Filed pursuant to Rule 424(B)(3)
Registration No. 333-108540
PROSPECTUS
$150,000,000
(ENERGY PARTNERS, LTD. LOGO)
ENERGY PARTNERS, LTD.
EXCHANGE OFFER FOR ALL OUTSTANDING
8 3/4% SENIOR NOTES DUE 2010
OF ENERGY PARTNERS, LTD.
---------------------
THE EXCHANGE NOTES
- The terms of the exchange notes we are issuing will be substantially
identical to the outstanding notes that we issued on August 5, 2003,
except for the elimination of some transfer restrictions, registration
rights and additional interest payments relating to the outstanding notes.
- Interest on the exchange notes will accrue at the rate of 8 3/4% per year,
payable on February 1 and August 1 of each year, beginning February 1,
2004, and the notes will mature on August 1, 2010.
- The exchange notes will be unsecured and will rank equally with all our
other unsecured and unsubordinated indebtedness.
- We may redeem some or all of the exchange notes at any time at the prices
described under the heading "Description of Exchange Notes -- Optional
Redemption." The exchange notes will not have the benefit of any sinking
fund.
- The exchange notes are expected to be eligible for trading in The
Portal(SM) Market ("Portal"), a subsidiary of The Nasdaq Stock Market,
Inc.
MATERIAL TERMS OF THE EXCHANGE OFFER
- The exchange offer expires at 5:00 p.m., New York City time, on October
27, 2003, unless extended.
- The exchange offer is not conditioned on any minimum principal amount of
outstanding notes being tendered.
- Our completion of the exchange offer is subject to customary conditions,
which we may waive.
- Upon our completion of the exchange offer, all outstanding notes that are
validly tendered and not withdrawn will be exchanged for an equal
principal amount of exchange notes that are registered under the
Securities Act of 1933.
- Tenders of outstanding notes may be withdrawn at any time before the
expiration of the exchange offer.
- The exchange of exchange notes for outstanding notes will not be a taxable
exchange for U.S. Federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
exchange notes received in exchange for old notes where such old notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration date (as defined herein), we will make this prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER BEFORE PARTICIPATING
IN THIS EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS
PROSPECTUS.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved of or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus or the investment merits of the notes
offered hereby. Any representation to the contrary is a criminal offense.
The date of this prospectus is September 25, 2003.
TABLE OF CONTENTS
PAGE
----
FORWARD-LOOKING STATEMENTS.................................. i
REFERENCE TO ADDITIONAL MATERIAL............................ i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. ii
SUMMARY..................................................... 1
RISK FACTORS................................................ 7
USE OF PROCEEDS............................................. 16
CAPITALIZATION.............................................. 17
SELECTED FINANCIAL DATA..................................... 18
THE EXCHANGE OFFER.......................................... 21
DESCRIPTION OF OTHER INDEBTEDNESS AND SERIES D PREFERRED
STOCK..................................................... 32
DESCRIPTION OF EXCHANGE NOTES............................... 33
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS.............. 77
PLAN OF DISTRIBUTION........................................ 82
LEGAL MATTERS............................................... 83
EXPERTS..................................................... 83
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN MAY ONLY BE ACCURATE ON THE DATE OF THIS
DOCUMENT OR SUCH INCORPORATED DOCUMENT, AS APPLICABLE.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
prospectus, the documents incorporated by reference in this prospectus and other
written or oral statements made by us or on our behalf are forward-looking
statements. When used herein, the words "anticipates," "expects," "believes,"
"goals," "intends," "plans" or "projects" and similar expressions are intended
to identify forward-looking statements. It is important to note that
forward-looking statements are based on a number of assumptions about future
events and are subject to various risks, uncertainties and other factors that
may cause our actual results to differ materially from the views, beliefs and
estimates expressed or implied in such forward-looking statements. We refer you
specifically to the section entitled "Risk Factors" in this prospectus as well
as the disclosure contained in our latest annual report on Form 10-K and the
other documents incorporated by reference herein. Although we believe that the
assumptions on which any forward-looking statements in this prospectus and
periodic reports filed by us are reasonable, no assurance can be given that such
assumptions will prove correct. All forward-looking statements in this
prospectus are expressly qualified in their entirety by the cautionary
statements in this paragraph and elsewhere in this prospectus and in the
documents incorporated by reference.
REFERENCE TO ADDITIONAL MATERIAL
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT ENERGY PARTNERS, LTD. THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
PROSPECTUS. SUCH INFORMATION IS AVAILABLE WITHOUT CHARGE BY WRITTEN OR VERBAL
REQUEST TO ENERGY PARTNERS, LTD., 201 ST. CHARLES AVENUE, SUITE 3400, NEW
ORLEANS, LOUISIANA 70170, ATTENTION: CORPORATE SECRETARY, TELEPHONE NUMBER:
(504) 569-1875. IF YOU WOULD LIKE TO
REQUEST COPIES OF THESE DOCUMENTS, PLEASE DO SO BY OCTOBER 20, 2003, IN ORDER TO
RECEIVE THEM BEFORE THE EXPIRATION OF THE EXCHANGE OFFER.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We file annual, quarterly and current reports, proxy statements and other
information with the SEC.
We incorporate by reference in this prospectus the following documents
filed with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"):
1. Annual Report on Form 10-K for the fiscal year ended December 31,
2002;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 2003;
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 2003;
and
4. Current Reports on Form 8-K filed on March 17, April 3, July 3
(other than the information contained in Item 9) and August 8, 2003.
We also incorporate by reference any future filings made with the SEC under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act (excluding any information
furnished pursuant to Item 9 or Item 12 on any Current Report on Form 8-K),
until the expiration of the exchange offer.
The information incorporated by reference is an important part of this
prospectus and information that we file later with the SEC will automatically
update and supersede this information as well as the information included in
this prospectus.
You may read and copy any document we file with the SEC at the SEC public
reference room located at:
Room 1024, Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room and its copy charges. Our SEC filings are also available to the
public on the SEC's web site at http://www.sec.gov and through the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, on which our
shares of common stock are traded. In addition, we maintain a web site at
www.eplweb.com which contains information about us, including links to our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all related amendments. Our web site and the information contained
in it and connected to it are not incorporated by reference into this
prospectus.
ii
SUMMARY
You should read the following summary together with the more detailed
information appearing elsewhere in this prospectus and the financial statements
and related notes and other information included or incorporated by reference in
this prospectus. In this prospectus, when we use the terms "Energy Partners,"
the "Company," "we," "our" or "us," we mean Energy Partners, Ltd. and its
subsidiaries on a consolidated basis, unless otherwise indicated or the context
requires otherwise. Throughout this prospectus, we use the terms "old notes" and
"outstanding notes" to refer to our currently outstanding 8 3/4% Senior Notes
due 2010 for which the exchange notes are being offered for exchange. Unless
otherwise stated or the context otherwise requires, references to "senior notes"
refer to the outstanding old notes and the exchange notes, collectively.
ABOUT ENERGY PARTNERS, LTD.
We are an independent oil and natural gas exploration and production
company focused on the shallow to moderate depth waters of the Gulf of Mexico
Shelf. We concentrate on the Gulf of Mexico Shelf region because that area
provides us with favorable geologic and economic conditions, including multiple
reservoir formations, regional economies of scale, extensive infrastructure and
comprehensive geologic databases. We believe that this region offers a balanced
and expansive array of existing and prospective exploration, exploitation and
development opportunities in both established productive horizons and deeper
geologic formations. In addition, we believe the Gulf of Mexico is a critical
supply basin in the United States. As of December 31, 2002, we had estimated
proved reserves of approximately 127.0 billion cubic feet of natural gas and
26.4 million barrels of oil, or an aggregate of approximately 47.5 million
barrels of oil equivalent, with a present value of estimated pre-tax future net
cash flows of $608.3 million, and of estimated after-tax future net cash flows
of $476.9 million based upon year-end 2002 prices and a discount rate of 10%.
Since our incorporation in January 1998 by Richard A. Bachmann, our
founder, chairman, president and chief executive officer, we have assembled a
team of geoscientists and management professionals with considerable
region-specific geological, geophysical, technical and operational experience.
We have grown through a combination of exploration, exploitation and development
drilling and multi-year, multi-well drill-to-earn programs, as well as strategic
acquisitions of mature oil and natural gas fields in the Gulf of Mexico Shelf
area, and in particular the acquisition of Hall-Houston Oil Company
("Hall-Houston") in early 2002. The acquisition of Hall-Houston strengthened our
management team, expanded our property base, reduced our geographic
concentration, and moved us to a more balanced oil and natural gas reserves and
production profile. This acquisition also expanded our technical knowledge base
through the addition of quality personnel and geophysical and geological data.
Furthermore, the acquisition significantly improved our portfolio of exploration
opportunities by adding 12 offshore exploratory blocks to complement our
development and drill-to-earn portfolio.
CORPORATE AND STOCKHOLDER INFORMATION
We are a publicly traded company with our common stock listed on the NYSE
under the symbol "EPL."
Our principal executive offices are located at 201 St. Charles Avenue,
Suite 3400, New Orleans, Louisiana 70170. Our telephone number is (504)
569-1875. We also maintain a web site at www.eplweb.com which contains
information about us. Our web site and the information contained in it and
connected to it will not be deemed incorporated by reference into this
prospectus.
1
THE EXCHANGE OFFER
The following is a brief summary of certain terms of this exchange offer.
For a more complete description of the terms of the exchange offer, see "The
Exchange Offer" in this prospectus.
THE EXCHANGE OFFER............ The exchange offer relates to the exchange of
up to $150 million aggregate principal amount
of our 8 3/4% Senior Notes due 2010 that have
been registered under the Securities Act of
1933 for an equal aggregate principal amount of
our outstanding unregistered 8 3/4% Senior
Notes due 2010. On August 5, 2003, we issued
and sold $150 million in aggregate principal
amount of these old notes in a private
placement. The form and terms of the exchange
notes are substantially the same as the form
and terms of the old notes, except that the
exchange notes have been registered under the
Securities Act and will not bear legends
restricting their transfer. We issued the old
notes under an indenture which grants you a
number of rights. The exchange notes also will
be issued under that indenture and you will
have the same rights under the indenture as the
holders of the old notes. See "Description of
Exchange Notes." We are offering to exchange
$1,000 principal amount of our exchange notes
for each $1,000 principal amount of old notes.
ACCRUED INTEREST ON THE
EXCHANGE NOTES................ Interest on the exchange notes will accrue from
the last interest payment date on which
interest was paid on the old notes or, if no
interest was paid on the old notes, from the
date of issuance of the old notes, which was
August 5, 2003. Holders whose old notes are
accepted for exchange will be deemed to have
waived the right to receive any interest
accrued on the old notes.
NO MINIMUM CONDITION.......... We are not conditioning the exchange offer on
the tender of any minimum principal amount of
old notes.
EXPIRATION DATE............... The exchange offer will expire at 5:00 p.m.,
New York City time, on October 27, 2003 unless
we decide to extend the exchange offer.
WITHDRAWAL RIGHTS............. You may withdraw your tender at any time before
the exchange offer expires.
CONDITIONS TO THE EXCHANGE
OFFER......................... The exchange offer is subject to customary
conditions, which we may waive. We currently
anticipate that each of the conditions will be
satisfied and that we will not need to waive
any conditions. We reserve the right to
terminate or amend the exchange offer at any
time before the expiration date if any of the
conditions occurs. See "The Exchange
Offer -- Certain Conditions to the Exchange
Offer."
PROCEDURES FOR TENDERING OLD
NOTES......................... If you are a holder of old notes who wishes to
accept the exchange offer, you must:
- complete, sign and date the accompanying
letter of transmittal, or a facsimile of the
letter of transmittal, and mail or otherwise
deliver the letter of transmittal, together
with your old notes, to the exchange agent at
the address provided in the section "The
Exchange Offer -- Exchange Agent"; or
- arrange for The Depository Trust Company to
transmit certain required information,
including an agent's message forming part
2
of a book-entry transfer in which you agree
to be bound by the terms of the letter of
transmittal, to the exchange agent in
connection with a book-entry transfer.
RESALE WITHOUT FURTHER
REGISTRATION.................. We believe that you may resell or otherwise
transfer the exchange notes that you receive in
the exchange offer without complying with the
registration and prospectus delivery provisions
of the Securities Act so long as you are not a
broker-dealer and you meet the following
conditions:
- you are not an "affiliate" of ours within the
meaning of Rule 405 of the Securities Act;
- you are acquiring the exchange notes issued
in the exchange offer in the ordinary course
of your business; and
- you have no arrangement or understanding with
any person to participate in the distribution
of the exchange notes.
By signing the letter of transmittal and
tendering your old notes or making arrangements
with The Depository Trust Company as described
above, you will be making representations to
this effect. You may incur liability under the
Securities Act if:
- any of the representations listed above are
not true; and
- you transfer any exchange note issued to you
in the exchange offer without complying with
the registration and prospectus delivery
requirements of the Securities Act, unless
the transfer otherwise meets an exemption
from the registration requirements under the
Securities Act.
We do not assume, or indemnify you against,
liability under these circumstances, which
means that we will not protect you from any
loss you incur as a result of this liability.
RESTRICTIONS ON RESALE BY
BROKER-DEALERS................ Each broker-dealer that has received exchange
notes for its own account in exchange for old
notes that were acquired as a result of
market-making or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resale of the exchange
notes. A broker-dealer may use this prospectus
in connection with any resale for a period of
180 days after the end of the exchange offer.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. If you beneficially own old notes registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender your old notes in the exchange offer,
you should contact the registered holder
promptly and instruct it to tender on your
behalf. If you wish to tender on your own
behalf, you must, prior to completing and
executing the letter of transmittal and
delivering your old notes, either arrange to
have your old notes registered in your name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time.
3
GUARANTEED DELIVERY
PROCEDURES.................... If you wish to tender your old notes and time
will not permit your required documents to
reach the exchange agent by the expiration
date, or the procedures for book-entry transfer
cannot be completed on time, you may tender
your old notes according to the guaranteed
delivery procedures described in the section
"The Exchange Offer -- Procedures for Tendering
Old Notes."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF EXCHANGE NOTES.... We will accept for exchange all old notes which
are properly tendered in the exchange offer
prior to 5:00 p.m., New York City time, on the
expiration date. The exchange notes issued in
the exchange offer will be delivered promptly
following the expiration date. See "The
Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of Exchange Notes."
USE OF PROCEEDS............... We will not receive any proceeds from the
issuance of exchange notes in the exchange
offer. We will pay for our expenses incident to
the exchange offer.
FEDERAL INCOME TAX............ The exchange of exchange notes for old notes in
the exchange offer will not be a taxable event
for federal income tax purposes. See "Certain
U.S. Federal Income Tax Considerations."
EFFECT ON HOLDERS OF OLD
NOTES......................... As a result of this exchange offer, we will
have fulfilled a covenant contained in the
registration rights agreement dated as of
August 5, 2003 by and among Energy Partners,
Ltd., each subsidiary guarantor and each of the
initial purchasers named in the agreement and
accordingly, there will be no increase in the
interest rate on the old notes. If you do not
tender your old notes in the exchange offer:
- you will continue to hold the old notes and
will be entitled to all the rights and
limitations applicable to the old notes under
the indenture governing the notes, except for
any rights under the registration rights
agreement that terminate as a result of the
completion of the exchange offer; and
- you generally will not have any further
registration or exchange rights and your old
notes will continue to be subject to
restrictions on transfer. Accordingly, the
trading market for untendered old notes could
be adversely affected.
EXCHANGE AGENT................ Wells Fargo Bank, N.A. is serving as exchange
agent in connection with the exchange offer.
4
THE EXCHANGE NOTES
ISSUER........................ Energy Partners, Ltd.
EXCHANGE NOTES OFFERED........ Up to $150,000,000 aggregate principal amount
of 8 3/4% Senior Notes due 2010. The form and
terms of the exchange notes will be the same as
the form and terms of the old notes, except
that:
- the exchange notes will have been registered
under the Securities Act, will not contain
transfer restrictions and will not bear
legends restricting their transfer;
- the exchange notes will not contain terms
providing for the payment of additional
interest under circumstances relating to our
obligation to file and cause to be effective
a registration statement;
- the exchange notes will be represented by one
or more global notes in book-entry form; and
- the exchange notes will be issuable in
denominations of $1,000 and multiples
thereof.
MATURITY DATE................. August 1, 2010.
INTEREST...................... 8 3/4% per annum, payable semi-annually in
arrears on February 1 and August 1, commencing
February 1, 2004. Interest will accrue from
August 5, 2003, the date of issuance of the old
notes, or, if interest has already been paid,
from the date it was most recently paid.
OPTIONAL REDEMPTION........... Except as set forth below, we cannot redeem the
exchange notes before August 1, 2007. On or
after August 1, 2007, we can redeem some or all
of the exchange notes in cash at the redemption
prices described in this prospectus, plus
accrued and unpaid interest to the date of
redemption.
In addition, at any time and from time to time
prior to August 1, 2006, we may redeem up to
35% of the exchange notes with the proceeds of
certain equity offerings at a redemption price
of 108.75% of the principal amount of the
exchange notes, plus accrued and unpaid
interest to the redemption date.
CHANGE OF CONTROL............. If a change of control occurs, subject to
certain conditions, we must give holders of the
exchange notes an opportunity to sell us the
exchange notes at a purchase price of 101% of
the principal amount of the exchange notes,
plus accrued and unpaid interest to the date of
the purchase. See "Description of Exchange
Notes -- Change of Control."
SUBSIDIARY GUARANTEES......... The payment of the principal, premium and
interest on the exchange notes will be fully
and unconditionally guaranteed on a senior
unsecured basis by some of our current and
future subsidiaries. See "Description of
Exchange Notes -- Subsidiary Guarantees."
5
RANKING....................... The exchange notes will be our senior unsecured
obligations. The exchange notes and the
guarantees will rank:
- equally with any of our and the guarantors'
existing and future senior indebtedness;
- senior to any of our and the guarantors'
existing and future subordinated
indebtedness; and
- effectively junior to our secured
indebtedness and that of the guarantors to
the extent of the collateral securing the
secured indebtedness.
As of June 30, 2003, after giving effect (i) to
amendments to our bank credit facility and (ii)
to our offering of the old notes in August 2003
and the application of the net proceeds to us
from the offering, our secured indebtedness
would have been approximately $0.5 million and
we would have had $59.9 million of borrowing
capacity under our bank credit facility, all of
which would be secured indebtedness effectively
ranking senior to the exchange notes. See
"Description of Exchange Notes -- Ranking."
RESTRICTIVE COVENANTS......... The indenture governing the exchange notes
contains covenants that limit our ability and
certain of our subsidiaries' ability to:
- incur additional debt or issue certain types
of preferred stock;
- pay dividends on our capital stock or redeem,
repurchase or retire our capital stock or
subordinated debt;
- make investments;
- create liens on our assets;
- create restrictions on the ability of our
restricted subsidiaries to pay dividends or
make other payments to us;
- engage in transactions with our affiliates;
- transfer or sell assets or shares of stock of
our subsidiaries; and
- consolidate, merge or transfer all or
substantially all of our assets and the
assets of our subsidiaries.
These covenants are subject to important
exceptions and qualifications, which are
described under the caption "Description of
Exchange Notes -- Certain Covenants."
USE OF PROCEEDS............... We will not receive any cash proceeds from the
exchange offer.
TRADING....................... We expect the exchange notes to be eligible for
trading in The Portal(SM) Market, a subsidiary
of The Nasdaq Stock Market, Inc. See "Plan of
Distribution."
OTHER......................... The exchange notes and any old notes not
exchanged for the exchange notes will
constitute a single series of senior notes
under the indenture and will therefore vote
together as a single class for purposes of
determining whether the holders of the
requisite percentage in outstanding principal
amount have taken certain actions or exercised
certain rights under the indenture.
6
RISK FACTORS
You should consider carefully each of the risks described below, together
with all of the other information contained or incorporated by reference in this
prospectus, before deciding to invest in the exchange notes.
RISKS RELATING TO THE OIL AND NATURAL GAS INDUSTRY
EXPLORING FOR AND PRODUCING OIL AND NATURAL GAS ARE HIGH-RISK ACTIVITIES WITH
MANY UNCERTAINTIES THAT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS.
Our future success will depend on the success of our exploration and
production activities. Our oil and natural gas exploration and production
activities are subject to numerous risks beyond our control, including the risk
that drilling will not result in commercially viable oil or natural gas
production. Our decisions to purchase, explore, develop or otherwise exploit
prospects or properties 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. Please read "-- Reserve estimates depend on many assumptions
that may prove to be inaccurate" for a discussion of the uncertainty involved in
these processes. Our cost of drilling, completing and operating wells is often
uncertain before drilling commences. Overruns in budgeted expenditures are
common risks that can make a particular project uneconomical. Further, many
factors may curtail, delay or cancel drilling, including the following:
- pressure or irregularities in geological formations;
- shortages of or delays in obtaining equipment and qualified personnel;
- equipment failures or accidents;
- adverse weather conditions, such as hurricanes and tropical storms;
- reductions in oil and natural gas prices;
- title problems; and
- limitations in the market for oil and natural gas.
