notification,
Rate Setting Information and Relationship
Manager Information):
712 Main Street, 5th Floor
Houston, Texas 77002
Telecopier No.: (713) 216-4117
Telephone No.: (713) 216-4147
Attention: Bob Mertensotto
Managing Director
Notices for Receipt and Payment of Funds:
Loan Syndication Services
1111 Fannin, 9th Floor MS 46
Houston, Texas 77002
Telecopier No.: (713) 750-3810
Telephone No.: (713) 750-2784
S-6
<PAGE>
LENDERS: UNION BANK OF CALIFORNIA, N.A.
- -------
/s/ CARL STUTZMAN
By:_____________________________
Name: Carl Stutzman
Title: Vice President
/s/ TONY R. WEBER
By:_____________________________
Name: Tony R. Weber
Title: Vice President
Lending Office for Base Rate and
Eurodollar Loans:
Specialized Lending Note Center
1980 Saturn Street
Monterey Park, CA 91754
Address for Notices:
4200 Lincoln Plaza
500 N. Akard
Dallas, TX 75201
Telecopier No.: 214-922-4209
Telephone No.: 214-922-4200
Attention: Carl Stutzman
S-7
<PAGE>
BANQUE PARIBAS
/s/ BARTON D. SCHOUEST
By:_____________________________
Barton D. Schouest
Group Vice President
/s/ DOUGLAS LIFTMAN
By:_____________________________
Douglas Liftman
Vice President
Lending Office for Base Rate and
Eurodollar Loans:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Address for Notices:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Telecopier No.: (713) 659-6915
Telephone No.: (713) 659-4811
Attention: Douglas Liftman
S-8
<PAGE>
BANK OF AMERICA ILLINOIS
/s/ RICHARD D. BLUTH
By:_____________________________
Name: Richard D. Bluth
Title: Vice President
/s/ JAMES R. MCBRIDE
By:_____________________________
Name: James R. McBride
Title: Managing Director
Lending Office for Base Rate and
Eurodollar Loans:
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
Address for Notices:
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
Telecopier No.: (312) 974-9626
Telephone No.: (312) 828-4575
Attention: Gloria Turner
S-9
<PAGE>
EXHIBIT A
FORM OF NOTE
------------
$ _____________________________ December 12, 1996
FOR VALUE RECEIVED, KELLEY OIL & GAS CORPORATION, a Delaware Corporation,
KELLEY OIL CORPORATION, a Delaware corporation, and KELLEY OPERATING COMPANY,
LTD., a Texas limited partnership (the "Borrowers"), jointly and severally,
hereby promise to pay to the order of __________________________________ (the
"Lender"), at the Principal Office of Texas Commerce Bank National Association
(the "Agent"), at 712 Main Street, Houston, Texas 77002, the principal sum of
_____________ Dollars ($____________) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Loans made by the Lender to the
Borrowers under the Credit Agreement, as hereinafter defined), in lawful money
of the United States of America and in immediately available funds, on the dates
and in the principal amounts provided in the Credit Agreement, and to pay
interest on the unpaid principal amount of each such Loan, at such office, in
like money and funds, for the period commencing on the date of such Loan until
such Loan shall be paid in full, at the rates per annum and on the dates
provided in the Credit Agreement.
The date, amount, Type, interest rate, Interest Period and maturity of each
Loan made by the Lender to the Borrowers, and each payment made on account of
the principal thereof, shall be recorded by the Lender on its books and, prior
to any transfer of this Note, endorsed by the Lender on the schedules attached
hereto or any continuation thereof.
This Note is one of the Notes referred to in the Amended and Restated
Credit Agreement dated as of December 12, 1996 among the Borrowers, Concorde Gas
Marketing, Inc., Kelley Partners 1992 Development Drilling Joint Venture, Kelley
Partners 1994 Development Drilling Joint Venture, Kelley Partners 1992
Development Drilling Program, Kelley Partners 1994 Development Drilling Program,
the Lenders which are or become parties thereto (including the Lender) and the
Agent, and evidences Loans made by the Lender thereunder (such Amended and
Restated Credit Agreement as the same may be amended or supplemented from time
to time, the "Credit Agreement"). Capitalized terms used in this Note have the
respective meanings assigned to them in the Credit Agreement.
This Note is issued pursuant to the Credit Agreement and is entitled to the
benefits provided for in the Credit Agreement and the Security Instruments. The
Credit Agreement provides for the acceleration of the maturity of this Note upon
the occurrence of certain events, for prepayments of Loans upon the terms and
conditions specified therein and other provisions relevant to this Note.
A-1
<PAGE>
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS.
KELLEY OIL & GAS CORPORATION
By:
-------------------------------
Stephen M. Smith
Treasurer
KELLEY OIL CORPORATION
By:
--------------------------------
Stephen M. Smith
Treasurer
KELLEY OPERATING COMPANY, LTD.
By: Kelley Oil Corporation,
its Managing General Partner
By:
---------------------------
Stephen M. Smith
Treasurer
A-2
<PAGE>
EXHIBIT B
FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST
------------------------------------------------------
_____________________, 199__
Kelley Oil & Gas Corporation, a Delaware corporation ("Parent"), Kelley Oil
Corporation, a Delaware corporation ("KOC") and Kelley Operating Company, Ltd.,
a Texas limited partnership ("Kelley Operating" together with Parent and KOC,
collectively, the "Borrowers"), pursuant to the Amended and Restated Credit
Agreement dated as of December 12, 1996 (together with all amendments or
supplements thereto, the "Credit Agreement") among the Borrowers, the other
Obligors (as therein defined) Texas Commerce Bank National Association, as Agent
and the lenders which are or become parties thereto (the "Lenders"), and such
Lenders, hereby make the requests indicated below (unless otherwise defined
herein, capitalized terms are defined in the Credit Agreement):
/ / 1. Revolving Credit Loans:
(a) Aggregate amount of new Revolving Credit Loans to be
$______________________;
(b) Requested funding date is _________________, 199__;
(c) $_____________________ of such borrowings are to be Eurodollar Loans;
$_____________________ of such borrowings are to be Base Rate Loans;
and
(d) Length of Interest Period for Eurodollar Loans is:
_________________________.
/ / 2. Eurodollar Loan Continuation for Eurodollar Loans maturing on
_____________________:
(a) Aggregate amount to be continued as Eurodollar Loans is
$____________________;
(b) Aggregate amount to be converted to Base Rate Loans is
$____________________;
B-1
<PAGE>
(c) Length of Interest Period for continued Eurodollar Loans is
________________________.
/ / 3. Conversion of Outstanding Base Rate Loans to Eurodollar Loans:
Convert $__________________ of the outstanding Base Rate Loans to
Eurodollar Loans on ____________________ with an Interest Period of
______________________.
/ / 4. Conversion of outstanding Eurodollar Loans to Base Rate Loans:
Convert $__________________ of the outstanding Eurodollar Loans with
Interest Period maturing on ______________________, 199_, to Base Rate
Loans.
The undersigned certifies that he is the _______________________ of Kelley
Oil & Gas Corporation and the _____________________ of Kelley Oil Corporation, a
Delaware corporation, which is the managing general partner of Kelley Operating
and that as such he is authorized to execute this certificate on behalf of the
Borrowers. The undersigned further certifies, represents and warrants on behalf
of the Borrowers that the Borrowers are entitled to receive the requested
borrowing, continuation or conversion under the terms and conditions of the
Credit Agreement.
KELLEY OIL & GAS CORPORATION
By:__________________________
Name:________________________
Title:_______________________
KELLEY OIL CORPORATION
By:__________________________
Name:________________________
Title:_______________________
B-2
<PAGE>
KELLEY OPERATING COMPANY, LTD.