WE MAY INCUR SUBSTANTIAL LOSSES AND BE SUBJECT TO SUBSTANTIAL LIABILITY CLAIMS
AS A RESULT OF OUR OIL AND NATURAL GAS OPERATIONS.
Losses and liabilities arising from uninsured and underinsured events could
materially and adversely affect our business, financial condition or results of
operations. Our oil and natural gas exploration and production activities are
subject to all of the operating risks associated with drilling for and producing
oil and natural gas, including the possibility of:
- environmental hazards, such as uncontrollable flows of oil, natural gas,
brine, well fluids, toxic gas or other pollution into the environment,
including groundwater and shoreline contamination;
- abnormally pressured formations;
- mechanical difficulties, such as stuck oil field drilling and service
tools and casing collapse;
- fires and explosions;
- personal injuries and death; and
- natural disasters.
Any of these risks could adversely affect our ability to conduct operations
or result in substantial losses to our company. We maintain insurance at levels
that we believe are consistent with industry practices, but we are not fully
insured against all risks. We may elect not to obtain insurance if we believe
that the cost of available insurance is excessive relative to the risks
presented. In addition, pollution and environmental risks generally are not
fully insurable. If a significant accident or other event occurs and is not
fully covered by insurance, it could adversely affect us.
7
A SUBSTANTIAL OR EXTENDED DECLINE IN OIL AND NATURAL GAS PRICES MAY ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS AND OUR
ABILITY TO MEET OUR CAPITAL EXPENDITURE OBLIGATIONS AND FINANCIAL COMMITMENTS.
The price we receive for our oil and natural gas production heavily
influences our revenue, profitability, access to capital and future rate of
growth. Oil and natural gas are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand. Historically, the markets for oil and natural gas have been
volatile. These markets will likely continue to be volatile in the future. The
prices we receive for our production, and the levels of our production, depend
on numerous factors beyond our control. These factors include:
- changes in the global supply, demand and inventories of oil;
- domestic natural gas supply, demand and inventories;
- the actions of the Organization of Petroleum Exporting Countries, or
OPEC;
- the price and quantity of foreign imports of oil;
- political conditions, including embargoes, in or affecting other
oil-producing countries;
- economic and energy infrastructure disruptions caused by actual or
threatened acts of war, or terrorist activities, or national security
measures deployed to protect the United States from such actual or
threatened acts or activities;
- economic stability of major oil and natural gas companies and the
interdependence of oil and natural gas and energy trading companies;
- the level of worldwide oil and natural gas exploration and production
activity;
- weather conditions;
- technological advances affecting energy consumption; and
- the price and availability of alternative fuels.
Lower oil and natural gas prices may not only decrease our revenues on a
per unit basis, but also may reduce the amount of oil and natural gas that we
can produce economically. A substantial or extended decline in oil and natural
gas prices may materially and adversely affect our future business, financial
condition, results of operations, liquidity or ability to finance planned
capital expenditures. Further, oil prices and natural gas prices do not
necessarily move together.
RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY PROVE TO BE INACCURATE.
ANY MATERIAL INACCURACIES IN THESE RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS
WILL MATERIALLY AFFECT THE QUANTITIES AND PRESENT VALUE OF OUR RESERVES.
The process of estimating oil and natural gas reserves is complex. This
process requires interpretations of available technical data and many
assumptions, including assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions could materially affect the
estimated quantities and present value of reserves incorporated by reference in
this prospectus.
In order to prepare our estimates, we must project production rates and
timing of development expenditures. We must also analyze available geological,
geophysical, production and engineering data. The extent, quality and
reliability of this data can vary. The process also requires economic
assumptions about matters such as oil and natural gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our estimates.
8
You should not assume that the present value of future net revenues from
our proved reserves referred to in this prospectus is the current market value
of our estimated oil and natural gas reserves. In accordance with SEC
requirements, we generally base the estimated discounted future net cash flows
from our proved reserves on prices and costs on the date of the estimate. Actual
future prices and costs may differ materially from those used in the present
value estimate.
MARKET CONDITIONS OR OPERATIONAL IMPEDIMENTS MAY HINDER OUR ACCESS TO OIL AND
NATURAL GAS MARKETS OR DELAY OUR PRODUCTION.
Market conditions or the unavailability of satisfactory oil and natural gas
transportation arrangements may hinder our access to oil and natural gas markets
or delay our production. The availability of a ready market for our oil and
natural gas production depends on a number of factors, including the demand for
and supply of oil and natural gas and the proximity of reserves to pipelines and
terminal facilities. Our ability to market our production depends in substantial
part on the availability and capacity of gathering systems, pipelines and
processing facilities owned and operated by third parties. Our failure to obtain
such services on acceptable terms could materially harm our business. We may be
required to shut in wells for lack of a market or because of inadequacy or
unavailability of oil or natural gas pipeline or gathering system capacity. If
that were to occur, we would be unable to realize revenue from those wells until
production arrangements were made to deliver to market.
WE ARE SUBJECT TO COMPLEX FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS,
INCLUDING ENVIRONMENTAL LAWS, THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Exploration for and development, exploitation, production and sale of oil
and natural gas in the United States are subject to extensive federal, state and
local laws and regulations, including complex tax laws and environmental laws
and regulations. Existing laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations could harm our
business, results of operations and financial condition. We may be required to
make large expenditures to comply with environmental and other governmental
regulations. In addition, some of our offshore operations are conducted on
federal leases that are regulated by the Minerals Management Service of the U.S.
Department of Interior. Accordingly, these properties will undergo more frequent
on-site governmental reviews and will be subject to a greater number of
compliance procedures, which could result in increased compliance or operating
costs or production being delayed or suspended.
Matters subject to regulation include oil and natural gas production and
our processing, handling and disposal of hazardous materials, such as
hydrocarbons and naturally occurring radioactive materials, discharge permits
for drilling operations, spacing of wells, environmental protection and
taxation. We could incur significant costs as a result of violations of or
liabilities under environmental or other laws, including third-party claims for
personal injuries and property damage, reclamation costs, remediation and
clean-up costs resulting from oil spills and discharges of hazardous materials,
fines and sanctions, and other environmental damages. See "Items 1 & 2. Business
and Properties -- Regulatory Matters" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 for additional information regarding
regulations applicable to us.
RISKS RELATING TO ENERGY PARTNERS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
We have only a limited operating history upon which you can evaluate our
business and prospects. Because of our limited operating history, our future
results of operations are difficult to estimate accurately. We also completed
two acquisitions in 2000 and the acquisition of Hall-Houston in January 2002,
which have changed our company.
9
A SIGNIFICANT PART OF THE VALUE OF OUR PRODUCTION AND RESERVES IS CONCENTRATED
IN ONE PROPERTY. BECAUSE OF THIS CONCENTRATION, ANY PRODUCTION PROBLEMS OR
INACCURACIES IN RESERVE ESTIMATES RELATED TO THIS PROPERTY COULD IMPACT OUR
BUSINESS ADVERSELY.
During the month of June 2003, 40% of our net daily production came from
our East Bay field. If mechanical problems, storms or other events curtail a
substantial portion of this production, our cash flow would be affected
adversely. Also, at December 31, 2002, approximately 58% of our proved reserves
were located on this property. If the actual reserves associated with this
property are less than our estimated reserves, our business, financial condition
or results of operations could be adversely affected.
RELATIVELY SHORT PRODUCTION LIVES FOR GULF OF MEXICO PROPERTIES SUBJECT US TO
HIGHER RESERVE REPLACEMENT NEEDS.
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. High production rates generally result in recovery of a
relatively higher percentage of reserves from properties during the initial few
years of production. All of our operations are on the Gulf of Mexico Shelf.
Production from reserves in reservoirs in the Gulf of Mexico generally declines
more rapidly than from reservoirs in many other producing regions of the world.
As a result, our reserve replacement needs from new investments are relatively
greater. Our future oil and natural gas reserves and production, and, therefore,
our cash flow and income, are highly dependent on our success in efficiently
developing and exploiting our current reserves and economically finding or
acquiring additional recoverable reserves.
RAPID GROWTH MAY PLACE SIGNIFICANT DEMANDS ON OUR RESOURCES.
We have experienced rapid growth in our operations and expect that
expansion of our operations will continue. Our acquisition of Hall-Houston
generated most of our growth in 2002. Our rapid growth has placed, and our
anticipated future growth will continue to place, a significant demand on our
managerial, operational and financial resources due to:
- the need to manage relationships with various strategic partners and
other third parties;
- difficulties in hiring and retaining skilled personnel necessary to
support our business;
- complexities in integrating acquired businesses and personnel;
- the need to train and manage our employee base; and
- pressures for the continued development of our financial and information
management systems.
If we have not made adequate allowances for the costs and risks associated
with these demands or if our systems, procedures or controls are not adequate to
support our operations, our business could be harmed.
PROPERTIES THAT WE BUY MAY NOT PRODUCE AS PROJECTED, AND WE MAY BE UNABLE TO
FULLY IDENTIFY LIABILITIES ASSOCIATED WITH THE PROPERTIES OR OBTAIN PROTECTION
FROM SELLERS AGAINST THEM.
Our strategy includes acquisitions. The successful acquisition of producing
properties requires assessments of many factors, which are inherently inexact
and may be inaccurate, including:
- the amount of recoverable reserves;
- future oil and natural gas prices;
- estimates of operating costs;
- estimates of future development costs;
- estimates of the costs and timing of plugging and abandonment; and
- potential environmental and other liabilities.
10
Our assessments will not reveal all existing or potential problems, nor
will they permit us to become familiar enough with the properties to evaluate
fully their deficiencies and capabilities. In the course of our due diligence,
we may not inspect every well, platform or pipeline. We cannot necessarily
observe structural and environmental problems, such as pipeline corrosion or
groundwater contamination, when an inspection is conducted. We may not be able
to obtain contractual indemnities from the seller for liabilities that it
created. We may be required to assume the risk of the physical condition of the
properties in addition to the risk that the properties may not perform in
accordance with our expectations.
SUBSTANTIAL ACQUISITIONS, DRILL-TO-EARN PROGRAMS OR OTHER TRANSACTIONS COULD
REQUIRE SIGNIFICANT EXTERNAL CAPITAL AND COULD CHANGE OUR RISK AND PROPERTY
PROFILE.
In order to finance acquisitions of additional producing properties,
finance the development of any discoveries made through any expanded exploratory
program that might be undertaken or enter into significant drill-to-earn
programs, we may need to alter or increase our capitalization substantially
through the issuance of debt or equity securities, the sale of production
payments or other means. These changes in capitalization may significantly
affect our risk profile. Additionally, significant acquisitions, drill-to-earn
programs or other transactions can change the character of our operations and
business. The character of the new properties may be substantially different in
operating or geological characteristics or geographic location than our existing
properties. Furthermore, we may not be able to obtain external funding for any
such acquisitions, drill-to-earn programs or other transactions or to obtain
external funding on terms acceptable to us.
OUR PRINCIPAL STOCKHOLDER IS IN A POSITION TO AFFECT OUR ONGOING OPERATIONS,
CORPORATE TRANSACTIONS AND OTHER MATTERS.
Our principal stockholder, Evercore Capital Partners L.P., together with
its affiliates ("Evercore"), beneficially owned, as of August 26, 2003,
approximately 14% of our outstanding shares of common stock and Evercore is
entitled to nominate two of our ten directors. Evercore's approval is required
to take a number of corporate actions, including making acquisitions, selling
assets, adopting or amending capital and operating budgets, incurring
indebtedness, increasing compensation, issuing our stock, declaring dividends,
engaging in hedging transactions and entering joint ventures. As a result,
Evercore is in a position to control or influence substantially the manner in
which our business is operated and the outcome of stockholder votes on the
election of directors and other matters.
THE UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES,
PERSONNEL AND OILFIELD SERVICES COULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE
ON A TIMELY BASIS OUR EXPLORATION AND DEVELOPMENT PLANS WITHIN OUR BUDGET.
All of our operations are on the Gulf of Mexico Shelf. Shortages or the
high cost of drilling rigs, equipment, supplies or personnel could delay or
adversely affect our exploration and development operations, which could have a
material adverse effect on our business, financial condition or results of
operations. Periodically, drilling activity in the Gulf of Mexico has increased,
and we have experienced increases in associated costs, including those related
to drilling rigs, equipment, supplies and personnel and the services and
products of other vendors to the industry. Increased drilling activity in the
Gulf of Mexico also decreases the availability of offshore rigs. We cannot
assure you that costs will not increase again or that necessary equipment and
services will be available to us at economical prices.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT US.
To a large extent, we depend on the services of our founder, chairman,
president and chief executive officer, Richard A. Bachmann, and other senior
management personnel. The loss of the services of Mr. Bachmann or other senior
management personnel could have a material adverse effect on our operations. We
do not maintain any insurance against the loss of any of these individuals.
The Gulf of Mexico Shelf area is highly competitive, and our success there
will depend largely on our ability to attract and retain experienced
geoscientists and other professional staff.
11
OUR HEDGING TRANSACTIONS COULD RESULT IN LOSSES OR LIMIT OUR POTENTIAL GAINS.
We enter into hedging transactions with major financial institutions to
reduce exposure to fluctuations in the price of oil and natural gas. Our hedging
program uses financially-settled crude oil and natural gas swaps, zero-cost
collars and a combination of options used to provide floor prices with varying
upside price participation. Our hedged volume as of June 30, 2003 approximated
27% of our estimated production from proved reserves through the balance of the
terms of our hedging contracts.
We may in the future enter into these and other types of hedging
arrangements to reduce our exposure to fluctuations in the market prices of oil
and natural gas. Hedging transactions expose us to risk of financial loss in
some circumstances, including if production is less than expected, the other
party to the contract defaults on its obligations, or there is a change in the
expected differential between the underlying price in the hedging agreement and
actual prices received. Hedging transactions may limit the benefit we would have
otherwise received from increases in the prices for oil and natural gas.
Furthermore, if we do not engage in hedging transactions, we may be more
adversely affected by declines in oil and natural gas prices than our
competitors who engage in hedging transactions.
COMPETITION IN THE OIL AND NATURAL GAS INDUSTRY IS INTENSE, WHICH MAY
ADVERSELY AFFECT OUR ABILITY TO COMPETE.
We operate in a highly competitive environment for acquiring oil and
natural gas properties, marketing oil and natural gas and securing trained
personnel. Many of our competitors possess and employ financial, technical and
personnel resources substantially greater than ours, which can be particularly
important in Gulf of Mexico activities. Those companies may be able to pay more
for productive oil and natural gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or personnel resources permit. Our ability to
acquire additional prospects and to discover reserves in the future will depend
on our ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. Also, there is substantial
competition for capital available for investment in the oil and natural gas
industry. We cannot make assurances that we will be able to compete successfully
in the future in acquiring prospective reserves, developing reserves, marketing
hydrocarbons, attracting and retaining quality personnel and raising additional
capital.
RISKS RELATING TO OUR INDEBTEDNESS AND THE SENIOR NOTES
OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW
AND OUR ABILITY TO MAKE PAYMENTS ON THE SENIOR NOTES.
After giving effect to our offering of the old notes in August 2003 and the
application of the net proceeds to us from the offering, we would have had total
debt of $150.5 million and stockholders' equity of $250.0 million as of June 30,
2003. Our level of debt could have potential consequences, including:
- we will need to use a portion of the money we earn to pay interest on our
debt which will reduce the amount of money we have to finance our
operations and other business activities;
- we may be more vulnerable to economic downturns and adverse developments
in our industry; and
- our debt level could limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which we operate.
Our ability to meet our expenses and debt obligations will depend on our
future performance, which will be affected by financial, business, economic,
regulatory and other factors. We will not be able to control many of these
factors, such as economic conditions and governmental regulation. We cannot be
certain that our earnings will be sufficient to allow us to pay the principal
and interest on our debt, including the senior notes, and meet our other
obligations. If we do not have enough money, we may be required to refinance all
or part of our existing debt, including the senior notes, reduce capital
expenditures and other expenditures we incur in our business, sell assets,
borrow more money or raise equity. We may not be able to refinance our debt,
sell assets, borrow more money or raise equity on terms acceptable to us, if at
all. Further, failing to comply with
12
the financial and other restrictive covenants in our indebtedness could result
in an event of default under such indebtedness, which could adversely affect our
business, financial condition and results of operations.
IN ADDITION TO OUR CURRENT INDEBTEDNESS, WE MAY BE ABLE TO INCUR SUBSTANTIALLY
MORE DEBT. THIS COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
Together with our subsidiaries, we may be able to incur substantially more
debt in the future. Although the indenture governing the senior notes contains
restrictions on our incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions, and under certain
circumstances, indebtedness incurred in compliance with these restrictions could
be substantial. Also, these restrictions do not prevent us from incurring
obligations that do not constitute indebtedness. As of June 30, 2003, after
giving effect (i) to amendments to our bank credit facility and (ii) to our
offering of the old notes in August 2003 and the application of the net proceeds
to us from the offering, we would have had approximately $59.9 million of
borrowing capacity available under our bank credit facility. To the extent new
debt is added to our current debt levels, the risks described above could
substantially increase.
THE SENIOR NOTES ARE NOT SECURED BY OUR ASSETS OR THOSE OF OUR SUBSIDIARY
GUARANTORS.
The senior notes are our general unsecured obligations and are effectively
subordinated in right of payment to all of our secured indebtedness to the
extent of the value of the assets securing such indebtedness. If we become
insolvent or are liquidated, our assets which serve as collateral under our
secured indebtedness would be made available to satisfy our obligations under
any secured debt before any payments are made on the senior notes. Our
obligations under our bank credit facility are secured by substantially all of
our assets. As of June 30, 2003, after giving effect (i) to amendments to our
bank credit facility and (ii) to our offering of old notes in August 2003 and
the application of the net proceeds to us from the offering, our secured
indebtedness would have been approximately $0.5 million and we would have had
$59.9 million of borrowing capacity under our bank credit facility, all of which
would be secured indebtedness. Although the indenture contains limitations on
the amount of indebtedness that we may incur, under certain circumstances the
amount of such indebtedness could be substantial and, in any case, such
indebtedness may be secured indebtedness. See "Description of Exchange
Notes -- Certain Covenants -- Limitation on Indebtedness," "-- Limitation on
Liens" and "Description of Other Indebtedness and Series D Preferred
Stock -- Bank Credit Facility."
A SUBSIDIARY GUARANTEE COULD BE VOIDED IF IT CONSTITUTES A FRAUDULENT TRANSFER
UNDER U.S. BANKRUPTCY OR SIMILAR STATE LAW, WHICH WOULD PREVENT THE HOLDERS OF
THE SENIOR NOTES FROM RELYING ON THAT SUBSIDIARY TO SATISFY CLAIMS.
Under U.S. bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee can be voided, or claims under the guarantee may be
subordinated to all other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by its guarantee
or, in some states, when payments become due under the guarantee, received less
than reasonably equivalent value or fair consideration for the incurrence of the
guarantee and:
- was insolvent or rendered insolvent by reason of such incurrence;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay those debts as they mature.
A guarantee may also be voided, without regard to the above factors, if a
court found that the guarantor entered into the guarantee with the actual intent
to hinder, delay or defraud its creditors.
A court would likely find that a guarantor did not receive reasonably
equivalent value or fair consideration for its guarantee if the guarantor did
not substantially benefit directly or indirectly from the issuance of the senior
notes. If a court were to void a guarantee, you would no longer have a claim
against the guarantor. Sufficient funds to repay the senior notes may not be
available from other sources, including the remaining
13
guarantors, if any. In addition, the court might direct you to repay any amounts
that you already received from the subsidiary guarantor.
The measures of insolvency for purposes of fraudulent transfer laws vary
depending upon the governing law. Generally, a guarantor would be considered
insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all its assets;
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they became absolute and
mature; or
- it could not pay its debts as they became due.
Each subsidiary guarantee will contain a provision intended to limit the
guarantor's liability to the maximum amount that it could incur without causing
the incurrence of obligations under its subsidiary guarantee to be a fraudulent
transfer. This provision may not be effective to protect the subsidiary
guarantees from being voided under fraudulent transfer law.
IF WE EXPERIENCE A CHANGE OF CONTROL, WE MAY BE UNABLE TO REPURCHASE THE
SENIOR NOTES AS REQUIRED UNDER THE INDENTURE.
In the event of a change of control, you will have the right to require us,
subject to various conditions, to repurchase the senior notes. We may not have
sufficient financial resources to pay the repurchase price for the senior notes,
or may be prohibited from doing so under our bank credit facility or other debt
agreements. In addition, before we can purchase any senior notes, we may be
required to:
- repay our bank debt; or
- obtain a consent from lenders of senior debt to repurchase the senior
notes.
If a change of control occurs and we are prohibited from repurchasing the
senior notes, our failure to do so would cause us to default under the
indenture, which in turn is likely to be a default under our bank credit
facility and any future debt. Any other default under our bank credit facility
or other debt would also likely prohibit our repurchasing the senior notes.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES.
The exchange notes will constitute a new issue of securities for which
there is no established trading market. We do not intend to list the exchange
notes on any national securities exchange or seek the admission of the exchange
notes for quotation through the National Association of Securities Dealers
Automated Quotation System. We have been informed by some of the initial
purchasers of the old notes that they intend to make a market in the exchange
notes after this exchange offer is completed. However, the initial purchasers
are not obligated to do so and may cease their market-making activities at any
time. The liquidity of the trading market for the exchange notes will depend in
part on the level of participation of the holders of the old notes in the
exchange offer. The greater the participation in the exchange offer, the greater
the liquidity of the trading market for the exchange notes and the less the
liquidity of the trading market for the old notes not tendered during the
exchange offer. We do not know how many holders of our old notes will accept
this exchange offer and, therefore, do not know what principal amount of
exchange notes will be issued. In addition, market-making activity by the
initial purchasers will be subject to the limits imposed by the Securities Act
and the Exchange Act. As a result, we cannot assure you that any market for the
exchange notes will develop, or, if one does develop, that it will be
maintained. If an active market for the exchange notes fails to develop, or be
maintained, the trading price and liquidity of the exchange notes could be
adversely affected.
14
Future trading prices of the exchange notes would depend on many factors,
including, among others, prevailing interest rates, our operating results and
the market for similar securities. Depending on these and other factors, the
exchange notes could trade at a discount from their principal amount.
IF YOU FAIL TO EXCHANGE YOUR OLD NOTES BY PROPERLY TENDERING THEM FOR EXCHANGE
NOTES IN THE EXCHANGE OFFER, YOUR OLD NOTES WILL CONTINUE TO BE SUBJECT TO
TRANSFER RESTRICTIONS AND MAY HAVE REDUCED LIQUIDITY.
We will issue exchange notes only in exchange for old notes that you timely
and properly tender. Therefore, you should allow sufficient time to ensure
timely delivery of the old notes, and you should carefully follow the
instructions on how to tender your old notes. Neither we nor the exchange agent
is required to tell you of any defects or irregularities with respect to your
tender of old notes.
If you do not exchange your old notes for exchange notes in the exchange
offer by properly tendering them for exchange notes, your old notes will
continue to be subject to the restrictions on transfer described in the legend
on your old notes. The restrictions on transfer of your old notes arise because
we issued the old notes under exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, you may only offer or sell the old notes if they
are registered under the Securities Act and applicable state securities laws, or
offered and sold under an exemption from these requirements. As we do not intend
to register the old notes under the Securities Act, in the event the exchange
offer is completed, holders of old notes which have not been exchanged who seek
liquidity in their investment would have to rely on exemptions from the
registration requirements under the securities laws, including the Securities
Act. Consequently, holders of old notes who do not participate in the exchange
offer could experience significant diminution in the value of their old notes
compared to the value of the exchange notes. See "The Exchange
Offer -- Consequences of Failure to Exchange Old Notes" for a discussion of
possible consequences of failing to exchange your old notes.
15
USE OF PROCEEDS
We will not receive any proceeds from the exchange of the exchange notes
for the old notes pursuant to the exchange offer.
We have used the aggregate net proceeds of the offering of the old notes to
redeem the $38.4 million outstanding of our 11% senior subordinated notes due
2009, to repay $39.9 million of borrowings under our bank credit facility and
for general corporate purposes.
16
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2003:
- on an actual basis; and
- on an as adjusted basis to give effect to our offering of the old notes
in August 2003 and the use of the net proceeds from the offering. Please
read "Use of Proceeds."
You should read this table in conjunction with our consolidated financial
statements and the notes to those financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in our Annual Report on Form 10-K for the year ended December 31, 2002
and Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, which are
incorporated by reference in this prospectus.
AS OF JUNE 30, 2003
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 8,796 $ 75,825
======== ========
Current maturities of long-term debt........................ $ 96 $ 96
Bank facility(1)............................................ 40,000 100
8 3/4% senior notes due 2010................................ -- 150,000
11% senior subordinated notes due 2009...................... 38,371 --
Other debt.................................................. 267 267
-------- --------
Total debt................................................ 78,734 150,463
-------- --------
Preferred stock............................................. 34,902 34,902
Common stock................................................ 320 320
Additional paid-in capital.................................. 227,273 227,273
Accumulated other comprehensive loss........................ (2,720) (2,720)
Accumulated deficit(2)...................................... (9,569) (9,753)
-------- --------
Total stockholders' equity................................ 250,206 250,022
-------- --------
Total capitalization................................... $328,940 $400,485
======== ========
---------------
(1) After giving effect to the offering of the old notes and the related
amendments to our bank credit facility, as described under "Description of
Other Indebtedness and Series D Preferred Stock -- Bank Credit Facility," we
would have had $59.9 million available for borrowing under our bank credit
facility as of June 30, 2003.
(2) Includes the effect of a charge of $0.2 million, net of $0.1 million of
taxes, for the write-off of unamortized costs relating to the reduction of
our borrowing capacity under the bank credit facility as a result of the
offering of the old notes.
17
SELECTED FINANCIAL DATA
The following table contains our selected consolidated financial data as of
and for the four years ended December 31, 2002 and the period January 29, 1998
(inception) to December 31, 1998 and as of and for the six months ended June 30,
2003 and 2002. We have prepared this information from audited consolidated
financial statements for the years ended December 31, 1999 through December 31,
2002 and the period ended December 31, 1998 and from unaudited consolidated
financial statements for the six months ended June 30, 2003 and 2002. In our
opinion, the information for the six months ended June 30, 2003 and 2002
reflects all adjustments consisting only of normal recurring adjustments,
necessary to fairly present the results of operations and financial condition.
Results for interim periods should not be considered indicative of results for
any other periods or for the year. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in our Annual Report on Form 10-K for the year ended December 31, 2002 and
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 incorporated
by reference in this prospectus.
JANUARY 29,
SIX MONTHS ENDED 1998
JUNE 30, YEARS ENDED DECEMBER 31, (INCEPTION) TO
------------------- ------------------------------------------- DECEMBER 31,
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- --------- --------- -------- --------------
(IN THOUSANDS, EXCEPT FOR RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $111,456 $ 65,988 $134,031 $ 146,201 $ 103,236 $ 9,509 $ 1,966
Costs and expenses:
Lease operating.......................... 17,444 17,344 34,400 36,543 24,241 1,640 359
Taxes, other than on earnings............ 4,151 3,165 6,572 7,190 6,327 -- --
Exploration expenditures and dry hole
costs.................................. 5,236 3,440 10,735 15,141 1,703 1,570 --
Depreciation, depletion and
amortization........................... 37,104 34,258 64,513 46,870 25,595 4,525 1,303
General and administrative(1)............ 13,469 12,676 24,168 19,833 54,091 2,609 615
-------- -------- -------- --------- --------- -------- --------
Total costs and expenses............... 77,404 70,883 140,388 125,577 111,957 10,344 2,277
-------- -------- -------- --------- --------- -------- --------
Income (loss) from operations.............. 34,052 (4,895) (6,357) 20,624 (8,721) (835) (311)
-------- -------- -------- --------- --------- -------- --------
Interest income............................ 46 72 107 329 596 312 49
Interest expense........................... (3,429) (3,438) (6,988) (1,916) (7,438) (2,947) (802)
Gain (loss) on sale of oil and natural gas
assets................................... -- -- (243) 39 7,781 -- --
-------- -------- -------- --------- --------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle................................ 30,669 (8,261) (13,481) 19,076 (7,782) (3,470) (1,064)
Income taxes............................... (11,191) 2,893 4,682 (7,102) (10,902) 1,186 359
-------- -------- -------- --------- --------- -------- --------
Net income (loss) before cumulative effect
of change in accounting principle........ 19,478 (5,368) (8,799) 11,974 (18,684) (2,284) (705)
Cumulative effect of change in accounting
principle................................ 2,268 -- -- -- -- -- --
-------- -------- -------- --------- --------- -------- --------
Net income (loss).......................... 21,746 (5,368) (8,799) 11,974 (18,684) (2,284) (705)
Less dividends earned on preferred stock
and accretion of discount and issuance
costs.................................... (1,808) (1,591) (3,330) -- (6,703) (836) --
-------- -------- -------- --------- --------- -------- --------
Net income (loss) available to common
stockholders............................. $ 19,938 $ (6,959) $(12,129) $ 11,974 $ (25,387) $ (3,120) $ (705)
======== ======== ======== ========= ========= ======== ========
OTHER FINANCIAL DATA:
Capital expenditures..................... $ 64,045 $ 22,291 $ 55,562 $ 122,340 $ 165,360 $ 19,233 $ 27,081
Net cash provided by (used in) operating
activities............................. 60,926 (2,374) 25,417 91,847 50,703 (4,594) 8,044
Net cash used in investing activities.... (63,739) (21,839) (54,380) (121,067) (130,378) (19,233) (27,081)
Net cash provided by financing
activities............................. 11,493 25,465 29,079 25,871 60,742 45,457 19,689
Ratio of earnings to fixed charges(2).... 5.9x -- -- 9.3x -- -- --
EBITDA(3)................................ 64,390 22,631 57,913 67,533 64,931 3,690 992
Exploration expenditures and dry hole
costs(3)............................... 5,236 3,440 10,735 15,141 1,703 1,570 --
18
AS OF JUNE 30, AS OF DECEMBER 31,
------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets................. $440,157 $359,459 $384,220 $242,777 $208,149 $69,276 $40,015
Long-term debt, including
current maturities......... 78,734 99,284 103,779 25,493 100 10,150 20,000
Mandatorily redeemable
preferred stock............ -- -- -- -- -- 56,475 --
Stockholders' equity......... 250,206 196,062 191,922 164,867 150,591 (3,815) (694)
---------------
(1) The 2000 loss from operations includes a one time non-cash stock
compensation charge for shares released from escrow to management and
director stockholders of $38.2 million and a non-cash charge of $2.1 million
for bonus shares awarded to employees at the time of our initial public
offering. Although these charges reduced our net income, they increased
paid-in capital and thus did not result in a net reduction of total
stockholders' equity.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of the sum of income from operations before income taxes and the
cumulative effect of change in accounting method, interest expense and the
portion of the rent expense deemed to represent interest. Fixed charges
consist of interest incurred, whether expensed or capitalized, including
amortization of debt issuance costs, if applicable, and the portion of rent
expense deemed to represent interest. For the six months ended June 30, 2002
and the years ended December 31, 2002, 2000, 1999 and 1998, the ratio of
earnings to fixed charges was less than a one-to-one coverage due to a
deficiency of $10.2 million, $17.5 million, $15.7 million, $3.8 million and
$1.4 million, respectively. For the indicated periods there were no
preferred stock dividends declared or paid by our subsidiaries.
(3) EBITDA is defined as net income (loss) before interest expense, income
taxes, depreciation, depletion and amortization and cumulative effect of
change in accounting principle. We have reported EBITDA because we believe
EBITDA is a measure commonly reported and widely used in our industry as an
indicator of a company's ability to internally fund its exploration and
development activities and incur and service debt. EBITDA is not a
calculation based on generally accepted accounting principles (GAAP) in the
United States and should not be used as an exclusive measure of net cash
provided by operating activities, as determined in accordance with GAAP or
as a measure of our ability to meet cash needs. Investors should carefully
consider the specific items included in our computation of EBITDA. While
EBITDA has been disclosed herein to permit a more complete comparative
analysis of our debt service ability relative to other oil and natural gas
companies, investors should be cautioned that EBITDA as reported by us may
not be comparable in all instances to EBITDA as reported by other companies
in our industry. Because we use the successful efforts method of accounting,
we expense exploration expenditures and dry hole costs. In order to compare
us to an oil and natural gas company using the full cost method of
accounting, which capitalizes these expenses, investors should add
exploration expenditures and dry hole costs to EBITDA (commonly referred to
as EBITDAX). We have provided these expenses for the applicable periods in
Other Financial Data to facilitate this comparison.
19
The following table reconciles the differences between net cash provided by
operating activities, the most comparable GAAP measure, and EBITDA.
JANUARY 29,
SIX MONTHS ENDED 1998
JUNE 30, YEARS ENDED DECEMBER 31, (INCEPTION) TO
------------------- -------------------------------------- DECEMBER 31,
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- ------- ------- ------- --------------
(IN THOUSANDS)
EBITDA....................... $ 64,390 $ 22,631 $ 57,913 $67,533 $64,931 $ 3,690 $ 992
Less:
Interest expense, net...... (3,383) (3,366) 6,881 1,587 6,842 2,635 753
Current income taxes....... -- -- (29) 79 150 -- --
Amortization of deferred
revenue.................. -- 1,935 3,420 -- -- -- --
Gain (loss) on sale of oil
and natural gas assets... 207 -- (243) 39 7,781 -- --
Add back:
Stock compensation
expense.................. 479 204 453 1,651 2,757 -- --
Exploration expenditures... 3,009 1,840 5,909 13,575 1,657 1,570 --
Amortization of deferred
financing costs.......... 205 159 370 968 1,090 91 --
Non-cash effect of
derivative instruments... -- 514 514 1,928 -- -- --
Other...................... 189 -- 52 -- -- --
Changes in operating assets
and liabilities.......... (10,522) (29,153) (29,765) 7,897 (4,959) (7,310) 7,805
-------- -------- -------- ------- ------- ------- ------
Net cash provided by (used
in) operating activities... $ 60,926 $ (2,374) $ 25,417 $91,847 $50,703 $(4,594) $8,044
======== ======== ======== ======= ======= ======= ======
20
THE EXCHANGE OFFER
As of the date of this prospectus, $150 million in principal amount of the
old notes is outstanding. This prospectus, together with the letter of
transmittal, is first being sent to holders on September 25, 2003.
PURPOSE OF THE EXCHANGE OFFER
We issued the old notes on August 5, 2003 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the old notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the sale of the old notes, we entered into a
registration rights agreement, which requires us to:
- file a registration statement with the Securities and Exchange Commission
(the "Commission") relating to the exchange offer on or prior to 90 days
after the date of issuance of the old notes;
- use our commercially reasonable efforts to cause the registration
statement relating to the exchange offer to become effective under the
Securities Act within 180 days after the date of issuance of the old
notes; and
- complete the exchange offer no later than 40 days after the exchange
offer registration statement becomes effective.
We are making the exchange offer to satisfy our obligations under the
registration rights agreement. Other than pursuant to the registration rights
agreement, we are not required to file any registration statement to register
any outstanding old notes. Holders of old notes who do not tender their old
notes or whose old notes are tendered but not accepted in the exchange offer
must generally rely on an exemption from the registration requirements under the
securities laws, including the Securities Act, if they wish to sell their old
notes.
We are making the exchange offer in reliance on the position of the staff
of the Commission as set forth in interpretive letters addressed to third
parties in other transactions. However, we have not sought our own interpretive
letter and we can provide no assurance that the staff would make a similar
determination with respect to the exchange offer as it has in interpretive
letters to third parties. Based on these interpretations by the staff, we
believe that the exchange notes issued in the exchange offer in exchange for old
notes may be offered for resale, resold and otherwise transferred by a holder
other than any holder who is a broker-dealer or an "affiliate" of ours within
the meaning of Rule 405 of the Securities Act, without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that:
- the exchange notes are acquired in the ordinary course of the holder's
business;
- the holder has no arrangement or understanding with any person to
participate in the distribution of the exchange notes; and
- the holder is not engaged in, and does not intend to engage in a
distribution of the exchange notes.
For additional information, see "-- Resale of Exchange Notes."
If you tender in the exchange offer for the purpose of participating in a
distribution of the exchange notes, of if you are a broker-dealer who purchased
the old notes from us for resale pursuant to Rule 144A or any other available
exemption under the Securities Act, you cannot rely on the interpretations by
the staff of the Commission stated in these no-action letters. Instead, you must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer, unless an exemption from
these requirements is otherwise available.
Further, each broker-dealer that receives the exchange notes for its own
account in exchange for the old notes, where the broker-dealer acquired the old
notes as a result of market-making or other trading activities, must acknowledge
in a letter of transmittal that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of those
exchange notes. The letter of transmittal states that by
21
making this acknowledgment and delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. We have agreed that this prospectus may be used by a
broker-dealer for any resale of exchange notes issued to it in the exchange
offer for a period of 180 days after the expiration date of the exchange offer.
See "Plan of Distribution."
TERMS OF THE EXCHANGE
We are offering to exchange, subject to the conditions described in this
prospectus and in the letter of transmittal accompanying this prospectus, $150
million in aggregate principal amount of our 8 3/4% senior notes due 2010 that
have been registered under the Securities Act for a like principal amount of our
outstanding unregistered 8 3/4% senior notes due 2010. The terms of the exchange
notes are identical in all material respects to the terms of the old notes,
except that:
- the exchange notes will have been registered under the Securities Act,
will not contain transfer restrictions, and will not bear legends
restricting their transfer;
- the exchange notes will not contain terms providing for the payment of
additional interest under circumstances relating to our obligation to
file and cause to be effective a registration statement;
- the exchange notes will be represented by one or more global notes in
book entry form unless exchanged for notes in definitive certificated
form under the limited circumstances described under "Description of
Exchange Notes -- Global Notes and Book-Entry System"; and
- the exchange notes will be issuable in denominations of $1,000 and
integral multiples thereof.
The exchange notes generally will be freely transferable by holders of the
exchange notes and will not be subject to the terms of the registration rights
agreement. The exchange notes will evidence the same indebtedness as the old
notes exchanged therefor and will be entitled to the benefits of the indenture.
For additional information, see "Description of Exchange Notes."
The exchange offer is not conditioned upon the tender of any minimum
principal amount of old notes.
The exchange notes will accrue interest from the last interest payment date
on which interest was paid on the old notes or, if no interest was paid on the
old notes, from the date of issuance of the old notes, which was on August 5,
2003. Holders whose old notes are accepted for exchange will be deemed to have
waived the right to receive any interest accrued on the old notes.
Tendering holders of the old notes will not be required to pay brokerage
commissions or fees or transfer taxes, except as specified in the instructions
in the letter of transmittal, with respect to the exchange of the old notes in
the exchange offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The exchange offer will expire at 5:00 p.m., New York City time, on October
27, 2003, unless we, in our sole discretion, have extended the period of time
for which the exchange offer is open. The time and date, as it may be extended,
is referred to herein as the "expiration date." The expiration date will be at
least 20 business days after the commencement of the exchange offer in
accordance with Rule 14e-1(a) under the Exchange Act. We expressly reserve the
right, at any time or from time to time, to extend the period of time during
which the exchange offer is open, and thereby delay acceptance for exchange of
any old notes. We may extend the expiration date by giving oral or written
notice of the extension to the exchange agent and by timely public announcement
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date. During the extension, all old notes
previously tendered will remain subject to the exchange offer unless properly
withdrawn.
We expressly reserve the right to:
- terminate or amend the exchange offer and not to accept for exchange any
old notes not previously accepted for exchange upon the occurrence of any
of the events specified in "-- Certain Conditions to the Exchange Offer"
which have not been waived by us; and
22
- amend the terms of the exchange offer in any manner which, in our good
faith judgment, is advantageous to the holders of the old notes, whether
before or after any tender of the old notes.
If any termination or amendment occurs, we will notify the exchange agent
and will either issue a press release or give oral or written notice to the
holders of the old notes as promptly as practicable.
For purposes of the exchange offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless we terminate
the exchange offer prior to 5:00 p.m., New York City time, on the expiration
date, we will exchange the exchange notes for the old notes promptly following
the expiration date.
PROCEDURES FOR TENDERING OLD NOTES
Our acceptance of old notes tendered by a holder will constitute a binding
agreement between the tendering holder and us upon the terms and subject to the
conditions described in this prospectus and in the accompanying letter of
transmittal. All references in this prospectus to the letter of transmittal are
deemed to include a facsimile of the letter of transmittal.
A holder of old notes may tender the old notes by:
- properly completing and signing the letter of transmittal;
- properly completing any required signature guarantees;
- properly completing any other documents required by the letter of
transmittal; and
- delivering all of the above, together with the certificate or
certificates representing the old notes being tendered, to the exchange
agent at its address set forth below at or prior to 5:00 p.m., New York
City time, on the expiration date; or
- complying with the procedure for book-entry transfer described below; or
- complying with the guaranteed delivery procedures described below.