By: Kelley Oil Corporation,
its Managing General Partner
By:__________________________
Name:________________________
Title:_______________________
B-3
<PAGE>
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
------------------------------
The undersigned hereby certifies that he is the ________________ of Kelley
Oil and Gas Corporation, a Delaware corporation (the "Parent") and the
___________________ of Kelley Oil Corporation, a Delaware corporation ("KOC"),
which is the managing general partner of Kelley Operating Company, Ltd., a Texas
limited partnership ("Kelley Operating," together with the Parent and KOC,
collectively, the "Borrowers"), Concorde Gas Marketing, Inc., a
_____________corporation ("Concorde"), Kelley Partners 1992 Development Drilling
Joint Venture, a Texas general partnership ("92 JV") Kelley Partners 1992
Development Drilling Program, a Texas limited partnership ("92 DDP"), Kelley
Partners 1994 Development Drilling Program, a Texas limited partnership ("94
DDP"), and Kelley Partners 1994 Development Drilling Joint Venture, a Texas
general partnership ("94 JV"; the Borrowers, the Parent, Concorde, 92 JV, 92
DDP, 94 DDP and 94 JV, collectively, the "Obligors") and that as such he is
authorized to execute this certificate on behalf of the Obligors. With
reference to the Amended and Restated Credit Agreement dated as of December 12,
1996 (together with all amendments or supplements thereto being the "Agreement")
among the Obligors, Texas Commerce Bank National Association, as Agent for the
lenders which are or become parties thereto (the "Lenders"), and such Lenders,
the undersigned represents and warrants as follows (each capitalized term used
herein having the same meaning given to it in the Agreement unless otherwise
specified):
(a) The representations and warranties of the Obligors contained in
Article VII of the Agreement and in the Security Instruments and otherwise
made in writing by or on behalf of the Obligors pursuant to the Agreement
and the Security Instruments were true and correct when made, and are
repeated at and as of the time of delivery hereof and are true and correct
at and as of the time of delivery hereof except to the extent such
representations and warranties are expressly limited to an earlier date or
the Majority Lenders shall have expressly consented in writing to the
contrary.
(b) The Obligors have performed and complied with all agreements and
conditions contained in the Agreement and in the Security Instruments
required to be performed or complied with by them prior to or at the time
of delivery hereof.
(c) Neither the Obligors nor any Subsidiary has incurred any material
liabilities, direct or contingent, since December 31, 1995, except those
set forth in Schedule 9.01 to the Agreement and except those allowed by the
terms of the Agreement or otherwise consented to by the Lenders in writing.
C-1
<PAGE>
(d) Since December 31, 1995, there has been no change or event having
a Material Adverse Effect which is continuing other than as shown on
Schedule 7.02 to the Agreement or otherwise consented to by the Lenders in
writing.
(e) There exists no Default under the Agreement or any event or
circumstance which constitutes, or with notice or lapse of time (or both)
would constitute, an event of default under any material loan or credit
agreement, indenture, deed of trust, security agreement or other agreement
or instrument to which any Obligor or Subsidiary is a party evidencing or
pertaining to any Debt of the Obligors or any Subsidiary aggregating
$1,000,000 or more, or under any material agreement or instrument to which
the Obligors or any Subsidiary is a party or by which the Obligors or any
Subsidiary is bound.
(f) The financial statements furnished to the Agent with this
certificate fairly present the consolidated financial condition and results
of operations of the Parent and its Consolidated Subsidiaries as at the end
of, and for, the [fiscal quarter] [fiscal year] ending
_________________________ and such financial statements have been prepared
in accordance with the accounting procedures specified in the Agreement.
(g) Attached hereto are the detailed computations necessary to
determine whether the Parent and its Consolidated Subsidiaries are in
compliance with Sections 9.12 and 9.13 of the Agreement as of the end of
the [fiscal quarter] [fiscal year] ending _________________________.
EXECUTED AND DELIVERED this ____ day of ______________.
KELLEY OIL & GAS CORPORATION
By:_____________________________
Name:___________________________
Title:__________________________
KELLEY OIL CORPORATION
By:_____________________________
Name:___________________________
Title:__________________________
C-2
<PAGE>
KELLEY OPERATING COMPANY, LTD.
By: Kelley Oil Corporation, its Managing General Partner
By:_______________________________
Name:_____________________________
Title:____________________________
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING JOINT VENTURE
By: Kelley Partners 1992 Development Drilling Program, its
Managing Joint Venturer
By: Kelley Oil Corporation, its Managing General
Partner
By:__________________________
Name:________________________
Title:_______________________
C-3
<PAGE>
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING JOINT VENTURE
By: Kelley Partners 1994 Development Drilling Program, its
Managing Joint Venturer
By: Kelley Oil Corporation, its Managing General
Partner
By:____________________________________
Name:__________________________________
Title:_________________________________
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
By: Kelley Oil Corporation,
its Managing General Partner
By:_______________________________
Name:
Title:
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
By: Kelley Oil Corporation,
its Managing General Partner
By:_______________________________
Name:
Title:
C-4
<PAGE>
EXHIBIT D
LIST OF SECURITY INSTRUMENTS
----------------------------
1. Guaranty Agreement dated as of December 12, 1996 executed by Concorde in
favor of the Agent, for its benefit and the benefit of the Lenders.
2. Guaranty Agreement dated as of December 12, 1996 executed by 92 JV in favor
of the Agent, for its benefit and the benefit of the Lenders.
3. Guaranty Agreement dated as of December 12, 1996 executed by 94 JV in favor
of the Agent, for its benefit and the benefit of the Lenders.
4. Guaranty Agreement dated as of December 12, 1996 executed by 92 DDP in
favor of the Agent, for its benefit and the benefit of the Lenders.
5. Guaranty Agreement dated as of December 12, 1996 executed by 94 DDP in
favor of the Agent, for its benefit and the benefit of the Lenders.
6. Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of February 7, 1995 in favor of Bank of Montreal, as Agent,
as assigned to the Agent pursuant to item 8.
7. Financing Statement with respect to item 6.
8. Assignment of Notes and Liens and Amendment of Mortgage, Assignment of
Production, Security Agreement and Financing Statement dated as of February 14,
1996 executed by the prior bank group to the Lenders and the Borrowers.
9. Financing Statement Assignments with respect to item 8 filed with:
(a) Louisiana Secretary of State
(b) Texas Secretary of State
10. Modification of Mortgage, Assignment of Production, Security Agreement and
Financing Statement dated as of December 12, 1996.
11. Financing Statement Amendments with respect to item 10 above.
12. Security Agreement (Accounts, General Intangibles and Partnership
Interests) dated as of February 14, 1996 executed by KOC in favor of the Agent,
for its benefit and the benefit of
D-1
<PAGE>
the Lenders, as amended by First Amendment to Security Agreement dated as of
December 12, 1996.
13. Financing Statement Assignments with respect to item 8 filed with:
(a) Louisiana Secretary of State
(b) Texas Secretary of State
14. Instructions regarding registration of uncertificated securities with
respect to item 12 above.
15. Confirmation of registration of uncertificated securities with respect to
item 12 above.
16. Assignment of Interest with respect to units of limited partnership
interests pledged in item 12 above.
17. Security Agreement (Accounts, General Intangibles and Partnership
Interests) dated as of February 14, 1996 executed by Kelley Operating in favor
of the Agent, for its benefit and the benefit of the Lenders, as amended by
First Amendment to Security Agreement dated as of December 12, 1996.
18. Financing Statement Assignments with respect to item 17 filed with the
Texas Secretary of State.
19. Instructions regarding registration of uncertificated securities with
respect to item 17 above.
20. Confirmation of registration of uncertificated securities with respect to
item 17 above.
D-2
<PAGE>
EXHIBIT E
FORM OF
ASSIGNMENT AGREEMENT
--------------------
ASSIGNMENT AGREEMENT ("Agreement") dated as of ________________, 199___
between: _________________________________ (the "Assignor") and
__________________________ (the "Assignee").
RECITALS
--------
A. The Assignor is a party to the Amended and Restated Credit Agreement
dated as of December 12, 1996 (as amended and supplemented and in effect from
time to time, the "Credit Agreement") among Kelley Oil & Gas Corporation, Kelley
Oil Corporation and Kelley Operating Company, Ltd. (the "Borrowers"), Concorde
Gas Marketing, Inc., Kelley Partners 1992 Development Drilling Joint Venture,
Kelley Partners 1994 Development Drilling Joint Venture, Kelley Partners 1992
Development Drilling Program, Kelley Partners 1994 Development Drilling Program,
each of the lenders that is or becomes a party thereto as provided in Section
12.06 of the Credit Agreement (individually, together with its successors and
assigns, a "Lender", and collectively, together with their successors and
assigns, the "Lenders"), and Texas Commerce Bank National Association, a
national banking association, in its individual capacity, ("TCB") and as agent
for the Lenders (in such capacity, together with its successors in such
capacity, the "Agent").
B. The Assignor proposes to sell, assign and transfer to the Assignee,
and the Assignee proposes to purchase and assume from the Assignor, [all][a
portion] of the Assignor's Maximum Credit Amount, outstanding Loans and its
Percentage Share of the outstanding LC Exposure, all on the terms and conditions
of this Agreement.