The method of delivery of old notes, letters of transmittal and all other
required documents is at the election and risk of the holders. If the delivery
is by mail, it is recommended that registered mail properly insured, with return
receipt requested, be used. In all cases, sufficient time should be allowed to
ensure timely delivery. Holders should not send old notes or letters of
transmittal to us.
The signature on the letter of transmittal need not be guaranteed if:
- tendered old notes are registered in the name of the signer of the letter
of transmittal; and
- the exchange notes to be issued in exchange for the old notes are to be
issued in the name of the holder; and
- any untendered old notes are to be reissued in the name of the holder.
In any other case, the tendered old notes must be:
- endorsed or accompanied by written instruments of transfer in form
satisfactory to us;
- duly executed by the holder; and
- the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution, each an "eligible institution" that
is a member of a recognized signature guarantee medallion program within
the meaning of Rule 17Ad-15 under the Exchange Act.
If the exchange notes and/or old notes not exchanged are to be delivered to
an address other than that of the registered holder appearing on the note
register for the old notes, the signature in the letter of transmittal must be
guaranteed by an eligible institution.
23
The exchange agent will make a request within two business days after the
date of receipt of this prospectus to establish accounts with respect to the old
notes at The Depository Trust Company, the "book-entry transfer facility," for
the purpose of facilitating the exchange offer. We refer to The Depository Trust
Company in this prospectus as "DTC." Subject to establishing the accounts, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of old notes by causing the
book-entry transfer facility to transfer the old notes into the exchange agent's
account with respect to the old notes in accordance with the book-entry transfer
facility's procedures for the transfer. Although delivery of old 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 with any
required signature guarantee and all other required documents, or an agent's
message, must in each case be properly transmitted to and received or confirmed
by the exchange agent at its address set forth below under "-- Exchange Agent"
prior to the expiration date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for the DTC Automated Tender Offer Program. We refer to the Automated
Tender Offer Program in this prospectus as "ATOP." Accordingly, DTC participants
may, in lieu of physically completing and signing the letter of transmittal and
delivering it to the exchange agent, electronically transmit their acceptance of
the exchange offer by causing DTC to transfer old notes to the exchange agent in
accordance with DTC's ATOP procedures for transfer. DTC will then send an
agent's message.
The term "agent's message" means a message which:
- is transmitted by DTC;
- received by the exchange agent and forming part of the book-entry
transfer;
- states that DTC has received an express acknowledgment from a participant
in DTC that is tendering old notes which are the subject of the
book-entry transfer;
- states that the participant has received and agrees to be bound by all of
the terms of the letter of transmittal; and
- states that we may enforce the agreement against the participant.
If a holder desires to accept the exchange offer and time will not permit a
letter of transmittal or old notes to reach the exchange agent before the
expiration date or the procedure for book-entry transfer cannot be completed on
a timely basis, the holder may effect a tender if the exchange agent has
received at its address set forth below on or prior to the expiration date, a
letter, telegram or facsimile transmission, and an original delivered by
guaranteed overnight courier, from an eligible institution setting forth:
- the name and address of the tendering holder;
- the names in which the old notes are registered and, if possible, the
certificate numbers of the old notes to be tendered; and
- a statement that the tender is being made thereby and guaranteeing that
within three business days after the expiration date, the old notes in
proper form for transfer, or a confirmation of book-entry transfer of
such old notes into the exchange agent's account at the book-entry
transfer facility and an agent's message, will be delivered by the
eligible institution together with a properly completed and duly executed
letter of transmittal and any other required documents.
Unless old notes being tendered by the above-described method are deposited
with the exchange agent, a tender will be deemed to have been received as of the
date when:
- the tendering holder's properly completed and duly signed letter of
transmittal, or a properly transmitted agent's message, accompanied by
the old notes or a confirmation of book-entry transfer of the old notes
into the exchange agent's account at the book-entry transfer facility is
received by the exchange agent; or
24
- a notice of guaranteed delivery or letter, telex or facsimile
transmission to similar effect from an eligible institution is received
by the exchange agent.
Issuances of exchange notes in exchange for old notes tendered pursuant to
a notice of guaranteed delivery or letter, telex or facsimile transmission to
similar effect by an eligible institution will be made only against deposit of
the letter of transmittal and any other required documents and the tendered old
notes or a confirmation of book-entry and an agent's message.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of old notes tendered for exchange will be determined by
us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all tenders of any old notes not
properly tendered or not to accept any old notes which acceptance might, in our
judgment or the judgment of our counsel, be unlawful. We also reserve the
absolute right to waive any defects or irregularities or conditions of the
exchange offer as to any old notes either before or after the expiration date,
including the right to waive the ineligibility of any holder who seeks to tender
old notes in the exchange offer. The interpretation of the terms and conditions
of the exchange offer, including the letter of transmittal and the instructions
contained in the letter of transmittal, by us will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes for exchange must be cured within such reasonable period of time as
we determine. Neither we, the exchange agent nor any other person has any duty
to give notification of any defect or irregularity with respect to any tender of
old notes for exchange, nor will any of us incur any liability for failure to
give such notification.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of old notes, the old notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the old notes.
If the letter of transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
us, such persons must submit proper evidence satisfactory to us of their
authority to so act.
By tendering, each holder represents to us that, among other things:
- the exchange notes acquired pursuant to the exchange offer are being
acquired in the ordinary course of business of the holder;
- the holder is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the exchange notes; and
- the holder is not an "affiliate" of ours within the meaning of Rule 405
of the Securities Act.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where the broker-dealer acquired the old notes 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 the exchange
notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer.
The party tendering old notes for exchange notes exchanges, assigns and
transfers the old notes to us and irrevocably constitutes and appoints the
exchange agent as the party's agent and attorney-in-fact to cause the old notes
to be assigned, transferred and exchanged. We refer to the party tendering notes
herein as the "transferor." The transferor represents and warrants that the
transferor has full power and authority to tender, exchange, assign and transfer
the old notes and to acquire exchange notes issuable upon the exchange of the
tendered old notes, and that, when the same are accepted for exchange, we will
acquire good and unencumbered title to the tendered old notes, free and clear of
all liens, restrictions, charges and encum-
25
brances and not subject to any adverse claim. The transferor also warrants that
the transferor will, upon request, execute and deliver any additional documents
deemed by the exchange agent or us to be necessary or desirable to complete the
exchange, assignment and transfer of tendered old notes or transfer ownership of
the old notes on the account books maintained by a book-entry transfer facility.
The transferor further agrees that the acceptance of any tendered old notes by
us and the issuance of exchange notes in exchange for old notes will constitute
performance in full by us of various of our obligations under the registration
rights agreement. All authority conferred by the transferor will survive the
death or incapacity of the transferor and every obligation of the transferor
will be binding upon the heirs, legal representatives, successors, assigns,
executors and administrators of the transferor.
The transferor certifies that the transferor: is not an "affiliate" of ours
within the meaning of Rule 405 under the Securities Act; is acquiring the
exchange notes offered hereby in the ordinary course of the transferor's
business; and has no arrangement with any person to participate in the
distribution of the exchange notes.
Each holder, other than a broker-dealer, must acknowledge that the holder
is not engaged in, and does not intend to engage in, a distribution of the
exchange notes. Each transferor which is a broker-dealer receiving the exchange
notes for its own account must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. 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.
WITHDRAWAL RIGHTS
Tenders of old notes may be withdrawn at any time before 5:00 p.m. New York
City time, on the expiration date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telex, facsimile transmission, or letter must be received by the exchange agent
at the address set forth in this prospectus before 5:00 p.m. New York City time,
on the expiration date. Any notice of withdrawal must:
- specify the name of the person having tendered the old notes to be
withdrawn;
- identify the old notes to be withdrawn, including the certificate number
or numbers and principal amount of such old notes;
- include a statement that the holder is withdrawing the holder's election
to have the old notes exchanged;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered or as
otherwise described above, including any required signature guarantees,
or be accompanied by documents of transfer sufficient to have the trustee
under the indenture register the transfer of the old notes into the name
of the person withdrawing the tender; and
- specify the name in which any such old notes are to be registered, if
different from that of the person who tendered the old notes.
The exchange agent will return the properly withdrawn old notes promptly
following receipt of the notice of withdrawal. If old notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn old notes or otherwise comply with the
book-entry transfer facility procedure. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by us and
our determination will be final and binding on all parties.
Any old notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the exchange offer. Any old notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder without cost to the holder. In the case of old notes
tendered by book-entry transfer into the exchange agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, the old notes will be credited to an account with the
book-entry transfer
26
facility specified by the holder. In either case, the old notes will be returned
promptly after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn old notes may be retendered by following one of the
procedures described in "-- Procedures for Tendering Old Notes" at any time
before the expiration date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept, on the expiration date, all old notes properly tendered and not
validly withdrawn and will issue or cause to be issued the exchange notes
promptly after such acceptance. See the discussion under "-- Certain Conditions
to the Exchange Offer" for more detailed information. For purposes of the
exchange offer, we will be deemed to have accepted properly tendered old notes
for exchange when, and if, we have given oral or written notice of our
acceptance to the exchange agent.
For each old note accepted for exchange, the holder of the old note will
receive an exchange note having a principal amount equal to that of the
surrendered old note.
In all cases, issuance of exchange notes for old notes that are accepted
for exchange pursuant to the exchange offer will be made only after:
- timely receipt by the exchange agent of certificates for the old notes or
a timely book-entry confirmation of the old notes into the exchange
agent's account at the book-entry transfer facility;
- a properly completed and duly executed letter of transmittal, or a
properly transmitted agent's message; and
- timely receipt by the exchange agent of all other required documents.
If any tendered old notes are not accepted for any reason described in the
terms and conditions of the exchange offer or if old notes are submitted for a
greater principal amount than the holder desires to exchange, the unaccepted or
nonexchanged old notes will be returned without expense to the tendering holder
of the old notes. In the case of old notes tendered by book-entry transfer into
the exchange agent's account at the book-entry transfer facility pursuant to the
book-entry transfer procedures described above, the non-exchanged old notes will
be credited to an account maintained with the book-entry transfer facility. In
either case, the old notes will be returned as promptly as practicable after the
expiration of the exchange offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to accept for exchange, or to
issue exchange notes in exchange for, any old notes and may terminate or amend
the exchange offer, by oral or written notice to the exchange agent or by a
timely press release, if, at any time before the acceptance of the old notes for
exchange or the exchange of the exchange notes for such old notes, in our
reasonable judgment any of the following conditions exists:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our judgment would reasonably be expected to impair our ability
to proceed with the exchange offer; or
- the exchange offer, or the making of any exchange by a holder, violates
applicable law or any applicable interpretation of the staff of the
Commission.
Regardless of whether any of the conditions has occurred, we may amend the
exchange offer in any manner which, in our good faith judgment, is advantageous
to holders of the old notes.
The conditions described above are for our sole benefit and may be asserted
by us regardless of the circumstances giving rise to the condition or we may
waive any condition in whole or in part at any time and from time to time in our
sole discretion. Our failure at any time to exercise any of the rights described
above will not be deemed a waiver of the right and each right will be deemed an
ongoing right which we may assert at any time and from time to time.
27
If we waive or amend the conditions above, we will, if required by law,
extend the exchange offer for a minimum of five business days from the date that
we first give notice, by public announcement or otherwise, of the waiver or
amendment, if the exchange offer would otherwise expire within the five
business-day period. Any determination by us concerning the events described
above will be final and binding upon all parties.
The exchange offer is not conditioned upon any minimum principal amount of
old notes being tendered.
EXCHANGE AGENT
Wells Fargo Bank, N.A. has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at one of the addresses set forth below:
Facsimile Transactions:
By Registered or Certified Mail (Eligible Institutions Only) By Hand or Overnight Delivery:
Wells Fargo Bank, N.A. (612) 667-4927 Wells Fargo Bank, N.A.
Corporate Trust Operations Corporate Trust Operations
MAC N9303-121 To Confirm by Telephone Sixth and Marquette
P.O. Box 1517 or for Information Call: MAC N9303-121
Minneapolis, MN 55480-1517 (800) 344-5128 Minneapolis, MN 55479
You should direct questions, requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery to the exchange agent at the address
and telephone number set forth in the letter of transmittal.
Delivery to an address other than as set forth on the letter of
transmittal, or transmission of instructions via a facsimile number other than
the one set forth on the letter of transmittal, will not constitute a valid
delivery.
SOLICITATION OF TENDERS; FEES AND EXPENSES
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this and other
related documents to the beneficial owners of the old notes and in handling or
forwarding tenders for their customers.
We will pay the expenses incurred in connection with the exchange offer.
Such expenses include, among others, the fees and expenses of the exchange agent
and trustee, registration fees, and accounting, legal, printing and related fees
and expenses.
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 upon as having been authorized by us. Neither the delivery of this
prospectus nor any exchange made pursuant to this prospectus, under any
circumstances, creates any implication that there has been no change in our
affairs since the respective dates as of which information is given in this
prospectus. The exchange offer is not being made to, and tenders will not be
accepted from or on behalf of, holders of old notes in any jurisdiction in which
the making of the exchange offer or the acceptance of the exchange offer would
not be in compliance with the laws of the jurisdiction. However, we may, at our
discretion, take such action as we may deem necessary to make the exchange offer
in the jurisdiction and extend the exchange offer to holders of old notes in the
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 our behalf by one or more registered brokers or
dealers which are licensed under the laws of the jurisdiction.
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TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. However, the transfer taxes will be
payable by the tendering holder if:
- certificates representing exchange notes or old notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be issued in the name of, any person other than the registered
holder of the old notes tendered; or
- tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes pursuant to the exchange offer.
We will bill the amount of the transfer taxes directly to the tendering
holder if satisfactory evidence of payment of the taxes or exemption therefrom
is not submitted with the letter of transmittal.
ACCOUNTING TREATMENT
For accounting purposes, we will not recognize gain or loss upon the
exchange of the exchange notes for old notes. We will amortize costs incurred in
connection with the issuance of the exchange notes over the term of the exchange
notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of old notes who do not exchange their old notes for exchange notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of the old notes as described in the legend on the old notes. Old
notes not exchanged pursuant to the exchange offer will continue to remain
outstanding in accordance with their terms. In general, the old notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. We do not currently anticipate that we will
register the old notes under the Securities Act.
Participation in the exchange offer is voluntary, and holders of old notes
should carefully consider whether to participate. Holders of old notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered old notes pursuant to the terms of, this exchange offer, we
will have fulfilled a covenant contained in the registration rights agreement.
Holders of old notes who do not tender their old notes in the exchange offer
will continue to hold the old notes and will be entitled to all the rights and
subject to the limitations applicable to the old notes under the indenture,
except for any rights under the registration rights agreement that by their
terms terminate or cease to have further effectiveness as a result of the making
of this exchange offer. All untendered old notes will continue to be subject to
the restrictions on transfer described in the indenture. To the extent that old
notes are tendered and accepted in the exchange offer, the trading market for
untendered old notes could be adversely affected.
We may in the future seek to acquire, subject to the terms of the
indenture, untendered old notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. We have no
present plan to acquire any old notes which are not tendered in the exchange
offer.
RESALE OF EXCHANGE NOTES
We are making the exchange offer in reliance on the position of the staff
of the Commission as set forth in interpretive letters addressed to third
parties in other transactions. However, we have not sought our own interpretive
letter and we can provide no assurance that the staff would make a similar
determination with respect to the exchange offer as it has in such interpretive
letters to third parties. Based on these
29
interpretations by the staff, we believe that the exchange notes issued pursuant
to the exchange offer in exchange for old notes may be offered for resale,
resold and otherwise transferred by a holder, other than any holder who is a
broker-dealer or an "affiliate" of ours within the meaning of Rule 405 of the
Securities Act, without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that:
- the exchange notes are acquired in the ordinary course of the holder's
business; and
- the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution of the exchange notes.
However, any holder who:
- is an "affiliate" of ours;
- has an arrangement or understanding with respect to the distribution of
the exchange notes to be acquired pursuant to the exchange offer; or
- is a broker-dealer who purchased old notes from us to resell pursuant to
Rule 144A or any other available exemption under the Securities Act,
cannot rely on the applicable interpretations of the staff and must comply with
the registration and prospectus delivery requirements of the Securities Act. A
broker-dealer who holds old notes that were acquired for its own account as a
result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of exchange notes. Each such broker-dealer that
receives exchange notes for its own account in exchange for old notes, where the
broker-dealer acquired the old notes as a result of market-making activities or
other trading activities, must acknowledge, as provided in the letter of
transmittal, that it will deliver a prospectus in connection with any resale of
such exchange notes. For more detailed information, see "Plan of Distribution."
SHELF REGISTRATION STATEMENT
If:
(1) applicable interpretations of the staff of the Commission do not
permit us to effect the exchange offer;
(2) for any other reason we do not consummate the exchange offer
within 220 days after the original issuance of the old notes;
(3) an initial purchaser notifies us following consummation of the
exchange offer that old notes held by it are not eligible to be exchanged
for exchange notes in the exchange offer; or
(4) any holder, other than a participating broker-dealer, is not
eligible to participate in the exchange offer or, in the case of any
holder, other than a participating broker-dealer, that participates in the
exchange offer, such holder does not receive freely tradeable exchange
notes on the date of the exchange and such holder so requests,
then, we will, subject to certain exceptions:
(1) promptly file a shelf registration statement covering resales of
the old notes or the exchange notes, as the case may be;
(2) (A) in the case of clause (1) above, use our commercially
reasonable efforts to cause the shelf registration statement to be declared
effective under the Securities Act on or prior to the 180th day following
the original issuance of the old notes and (B) in the case of clause (2),
(3) or (4) above, use our commercially reasonable efforts to cause the
shelf registration statement to be declared effective under the Securities
Act on or prior to the 75th day after the date on which the shelf
registration statement is required to be filed; and
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(3) keep the shelf registration statement effective until the earliest
of (A) the time when the senior notes covered by the shelf registration
statement can be sold under Rule 144 without any limitations under clauses
(c), (e), (f) and (h) of Rule 144, (B) two years from the effective date of
the shelf registration statement and (C) the date on which all senior notes
registered thereunder are disposed of in accordance therewith.
We will, in the event that a shelf registration statement is filed, among
other things, provide to each holder for whom such shelf registration statement
was filed copies of the prospectus which is a part of the shelf registration
statement, notify each such holder when the shelf registration statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the old notes or the exchange notes, as the case may be.
A holder selling such old notes or exchange notes under the shelf registration
statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
registration rights agreement that are applicable to such holder (including
certain indemnification obligations).
ADDITIONAL INTEREST
The registration rights agreement states that if a Registration Default (as
defined below) occurs, then we will be required to pay additional interest to
each holder of senior notes. During the first 90-day period that a Registration
Default occurs and is continuing, we will pay additional interest on the senior
notes at a rate of 0.50% per annum. The additional interest rate shall increase
by an additional 0.50% per annum with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum additional
interest rate of 2.0% per annum. Such additional interest will accrue only for
those days that a Registration Default occurs and is continuing. All accrued
additional interest will be paid to the holders of the senior notes on the
regular interest payment dates. Following the cure of all Registration Defaults,
no more additional interest will accrue unless a subsequent Registration Default
occurs.
A "Registration Default" shall occur if:
- we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such
filing; or
- any of such registration statements is not declared effective by the
Commission on or before the date specified for such effectiveness; or
- we fail to complete the exchange offer on or before the date specified
for such completion; or
- any of such registration statements is declared effective but thereafter
ceases to be effective or usable in connection with resales of the old
notes during the period specified in the registration rights agreement.
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DESCRIPTION OF OTHER INDEBTEDNESS AND SERIES D PREFERRED STOCK
BANK CREDIT FACILITY
We have a bank credit facility consisting of a revolving line of credit
with a group of banks available through March 30, 2005. The bank credit
facility, as amended effective as of July 28, 2003, currently has a borrowing
base of $60 million that is subject to redetermination based on the proved
reserves of the oil and natural gas properties that serve as collateral for the
bank credit facility as set out in the reserve report delivered to the banks
each April 1 and October 1. The bank credit facility permits both prime rate
based borrowing and LIBOR borrowings plus a floating spread. The spread will
float up or down based on our utilization of the bank credit facility. The
spread can range from 1.50% to 2.25% above LIBOR and 0% to 0.75% above prime.
The borrowing base under the bank credit facility is secured by substantially
all of our assets. The bank credit facility contains customary events of default
and requires that we satisfy various financial covenants. At June 30, 2003,
after giving effect (i) to amendments to our bank credit facility and (ii) to
our offering of the old notes in August 2003 and the application of the net
proceeds to us from the offering, we would have had approximately $59.9 million
of borrowing capacity available under our bank credit facility.