C. In consideration of the foregoing and the mutual agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS.
-----------
Section 1.01 Definitions. All capitalized terms used but not defined
herein have the respective meanings given to such terms in the Credit Agreement.
E-1
<PAGE>
Section 1.02 Other Definitions. As used herein, the following terms have
the following respective meanings:
"Assigned Interest" shall mean all of Assignor's (in its capacity as a
"Lender") rights and obligations (i) under the Credit Agreement and the other
Security Instruments in respect of the Maximum Credit Amount of the Assignor in
the principal amount equal to $____________________, including, without
limitation, any obligation to participate pro rata in any LC Exposure and (ii)
to make Loans under the Maximum Credit Amount and any right to receive payments
for the Loans outstanding under the Maximum Credit Amount assigned hereby of
$__________________ (the "Loan Balance"), plus the interest and fees which will
accrue from and after the Assignment Date.
"Assignment Date" shall mean _____________________, 199___.
ARTICLE II
SALE AND ASSIGNMENT.
-------------------
Section 2.01 Sale and Assignment. On the terms and conditions set forth
herein, effective on and as of the Assignment Date, the Assignor hereby sells,
assigns and transfers to the Assignee, and the Assignee hereby purchases and
assumes from the Assignor, all of the right, title and interest of the Assignor
in and to, and all of the obligations of the Assignor in respect of, the
Assigned Interest. Such sale, assignment and transfer is without recourse and,
except as expressly provided in this Agreement, without representation or
warranty.
Section 2.02 Assumption of Obligations. The Assignee agrees with the
Assignor (for the express benefit of the Assignor and the Borrower) that the
Assignee will, from and after the Assignment Date, perform all of the
obligations of the Assignor in respect of the Assigned Interest. From and after
the Assignment Date: (a) the Assignor shall be released from the Assignor's
obligations in respect of the Assigned Interest, and (b) the Assignee shall be
entitled to all of the Assignor's rights, powers and privileges under the Credit
Agreement and the other Security Instruments in respect of the Assigned
Interest.
Section 2.03 Consent by Agent. By executing this Agreement as provided
below, in accordance with Section 12.06(b) of the Credit Agreement, the Agent
hereby acknowledges notice of the transactions contemplated by this Agreement
and consents to such transactions.
E-2
<PAGE>
ARTICLE III
PAYMENTS.
--------
Section 3.01 Payments. As consideration for the sale, assignment and
transfer contemplated by Section 2.01 hereof, the Assignee shall, on the
Assignment Date, assume Assignor's obligations in respect of the Assigned
Interest and pay to the Assignor an amount equal to the Loan Balance, if any.
An amount equal to all accrued and unpaid interest and fees shall be paid to the
Assignor as provided in Section 3.02 (iii) below. Except as otherwise provided
in this Agreement, all payments hereunder shall be made in Dollars and in
immediately available funds, without setoff, deduction or counterclaim.
Section 3.02 Allocation of Payments. The Assignor and the Assignee
agree that (i) the Assignor shall be entitled to any payments of principal with
respect to the Assigned Interest made prior to the Assignment Date, together
with any interest and fees with respect to the Assigned Interest accrued prior
to the Assignment Date, (ii) the Assignee shall be entitled to any payments of
principal with respect to the Assigned Interest made from and after the
Assignment Date, together with any and all interest and fees with respect to the
Assigned Interest accruing from and after the Assignment Date, and (iii) the
Agent is authorized and instructed to allocate payments received by it for
account of the Assignor and the Assignee as provided in the foregoing clauses.
Each party hereto agrees that it will hold any interest, fees or other amounts
that it may receive to which the other party hereto shall be entitled pursuant
to the preceding sentence for account of such other party and pay, in like money
and funds, any such amounts that it may receive to such other party promptly
upon receipt.
Section 3.03 Delivery of Notes. Promptly following the receipt by
the Assignor of the consideration required to be paid under Section 3.01 hereof,
the Assignor shall, in the manner contemplated by Section 12.06(b) of the Credit
Agreement, (i) deliver to the Agent (or its counsel) the Notes held by the
Assignor and (ii) notify the Agent to request that the Borrower execute and
deliver new Notes to the Assignor, if Assignor continues to be a Lender, and the
Assignee, dated the date of this Agreement in respective principal amounts equal
to the respective Commitments of the Assignor (if appropriate) and the Assignee
after giving effect to the sale, assignment and transfer contemplated hereby.
Section 3.04 Further Assurances. The Assignor and the Assignee
hereby agree to execute and deliver such other instruments, and take such other
actions, as either party may reasonably request in connection with the
transactions contemplated by this Agreement.
E-3
<PAGE>
ARTICLE IV
CONDITIONS PRECEDENT.
--------------------
Section 4.01 Conditions Precedent. The effectiveness of the sale,
assignment and transfer contemplated hereby is subject to the satisfaction of
each of the following conditions precedent:
(a) the execution and delivery of this Agreement by the Assignor and
the Assignee;
(b) the receipt by the Assignor of the payment required to be made by
the Assignee under Section 3.01 hereof; and
(c) the acknowledgment and consent by the Agent contemplated by
Section 2.03 hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES.
------------------------------
Section 5.01 Representations and Warranties of the Assignor. The
Assignor represents and warrants to the Assignee as follows:
(a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its obligations
under, and consummate the transactions contemplated by, this Agreement;
(b) the execution, delivery and compliance with the terms hereof by
Assignor and the delivery of all instruments required to be delivered by it
hereunder do not and will not violate any Governmental Requirement applicable to
it;
(c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor, enforceable
against it in accordance with its terms;
(d) all approvals and authorizations of, all filings with and all
actions by any Governmental Authority necessary for the validity or
enforceability of its obligations under this Agreement have been obtained;
(e) the Assignor has good title to, and is the sole legal and
beneficial owner of, the Assigned Interest, free and clear of all Liens, claims,
participations or other charges of any nature whatsoever; and
E-4
<PAGE>
(f) the transactions contemplated by this Agreement are commercial
banking transactions entered into in the ordinary course of the banking business
of the Assignor.
Section 5.02 Disclaimer. Except as expressly provided in Section
5.01 hereof, the Assignor does not make any representation or warranty, nor
shall it have any responsibility to the Assignee, with respect to the accuracy
of any recitals, statements, representations or warranties contained in the
Credit Agreement or in any certificate or other document referred to or provided
for in, or received by any Lender under, the Credit Agreement, or for the value,
validity, effectiveness, genuineness, execution, effectiveness, legality,
enforceability or sufficiency of the Credit Agreement, the Notes or any other
document referred to or provided for therein or for any failure by the Borrower
or any other Person (other than Assignor) to perform any of its obligations
thereunder prior or for the existence, value, perfection or priority of any
collateral security or the financial or other condition of the Borrower or the
Subsidiaries or any other obligor or guarantor, or any other matter relating to
the Credit Agreement or any other Security Instrument or any extension of credit
thereunder.
Section 5.03 Representations and Warranties of the Assignee. The
Assignee represents and warrants to the Assignor as follows:
(a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its obligations
under, and consummate the transactions contemplated by, this Agreement;
(b) the execution, delivery and compliance with the terms hereof by
Assignee and the delivery of all instruments required to be delivered by it
hereunder do not and will not violate any Governmental Requirement applicable to
it;
(c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignee, enforceable
against it in accordance with its terms;
(d) all approvals and authorizations of, all filings with and all
actions by any Governmental Authority necessary for the validity or
enforceability of its obligations under this Agreement have been obtained;
(e) the Assignee has fully reviewed the terms of the Credit Agreement
and the other Security Instruments and has independently and without reliance
upon the Assignor, and based on such information as the Assignee has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement;
(f) the Assignee hereby affirms that the representations contained in
Section 4.06(d)[(i)][ii)] of the Credit Agreement are true and accurate as to it
[IF (ii) IS SELECTED ADD: and, the Assignee has contemporaneously herewith
delivered to the Agent and the
E-5
<PAGE>
Borrower such certifications as are required thereby to avoid the withholding
taxes referred to in Section 4.06]; and
(g) the transactions contemplated by this Agreement are commercial
banking transactions entered into in the ordinary course of the banking business
of the Assignee.
ARTICLE VI
MISCELLANEOUS.
-------------
Section 6.01 Notices. All notices and other communications provided
for herein (including, without limitation, any modifications of, or waivers,
requests or consents under, this Agreement) shall be given or made in writing
(including, without limitation, by telex or telecopy) to the intended recipient
at its "Address for Notices" specified below its name on the signature pages
hereof or, as to either party, at such other address as shall be designated by
such party in a notice to the other party.
Section 6.02 Amendment, Modification or Waiver. No provision of this
Agreement may be amended, modified or waived except by an instrument in writing
signed by the Assignor and the Assignee, and consented to by the Agent.
Section 6.03 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. The representations and warranties made
herein by the Assignee are also made for the benefit of the Agent and the
Borrower, and the Assignee agrees that the Agent and the Borrower are entitled
to rely upon such representations and warranties.
Section 6.04 Assignments. Neither party hereto may assign any of its
rights or obligations hereunder except in accordance with the terms of the
Credit Agreement.
Section 6.05 Captions. The captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
Section 6.06 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be identical and all of which, taken
together, shall constitute one and the same instrument, and each of the parties
hereto may execute this Agreement by signing any such counterpart.
Section 6.07 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of Texas.
E-6
<PAGE>
Section 6.08 Expenses. To the extent not paid by the Borrower
pursuant to the terms of the Credit Agreement, each party hereto shall bear its
own expenses in connection with the execution, delivery and performance of this
Agreement.
Section 6.09 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
E-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNOR
--------
---------------------------------------
By: _________________________________
Name:
Title:
Address for Notices:
----------------------------------------
----------------------------------------
----------------------------------------
Telecopier No.: _______________________
Telephone No.: _______________________
Attention: ___________________
E-8
<PAGE>
ASSIGNEE
--------
-----------------------------------------
By: ____________________________________
Name:
Title:
Address for Notices:
-----------------------------------------
-----------------------------------------
-----------------------------------------
Telecopier No.: _________________________
Telephone No.: _________________________
Attention: _____________________
ACKNOWLEDGED AND CONSENTED TO:
______________________________________,
as Agent
By:__________________________________
Name:
Title:
E-9
<PAGE>
EXHIBIT F
LIST OF MAXIMUM CREDIT AMOUNTS
------------------------------
Maximum
Name of Lender Percentage Share Credit Amount
- -------------- ----------------- -------------
Texas Commerce Bank 28.0% $ 35,000,000
National Association
Banque Paribas 24.0% $ 30,000,000
Union Bank of California, 24.0% $ 30,000,000
N.A.
Bank of America Illinois 24.0% $ 30,000,000
------------
TOTAL 100% $125,000,000
F-1
<PAGE>
SCHEDULE 7.02
LIABILITIES
-----------
1. Since September 30, 1996, the Borrowers have borrowed an
incremental $15 million under the Prior Credit Agreement bringing total
borrowings to $22 million.
2. During October 1996, the Parent issued $125 million of 10% Senior
Subordinated Notes due October 15, 2006. Substantially all of the proceeds
from this financing were used to retire $99,565,000 of the Parent's 13 1/2%
Senior Notes due June 15, 1999 plus associated expenses and accrued interest.
The Company expects to record an extraordinary loss of approximately $17.4
million in the fourth quarter of 1996 as a result of the excess of the purchase
price of the 13 1/2% Notes over their carrying value.
<PAGE>
SCHEDULE 7.03
LITIGATION
----------
None.
<PAGE>
SCHEDULE 7.09
TAXES
-----
None.
<PAGE>
SCHEDULE 7.10(A)
TITLES, ETC.
------------
Pursuant to letters of intent dated November 13, 1996 among the Parent
and Williams Production Company ("Williams"), the Parent has agreed to sell
Williams an undivided 50% of its right, title and interest in certain
producing properties and leasehold interests located in the Houma Embayment
Area of Terrebonne Parish, Louisiana. Copies of these letters of intent have
been delivered to the Agent.
<PAGE>
SCHEDULE 7.14
SUBSIDIARIES AND PARTNERSHIPS
-----------------------------
1. The following table sets forth for each Subsidiary (i) the amount of its
authorized capital stock or classes of partnership interests, (ii) the
amount of its outstanding capital stock or interests and (iii) the record and
beneficial owners of its outstanding capital stock or interests. The address of
each of the entities below is, 601 Jefferson, Suite 1100, Houston, Texas 77002.
All shares of capital stock referred to in the table are shares of common stock
of the corporate Subsidiaries.
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING RECORD AND
CAPITAL STOCK CAPITAL STOCK OR BENEFICIAL
NAME OF SUBSIDIARY/1/ OR INTERESTS INTERESTS/UNITS OWNERS
- --------------------- ------------- ---------------- ------------
<S> <C> <C> <C>
Kelley Oil Corporation
("KOC") 1,000 shares 100 Parent
Petrofunds, Inc.
("Petrofunds") 1,000 shares 1,000 KOC
Concorde Gas Marketing,
Inc. ("CGM") 1,000 shares 1,000 KOC
Concorde Gas Intrastate,
Inc. ("GCI") 1,000 shares 1,000 KOC
Kelley Operating limited partner interest 98% KOC
general partner interests 2% KOC (1.99%)
Petrofunds, Inc. (.01%)
92 DDP limited and general partner units/(2)/ 16,033,009 KOC (13,422,310) (83.72%)
Public (2,610,699) (12.32%)
other general partner interests 3.96% KOC (3.94%)
David Kelley (.02%)
92 JV general partner interests 100% 92 DDP/(3)/
Kelley Operating/(3)/
94 DDP limited and general partner units/(2)/ 20,864,414 KOC ( 19,163,889) (91.85%)
Public (1,700,525) (4.19%)
other general partner interests 3.96% KOC (3.94%)
David Kelley (.02%)
94 JV general partner interests 100% 94 DDP/(3)/
Kelley Operating/(3)/
</TABLE>
/(1)/ Private drilling programs managed by Petrofunds are not
listed herein because Petrofunds has no economic interest therein other than
the right to receive management fees.
/(2)/ The units represent 96.04% of the outstanding interests
/(3)/ Kelley Operating has a 20% reversionary interest after payout, as
defined in the joint venture agreement.
<PAGE>
SCHEDULE 7.17
ENVIRONMENTAL MATTERS
---------------------
None.
<PAGE>
SCHEDULE 7.19
INSURANCE
---------
1. The Parent and its Subsidiaries maintain insurance providing the
following coverage:
(a) Worker's compensation and employer's liability insurance, in
compliance with applicable laws.
(b) Comprehensive general liability insurance with a single limit
per occurrence of $1,000,000 and an aggregate limit of $1,000,000 for products
liability and completed operations coverage, subject to customary exclusions
and a $25,000 deductible.
(c) Automobile liability and property damage insurance with per
occurrence limits of$1,000,000 for bodily injury and property damage combined,
subject to customary exclusions and to a deductible of $1,000.
(d) Excess maritime employer's liability insurance with a single
limit per occurrence of $975,000, subject to customary exclusions and a $25,000
deductible.
(e) Operators extra expense indemnity of $20,000,000 with a
deductible of up to $25,000 per occurrence, and care, custody and control
coverage of up to $1,000,000, with a deductible of up to $10,000 per
occurrence, subject to customary exclusions.
(f) Umbrella coverage for categories (a) through (d) above, with a
total limit of $50,000,000 per occurrence for bodily injury and property damage,
subject to customary exclusions.
2. The foregoing coverage will remain in full force and effect through
May 1, 1997 without the payment of additional premiums.
3. Prior to February 15, 1996 the Parent identified director and
officer liability exposure as a self insured risk. Presently, director and
officer liability coverage is maintained with a per occurrence limit of $20
million, subject to a deductible of up to $500,000 and customary exclusions.
<PAGE>
SCHEDULE 7.20
HEDGING AGREEMENTS
------------------
KOC periodically uses forward sales contracts and derivative financial
instruments covering natural gas to reduce exposure to downward price
fluctuations on natural gas production of the Parent and its Subsidiaries
(collectively, the "Kelley Group"). The natural gas swap agreements generally
provide for the Kelley Group to receive or make counter party payments on the
differential between a fixed price and a variable indexed price for natural
gas. Through a combination of natural gas swap agreements, approximately 35%
of the Kelley Group's anticipated natural gas production for the period from
January through August 1997 has been hedged as of December 11, 1996 at an
average NYMEX quoted price of $2.41 per MMBtu, before transaction costs and
transportation costs on gas delivered under forward sales contracts. A
description of Hedging Agreements in place as of December 11, 1996 is set
forth in Attachment A hereto.