SERIES D PREFERRED STOCK
As of June 30, 2003, we had outstanding $37.3 million liquidation
preference of Series D exchangeable convertible preferred stock. The Series D
preferred stock pays semi-annual dividends as follows:
DIVIDEND PERIOD ENDING DIVIDEND RATE
---------------------- -------------
June 30, 2002 to December 31, 2004.......................... 7%
June 30, 2005 to December 31, 2005.......................... 8%
June 30, 2006 to December 31, 2006.......................... 9%
June 30, 2007 and thereafter................................ 10%
The dividends are payable in cash from the issue date until December 31,
2005, in cash or in additional shares of Series D preferred stock (at our
option) after December 31, 2005 and on or before December 31, 2008, and in cash
again from January 1, 2009 forward. The Series D preferred stock is convertible
into our common stock at a fixed conversion price of $8.54 per share, and is
convertible in the aggregate into 4,374,600 shares of our common stock. The
Series D preferred stock does not have a final maturity date and is not subject
to any put or other obligation on our part to redeem or otherwise purchase such
stock. The Series D preferred stock is redeemable at our option beginning
January 1, 2005 and is exchangeable (at our option) for convertible subordinated
debt securities with similar economic terms and maturing in January 2009 in an
aggregate principal amount equal to the liquidation preference of such preferred
stock.
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DESCRIPTION OF EXCHANGE NOTES
Energy Partners, Ltd. issued the outstanding notes and will issue the
exchange notes under the indenture (the "Indenture") dated August 5, 2003, among
itself, the Subsidiary Guarantors (as defined below) and Wells Fargo Bank, N.A.,
as Trustee. The terms of the exchange notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act.
We define certain terms used in this description under "-- Certain
Definitions" below. In this description, the words "Company," "we," "us" and
"our" refer only to Energy Partners, Ltd. and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the Indenture. We urge you to read the Indenture because it, not this
description, defines your rights as Holders of these exchange notes. You may
request a copy of the Indenture at our address set forth under
"Summary -- Corporate and Stockholder Information."
BRIEF DESCRIPTION OF THE EXCHANGE NOTES
The exchange notes will:
- be senior unsecured obligations of the Company;
- mature on August 1, 2010;
- be equal ("pari passu") in right of payment with all existing and future
Senior Indebtedness of the Company;
- be senior in right of payment to any future Subordinated Obligations of
the Company;
- be guaranteed on a senior unsecured basis by each Subsidiary Guarantor;
- be eligible for trading in The Portal(SM) Market; and
- be substantially identical to the old notes, except for the elimination
of some transfer restrictions, registration rights and additional
interest payments relating to the old notes.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue the exchange notes initially with a maximum
aggregate principal amount of $150 million. The exchange notes will be issued in
denominations of $1,000 and any integral multiples of $1,000 and will mature on
August 1, 2010. Subject to our compliance with the covenant described below
under "-- Certain Covenants -- Limitation on Indebtedness," we are entitled to,
without the consent of the Holders, issue more senior notes under the Indenture
on the same terms and conditions as the exchange notes offered hereby in an
unlimited principal amount (the "Additional Notes"). The exchange notes, the old
notes and the Additional Notes, if any, will be treated as a single class for
all purposes of the Indenture, including waivers, amendments, redemptions and
offers to purchase. Unless the context otherwise requires, for all purposes of
the Indenture and this description of the exchange notes, references to the
exchange notes include any Additional Notes actually issued.
Interest on the exchange notes will accrue at the rate of 8 3/4% per annum
and will be payable semiannually in arrears on February 1 and August 1,
commencing on February 1, 2004. We will make each interest payment to the
Holders of record of the exchange notes on the immediately preceding January 15
and July 15. We will pay interest on overdue principal at 1% per annum in excess
of the above rate and will pay interest on overdue installments of interest at
such higher rate to the extent lawful.
Interest on these exchange notes will accrue from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
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OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the exchange notes will not
be redeemable at our option prior to August 1, 2007. Thereafter, the exchange
notes will be redeemable, at our 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 August 1 of
the years set forth below:
REDEMPTION
PERIOD PRICE
------ ----------
2007........................................................ 104.375%
2008........................................................ 102.188%
2009 and thereafter......................................... 100.000%
In addition, prior to August 1, 2006, we may at our option on one or more
occasions redeem senior notes (which includes Additional Notes, if any) in an
aggregate principal amount not to exceed 35% of the aggregate principal amount
of the senior notes (which includes Additional Notes, if any) originally issued
at a redemption price (expressed as a percentage of principal amount) of
108.75%, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds from one or more Equity Offerings; provided that
(1) at least 65% of such aggregate principal amount of senior notes
(which includes Additional Notes, if any) remains outstanding immediately
after the occurrence of each such redemption (other than senior notes held,
directly or indirectly, by us or our Affiliates); and
(2) each such redemption occurs within 90 days after the date of
consummation of the related Equity Offering.
In the case of any partial redemption, the Trustee will select the exchange
notes for redemption on a pro rata basis, by lot or by such other method as the
Trustee in its sole discretion deems to be fair and appropriate, although no
exchange note of $1,000 in original principal amount or less will be redeemed in
part. If any exchange note is to be redeemed in part only, the notice of
redemption relating to such exchange note will state the portion of the
principal amount thereof to be redeemed. A new exchange 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 exchange note. Exchange notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest will cease to accrue on exchange notes or portions of
them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the exchange notes. However, under certain
circumstances, we may be required to offer to purchase exchange notes as
described under the captions "-- Change of Control" and "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock." We may at any
time and from time to time purchase exchange notes in the open market or
otherwise.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors, jointly and severally, as primary obligors and
not merely as sureties, will irrevocably, fully and unconditionally guarantee
(each, a "Subsidiary Guarantee") on a senior unsecured basis the performance and
the punctual payment when due, whether at Stated Maturity, by acceleration or
otherwise, of all our obligations under the Indenture and the exchange notes
(all such obligations guaranteed by the Subsidiary Guarantors being herein
called the "Guaranteed Obligations"). The Subsidiary Guarantors initially
include all of our active Subsidiaries existing on the Issue Date, and we and
such active Subsidiaries collectively own substantially all of our consolidated
assets and produce substantially all of our consolidated
34
cash flow. In addition, subject to certain exceptions described below under
"-- Certain Covenants -- Future Subsidiary Guarantors," the Subsidiary
Guarantors will include future Restricted Subsidiaries that Incur Indebtedness.
We will derive a substantial portion of our operating income and cash flow from,
and a substantial portion of our assets will be held by, our Subsidiaries,
including the Subsidiary Guarantors. 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 Guarantee with respect to the
Subsidiary Guarantor.
Each Subsidiary Guarantee 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 the Subsidiary Guarantee, 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. If a Subsidiary Guarantee were to be rendered voidable, it
could be subordinated by a court to all other indebtedness, including guarantees
and other contingent liabilities, of the applicable Subsidiary Guarantor, and
depending on the amount of such indebtedness, a Subsidiary Guarantor's liability
on its Subsidiary Guarantee could be reduced to zero. Please read "Risk
Factors -- Risks Relating to Our Indebtedness and the Senior Notes -- A
subsidiary guarantee could be voided if it constitutes a fraudulent transfer
under U.S. bankruptcy or similar state law, which would prevent the holders of
the senior notes from relying on that subsidiary to satisfy claims."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guarantee will be entitled to a contribution from each other Subsidiary
Guarantor in an amount equal to such other Subsidiary Guarantor's pro rata
portion of such payment based on the respective net assets of all the Subsidiary
Guarantors, determined in accordance with GAAP, at the time of such payment.
Each Subsidiary Guarantee is a continuing guarantee and is intended to:
(1) subject to certain limited exceptions, remain in full force and
effect until payment in full of all the obligations relating to the
exchange notes;
(2) be binding upon the Subsidiary Guarantor; and
(3) inure to the benefit of and be enforceable by the Trustee, the
Holders and their successors, transferees and assigns.
Under the Indenture, a Subsidiary Guarantor may consolidate with, merge
with or into, or transfer all or substantially all its assets to any other
Person to the extent described below under "-- Certain Covenants -- Merger and
Consolidation"; provided, however, that, except in the case of a release
pursuant to the following paragraph, if such Person is not us, the Subsidiary
Guarantor's obligations under the Indenture and its Subsidiary Guarantee must be
expressly assumed by such other Person.
The Subsidiary Guarantee of a Subsidiary Guarantor will be released in the
event of a sale or other disposition (including by way of consolidation or
merger) of all or substantially all of the assets or all of the Capital Stock of
that Subsidiary Guarantor to a Person other than the Company or a Subsidiary of
the Company; provided, however, that such sale or disposition is permitted by,
and the proceeds from any such sale or disposition are applied in accordance
with, the Indenture as described under "-- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock." In addition, if the Board of Directors
designates a Subsidiary Guarantor to be an Unrestricted Subsidiary in accordance
with the applicable provisions of the Indenture, then such Subsidiary Guarantor
will be released and relieved of any obligations under its Subsidiary Guarantee.
RANKING
The indebtedness evidenced by the exchange notes and the Subsidiary
Guarantees will be unsecured, general obligations of the Company and the
relevant Subsidiary Guarantor, as the case may be, ranking pari passu in right
of payment with all senior unsecured Indebtedness of the Company or the relevant
Subsidiary Guarantor, as the case may be, whether outstanding on the Issue Date
or thereafter incurred.
35
The exchange notes and the Subsidiary Guarantees will be effectively junior
in right of payment to all existing and future secured Indebtedness of the
Company and of the Subsidiary Guarantors, as the case may be, including under
the Credit Agreement, to the extent of the value of the assets securing such
Indebtedness.
As of June 30, 2003, after giving pro forma effect to our offering of the
old notes in August 2003 and the application of the net proceeds from the
offering, we and our Subsidiary Guarantors would have had $0.5 million of
Indebtedness that effectively ranked senior in right of payment to the exchange
notes or to the Subsidiary Guarantees because of security granted to secure such
Indebtedness. In addition, as of such date on a pro forma basis as indicated,
and after giving effect to the amendment to the Credit Agreement as described
under "Description of Other Indebtedness and Series D Preferred Stock," we would
be able to borrow up to $59.9 million of secured Indebtedness under the Credit
Agreement. Substantially all of our oil and natural gas properties, and the oil
and natural gas properties of our Subsidiaries, are mortgaged and pledged to
secure obligations under the Credit Agreement.
Although the Indenture contains limitations on the amount of additional
Indebtedness that we and the Subsidiary Guarantors may Incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Secured Indebtedness. Please read "-- Certain
Covenants -- Limitation on Indebtedness" and "-- Certain Covenants -- Limitation
on Liens."
A substantial portion of our operations are currently conducted through our
Subsidiaries. All of our active Subsidiaries are guaranteeing the exchange
notes. However, our inactive subsidiaries are not guaranteeing, and certain of
our future Subsidiaries may not be required to guarantee, the exchange notes.
Claims of creditors of any non-guarantor Subsidiaries, including trade
creditors, secured creditors and creditors holding guarantees issued by such
non-guarantor Subsidiaries, and claims of preferred stockholders (if any) of
such non-guarantor Subsidiaries generally would have priority with respect to
the assets and earnings of such non-guarantor Subsidiaries over the claims of
our creditors, including Holders of the exchange notes, even though such
obligations would not constitute Senior Indebtedness of such non-guarantor
Subsidiaries. The exchange notes, therefore, would be effectively subordinated
to creditors, including trade creditors, and preferred stockholders, if any, of
such non-guarantor Subsidiaries of the Company. Although the Indenture limits
the incurrence of Indebtedness and the issuance of preferred stock by certain of
our Subsidiaries, such limitation is subject to a number of significant
qualifications. In addition, the Indenture does not impose any limitation on the
incurrence by such Subsidiaries of liabilities that are not considered
Indebtedness under the Indenture. Please read "-- Certain
Covenants -- Limitation on Indebtedness."
CHANGE OF CONTROL
(a) Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require that we repurchase such
Holder's exchange 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:
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a Permitted Holder, 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 (1) such person will 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 (for the purposes of this
clause (1), such person will be deemed to beneficially own any Voting Stock
of a specified corporation held by a parent corporation, if such person is
the beneficial owner (as defined in this clause (1)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation);
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors of the Company then still
in office who were either
36
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;
(3) the stockholders of the Company have approved any plan of
liquidation or dissolution of the Company; or
(4) 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, lease, conveyance or transfer of all or substantially all the assets
of the Company and its Restricted Subsidiaries, taken as a whole, to
another Person or group of related Persons (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than the Permitted
Holders, and, in the case of any such merger or consolidation, the
securities of the Company that are outstanding immediately prior to such
transaction and that 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.
If at the time a Change of Control occurs the terms of the Indebtedness
under the Credit Agreement restrict or prohibit the repurchase of exchange notes
under this covenant, then prior to the mailing of the notice to Holders provided
for in paragraph (b) below, but in any event within 30 days following any Change
of Control, we will:
(1) repay in full the Indebtedness under the Credit Agreement; or
(2) obtain the requisite consent under the agreements governing the
Indebtedness under the Credit Agreement to permit the repurchase of the
exchange notes as provided for in paragraph (b) below.
(b) Within 30 days following a Change of Control, we will 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 us to purchase such Holder's exchange 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 reasonably available information with respect to pro
forma historical income, cash flow and capitalization, in each case after
giving effect to such Change of Control);
(3) the purchase date, which will be no earlier than 30 days nor later
than 60 days from the date such notice is mailed; and
(4) the instructions determined by us, consistent with this covenant,
that a Holder must follow in order to have its exchange notes purchased.
(c) We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of exchange notes under this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this covenant, we will comply with the applicable securities
laws and regulations and will not be deemed to have breached our obligations
under this covenant by virtue thereof.
The Change of Control purchase feature of the exchange notes
(1) may in certain circumstances make more difficult or discourage a
sale or takeover of the Company and, thus, the removal of incumbent
management; and
(2) is a result of negotiations between us and the Initial Purchasers.
37
Management has no present intention to engage in a transaction involving a
Change of Control, although it is possible that we would decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "-- Certain Covenants -- Limitation on
Indebtedness" and "-- Limitation on Liens." Such restrictions can only be waived
with the consent of the Holders of a majority in principal amount of the
exchange 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 exchange notes protection in the event of a
highly leveraged transaction.
The Credit Agreement may prohibit us from purchasing any exchange notes and
provides that the occurrence of certain change of control events would
constitute a default thereunder. If a Change of Control occurs at a time when we
are prohibited from purchasing exchange notes, we could seek the consent of our
lenders to the purchase of exchange notes or could attempt to refinance the
borrowings that contain such prohibition. If we do not obtain such a consent or
repay such borrowings, we will remain prohibited from purchasing exchange notes.
In such case, our failure to purchase tendered exchange notes would constitute
an Event of Default under the Indenture that would, in turn, constitute a
default under the Credit Agreement.
Our future indebtedness 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 us to repurchase the exchange 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 us. Finally,
our ability to pay cash to the Holders of exchange notes following the
occurrence of a Change of Control may be limited by our then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases.
The definition of "Change of Control" includes a disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries,
taken as a whole, to another Person or group of related Persons (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) other than the Permitted
Holders. Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company and its
Restricted Subsidiaries, taken as a whole. As a result, it may be unclear as to
whether a Change of Control has occurred and whether a Holder of exchange notes
may require the Company to make an offer to repurchase the exchange notes as
described above.
The provisions under the Indenture relating to our obligation to make an
offer to repurchase the exchange 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 exchange notes.
We will not be required to make an offer to purchase the exchange notes as
a result of a Change of Control if a third party:
(1) makes such offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture relating to our
obligations to make such an offer; and
(2) purchases all exchange notes validly tendered and not withdrawn
under such an offer.
38
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
COVENANT SUSPENSION
During any period that the exchange notes have a rating equal to or higher
than BBB- by S&P and Baa3 by Moody's ("Investment Grade Ratings") and no Default
has occurred and is continuing, we and our Restricted Subsidiaries will not be
subject to the following covenants:
(a) "-- Limitation on Indebtedness";
(b) "-- Limitation on Restricted Payments";
(c) "-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries";
(d) "-- Limitation on Sales of Assets and Subsidiary Stock";
(e) "-- Limitation on Affiliate Transactions";
(f) clause (3) of the covenant described under "-- Merger and
Consolidation"; and
(g) "-- Future Subsidiary Guarantors'
(collectively, the "Suspended Covenants"). In the event that we and our
Restricted Subsidiaries are not subject to the Suspended Covenants for any
period of time as a result of the preceding sentence, and subsequently one or
both of S&P and Moody's downgrades the rating assigned to the exchange notes
below BBB-, in the case of S&P, and below Baa3, in the case of Moody's, then we
and our Restricted Subsidiaries will thereafter again be subject to the
Suspended Covenants (subject to subsequent suspension if the exchange notes
again receive Investment Grade Ratings). With respect to Restricted Payments
proposed to be made after the time of such a downgrade, the permissibility of
proposed Restricted Payments will be calculated in accordance with the terms of
the covenant described below under "-- Limitation on Restricted Payments" as
though such covenant had been in effect since the Issue Date.
LIMITATION ON INDEBTEDNESS
(a) We will not, and will not permit any Restricted Subsidiary to, Incur,
directly or indirectly, any Indebtedness; provided, however, that we or a
Restricted Subsidiary may Incur Indebtedness if, on the date of such Incurrence
and after giving effect thereto, no Default has occurred and is continuing and
the Consolidated Coverage Ratio exceeds 2.5 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), we and any Restricted
Subsidiary may Incur the following Indebtedness:
(1) Indebtedness Incurred under any Credit Facility, so long as the
aggregate amount of all Indebtedness outstanding under all Credit
Facilities pursuant to this clause (b)(1) does not exceed the greater of
(x) $100 million less the sum of all principal payments since the Issue
Date with respect to such Indebtedness under paragraph (a)(3)(A) of the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock" and (y) 25% of ACNTA as of the date of such Incurrence;
(2) Indebtedness owed to and held by us or any Restricted Subsidiary;
provided, however, that (A) any subsequent issuance or transfer of any
Capital Stock that results in any such Restricted Subsidiary ceasing to be
a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to us or a Restricted Subsidiary) will be deemed, in each case,
to constitute the Incurrence of such Indebtedness by the obligor thereon
and (B) if the Company is the obligor on such Indebtedness, unless such
Indebtedness is owed to a Subsidiary Guarantor, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the exchange notes;
(3) The senior notes (other than any Additional Notes);
39
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of paragraph (b) of this
covenant);
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by us (other than Indebtedness
Incurred in connection with, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions by which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by us); provided, however, that on
the date of such Incurrence and after giving pro forma effect thereto, we
would have been entitled to Incur at least $1.00 of additional Indebtedness
under paragraph (a) of this covenant;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred under
paragraph (a) or under clause (3), (4), (5) above, this clause (6) or
clause (7) below; provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a Restricted
Subsidiary Incurred under clause (5), such Refinancing Indebtedness will be
Incurred only by such Restricted Subsidiary or the Company;
(7) Non-recourse Purchase Money Indebtedness;
(8) Indebtedness arising from any agreement providing for indemnities,
Guarantees, purchase price adjustments, holdbacks, contingency payment
obligations based on the performance of the acquired or disposed assets or
similar obligations (other than Guarantees of Indebtedness) Incurred by any
Person in connection with the acquisition or disposition of assets and
Indebtedness under the Earnout Agreement;
(9) Indebtedness consisting of the Subsidiary Guarantees and any
Guarantee by the Company or a Subsidiary Guarantor of Indebtedness
permitted by the Indenture to be Incurred by the Company or a Subsidiary
other than Non-recourse Purchase Money Indebtedness;
(10) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness outstanding on the Issue Date or permitted
to be Incurred by the Company and its Restricted Subsidiaries under the
Indenture;
(11) Hedging Obligations consisting of 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 and its Restricted Subsidiaries;
(12) obligations in respect of bid, performance or surety bonds,
including Guarantees and letters of credit functioning as or supporting
such bid, performance or surety bonds, completion guarantees and other
reimbursement obligations provided by the Company or any Restricted
Subsidiary in the ordinary course of business (in each case other than for
an obligation for money borrowed);
(13) in-kind obligations relating to oil and gas balancing positions
arising in the ordinary course of business; and
(14) Indebtedness in an aggregate amount that, together with the
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 $35 million of which not more than $10 million may be
Indebtedness of Restricted Subsidiaries that are not Subsidiary Guarantors.
(c) Notwithstanding the foregoing, we will not, and will not permit any
Subsidiary Guarantor to, Incur any Indebtedness under the foregoing paragraph
(b) if the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations unless such Indebtedness is subordinated to the senior
notes or the relevant Subsidiary Guarantee, as the case may be, to at least the
same extent as such Subordinated Obligations.