<PAGE>
SCHEDULE 9.01
DEBT
----
1. The Parent and its Subsidiaries maintain operating leases for
office space, computer and similar equipment with minimum rentals aggregating
$1,089,430 in 1997.
2. As of September 30, 1996, the 92 DDP was indebted to KOC for
repayment of advances aggregating $6,000,000.
<PAGE>
SCHEDULE 9.02
LIENS
-----
None.
<PAGE>
SCHEDULE 9.03
INVESTMENTS, LOANS AND ADVANCES
-------------------------------
Excepted from Section 9.03(a) of the Agreement are the advances from
KOC to the 92 DDP referred to in Item 2 under Schedule 9.01.
<PAGE>
SCHEDULE 9.16
TRANSACTIONS WITH AFFILIATES
----------------------------
1. The Parent has entered into an advisory engagement letter dated
January 23, 1996 (the "Advisory Agreement") with Bessemer Partners & Co.
("BPC"), providing for the engagement of BPC to render financial advisory
services to the Parent for a term expiring at the end of 1998. Under the
Advisory Agreement, BPC has agreed to assist the Parent in arranging the
transactions contemplated under the Loan Documents, negotiating the related
Loan Documents and restructuring the Parent's current capital structure. For
its services under the Advisory Agreement, BPC was paid a fee of $2 million on
the Closing Date and will be paid an additional $500,000 per year in December
1996, 1997 and 1998. In addition, BPC will be entitled to reimbursement of
expenses incurred in connection with rendering advisory services. The Parent
has also agreed to indemnify BPC and its Affiliates against certain liabilities
under the Advisory Agreement.
2. The Acquisition Documents include an Option Agreement to be entered
into between the Parent and Contour on the Closing Date (the "Option
Agreement"), providing Contour with an irrevocable option (the "Option") to
purchase 27 million newly issued shares of Common Stock (the "Option Shares") at
$1.00 per share (subject to antidilution provisions) at any time in whole or in
part after the Closing Date as long as the exercise would not cause a Debt Event
(as defined therein). The Option is required to be exercised for the full
remaining number of Option Shares within 30 days after the date Contour
concludes that the exercise of the Option in full would not cause a Debt Event.
The Option Shares will be subject to registration rights provided under the
Acquisition Documents.
3. The Acquisition Documents provide for the appointment of John F.
Bookout as Chairman, President and Chief Executive Officer of the Parent and
KOC on the Closing Date and for the appointment of other Contour executives
designated by him as full-time senior executives of the Parent and KOC. The
employment agreements with Mr. Bookout and the other Contour executives to be
joining the Parent, together with any extensions or renewals thereof, are
excluded from Section 9.16 of the Agreement.
<PAGE>
ATTACHMENT A
TO SCHEDULES TO
CREDIT AGREEMENT DATED AS OF DECEMBER 12, 1996 AMONG
KELLEY OIL & GAS CORPORATION
KELLEY OIL CORPORATION
KELLEY OPERATING COMPANY, LTD.
AND THE GUARANTORS
AND
TEXAS COMMERCE BANK NATIONAL ASSOCIATION AS AGENT
SUMMARY OF HEDGING POSITION AT DECEMBER 11, 1996
SWAP TRANSACTIONS
- -----------------
CONTRACT PRODUCTION VOLUME CONTRACT
COUNTERPARTY DATE MONTH MMBTU/DAY PRICE
------------ ---- ----- --------- -----
PARIBAS 10/09/96 JANUARY 97 35,000 $2.6050
PARIBAS 11/15/96 JANUARY 97 20,000 $2.8500
PARIBAS 10/09/06 FEBRUARY 97 35,000 $2.4700
PARIBAS 11/20/96 FEBRUARY 97 20,000 $2.8500
PARIBAS 10/09/96 MARCH 97 35,000 $2.3100
PARIBAS 11/20/96 MARCH 97 20,000 $2.5250
PARIBAS 11/20/96 APRIL 97 25,000 $2.2500
PARIBAS 11/20/96 MAY 97 25,000 $2.1350
MORGAN 11/27/96 JUNE 97 10,000 $2.2300
MORGAN 12/05/96 JUNE 97 15,000 $2.2400
MORGAN 11/27/96 JULY 97 10,000 $2.2300
MORGAN 12/05/96 JULY 97 15,000 $2.2400
MORGAN 11/27/96 AUGUST 97 10,000 $2.2300
MORGAN 12/05/96 AUGUST 97 15,000 $2.2400
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Kelley Oil & Gas
Corporation on Form S-4 of our report dated March 28, 1996, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Houston, Texas
December 20, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 6, 1995, with respect to the financial
statements of Kelly Oil and Gas Corporation and Kelly Oil & Gas Partners, Ltd.
(a Texas limited partnership) included in the Registration Statement (Form S-4)
and related Prospectus of Kelly Oil & Gas Corporation for the registration
dated December 20, 1996.
/s/ Ernst & Young LLP
Houston, Texas
December 20, 1996
<PAGE>
EXHIBIT 23.4
[LOGO OF H.J. GRUY AND ASSOCIATES, INC. APPEARS HERE]
CONSENT OF H.J. GRUY AND ASSOCIATES, INC.
We hereby consent to the use of the name H.J. Gruy and Associates, Inc. and of
references to H.J. Gruy and Associates, Inc. under the caption "EXPERTS," and of
information contained in our reserve report dated March 28, 1996, prepared for
Kelley Oil & Gas Corporation, in the Registration Statement on Form S-4 of
Kelley Oil & Gas Corporation.
H.J. GRUY AND ASSOCIATES, INC.
/s/ Marilyn Wilson
Marilyn Wilson, P.E.
Chief Operating Officer
Houston, Texas
December 19, 1996
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
__________________________
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
__________________________
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
__________________________
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I. R. S. Employer
if not a U. S. national bank) Identification No.)
114 West 47th Street 10036-1532
New York, New York (Zip Code)
(Address of principal
executive offices)
__________________________
Kelley Oil & Gas Corporation
(Exact name of OBLIGOR as specified in its charter)
Delaware 76-0447267
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
__________________________
Kelley Oil Corporation
(Exact name of OBLIGOR as specified in its charter)
Delaware 76-0082502
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
<PAGE>
-2-
__________________________
Kelley Operating Company, Ltd.
(Exact name of OBLIGOR as specified in its charter)
Delaware 76-0156485
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
601 Jefferson, Suite 1100 77002
Houston, Texas (Zip code)
(Address of principal executive offices)
__________________________
10-3/8% Senior Subordinated Notes due 2006, Series B
(Title of the indenture securities)
=========================================================================
<PAGE>
-3-
GENERAL
1. GENERAL INFORMATION
-------------------
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
-----------------------------
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:
Kelley Oil & Gas Corporation, Kelley Oil Corporation and Kelley Operating
Company, Ltd. currently is not in default under any of its outstanding
securities for which United States Trust Company of New York is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and
15 of Form T-1 are not required under General Instruction B.
16. LIST OF EXHIBITS
----------------
T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a Trust
Company, is incorporated by reference to Exhibit T-1.1 to Form
T-1 filed on September 15, 1995 with the Commission pursuant to
the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 (Registration No. 33-97056).
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
<PAGE>
-4-
16. LIST OF EXHIBITS
----------------
(cont'd)
T-1.4 -- The By-Laws of United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to Form
T-1 filed on September 15, 1995 with the Commission pursuant to
the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 (Registration No. 33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust Indenture
Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
====
As of December 16, 1996, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States
Trust Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
__________________
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 17th day
of December, 1996.
UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee
By: /s/ JAMES E. LOGAN
-----------------------
James E. Logan
Vice President
<PAGE>
EXHIBIT T-1.6
-------------
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
By: /s/ GERARD F. GANEY
-----------------------
Gerard F. Ganey
Senior Vice President
<PAGE>
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
SEPTEMBER 30, 1996
------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
Cash and Due from Banks $ 38,257
Short-Term Investments 82,377
Securities, Available for Sale 861,975
Loans 1,404,930
Less: Allowance for Credit Losses 13,048
----------
Net Loans 1,391,882
Premises and Equipment 60,012
Other Assets 133,673
----------
TOTAL ASSETS $2,568,176
==========
LIABILITIES
- -----------
Deposits:
Non-Interest Bearing $ 466,849
Interest Bearing 1,433,894
----------
Total Deposits 1,900,743
Short-Term Credit Facilities 369,045
Accounts Payable and Accrued Liabilities 143,604
----------
TOTAL LIABILITIES $2,413,392
==========
STOCKHOLDER'S EQUITY
- --------------------
Common Stock 14,995
Capital Surplus 42,394
Retained Earnings 98,402
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Taxes (1,007)
----------
TOTAL STOCKHOLDER'S EQUITY 154,784
----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,568,176
==========
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
Richard E. Brinkman, SVP & Controller
October 24, 1996
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
KELLEY OIL & GAS CORPORATION
Offer to Exchange all outstanding 10 3/8% Senior Subordinated Notes Due 2006,
Series A, for 10 3/8% Senior Subordinated Notes Due 2006, Series B
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
12:00 MIDNIGHT, NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED
Deliver to United States Trust Company of New York
(the "Exchange Agent")
BY HAND DELIVERY: BY OVERNIGHT COURIER: BY REGISTERED OR
United States Trust United States Trust Company CERTIFIED MAIL:
Company of New York United States Trust
of New York 770 Broadway Company
111 Broadway 13th Floor of New York
Lower Level New York, NY 10003 Box 843
New York, NY 10005 Attn: Corporate Trust Service Peter Cooper Station
Attn: Corporate Trust Window New York, NY 10276
Attn: Corporate Trust
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
United States Trust Company of New York
(212) 420-6152
Confirm: (800) 548-6565
For Information:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
The undersigned hereby acknowledges receipt of the Prospectus dated ,
1997 (the "Prospectus") of Kelley Oil & Gas Company (the "Company") and this
Letter of Transmittal, which together constitute the Company's offer (the
"Exchange Offer") to exchange an aggregate principal amount of $125,000,000 of
its 10 3/8% Senior Subordinated Notes Due 2006, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
the Prospectus is a part, for an equal principal amount of its outstanding
10 3/8% Senior Subordinated Notes Due 2006, Series A (the "Outstanding Notes"),
in integral multiples of $1,000. The term "Expiration Date" means 12:00
midnight, New York City time, on , 1997, unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term shall mean the
latest date and time to which the Exchange Offer is extended. Capitalized
terms used but not defined herein have the respective meanings given to them
in the Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS RELATING
TO THE PROCEDURE FOR TENDERING AND REQUESTS FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE
AGENT. QUESTIONS RELATING TO THE EXCHANGE OFFER AND REQUESTS FOR ASSISTANCE OR
FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE
DIRECTED TO THE COMPANY.
<PAGE>
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space indicated below is inadequate, additional information
should be listed on a separately signed schedule affixed hereto.
DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREBY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND
ADDRESS(ES)
OF
REGISTERED
HOLDER(S)
EXACTLY AS
NAME(S) PRINCIPAL
APPEAR(S) AGGREGATE PRINCIPAL AMOUNT
ON NOTE(S) AMOUNT REPRESENTED TENDERED**
(PLEASE NOTE BY OUTSTANDING (IF LESS
FILL IN) NUMBERS* NOTES THAN ALL)
- -------------------------------------------------------
<S> <C> <C> <C>
-------- -------- -------------
-------- -------- -------------
-------- -------- -------------
-------- -------- -------------
-------- -------- -------------
TOTAL
</TABLE>
- -------------------------------------------------------------------------------
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered
the full aggregate principal amount represented by such Outstanding
Notes. All tenders must be in integral multiples of $1,000.
This Letter of Transmittal is to be used (i) if certificates of Outstanding
Notes are to be tendered herewith, (ii) if delivery of Outstanding Notes is to
be made by book-entry transfer to an account maintained by the Exchange Agent
at The Depository Trust Company ("DTC"), pursuant to the procedures set forth
in "The Exchange Offer--Procedures for Tendering" in the Prospectus or (iii)
tender of the Outstanding Notes is to be made according to the guaranteed
delivery procedures described in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures". See Instruction 2. Delivery
of documents to a book-entry transfer facility does not constitute delivery to
the Exchange Agent. It is understood that participants in DTC's book-entry
system (the "Book-Entry Transfer Facility") will, in accordance with DTC's
Automated Tender Offer Program procedures and in lieu of physical delivery to
the Exchange Agent of a Letter of Transmittal, electronically acknowledge
receipt of, and agree to be bound by, the terms of this Letter of Transmittal.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Outstanding Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their
Outstanding Notes must complete this letter in its entirety.
[_] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-
ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution__________________________________________________
[_] The Depository Trust Company
Account Number_________________________________________________________________
Transaction Code Number________________________________________________________
Holders whose Outstanding Notes are not immediately available or who cannot
deliver their Outstanding Notes and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date must tender their
Outstanding Notes according to the guaranteed delivery procedure set forth in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures". See Instruction 2.
<PAGE>
[_]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)________________________________________________
Date of Execution of Notice of Guaranteed Delivery_____________________________
Name of Eligible Institution that Guaranteed Delivery__________________________
If delivered by book-entry transfer:
Account Number________________________________________________________________
Transaction Code Number_______________________________________________________
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name___________________________________________________________________________
Address________________________________________________________________________
<PAGE>
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of such Outstanding Notes tendered hereby, the
undersigned hereby exchanges, assigns and transfers to, or upon the order of,
the Company all right, title and interest in and to such Outstanding Notes as
are being tendered hereby, including all rights to accrual of interest thereon
on and after the date of issuance of the Exchange Notes. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent the true and
lawful agent and attorney-in-fact of the undersigned (with full knowledge that
the Exchange Agent acts as the agent of the Company in connection with the
Exchange Offer) to cause the Outstanding Notes to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Outstanding Notes and
to acquire Exchange Notes issuable upon the exchange of such tendered
Outstanding Notes, and that when the same are accepted for exchange, the
Company will acquire good and unencumbered title to the tendered Outstanding
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim.
The undersigned represents to the Company that (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the undersigned, and (ii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. If the undersigned or
the person receiving the Exchange Notes covered hereby is not a broker-dealer,
the undersigned represents that it is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. If the undersigned is a
broker-dealer that will receive Exchange Notes, it represents that the
Outstanding Notes to be exchanged for the Exchange Notes were acquired as a
result of market-making activities or other trading activities. If the
undersigned or the person receiving the Exchange Notes covered hereby is a
broker-dealer that is receiving the Exchange Notes for its own account in
exchange for Outstanding Notes that were acquired as a result of market-making
activities or other trading activities, the undersigned acknowledges that it
or such other person will deliver a prospectus in connection with any resale
of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The undersigned and
any such other person acknowledge that, if they are participating in the
Exchange Offer for the purpose of distributing the Exchange Notes, (i) they
cannot rely on the position of the staff of the Securities and Exchange
Commission enunciated in Exxon Capital Holdings Corporation (available May 13,
1988), Morgan Stanley & Co. Incorporated (available June 5, 1991) or similar
no-action letters and, in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with the resale transaction and (ii) failure to comply with
such requirements in such instance could result in the undersigned or any such
other person incurring liability under the Securities Act for which such
persons are not indemnified by the Company. If the undersigned or the person
receiving the Exchange Notes covered by this letter is an affiliate (as
defined under Rule 405 of the Securities Act) of the Company, the undersigned
represents to the Company that (i) the undersigned understands and
acknowledges that such Exchange Notes may not be offered for resale, resold or
otherwise transferred by the undersigned or such other person without
registration under the Securities Act or an exemption therefrom and (ii) the
undersigned or such other person will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable.
The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company
to be necessary or desirable to complete the exchange, assignment and transfer
of tendered Outstanding Notes or transfer ownership of such Outstanding Notes
on the account books maintained by the Book-Entry Transfer Facility. The
undersigned further agrees that acceptance of any tendered Outstanding Notes
by the Company and the issuance of Exchange Notes in exchange therefor shall
constitute performance in full by the Company of its obligations under the
Registration Agreement and that the Company shall have no further obligations
or liabilities thereunder for the registration of the Outstanding Notes or the
Exchange Notes.
<PAGE>
The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer--Conditions". The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Outstanding Notes
tendered hereby and, in such event, the Outstanding Notes not exchanged will
be returned to the undersigned at the address shown below the signature of the
undersigned.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Tendered Outstanding Notes may be
withdrawn at any time prior to the Expiration Date.