The Company will not, and will not permit any Subsidiary Guarantor to,
directly or indirectly, incur any Indebtedness that by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated to any other
Indebtedness of the Company or of such Guarantor, as the case may be, unless
such
40
Indebtedness is also by its terms (or by the terms of any agreement governing
such Indebtedness) made expressly subordinate to the exchange notes or the
Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be, pursuant
to terms no less favorable to the Holders of the exchange notes.
(d) For purposes of determining compliance with the foregoing covenant:
(1) if an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, or is entitled to be incurred in
compliance with the Consolidated Coverage Ratio in clause (a) of this
covenant, we, in our sole discretion, may classify such item of
Indebtedness (or any portion thereof) at the time of Incurrence in any
manner that complies with this covenant and will only be required to
include the amount and type of such Indebtedness in one of the above
clauses; and
(2) we will be entitled to divide and classify an item of Indebtedness
in more than one of the types of Indebtedness described above or treat such
Indebtedness as having been incurred in compliance with the Consolidated
Coverage Ratio in clause (a) of this covenant.
LIMITATION ON RESTRICTED PAYMENTS
(a) We will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, make a Restricted Payment if at the time we make or such
Restricted Subsidiary makes such Restricted Payment:
(1) a Default or an Event of Default has occurred and is continuing
(or would result therefrom);
(2) we are not entitled to Incur an additional $1.00 of Indebtedness
under 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, without
duplication:
(A) 50% of the aggregate Consolidated Net Income of the Company
accrued during the period (treated as one accounting period) commencing
on the first day of the fiscal quarter during which the Issue Date
occurs and ending on the last day of the most recent fiscal quarter for
which financial statements of the Company are publicly available prior
to the date of such proposed Restricted Payment (or, if such aggregate
Consolidated Net Income is a deficit, minus 100% of such deficit); plus
(B) 100% of (i) the aggregate Net Cash Proceeds, and (ii) the Fair
Market Value of (a) Capital Stock (other than Capital Stock of the
Company) of a Person (other than an Affiliate of the Company) engaged
primarily in the Oil and Gas Business, provided that Person becomes a
Restricted Subsidiary of the Company, and (b) other assets used in the
Oil and Gas Business, in the case of clauses (i) and (ii) received by us
from the issuance or sale of our 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); plus
(C) the aggregate Net Cash Proceeds received by us subsequent to
the Issue Date from the issue or sale of our Capital Stock (other than
Disqualified Stock) 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; provided, however, that if such employee stock
ownership plan or trust Incurs any Indebtedness to finance the purchase
of such Capital Stock, such aggregate amount will be limited to the
excess of such Net Cash Proceeds over the amount of such Indebtedness
plus 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 or trust with respect to such Indebtedness; plus
(D) the amount by which our Indebtedness is reduced on our balance
sheet upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date of any of our Indebtedness that is
convertible or exchangeable for our Capital Stock (other than
41
Disqualified Stock) (less the amount of any cash, or the fair value of
any other Property, distributed by us upon such conversion or exchange);
provided, however, that the foregoing will not exceed the Net Cash
Proceeds received by the Company or any Restricted Subsidiary from the
sale of such Indebtedness (excluding Net Cash Proceeds from sales to a
Subsidiary of the Company or 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); plus
(E) an amount equal to the sum of (x) the net reduction in
Investments (other than Permitted Investments) made by us or any
Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemption of such Investments by such Person, proceeds
realized on the sale of such Investment and proceeds representing the
return of capital, in each case received by us or any Restricted
Subsidiary, and (y) to the extent such Person is an Unrestricted
Subsidiary, the portion (proportionate to our equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that to the
extent the foregoing sum exceeds, in the case of any such Person or
Unrestricted Subsidiary, the amount of Investments (excluding Permitted
Investments) previously made (and treated as a Restricted Payment) by
the Company or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary, such excess will not be included in this clause (E) unless
the amount represented by such excess has not been and will not be taken
into account in one of the foregoing clauses (A) through (D); plus
(F) $5 million.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) 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 such dividend will be included
in the calculation of the amount of Restricted Payments at the time of
payment;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of
their employees); provided, however, that (A) such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value will be
excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale will 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, repurchase,
redeem, defease or otherwise acquire or retire for value such Capital Stock
or Subordinated Obligations as provided in this clause (2));
(3) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness that is permitted to be Incurred under the
covenant described under "-- Limitation on Indebtedness"; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value will be excluded in the calculation of
the amount of Restricted Payments;
(4) so long as no Default or Event of Default has occurred and is
continuing, the purchase, redemption or other acquisition or retirement for
value of shares of Capital Stock of the Company or any of our Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of our Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), under 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 Capital Stock; provided, however, that the aggregate amount
of such purchases, redemptions and other acquisitions and retirements
(excluding
42
amounts representing cancellation of Indebtedness) will not exceed $2
million in any calendar year; provided, further, however, that such
purchases, redemptions and other acquisitions and retirements will be
excluded in the calculation of the amount of Restricted Payments;
(5) so long as no Default or Event of Default has occurred and is
continuing, any declaration or payment of dividends and other distributions
in respect of, but excluding any purchase, redemption or other acquisition
or retirement for value of, the Existing Preferred Stock; provided,
however, that such dividends and distributions will be included in the
calculation of the amount of Restricted Payments for purposes of
determining whether any subsequent Restricted Payment may be made under
paragraph (a) of this covenant;
(6) repurchases, acquisitions or retirements of shares of Company
common stock deemed to occur upon the exercise of stock options or similar
rights issued under employee benefit plans or warrants when shares are
surrendered to pay all or a portion of the exercise price or to satisfy any
federal income tax obligations; provided, however, that the aggregate
amount of such repurchases, acquisitions or retirements (i) effected to
satisfy any federal income tax obligations shall not exceed $2 million in
any twelve-month period and (ii) will be excluded in the calculation of the
amount of Restricted Payments;
(7) the payment of cash in lieu of fractional shares of Capital Stock
in connection with any transaction otherwise permitted under this covenant;
provided, however, that such payment will be excluded in the calculation of
the amount of Restricted Payments;
(8) upon the occurrence of a Change of Control or an Asset Disposition
and within 60 days after the completion of the offer to repurchase the
senior notes under the covenants described under "-- Change of Control"
above or "-- Limitation on Sales of Assets and Subsidiary Stock" below
(including the purchase of all exchange notes tendered), any purchase,
repurchase, redemption, defeasance, acquisition or other retirement for
value of Subordinated Obligations required under the terms thereof as a
result of such Change of Control or Asset Disposition at a purchase or
redemption price not to exceed 101% of the outstanding principal amount
thereof, plus accrued and unpaid interest thereon, if any; provided,
however, that (A) at the time of such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, no Default or
Event of Default has occurred and is continuing (or would result
therefrom), and (B) such purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value will be excluded in the
calculation of the amount of Restricted Payments; or
(9) the redemption, repurchase or repayment of our 11% Senior
Subordinated Notes due 2009 with the proceeds from the issuance of the old
notes; provided, however, that such redemption, repurchase or repayment
will be excluded in the calculation of the amount of Restricted Payments.
The amount of all Restricted Payments (other than cash) will be the Fair
Market Value on the date of the Restricted Payment of the assets proposed to be
transferred by the Company or such Restricted Subsidiary, as the case may be, in
accordance with the Restricted Payment.
For purposes of determining compliance with this covenant, if a Restricted
Payment meets the criteria of more than one of the types of Restricted Payments
described above, we, in our sole discretion, may order and classify such
Restricted Payment in any manner in compliance with this covenant.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
We will not, and will 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 us
43
or a Restricted Subsidiary, (b) to make any loans or advances to us or a
Restricted Subsidiary or (c) to transfer any of its Property to us or a
Restricted Subsidiary, except:
(1) with respect to clauses (a), (b) and (c),
(i) any encumbrance or restriction in the Credit Agreement on the
Issue Date or under any other agreement governing Indebtedness or
Capital Stock in effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction relating to Indebtedness of a
Restricted Subsidiary and existing at the time it became a Restricted
Subsidiary, provided that such encumbrance or restriction relates solely
to such Restricted Subsidiary and was not created in anticipation of or
in connection with the transactions by which such Restricted Subsidiary
became a Restricted Subsidiary;
(iii) any encumbrance or restriction under an agreement effecting a
Refinancing of Indebtedness Incurred under an agreement referred to in
clause (i) or (ii) of clause (1) of this covenant or this clause (iii)
or contained in any amendment to, or modification, restatement, renewal,
increase, supplement, replacement or extension of, an agreement referred
to in clause (i) or (ii) of clause (1) 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, modification, restatement, renewal, increase,
supplement, replacement or extension are not materially more
restrictive, taken as a whole, to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
such predecessor agreements;
(iv) customary restrictions with respect to a Restricted Subsidiary
imposed under an agreement entered into for the sale or disposition of
all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition;
(v) customary restrictions contained in agreements entered into in
the ordinary course of business of the types described in the definition
of the term "Permitted Business Investments"; and
(2) with respect to clause (c) only,
(A) customary nonassignment provisions, including provisions
forbidding subletting or sublicensing, in leases governing leasehold
interests and licenses to the extent such provisions restrict the
transfer of the lease or license or the property leased or licensed
thereunder;
(B) any encumbrance or restriction under Liens permitted to be in
effect without also securing the exchange notes as described under
"-- Limitation on Liens" that limit the right of the debtor to dispose
of the Property subject to such Lien;
(C) any encumbrance or restriction with respect to Property at the
time it is acquired by us or a Restricted Subsidiary, provided that such
encumbrance or restriction relates solely to the Property so acquired
and was not created in anticipation of or in connection with such
acquisition;
(D) restrictions on cash or other deposits imposed by customers
under contracts entered into in the ordinary course of business;
(E) encumbrances and restrictions contained in contracts entered
into in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract
from the value of, or from the ability of the Company and the Restricted
Subsidiaries to realize the value of, property or assets of the Company
or any Restricted Subsidiary in any manner material to the Company or
any Restricted Subsidiary; and
(F) restrictions on the transfer of property or assets required by
any regulatory authority having jurisdiction over the Company or such
Restricted Subsidiary.
44
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) We will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, consummate any Asset Disposition unless:
(1) we receive or such Restricted Subsidiary receives consideration at
the time of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration) (as determined in
good faith by the Board of Directors or an officer with responsibility for
such transaction), of the shares and assets subject to such Asset
Disposition;
(2) at least 75% of the consideration thereof received by us or such
Restricted Subsidiary is in the form of (a) cash or cash equivalents, (b)
oil and natural gas properties, (c) Capital Stock of a Person that becomes
a Restricted Subsidiary as a result of such acquisition and all or
substantially all of whose assets consist of oil and natural gas properties
or (d) capital assets to be used by us or any Restricted Subsidiary in the
Oil and Gas Business; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by us (or such Restricted Subsidiary, as the case
may be):
(A) to the extent we elect (or are required by the terms of any
Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness
of the Company or any Subsidiary Guarantor or Indebtedness of a Wholly
Owned Subsidiary that is not a Subsidiary Guarantor (in each case other
than Indebtedness owed to us or a Subsidiary of the Company) within one
year from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash;
(B) to the extent we elect, to acquire Additional Assets or to make
capital expenditures in the Oil and Gas Business within one year from
the later of the date of such Asset Disposition or the receipt of such
Net Available Cash; and
(C) to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and/or (B), to make an offer
to the Holders of the senior notes (and to holders of other Senior
Indebtedness of the Company designated by us) to purchase senior notes
(and such other Senior Indebtedness of the Company) pursuant to and
subject to the conditions contained in the Indenture;
provided, however, that in connection with any prepayment, repayment,
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness under clause (A) or (C) above, we or
such Restricted Subsidiary must permanently retire such Indebtedness and
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, we and the
Restricted Subsidiaries will not be required to apply any Net Available Cash in
accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions that is not applied in accordance
with this covenant exceeds $10 million.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition; and
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are converted by the Company or such Restricted
Subsidiary into cash within 120 days of receipt.
Notwithstanding the foregoing, the 75% limitation referred to in paragraph
(a)(2) above will be deemed satisfied with respect to any Asset Disposition in
which the cash or cash equivalents portion of the consideration received
therefrom, determined in accordance with the foregoing provision on an after-tax
basis,
45
is equal to or greater than what the after-tax proceeds would have been had such
Asset Disposition complied with the aforementioned 75% limitation.
The requirement of clause (a)(3)(B) above will be deemed to be satisfied if
an agreement (including a lease, whether a capital lease or an operating lease)
committing to make the acquisitions or expenditures referred to therein is
entered into by us or a Restricted Subsidiary within the time period specified
in such clause and such Net Available Cash is subsequently applied in accordance
with such agreement within six months following such agreement.
(b) If an Asset Disposition occurs that requires the purchase of senior
notes (and other Senior Indebtedness of the Company) under clause (a)(3)(C)
above, we will
(1) make such offer to purchase senior notes on or before the 366th
day after the later of the date of such Asset Disposition or the receipt of
such Net Available Cash, and
(2) purchase senior notes tendered under an offer by us for the senior
notes (and such other Senior Indebtedness of the Company) at a purchase
price of 100% of their principal amount (or, in the event such other Senior
Indebtedness of the Company was issued with significant original issue
discount, 100% of the accreted value thereof) without premium, plus accrued
but unpaid interest (or, in respect of such other Senior Indebtedness of
the Company, such lesser price, if any, as may be provided for by the terms
of such Senior Indebtedness of the Company) in accordance with the
procedures (including prorating in the event of oversubscription) set forth
in the Indenture.
If the aggregate purchase price of the securities tendered exceeds the Net
Available Cash allotted to their purchase, we will select the securities to be
purchased on a pro rata basis but in round denominations, which in the case of
the exchange notes will be denominations of $1,000 principal amount or multiples
thereof. We will not be required to make such an offer to purchase senior notes
(and other Senior Indebtedness of the Company) under this covenant if the Net
Available Cash available therefor is less than $10 million (which lesser amount
will be carried forward for purposes of determining whether such an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition). Upon completion of such an offer to purchase, Net Available Cash
will be deemed to be reduced by the aggregate amount of such offer.
(c) We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of senior notes under this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this covenant, we will comply with the applicable securities
laws and regulations and will not be deemed to have breached our obligations
under this covenant by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) We will not, and will not permit any Restricted Subsidiary to, enter
into or permit to exist any transaction (including the purchase, sale, lease or
exchange of any Property or the rendering of any service) with any Affiliate of
the Company (an "Affiliate Transaction") unless:
(1) the terms thereof are no less favorable to us 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 $5
million, the terms of the Affiliate Transaction are set forth in writing
and a majority of the non-employee directors of the Company who are
disinterested with respect to such Affiliate Transaction have determined in
good faith that the criteria set forth in clause (1) are satisfied and have
approved the relevant Affiliate Transaction as evidenced by a resolution of
the Board of Directors; and
(3) if such Affiliate Transaction involves an amount in excess of $20
million, the Board of Directors has also received a written opinion from an
Independent Qualified Party to the effect that such Affiliate Transaction
is fair, from a financial standpoint, to us and our Restricted Subsidiaries
or is not less
46
favorable to us and our Restricted Subsidiaries than could reasonably be
expected to be obtained at the time in an arm's-length transaction with a
Person who was not an Affiliate.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) the sale to an Affiliate of the Company of Capital Stock of the
Company that does not constitute Disqualified Stock, and the sale to an
Affiliate of the Company of Indebtedness (including Disqualified Stock) of
the Company in connection with an offering of such Indebtedness in a market
transaction and on terms substantially identical to those of other
purchasers in such market transaction;
(2) transactions contemplated by any employment agreement or other
compensation plan or arrangement existing on the Issue Date or thereafter
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business;
(3) the payment of reasonable fees to directors of the Company or any
of its Restricted Subsidiaries who are not employees of the Company or any
Restricted Subsidiary;
(4) indemnities of officers and directors of the Company or any
Restricted Subsidiary consistent with such Person's charter, bylaws and
applicable statutory provisions;
(5) the payment of reasonable compensation to officers of the Company
or any Restricted Subsidiary as determined in good faith by the Board of
Directors;
(6) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "-- Limitation on Restricted
Payments";
(7) any transaction between or among us and a Restricted Subsidiary or
joint venture or similar entity that would constitute an Affiliate
Transaction solely because the Company or a Restricted Subsidiary owns an
equity interest in or otherwise controls such Restricted Subsidiary, joint
venture or similar entity; provided that no more than 10% of the total
voting power of the Voting Stock of any such Restricted Subsidiary, joint
venture or similar entity is owned by an Affiliate of the Company (other
than a Restricted Subsidiary); and
(8) transactions or obligations provided for under the Stockholder
Agreement, dated as of November 17, 1999 and amended and restated as of
March 17, 2003 by and among us and the stockholders parties thereto, as in
effect on the Issue Date.
LIMITATION ON LIENS
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, create, incur, assume or suffer to exist or become
effective any Lien securing Indebtedness, except for Permitted Liens, on or with
respect to any Property of the Company or such Restricted Subsidiary, whether
owned on the Issue Date or acquired after the Issue Date, or any interest
therein or any income or profits therefrom, unless the exchange notes or any
Subsidiary Guarantee of such Restricted Subsidiary, as applicable, are secured
equally and ratably with such Indebtedness.
MERGER AND CONSOLIDATION
We will not consolidate with or merge with or into, or convey, transfer,
lease or otherwise dispose of, in one transaction or a series of transactions,
all or substantially all the assets of the Company and its Restricted
Subsidiaries, taken as a whole, to, any Person, unless:
(1) (A) the resulting, surviving or transferee Person (the "Successor
Company") is a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and (B)
the Successor Company (if not the Company) expressly assumes, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all of our obligations under the exchange
notes and the Indenture;
47
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness that 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;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under
"-- Limitation on Indebtedness";
(4) immediately after giving pro forma effect to such transaction, the
Successor Company will have Adjusted Consolidated Net Tangible Assets that
are not less than the Adjusted Consolidated Net Tangible Assets of the
Company immediately prior to such transaction;
(5) in the case of a conveyance, transfer or lease of all or
substantially all the assets of the Company and its Restricted
Subsidiaries, taken as a whole, such assets shall have been so conveyed,
transferred or leased as an entirety or virtually as an entirety to one
Person; and
(6) we have complied with certain additional conditions set forth in
the Indenture, including the delivery to the Trustee of an officers'
certificate and Opinion of Counsel regarding compliance with the terms of
the Indenture;
provided, however, that clauses (3) and (4) will not be applicable to any such
transaction solely between us and any Restricted Subsidiary.
The Successor Company will be the successor to us and will succeed to, and
be substituted for, and may exercise every right and power of, the Company under
the Indenture, and the predecessor company, except in the case of a lease, will
be released from the obligation to pay the principal of and interest on the
exchange notes.
We will not permit any Subsidiary Guarantor to consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not such
Subsidiary) is a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person expressly assumes, by executing a Guarantee
Agreement, all the obligations of such Subsidiary, if any, under its
Subsidiary Guarantee;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness that
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;
(3) in the case of a conveyance, transfer or lease of all or
substantially all the assets of a Subsidiary Guarantor, such assets shall
have been so conveyed, transferred or leased as an entirety or virtually as
an entirety to one Person; and
(4) we have complied with certain additional conditions contained in
the Indenture.
The provisions above will not apply to any one or more transactions that
constitute an Asset Disposition if the Company has complied with the applicable
provisions of the covenant described under "-- Limitation on Sales of Assets and
Subsidiary Stock" above.
LIMITATION ON LINE OF BUSINESS
We will not engage in any business other than the Oil and Gas Business.
However, this restriction will not prevent us from acquiring an entity that is
primarily engaged in the Oil and Gas Business, provided that the entity does not
have either a "Significant Subsidiary," as that term is defined in applicable
SEC rules and
48
regulations (Rule 1-02(w) of Regulation S-X), that is not in the Oil and Gas
Business or an amount of assets or operations not used in the Oil and Gas
Business such that, if such assets or operations were held in or conducted
through a single subsidiary, would represent a "Significant Subsidiary" under
such rules and regulations.