Unless otherwise indicated in the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this
Letter of Transmittal, certificates for all Exchange Notes delivered in
exchange for tendered Outstanding Notes, and any Outstanding Notes delivered
herewith but not exchanged, will be registered in the name of the undersigned
and shall be delivered to the undersigned at the address shown below the
signature of the undersigned. If an Exchange Note is to be issued to a person
other than the person(s) signing this Letter of Transmittal, or if the
Exchange Note is to be mailed to someone other than the person(s) signing this
Letter of Transmittal or to the person(s) signing this Letter of Transmittal
at an address different than the address shown on this Letter of Transmittal,
the appropriate boxes of this Letter of Transmittal should be completed. IF
OUTSTANDING NOTES ARE SURRENDERED BY HOLDER(S) THAT HAVE COMPLETED EITHER THE
BOX ENTITLED "SPECIAL REGISTRATION INSTRUCTIONS" OR THE BOX ENTITLED "SPECIAL
DELIVERY INSTRUCTIONS" IN THIS LETTER OF TRANSMITTAL, SIGNATURE(S) ON THIS
LETTER OF TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (SEE
INSTRUCTION 4).
<PAGE>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 5) (SEE INSTRUCTION 5)
To be completed ONLY if the
To be completed ONLY if the Exchange Notes are to be sent to
Exchange Notes are to be issued in someone other than the undersigned,
the name of someone other than the or to the undersigned at an address
undersigned. other than that shown under
"Description of Outstanding Notes
Tendered Hereby."
Issue Exchange Note to:
Name: ______________________________
Mail Exchange Note to:
Address: ___________________________ Name: ______________________________
------------------------------------ Address:____________________________
(Please Print or Type)
------------------------------------
(Please Print or Type)
REGISTERED HOLDER(S) OF OUTSTANDING NOTES SIGN HERE
(In addition, complete Substitute Form W-9 Below)
X __________________________________________________________________________
X __________________________________________________________________________
(Signature(s) of Registered Holder(s))
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
the Outstanding Notes or on a security position listing as the owner of the
Outstanding Notes or by person(s) authorized to become registered holder(s)
by properly completed bond powers transmitted herewith. If signature is by
attorney-in-fact, trustee, executor, administrator, guardian, officer of a
corporation or other person acting in a fiduciary capacity, please provide
the following information.
(Please Print or Type):
Name and Capacity (full title): ____________________________________________
Address (including zip): ___________________________________________________
Area Code and Telephone Number: ____________________________________________
Dated: _____________________________________________________________________
SIGNATURE GUARANTY (If required--See Instruction 4)
Authorized Signature: ______________________________________________________
(Signature of Representative of Signature
Guarantor)
Name and Title: ____________________________________________________________
Name of Firm: ______________________________________________________________
Area Code and Telephone Number: ____________________________________________
(Please Print or Type)
Dated: _____________________
<PAGE>
PAYOR'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED
Please provide your social security number or other taxpayer identification
number on the following Substitute Form W-9 and certify therein that you are
not subject to backup withholding.
PART 1--Please provide your
TIN in the box at right and
certify by signing and dating
below. --------------------
Social Security
SUBSTITUTE PART 2--CERTIFICATION--Under Number or
FORM W-9 penalties of perjury, I Employer
certify (1) that the number Identification
shown on this form is my Number
correct taxpayer -----------------------
identification number and (2)
that I am not subject to
backup withholding under the
provisions of Section
3406(a)(1)(C) of the Internal
Revenue Code either because
(a) I have not been notified
that I am subject to backup
withholding as a result of
failure to report all
interest or dividends or (b)
the Internal Revenue Service
has notified me that I am no
longer subject to backup
withholding.
DEPARTMENT OF THE
TREASURY
INTERNAL REVENUE
SERVICE PART 3--
PAYOR'S REQUEST FOR Exempt from backup
TAXPAYER withholding [_]
IDENTIFICATION -----------------------
NUMBER ("TIN")
PART 4--
Awaiting TIN [_]
Signature ______________Dated:
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY INTEREST OR OTHER REPORTABLE PAYMENTS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 4 OF SUBSTITUTE FORM W-9.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number within 60 days, 31% of all reportable payments made
to me thereafter will be withheld until I provide a number. Moreover, I
understand that during this 60-day period, 31% of all reportable interest
payments made to me will be withheld commencing 7 business days after the
payor receives this Certificate of Awaiting Tax Identification Number and
terminating on the date I provide a certified TIN to the payor.
-------------------------------------- ------------------------------
Signature Date
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
All physically delivered Outstanding Notes or any confirmation of a book-
entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Outstanding Notes tendered by book-entry transfer, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses
set forth herein on or prior to the Expiration Date (as defined in the
Prospectus). THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE
OUTSTANDING NOTES AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK
OF THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, BE USED.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal
(or facsimile thereof), shall waive any right to receive notice of the
acceptance of the Outstanding Notes for exchange.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH HEREIN, OR INSTRUCTIONS VIA A
FACSIMILE NUMBER OTHER THAN THE ONES SET FORTH HEREIN, WILL NOT CONSTITUTE A
VALID DELIVERY.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Outstanding Notes and (i) whose Outstanding Notes are not immediately
available or (ii) who cannot deliver their Outstanding Notes, this Letter of
Transmittal or any other required documents to the Exchange Agent (or complete
the procedures for book-entry transfer) prior to the Expiration Date, may
effect a tender if:
(a) the tender is made through a member firm of a registered national
securities exchange of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States or an "eligible guarantor institution" within the
meaning of Rule 17 Ad-15 under the Securities Exchange Act of 1934, as
amended (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the registration
number(s) of such Outstanding Notes and the principal amount of Outstanding
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, this Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Outstanding Notes (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility) and any other
documents required by this Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Outstanding Notes in proper
form for transfer (or a confirmation of book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility) and all other documents required by this Letter of
Transmittal, are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above. Any Holder who wishes to
tender Outstanding Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery relating to such Outstanding Notes prior to the Expiration
Date. Failure to complete the guaranteed delivery procedures outlined above
will not, of itself, affect the validity or effect a revocation of any Letter
of Transmittal form properly completed and executed by a Holder who attempted
to use the guaranteed delivery procedures.
<PAGE>
3. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Outstanding Notes evidenced by a
submitted certificate is tendered, the tendering Holder should fill in the
principal amount tendered in the column entitled "Principal Amount Tendered"
of the box entitled "Description of Outstanding Notes Tendered Hereby". A
newly issued Outstanding Note for the principal amount of Outstanding Notes
submitted but not tendered will be sent to such Holder as soon as practicable
after the Expiration Date. All Outstanding Notes delivered to the Exchange
Agent will be deemed to have been tendered in full unless otherwise indicated.
Tenders of Outstanding Notes will be accepted only in integral multiples of
$1,000.
Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date, after which tenders of Outstanding
Notes are irrevocable. To be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Exchange
Agent. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii)
identify the Outstanding Notes to be withdrawn (including the note number(s)
and principal amount of such Outstanding Notes, or, in the case of Outstanding
Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
Holder in the same manner as the original signature on this Letter of
Transmittal (including any required signature guaranties) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes into the
name of the person withdrawing the tender and (iv) specify the name in which
any such Outstanding Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Outstanding Notes so withdrawn are validly retendered. Any
Outstanding Notes that have been tendered but not accepted for exchange, will
be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS;
GUARANTY OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificates
without alteration or enlargement or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility,
the signature must correspond with the name as it appears on the security
position listing as the holder of the Outstanding Notes.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Outstanding Notes registered in different names are tendered,
it will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Outstanding
Notes.
Signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the
Outstanding Notes tendered hereby are tendered (i) by a registered Holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If this Letter of Transmittal is signed by the registered Holder or Holders
of Outstanding Notes (which term, for the purposes described herein, shall
include a participant in the Book-Entry Transfer Facility whose name appears
on a security listing as the holder of the Outstanding Notes) listed and
tendered hereby, no endorsements of the tendered Outstanding Notes or separate
written instruments of transfer or exchange are required. In any other case,
the registered Holder (or acting Holder) must either properly endorse the
Outstanding Notes or
<PAGE>
transmit properly completed bond powers with this Letter of Transmittal (in
either case, executed exactly as the name(s) of the registered Holder(s)
appear(s) on the Outstanding Notes, and, with respect to a participant in the
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Outstanding Notes, exactly as the name of the participant
appears on such security position listing), with the signature on the
Outstanding Notes or bond power guaranteed by an Eligible Institution (except
where the Outstanding Notes are tendered for the account of an Eligible
Institution).
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Book-Entry Transfer Facility) in which the Exchange
Notes or substitute Outstanding Notes for principal amounts not tendered or
not accepted for exchange are to be issued (or deposited), if different from
the names and addresses or accounts of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification number or social security number of the person named must also
be indicated and the tendering Holder should complete the applicable box.
If no instructions are given, the Exchange Notes (and any Outstanding Notes
not tendered or not accepted) will be issued in the name of and sent to the
acting Holder of the Outstanding Notes or deposited at such Holder's account
at the Book-Entry Transfer Facility.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
and exchange of Outstanding Notes to it or its order pursuant to the Exchange
Offer. If, however, certificates representing the Exchange Notes or the
Outstanding Notes for the principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any
person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any other reason, other than the transfer and
exchange of Outstanding Notes to the Company or its order pursuant to the
Exchange Offer, the amount of any such transfer taxes (whether imposed on the
registered Holder or any other person) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exception
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Outstanding Notes listed in this Letter
of Transmittal.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
8. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES.
Any Holder whose Outstanding Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
<PAGE>
9. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number(s) set
forth above. In addition, all questions relating to the Exchange Offer, as
well as requests for assistance or additional copies of the Prospectus and
this Letter of Transmittal, may be directed to the Company at 601 Jefferson,
Suite 1100, Houston, Texas 77002, Attention: Investor Relations Manager
(telephone: (713) 652-5200).
10. VALIDITY AND FORM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the
absolute right to reject any and all Outstanding Notes not properly tendered
or any Outstanding Notes the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Outstanding Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding Notes must
be cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Outstanding Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Holders as soon as practicable
following the Expiration Date.
IMPORTANT TAX INFORMATION
Under federal income tax law, a holder receiving interest on Exchange Notes
is required to provide the payor of interest with such holder's correct TIN on
Substitute Form W-9 herein. If such holder is an individual, the TIN is the
holder's social security number. The Certificate of Awaiting Taxpayer
Identification Number should be completed if the holder has not been issued a
TIN and has applied for a number or intends to apply for a number in the near
future. The payor is required to report to the Internal Revenue Service the
amount of reportable interest paid to the holder on Exchange Notes. If the
payor is not provided with the correct TIN, the holder may be subject to a $50
penalty imposed by the Internal Revenue Service. In addition, interest
payments that are made to such holder on Exchange Notes may be subject to
backup withholding.
Certain holders (including, among others, all corporations and certain
foreign individuals and foreign entities) are not subject to these backup
withholding and reporting requirements. For a foreign holder to qualify as an
exempt recipient, that holder must submit to the payor of interest a properly
completed Internal Revenue Service Form W-8, signed under penalties of
perjury, attesting to that holder's exempt status. Such forms can be obtained
from the Exchange Agent.
If backup withholding applies, the payor is required to withhold 31% of any
amounts otherwise payable to the holder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be applied for with the
Internal Revenue Service.
<PAGE>
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on interest payments to be made to a holder
with respect to Exchange Notes, the holder is required to notify the payor of
his or her correct TIN by completing the form herein certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder is awaiting a
TIN) and that (i) such holder has not been notified by the Internal Revenue
Service that he or she is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified such holder that he or she is no longer subject to backup
withholding.
WHAT NUMBER TO GIVE THE PAYOR
Each holder is required to give the payor the social security number or
employer identification number of the record holder(s) of the Exchange Notes.
If Exchange Notes are in more than one name or are not in the name of the
actual holder, consult the attached Guidelines for Certifying TIN for
additional guidance on which number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the holder of Exchange Notes has not been issued a TIN and has applied
for a number or intends to apply for a number in the near future, write
"Applied For" in the space for the TIN on Substitute Form W-9, check the box
in Part 4, sign and date the form and the Certificate of Awaiting Taxpayer
Identification Number and return them to the Exchange Agent. If such
certificate is completed and the payor of interest on the Exchange Notes is
not provided with the TIN within 60 days, the payor will withhold 31% of all
payments made thereafter until a TIN is provided to the payor. Moreover, even
if a TIN is provided within such 60-day period, the payor is required to
withhold 31% of any reportable interest payments made to the payee 7 days
following receipt by the payor of the Certificate of Awaiting Tax
Identification Number. The payor must refund these amounts withheld if it
receives the payee's certified TIN within the 60-day period and the payee was
not otherwise subject to backup withholding during the period.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE THEREOF
(TOGETHER WITH OUTSTANDING NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND
ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE>
KELLEY OIL & GAS CORPORATION
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
As set forth in the Prospectus dated , 1997 (the "Prospectus") of
Kelley Oil & Gas Corporation (the "Company") in the section entitled "The
Exchange Offer--Procedures for Tendering" and in the accompanying Letter of
Transmittal (the "Letter of Transmittal") and Instruction 2 thereto, this form
or one substantially equivalent hereto must be used to accept the Exchange
Offer if certificates representing the Company's 10 3/8% Senior Subordinated
Notes Due 2006, Series A (the "Outstanding Notes") are not immediately
available to the Holder thereof or time will not permit the Holder to deliver
its Outstanding Notes or other required documents to the Exchange Agent, or to
complete the procedures for book-entry transfer, before the Expiration Date.
Capitalized terms used but not defined herein have the respective meanings
given to them in the Prospectus. This form may be delivered by hand or sent by
overnight courier, facsimile transmission or registered or certified mail to
the Exchange Agent and must be received by the Exchange Agent before 12:00
midnight, New York City time on , 1997.
To United States Trust Company of New York
(the "Exchange Agent")
BY HAND DELIVERY: BY OVERNIGHT COURIER: BY REGISTERED OR
United States Trust United States Trust Company CERTIFIED MAIL:
Company of New York United States Trust
of New York 770 Broadway Company
111 Broadway 13th Floor of New York
Lower Level New York, NY 10003 Box 843
New York, NY 10005 Attn: Corporate Trust Service Peter Cooper Station
Attn: Corporate Trust Window New York, NY 10276
Attn: Corporate Trust
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
United States Trust Company of New York
(212) 420-6152
Confirm: (800) 548-6565
FOR INFORMATION:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTY MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL FOR GUARANTY OF SIGNATURES.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to Kelley Oil & Gas Corporation, the
principal amount of the Outstanding Notes listed below, upon the terms of and
subject to the conditions set forth in the Prospectus and the related Letter of
Transmittal and the instructions thereto (which together constitute the
"Exchange Offer"), receipt of which is hereby acknowledged, pursuant to the
guaranteed delivery procedures set forth in the Prospectus, as follows:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT TENDERED
NOTE NOS. AMOUNT OF NOTE(S) (MUST BE IN INTEGRAL MULTIPLES OF 1,000)
- ------------------- ------------------------- ----------------------------------------
<S> <C> <C>
- ------------------- ------------------------- ----------------------------------------
- ------------------- ------------------------- ----------------------------------------
- ------------------- ------------------------- ----------------------------------------
- ------------------- ------------------------- ----------------------------------------
</TABLE>
The Book-Entry Transfer Sign Here
Facility Account Number (if the X
Outstanding Notes -------------------------------------
will be tendered by book-entry
transfer)
X
-------------------------------------
- ------------------------------- Signature(s)
Account Number
-------------------------------------
- ------------------------------- Number and Street or P.O. Box
Principal Amount Tendered
(must be in integral multiples -------------------------------------
of $1,000) City, State, Zip Code
Dated: , 1997
-------------------------
<PAGE>
GUARANTY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
The undersigned, a member firm of a registered national securities exchange,
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States,
guarantees (a) that the above named person(s) "own(s)" the principal amount of
10 3/8% Senior Subordinated Notes due 2006, Series A, of Kelley Oil & Gas
Corporation (the "Outstanding Notes") tendered hereby within the meaning of
Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) that such
tender of such Outstanding Notes complies with Rule 14e-4 and (c) to deliver to
the Exchange Agent the certificates representing the Outstanding Notes tendered
hereby or confirmation of book-entry transfer of such Outstanding Notes into
the Exchange Agent's account at The Depository Trust Company, in proper form
for transfer, together with the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guaranties
and any other required documents, within five New York Stock Exchange trading
days after the Expiration Date.
Name of Firm __________________ Title________________________________
Authorized Signature __________ Address______________________________
Zip Code
Name __________________________
Please Type or Print Area Code and Telephone No.__________
Dated:_________________________, 1997
NOTE: DO NOT SEND ORIGINAL NOTES WITH THIS FORM. ORIGINAL NOTES SHOULD
BE SENT ONLY WITH A LETTER OF TRANSMITTAL.