FUTURE SUBSIDIARY GUARANTORS
We will cause each Restricted Subsidiary that:
(a) incurs Indebtedness or issues Preferred Stock following the Issue
Date; or
(b) has Indebtedness or Preferred Stock outstanding on the date on
which such Restricted Subsidiary becomes a Restricted Subsidiary,
to execute and deliver to the Trustee a Subsidiary Guarantee at the time such
Restricted Subsidiary Incurs such Indebtedness, issues such Preferred Stock or
becomes a Restricted Subsidiary; provided, however, that such Restricted
Subsidiary will not be required to deliver a supplemental indenture providing
for a Subsidiary Guarantee if the aggregate amount of such Indebtedness or
Preferred Stock, together with all other Indebtedness and Preferred Stock then
outstanding among Restricted Subsidiaries that are not Subsidiary Guarantors,
does not exceed $10 million.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
Unless defined or designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of the Company or any of its Restricted Subsidiaries will
be classified as a Restricted Subsidiary subject to the provisions of the next
paragraph. We may designate a Subsidiary, including a newly formed or newly
acquired Subsidiary, or any of our Restricted Subsidiaries as an Unrestricted
Subsidiary if:
(a) such Subsidiary does not at such time own any Capital Stock or
Indebtedness of, or own or hold any Lien on any Property of, the Company or
any other Restricted Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated;
(b) such Subsidiary does not at such time have any Indebtedness or
other obligations that, if in default, would permit any holder of any
Indebtedness or other obligations of the Company or any Restricted
Subsidiary to declare a default on such Indebtedness or obligations or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity; and
(c)(1) such designation is effective immediately upon such Subsidiary
becoming a Subsidiary of the Company or of a Restricted Subsidiary,
(2) the Subsidiary to be so designated has total assets of $1,000 or
less, or
(3) if such Subsidiary has assets greater than $1,000, then such
redesignation as an Unrestricted Subsidiary will be deemed to constitute a
Restricted Payment in an amount equal to the Fair Market Value of our
direct and indirect ownership interest in such Subsidiary, and such
Restricted Payment would be permitted to be made at the time of such
designation under "-- Limitation on Restricted Payments."
Except as provided in the immediately preceding sentence, no Restricted
Subsidiary may be redesignated as an Unrestricted Subsidiary. The designation of
an Unrestricted Subsidiary or removal of such designation shall be made by our
Board of Directors or a committee thereof under a certified resolution delivered
to the Trustee and will be effective as of the date specified in the applicable
certified resolution, which will not be prior to the date such certified
resolution is delivered to the Trustee.
We will not, and will not permit any Unrestricted Subsidiaries to, take any
action or enter into any transaction or series of transactions that would result
in a Person becoming a Restricted Subsidiary (whether
49
through an acquisition or otherwise) unless, after giving effect to such action,
transaction or series of transactions, on a pro forma basis:
(a) we could Incur at least $1.00 of additional Indebtedness under
clause (a) of the first paragraph under "-- Limitation on Indebtedness";
and
(b) no Default or Event of Default would occur or be continuing.
SEC REPORTS
Notwithstanding that we may not at any time be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, we will file with the
SEC (to the extent the SEC will accept such filing) 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 and
applicable to a U.S. corporation subject to such Sections (but without exhibits
in the case of Noteholders), 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.
In addition, we will furnish to the Holders of the exchange notes and to
prospective investors, upon the request of such Holders, any information
required to be delivered under Rule 144A(d)(4) under the Securities Act so long
as the exchange notes are not freely transferable under the Securities Act.
DEFAULTS
An Event of Default is defined in the Indenture as:
(1) a default in the payment of interest on the senior notes when due,
continued for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required purchase, upon
declaration of acceleration or otherwise;
(3) the failure by us to comply with our obligations under "-- Certain
Covenants -- Merger and Consolidation" above;
(4) our failure to comply for 30 days after notice with any of our
obligations in the covenants described above under "-- Change of Control"
(other than a failure to purchase senior notes) and under "-- Certain
Covenants" under "-- 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 senior notes), "-- Limitation on
Affiliate Transactions," "-- Limitation on Liens," "-- Future Subsidiary
Guarantors" or "-- SEC Reports";
(5) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company, any Subsidiary Guarantor or any
Significant Subsidiary (other than Production Payments and Reserve Sales
and Non-recourse Purchase Money Indebtedness) is not paid within any
applicable grace period after final maturity or the maturity of such
Indebtedness is accelerated by the holders thereof because of a default
(and such acceleration is not rescinded or annulled) and the total amount
of such Indebtedness unpaid or accelerated exceeds $5 million (the
"cross-acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, a Subsidiary Guarantor or a Significant Subsidiary (the
"bankruptcy provisions");
(8) any judgment or decree for the payment of money in an uninsured or
unindemnified amount in excess of $5 million or its foreign currency
equivalent at the time is rendered against the Company, a Subsidiary
Guarantor or a Significant Subsidiary, remains outstanding for a period of
60 days following
50
such judgment and is not discharged, waived, bonded or stayed within 10
days after notice (the "judgment default provision"); or
(9) any Subsidiary Guarantee ceases to be in full force and effect
(other than in accordance with the terms thereof) for five days after
notice or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guarantee (the "guarantee default provision").
However, a default under clauses (4), (5) and (9) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding senior notes notify us of the default and we do not cure such
default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding senior notes may declare
the principal of and accrued but unpaid interest on all the exchange notes to be
due and payable. Upon such a declaration, such principal and interest will 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 exchange 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 exchange notes. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding senior notes may rescind any such acceleration with respect to the
senior 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 exchange
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 an exchange note may pursue any remedy with respect to the Indenture or the
exchange notes unless:
(1) such Holder has previously given the Trustee notice that an Event
of Default is continuing;
(2) Holders of at least 25% in principal amount of the outstanding
senior notes have requested the Trustee to pursue the remedy;
(3) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the outstanding
senior 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 exchange 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 an exchange 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 exchange 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 exchange 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 exchange notes. In addition, we are required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate stating that in
the course of the performance by the signers of their duties as officers of the
Company they would normally have knowledge of any Default and whether or not the
signers thereof know of any Default that occurred during the previous year. We
are also required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of
51
any event which would constitute certain Defaults, their status and what action
we are taking or propose to take in respect thereof.
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 senior notes
then outstanding (including consents obtained in connection with a tender offer
or exchange for the exchange notes) and any past default or compliance with any
provisions may also be waived with the consent of the Holders of a majority in
principal amount of the senior notes then outstanding. However, without the
consent of each Holder of an outstanding exchange note affected thereby, an
amendment or waiver may not, among other things:
(1) reduce the amount of senior notes whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any exchange note;
(3) reduce the principal of or extend the Stated Maturity of any
exchange note;
(4) reduce the amount payable upon the redemption of any exchange note
or change the time at which any exchange note may be redeemed as described
under "-- Optional Redemption" above;
(5) make any exchange note payable in money other than that stated in
the exchange note;
(6) impair the right of any Holder of the exchange notes to receive
payment of principal of and interest on such Holder's exchange 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 exchange notes;
(7) make any change in the amendment provisions that require each
Holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any exchange note
that would adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guarantee that would adversely
affect the Noteholders.
Without the consent of any Holder of the exchange notes, we, the Subsidiary
Guarantors and the Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation of the
obligations of the Company or the Subsidiary Guarantors under the
Indenture;
(3) provide for uncertificated exchange notes in addition to or in
place of certificated exchange notes (provided that the uncertificated
exchange notes are issued in registered form for purposes of Section 163(f)
of the Code, or in a manner such that the uncertificated exchange notes are
described in Section 163(f)(2)(B) of the Code);
(4) add guarantees with respect to the exchange notes (including any
Subsidiary Guarantee);
(5) secure the exchange notes;
(6) add to the covenants of the Company or a Subsidiary Guarantor for
the benefit of the Holders of the exchange notes or surrender any right or
power conferred upon us or any Subsidiary Guarantor;
(7) make any change that does not adversely affect the rights of any
Holder of the exchange notes; or
(8) comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
52
The consent of the Holders of the exchange 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, we are required
to mail to Holders of the exchange notes a notice briefly describing such
amendment. However, the failure to give such notice to all Holders of the
exchange notes, or any defect therein, will not impair or affect the validity of
the amendment.
TRANSFER
The exchange notes will be issued in registered form and will be
transferable only upon the surrender of the exchange notes being transferred for
registration of transfer. We may require payment of a sum sufficient to cover
any tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the exchange 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 exchange notes, to replace mutilated, destroyed,
lost or stolen exchange notes and to maintain a registrar and paying agent in
respect of the exchange notes.
In addition, at any time we may terminate our obligations under "-- Change
of Control" and 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 Subsidiary Guarantors and Significant Subsidiaries, the judgment
default provision and the guarantee default provision described under
"-- Defaults" above and the limitations contained in clauses (3) and (4) under
the first paragraph of "-- Certain Covenants -- Merger and Consolidation" above
("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the exchange notes may not be accelerated because of an Event
of Default with respect thereto. If we exercise our covenant defeasance option,
payment of the exchange notes may not be accelerated because of an Event of
Default specified in clause (4), (6), (7) (with respect only to Significant
Subsidiaries and Subsidiary Guarantors) or (8) (with respect only to Significant
Subsidiaries and Subsidiary Guarantors) or (9) under "-- Defaults" above or
because of our failure to comply with clause (3) or (4) under the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" above. If we
exercise our legal defeasance option or our covenant defeasance option, each
Subsidiary Guarantor will be released from all its obligations with respect to
its Subsidiary Guarantee.
In order to exercise either defeasance option, we must irrevocably deposit
in trust (the "defeasance trust") with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the exchange 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 exchange 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 amounts 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
Wells Fargo Bank, N.A. will be the Trustee under the Indenture. We have
appointed the Trustee as Registrar and Paying Agent with regard to the exchange
notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of
53
any such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, however, if it acquires any conflicting
interest it must either eliminate such conflict within 90 days, apply to the SEC
for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding senior
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
exchange notes, unless such Holder has 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.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor will have any liability for any obligations of the
Company or any Subsidiary Guarantor under the exchange notes, any Subsidiary
Guarantee or the Indenture or for any claim based on, in respect of, or by
reason of such obligations or their creation. Each Holder of the exchange notes
by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the exchange notes. Such
waiver and release may not be effective to waive liabilities under the U.S.
Federal securities laws, and it is the view of the SEC that such a waiver is
against public policy.
GOVERNING LAW
The Indenture and the exchange 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.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock)
in the Oil and Gas Business;
(2) 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
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clauses (2)
or (3) above is engaged in the Oil and Gas Business.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without
duplication), as of the date of determination:
(a) the sum of:
(1) discounted future net revenue from proved crude oil and natural
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
54
independent petroleum engineers, as increased by, as of the date of
determination, the discounted future net revenue of
(A) estimated proved crude oil and natural gas reserves of the
Company and its Restricted Subsidiaries attributable to acquisitions
consummated since the date of such year-end reserve report, and
(B) estimated crude oil and natural gas reserves of the Company
and its Restricted Subsidiaries attributable to extensions,
discoveries and other additions and upward determinations of
estimates of proved crude oil and natural gas reserves (including
previously estimated development costs incurred during the period and
the accretion of discount since the prior year end) due to
exploration, development or exploitation, production or other
activities, which reserves were not reflected in such year-end
reserve report, that would, in the case of determinations made under
clauses (A) and (B), 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),
and decreased by, as of the date of determination, the discounted future
net revenue attributable to
(C) estimated proved crude oil and natural gas reserves of the
Company and its Restricted Subsidiaries reflected in such year-end
reserve report produced or disposed of since the date of such
year-end reserve report and
(D) reductions in the estimated crude oil and natural gas
reserves of the Company and its Restricted Subsidiaries reflected in
such year-end reserve report since the date of such year-end reserve
report attributable to downward determinations of estimates of proved
crude oil and natural 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 that would,
in the case of determinations made under 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, however, that, in the case of each of the determinations made
under clauses (A) through (D), such increases and decreases will 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 that is an increase, then such increases and
decreases in the discounted future net revenue will be confirmed in
writing by an independent petroleum engineer;
(2) the capitalized costs that are attributable to crude oil and
natural gas properties of the Company and its Restricted Subsidiaries to
which no proved crude oil and natural 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;
(3) the Net Working Capital on a date no earlier than the date of
the Company's latest annual or quarterly financial statements; and
(4) 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 will not
be required to obtain such an appraisal of such assets if no such
appraisal has been performed);
minus
55
(b) to the extent not otherwise taken into account in the immediately
preceding clause (a), the sum of:
(1) minority interests;
(2) any natural gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest audited
financial statements;
(3) 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, under participation, partnership, vendor financing or
other agreements then in effect, or which otherwise are required to be
delivered to third parties;
(4) 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 that are required to
be delivered to third parties to fully satisfy the obligations of the
Company and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect thereto; and
(5) the discounted future net revenue, 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 revenue
specified in the immediately preceding clause (a)(1) (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.
If the Company changes its method of accounting from the successful efforts
method to the full cost method or a similar method of accounting, "ACNTA" will
continue to be calculated as if the Company were still using the successful
efforts method of accounting.
"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 -- Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" will also mean any beneficial owner of
Capital Stock representing 10% 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 under the first
sentence hereof.
"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:
(1) 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);
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary.
56
Notwithstanding the foregoing, none of the following will 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," a disposition of all or substantially all the assets of the
Company in compliance with "-- Certain Covenants -- Merger and
Consolidation" or a disposition that constitutes a Change of Control under
clause (3) of the definition thereof;
(3) the sale or transfer (whether or not in the ordinary course of
business) of crude oil and natural 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 crude oil and natural gas properties in the ordinary course of
business;
(5) the trade or exchange by the Company or any Restricted Subsidiary
of any crude oil and natural gas property owned or held by the Company or
such Restricted Subsidiary for (a) any crude oil and natural gas property
owned or held by another Person or (b) the Capital Stock of another Person
that becomes a Restricted Subsidiary as a result of such trade or exchange
and all or substantially all of whose assets consist of crude oil and
natural gas properties, in either case including any cash or cash
equivalents necessary in order to achieve an exchange of equivalent value;
provided, however, that the value of the property or Capital Stock received
by the Company or any Restricted Subsidiary in such trade or exchange
(including any cash or cash equivalents) is at least equal to the fair
market value (as determined in good faith by the Board of Directors or an
Officer of the Company with responsibility for such transaction) of the
property (including any cash or cash equivalents) so traded or exchanged;
(6) the sale or transfer of hydrocarbons or other mineral products or
surplus or obsolete equipment in the ordinary course of business;
(7) any sale, lease or other disposition of any individual asset or
series of related sales, leases or other dispositions where the cash
proceeds and fair market value of non-cash proceeds do not exceed $750,000;
or
(8) Production Payments and Reserve Sales in connection with the
acquisition of any crude oil and natural gas property after the Issue Date;
provided that any such Production Payment and Reserve Sale is created,
incurred, issued or assumed in connection with the financing of, and within
90 days after the acquisition of, such oil and natural gas property.
"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; provided, however, that if such
Sale/Leaseback Transaction results in a Capital Lease Obligation, the amount of
Indebtedness represented by such Sale/Leaseback Transaction will be determined
in accordance with the definition of "Capital Lease Obligation."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing
(1) the sum of the products of the 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
(2) the sum of all such payments.
57
"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 other than a Saturday, a Sunday or a day on
which banking institutions are not required to be open in the State of New York
or Texas.
"Capital Lease Obligation" 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 will be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof will 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of
(a) 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
(b) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(1) if we have 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 will 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 we have 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
will 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 had 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 we or any Restricted
Subsidiary has made any Asset Disposition, then EBITDA for such period
will be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets that 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 will 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 we and our continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale);
(4) if since the beginning of such period we or any Restricted
Subsidiary (by merger or otherwise) has made an Investment in any
Restricted Subsidiary (or any person that becomes a
58
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 will 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
us or any Restricted Subsidiary since the beginning of such period) has
made any Asset Disposition, any Investment or acquisition of assets that
would have required an adjustment under clause (3) or (4) above if made
by us or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period will be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations
will be determined in good faith by a responsible financial or accounting
Officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such
Indebtedness will 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,
but if the remaining term of such Interest Rate Agreement is less than 12
months, then such Interest Rate Agreement will only be taken into account
for that portion of the period equal to the remaining term of such
agreement).
The Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility, the outstanding principal
balance of which is required to be computed on a pro forma basis in accordance
with the foregoing, will be computed based on the average daily balance of such
Indebtedness during the applicable period; provided, that such average daily
balance will take into account the amount of any repayment of Indebtedness under
such revolving credit facility during the applicable period, to the extent such
repayment permanently reduced the commitments or amounts available to be
borrowed under such facility.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its 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:
(1) interest expense attributable to Capital Lease Obligations and
imputed interest with respect to Attributable Debt;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net costs (including amortization of fees and up-front payments)
associated with Interest Rate Agreements that, at the time entered into,
resulted in the Company and its Restricted Subsidiaries being net payees as
to future payouts under such agreements, and Interest Rate Agreements for
which the Company or any of its Restricted Subsidiaries has paid a premium;
(7) dividends paid (excluding dividends paid in shares of Capital
Stock that is not Disqualified Stock) in respect of all Preferred Stock
held by Persons other than the Company or a Wholly Owned Subsidiary;
59
(8) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by, or secured by a Lien on Property
of, the Company or any Restricted Subsidiary (whether or not such Guarantee
or Lien is called upon);
(9) interest incurred in connection with Investments in discontinued
operations;
(10) cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust;
minus, to the extent included above, write-off of deferred financing costs and
interest attributable to Dollar-Denominated Production Payments.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Subsidiaries determined on a consolidated basis in accordance
with GAAP; provided, however, that there will not be included in such
Consolidated Net Income:
(1) 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 (3) below, the
Company's equity in the net income of any such Person for such period
will 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, interest payment
or other distribution (subject, in the case of a dividend , interest
payment or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (2) below); and
(B) the Company's equity in a net loss of any such Person for such
period will not be included in determining such Consolidated Net Income,
except to the extent of the aggregate cash actually contributed to such
Person by the Company or a Restricted Subsidiary during such period;
(2) 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 (3) below, the
equity in the net income of any such Restricted Subsidiary for such
period will be included in such Consolidated Net Income up to the amount
of cash permitted to be 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 will be included in determining such
Consolidated Net Income;
(3) any gain or loss realized upon the sale or other disposition of
any assets of the Company or its consolidated Subsidiaries (including any
sale or disposition under any sale-and-leaseback arrangement) that 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;
(4) extraordinary gains or losses, together with any related provision
for taxes on such gains or losses and all related fees and expenses;
(5) any non-cash compensation expense realized for grants of
performance shares, stock options or stock awards to officers, directors
and employees of the Company or any of its Restricted Subsidiaries;
(6) any impairment losses on oil and natural gas properties;
(7) the cumulative effect of a change in accounting principles; and
(8) any unrealized non-cash gains or losses or charges in respect of
Hedging Obligations.
60
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there will be
excluded from Consolidated Net Income any dividends, interest payments,
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, interest payments, repayments or transfers increase the amount of
Restricted Payments permitted under such covenant under clause (a)(3)(E)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its 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 the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
(2) paid-in capital or capital surplus relating to such Capital Stock
plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Agreement" means that certain Third Amended and Restated Credit
Agreement, dated November 1, 2002, as amended by the First Amendment thereto
effective as of July 28, 2003, by and among us, certain of the Subsidiary
Guarantors and Bank One, NA (or any successor thereto or replacement thereof),
as administrative agent, letter of credit issuer and a bank, and certain other
financial institutions, as banks, 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, refinanced or increased 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, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"Currency Agreement" means, in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
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:
(1) matures or is mandatorily redeemable under a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder thereof
for Indebtedness or Disqualified Stock; or
(3) is redeemable or repurchasable, in whole or in part, at the option
of the holder thereof;
in each case on or prior to the first anniversary of the Stated Maturity of the
exchange 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 purchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the exchange notes will not constitute Disqualified Stock if:
(x) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable, as measured by the purchase or
redemption price or the breadth of the definition of the event
61
or events triggering such purchase or redemption obligation 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"; and
(y) any such requirement only becomes operative after compliance with
such corresponding terms applicable to the exchange notes, including the
purchase of any exchange notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined under the Indenture; provided, however, that if such Disqualified
Stock could not be required to be redeemed, repaid or repurchased at the time of
such determination, the redemption, repayment or repurchase price will be the
book value of such Disqualified Stock as reflected in the most recent financial
statements of such Person.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Earnout Agreement" means the Earnout Agreement, dated January 15, 2002, as
amended on July 1, 2002, by and among the Company and Hall-Houston Oil Company,
with Hall-Houston Oil Company executing on behalf of the Participants (as
defined therein).
"EBITDA" means, with respect to any period, the Consolidated Net Income for
such period:
(a) plus the sum of, to the extent reflected in the consolidated
income statement of the Company and its Restricted Subsidiaries for such
period from which Consolidated Net Income is determined and deducted in the
determination of such Consolidated Net Income, without duplication:
(1) Consolidated Interest Expense;
(2) income tax expense;
(3) depreciation, depletion and amortization expense (excluding
amortization expense attributable to a prepaid operating activity item
that was paid in cash in a prior period);
(4) exploration expense; and
(5) all other non-cash charges including non-cash charges taken
under FAS 133 (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);
(b) less, to the extent included in the determination of such
Consolidated Net Income and in excess of any costs or expenses attributable
thereto and deducted in the determination of such Consolidated Net Income,
the sum of:
(1) the amount of deferred revenues that are amortized during such
period and are attributable to reserves that are subject to Volumetric
Production Payments; and
(2) amounts recorded in accordance with GAAP as repayments of
principal and interest under Dollar-Denominated Production Payments.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depletion, depreciation, amortization and exploration and
other non-cash charges of, a Restricted Subsidiary will be added to Consolidated
Net Income to compute EBITDA only
(1) to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in the determination of
Consolidated Net Income, and
62
(2) if a corresponding amount would be permitted at the date of
determination to be paid as a dividend to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), under the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Equity Offering" means:
(1) a primary offering of shares of common stock of the Company
pursuant to an underwritten offering registered under the Securities Act;
or
(2) a private offering of shares of common stock of the Company so
long as, at the time of consummation of the sale pursuant to such offering,
the Company's common stock continues to be registered pursuant to Section
12(b) or Section 12(g) under the Exchange Act,
in each case, other than public offerings with respect to such common stock or
options, warrants or rights to acquire same, registered on Form S-4 or Form S-8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Preferred Stock" means our Series D Exchangeable Convertible
Preferred Stock, par value $1.00 per share and stated value of $100 per share.
"Fair Market Value" means, with respect to any non-cash consideration or
property transferred or received by any Person, the fair market value of such
consideration or property as determined by the Board of Directors of the
Company.
"FAS 133" means Financial Accounting Standards Board Statement No. 133, as
amended, "Accounting for Derivative Instruments and Hedging Activities."
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board;
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession; and
(4) 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 under 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:
(1) 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
(2) 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" will 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" will mean any
Person Guaranteeing any obligation.
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"Guarantee Agreement" means a supplemental indenture, in a form
satisfactory to the Trustee, by which a Subsidiary Guarantor or any other Person
becomes subject to the applicable terms and conditions of the Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
under 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) will be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun will have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security will not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) 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;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(3) 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;
(4) 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 clauses (1)
through (3) 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);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock, but
excluding any accrued dividends;
(6) any Preferred Stock of any Restricted Subsidiary;
(7) all obligations of the type referred to in clauses (1) through (6)
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;
(8) all obligations of the type referred to in clauses (1) through (7)
of other Persons secured by any Lien on any Property 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 the amount of the obligation so
secured;
(9) to the extent not otherwise included in this definition, Hedging
Obligations of such Person; and
(10) any Guarantee by such Person of production or payment with
respect to a Production Payment and Reserve Sale.
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, assuming the occurrence on such date of the contingency
giving rise to the obligation, of any contingent obligations outstanding at such
date.
64
None of the following will constitute Indebtedness:
(1) obligations for indemnification or adjustment of purchase price or
arising from guarantees securing any such obligations of ours or any of our
Subsidiaries 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 us or any of our 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;
(2) any trade payables or other similar liabilities to trade creditors
and other accrued current liabilities incurred in the ordinary course of
business as the deferred purchase price of property;
(3) any liability for Federal, state, local or other taxes owed or
owing by such Person;
(4) amounts due in the ordinary course of business to other royalty
and working interest owners;
(5) obligations arising from guarantees to suppliers, lessors,
licensees, contractors, franchisees or customers incurred in the ordinary
course of business;
(6) 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;
(7) obligations in respect of performance bonds provided by us or any
of our Subsidiaries in the ordinary course of business and refinancing
thereof;
(8) 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;
(9) any obligations under workers' compensation laws and similar
legislation; and
(10) except as expressly provided in clause (10) above, obligations
relating to Production Payments and Reserve Sales.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect us 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 us 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. Except as otherwise provided
for herein, the amount of an Investment will be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments":
(1) "Investment" will 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 will 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
65
(proportionate to the Company's equity interest in such Subsidiary) of the
Fair Market Value of the net assets of such Subsidiary at the time of such
redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
will 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 exchange 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.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices and changes resulting from the incurrence
of previously estimated future development costs) of more than 25% during a
fiscal quarter in the discounted future net revenues from proved crude oil and
natural gas reserves of the Company and its Restricted Subsidiaries, calculated
in accordance with clause (a)(1) of the definition of Adjusted Consolidated Net
Tangible Assets; provided, however, that the following will be excluded from the
calculation of Material Change:
(1) 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
(2) 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."
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal under 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:
(1) 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;
(2) all payments made on any Indebtedness that 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 that 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;
(3) 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
(4) 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 of 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 cash flows associated with such reserves, determined
in accordance with the rules and regulations (including interpretations thereof)
of the SEC in effect on the date of this prospectus.
66
"Net Working Capital" means:
(1) all current assets of the Company and its Restricted Subsidiaries;
minus
(2) all current liabilities of the Company and its Restricted
Subsidiaries, except current liabilities included in Indebtedness;
in each case determined in accordance with GAAP.
"Non-recourse Purchase Money Indebtedness" means Indebtedness (other than
Capital Lease Obligations) of the Company or any Subsidiary Guarantor incurred
in connection with the acquisition by the Company or such Subsidiary Guarantor
in the ordinary course of business of fixed assets used in the Oil and Gas
Business (including office buildings and other real property used by the Company
or such Subsidiary Guarantor in conducting its operations) with respect to
which:
(1) the holders of such Indebtedness agree that they will look solely
to the fixed assets so acquired that secure such Indebtedness, and neither
the Company nor any Restricted Subsidiary (a) is directly or indirectly
liable for such Indebtedness or (b) provides credit support, including any
undertaking, Guarantee, agreement or instrument that would constitute
Indebtedness (other than the grant of a Lien on such acquired fixed
assets); and
(2) no default or event of default with respect to such Indebtedness
would cause, or permit (after notice or passage of time or otherwise), any
holder of any other Indebtedness of the Company or a Subsidiary Guarantor
to declare a default or event of default on such other Indebtedness or
cause the payment, repurchase, redemption, defeasance or other acquisition
or retirement for value thereof to be accelerated or payable prior to any
scheduled principal payment, scheduled sinking fund payment or maturity.
"Obligations" means, with respect to any Indebtedness, all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Oil and Gas Business" means
(1) the acquisition, exploration, exploitation, development, operation
or disposition of interests in, or obtaining production from, oil, natural
gas or other hydrocarbon properties;
(2) the gathering, marketing, treating, processing (but not refining),
storage, selling or transporting of any production from such interests or
properties; or
(3) any activity that is ancillary, necessary or appropriate to
facilitate, or that is incidental to, the activities described in clauses
(1) and (2) of this definition.
"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.
"Oil and Gas Liens" means:
(1) Liens on any specific property or any interest therein,
construction thereon or improvement thereto to secure all or any part of
the costs incurred for surveying, exploration, drilling, extraction,
development, operation, production, construction, alteration, repair or
improvement of, in, under or on such property and the plugging and
abandonment of wells located thereon (it being understood that, in the case
of oil and gas producing properties, or any interest therein, costs
incurred for "development" will include costs incurred for all facilities
relating to such properties or to projects, ventures or other arrangements
of which such properties form a part or that relate to such properties or
interests);
(2) Liens on an oil or gas producing property to secure obligations
incurred or guarantees of obligations incurred in connection with or
necessarily incidental to commitments for the purchase or sale of, or the
transportation or distribution of, the products derived from such property;
67
(3) Liens arising under partnership agreements, oil and gas leases,
overriding royalty agreements, net profits agreements, production payment
agreements, royalty trust agreements, incentive compensation programs on
terms that are reasonably customary in the Oil and Gas Business for
geologists, geophysicists and other providers of technical services to the
Company or a Restricted Subsidiary, farm-out agreements, farm-in
agreements, division orders, contracts for the sale, purchase, exchange,
transportation, gathering or processing of oil, gas or other hydrocarbons,
unitizations and pooling designations, declarations, orders and agreements,
development agreements, operating agreements, production sales contracts,
area of mutual interest agreements, gas balancing or deferred production
agreements, injection, repressuring and recycling agreements, salt water or
other disposal agreements, seismic or geophysical permits or agreements,
and other agreements that are customary in the Oil and Gas Business;
provided, however, that in all instances such Liens are limited to the
assets that are the subject of the relevant agreement, program, order or
contract;
(4) Liens arising in connection with Production Payments and Reserve
Sales; and
(5) Liens on pipelines or pipeline facilities that arise by operation
of law.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Business Investment" means any investment or expenditure made in
the ordinary course of, and of a nature that is or has become customary in, the
Oil and Gas Business including investments or expenditures arising through
agreements, transactions, interests or arrangements that 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:
(1) ownership interests in oil and gas properties, processing
facilities, gathering systems, pipelines or ancillary real property
interests; and
(2) Investments in the form of or under operating agreements,
processing agreements, farm-in agreements, farm-out agreements, development
agreements, area of mutual interest agreements, unitization agreements,
pooling agreements, joint bidding agreements, service contracts, joint
venture agreements, partnership agreements (whether general or limited),
subscription agreements, stock purchase agreements and other similar
agreements (including for limited liability companies) with third parties,
excluding, however, Investments in any corporation, partnership, limited
liability company or any other entity that is not a Restricted Subsidiary.
"Permitted Holders" means:
(1) Richard A. Bachmann;
(2) Evercore Capital Partners L.P., Evercore Capital Offshore Partners
L.P., Evercore Capital Partners (NQ) L.P. and Evercore Co-Investment
Partnership L.P.;
(3) trusts, the sole beneficiaries and trustees of which is or are the
individual who would be a Permitted Holder under clause (1) above or his
immediate family members; and
(4) corporations, partnerships and other entities (a) of which the
individual who would be a Permitted Holder under clause (1) above or his
immediate family members is or are the beneficial owners of all Capital
Stock and other equity or voting interests and (b) that are controlled by
such individual and his immediate family members.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) 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 the Oil and Gas
Business;
68
(2) 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 the Oil and Gas
Business;
(3) Temporary Cash Investments;
(4) receivables owing to us 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;
(5) 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;
(6) loans or advances to employees made in the ordinary course of
business;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to us or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the noncash
portion of the consideration received for an Asset Disposition as permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock";
(9) Permitted Business Investments;
(10) Investments made pursuant to Hedging Obligations of the Company
and the Restricted Subsidiaries;
(11) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (a) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment
or accounts receivable or (b) as a result of a foreclosure by the Company
or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured
Investment in default; and
(12) any Person, not otherwise permitted to be made under clause (1)
through (11), in an aggregate amount, which when taken together with all
other Investments made on or after the Issue Date under this clause, does
not exceed $20 million at any one time outstanding.
"Permitted Liens" means, with respect to any Person:
(1) Liens existing as of the Issue Date;
(2) Liens securing the exchange notes, any Subsidiary Guarantee and
other obligations arising under the Indenture;
(3) any Lien existing on any Property of a Person at the time such
Person is merged or consolidated with or into the Company or a Restricted
Subsidiary or becomes a Restricted Subsidiary (and not incurred in
anticipation of or in connection with such transaction), provided that such
Liens are not extended to other Property of the Company or the Restricted
Subsidiaries;
(4) any Lien existing on any Property at the time of the acquisition
thereof (and not incurred in anticipation of or in connection with such
transaction), provided that such Liens are not extended to other Property
of the Company or the Restricted Subsidiaries;
(5) any Lien incurred in the ordinary course of business incidental to
the conduct of the business of the Company or the Restricted Subsidiaries
or the ownership of their property (including (a) easements, rights of way
and similar encumbrances, (b) rights or title of lessors under leases
(other than Capital Lease Obligations), (c) rights of collecting banks
having rights of setoff, revocation, refund or chargeback with respect to
money or instruments of the Company or the Restricted Subsidiaries on
69
deposit with or in the possession of such banks, (d) Liens imposed by law,
including Liens under workers' compensation or similar legislation and
mechanics', carriers', warehousemen's, materialmen's, suppliers' and
vendors' Liens, (e) Liens incurred to secure performance of obligations
with respect to statutory or regulatory requirements, performance or
return-of-money bonds, surety bonds or other obligations of a like nature
and incurred in a manner consistent with industry practice and (f) Oil and
Gas Liens, in each case which are not incurred in connection with the
borrowing of money, the obtaining of advances or credit or the payment of
the deferred purchase price of property (other than trade accounts payable
arising in the ordinary course of business));
(6) Liens for taxes, assessments and governmental charges not yet due
or the validity of which are being contested in good faith by appropriate
proceedings, promptly instituted and diligently conducted, and for which
adequate reserves have been established to the extent required by GAAP as
in effect at such time;
(7) Liens incurred to secure appeal bonds and judgment and attachment
Liens, in each case in connection with litigation or legal proceedings that
are being contested in good faith by appropriate proceedings, so long as
reserves have been established to the extent required by GAAP as in effect
at such time and so long as such Liens do not encumber assets by an
aggregate amount (together with the amount of any unstayed judgments
against the Company or any Restricted Subsidiary but excluding any such
Liens to the extent securing insured or indemnified judgments or orders) in
excess of $5 million;
(8) Liens securing Hedging Obligations of the Company and its
Restricted Subsidiaries;
(9) Liens securing Purchase Money Indebtedness or Capital Lease
Obligations Incurred in accordance with the Indenture, provided that such
Liens attach only to the property acquired (or, if such property is Capital
Stock, to the assets of such person as well as such Capital Stock) with the
proceeds of such Purchase Money Indebtedness or the property that is the
subject of such Capital Lease Obligations;
(10) Liens securing Non-recourse Purchase Money Indebtedness granted
in connection with the acquisition by the Company or any Restricted
Subsidiary in the ordinary course of business of fixed assets used in the
Oil and Gas Business (including the office buildings and other real
property used by the Company or such Restricted Subsidiary in conducting
its operations), provided that (a) such Liens attach only to the fixed
assets acquired with the proceeds of such Non-recourse Purchase Money
Indebtedness and (b) such Non-recourse Purchase Money Indebtedness is not
in excess of the purchase price of such fixed assets;
(11) Liens resulting from the deposit of funds or evidences of
Indebtedness in trust for the purpose of decreasing or legally defeasing
Indebtedness of the Company or any Restricted Subsidiary so long as such
deposit of funds is permitted by the provisions of the Indenture described
under "-- Limitation on Restricted Payments";
(12) Liens resulting from a pledge of Capital Stock of a Person that
is not a Restricted Subsidiary to secure obligations of such Person and any
refinancings thereof;
(13) Liens securing Obligations under the Credit Agreement;
(14) Liens to secure any permitted extension, renewal, refinancing,
refunding or exchange (or successive extensions, renewals, refinancings,
refundings or exchanges), in whole or in part, of or for any Indebtedness
secured by Liens referred to in clauses (1), (2), (3), (4), (9), (10) and
(13) above; provided, however, that (a) such new Lien must be limited to
all or part of the same property (including future improvements thereon and
accessions thereto) subject to the original Lien and (b) the Indebtedness
secured by such Lien at such time is not increased to any amount greater
than the sum of (I) the outstanding principal amount or, if greater, the
committed amount of the Indebtedness secured by such original Lien
immediately prior to such extension, renewal, refinancing, refunding or
exchange and (II) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension,
renewal or replacement; and
(15) Liens in favor of the Company or a Restricted Subsidiary.
70
Notwithstanding anything in this definition to the contrary, the term "Permitted
Liens" will not include Liens resulting from the creation, incurrence, issuance
or assumption of any Production Payments and Reserve Sales other than:
(1) any such Liens existing as of the Issue Date;
(2) Production Payments and Reserve Sales in connection with the
acquisition of any Property after the Issue Date; provided that any such
Lien created in connection therewith is created, incurred, issued or
assumed in connection with the financing of, and within 90 days after the
acquisition of, such Property; and
(3) Production Payments and Reserve Sales other than those described
in clauses (1) and (2), to the extent such Production Payments and Reserve
Sales constitute Asset Dispositions made pursuant to and in compliance with
the provisions described under "-- Limitation on Sales of Assets and
Subsidiary Stock";
provided, however, that, in the case of the immediately foregoing clauses (1),
(2) and (3), any Lien created in connection with any such Production Payments
and Reserve Sales must be limited to the Property that is the subject of such
Production Payments and Reserve Sales.
"Person" means any individual, corporation, partnership, limited liability
company, 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 Person, means
Capital Stock of any class or classes, however designated, that ranks prior, as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
The term "principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note that is due or overdue or is to become due
at the relevant time.
"Production Payments and Reserve Sales" means the grant or transfer by us
or a Restricted Subsidiary to any Person of a royalty, overriding royalty, net
profits interest or production payment (whether volumetric or dollar
denominated) in oil and natural gas properties, reserves or the right to receive
all or a portion of the production or the proceeds from the sale of production
attributable to such properties where the holder of such interest has recourse
solely to such production or proceeds of production, subject to the obligation
of the grantor or transferor to operate and maintain, or cause the subject
interests to be operated and maintained, in a reasonably prudent manner or other
customary standard or subject to the obligation of the grantor or transferor to
indemnify for environmental, title or other matters customary in the Oil and Gas
Business.
"Property" means, for any Person, any interest of such Person in any kind
of property or asset, whether real, personal or mixed, or tangible or
intangible, including Capital Stock and other securities issued by any other
Person (but excluding Capital Stock or other securities issued by such first
mentioned Person).
"Purchase Money Indebtedness" means any Indebtedness Incurred in connection
with the acquisition, construction or improvement of property (real or personal)
or assets, and whether acquired through the direct acquisition of such property
or assets or the acquisition of the Capital Stock or other equity interests of
any Person owning such property or assets, or otherwise.
"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. "Refinanced" and
"Refinancing" will have correlative meanings.
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"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) 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;
(3) 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; and
(4) if the Indebtedness being Refinanced is Non-recourse Purchase
Money Indebtedness, such Refinancing Indebtedness satisfies clauses (1) and
(2) of the definition of "Non-recourse Purchase Money Indebtedness";
provided further, however, that Refinancing Indebtedness will not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Restricted Payment" with respect to any Person means:
(1) 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 us 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));
(2) 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);
(3) 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
of such Person (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
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Company, Inc., and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned on the Issue Date or thereafter acquired whereby we or a Restricted
Subsidiary transfers such property to a Person and we or a Restricted Subsidiary
lease it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company or of any
Subsidiary secured by a Lien.
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"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter Incurred; and
(2) all other Obligations of such Person, 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 Indebtedness described in clause (1) above;
unless, with respect to obligations described in the immediately preceding
clause (1) or (2), in the instrument creating or evidencing the same or under
which the same is outstanding, it is provided that such Indebtedness or other
Obligations are subordinate in right of payment to the exchange notes or the
applicable Subsidiary Guarantee; provided, however, that Senior Indebtedness
will 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 or other Obligation of such Person, and any
accrued and unpaid interest in respect thereof, that is subordinate or
junior in any respect to any other Indebtedness or other Obligation of such
Person;
(5) Subordinated Obligations;
(6) that portion of any Indebtedness that at the time of Incurrence is
Incurred in violation of the Indenture (other than, in the case of the
Company or any Subsidiary Guarantor that Guarantees or is an obligor under
any Credit Facility, Indebtedness under any Credit Facility that is
Incurred on the basis of a representation by the Company or the applicable
Subsidiary Guarantor to the applicable lenders that such Person is
permitted to Incur such Indebtedness under the Indenture); or
(7) any Disqualified Stock or obligations with respect to any Capital
Stock.
"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 or obligation, the
date specified in such security or obligation as the fixed date on which the
final payment of principal of such security or payment on such obligation is due
and payable, including under any mandatory redemption provision (but excluding
any provision providing for the repurchase of such security or obligation 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 or any
Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter
Incurred, that is subordinate or junior in right of payment to, in the case of
the Company, the exchange notes or, in the case of a Subsidiary Guarantor, its
Subsidiary Guarantee under 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:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means each Subsidiary of the Company that executes
the Indenture as a guarantor and each other Subsidiary of the Company that
thereafter Guarantees the exchange notes under the terms of the Indenture, in
each case unless and until such Subsidiary is released from its obligations
under its
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Subsidiary Guarantee in accordance with the terms of the Indenture. Initially,
the Subsidiary Guarantors will be EPL Pipeline, L.L.C. (Delaware), Nighthawk,
L.L.C. (Louisiana), EPL of Louisiana, L.L.C. (Louisiana), Delaware EPL of Texas,
LLC (Delaware), and EPL Pioneer Houston, Inc. (Texas).
"Temporary Cash Investments" means any of the following:
(1) Investments in U.S. Government Obligations maturing within one
year of the date of acquisition thereof;
(2) Investments in (a) time deposit accounts, certificates of deposit
and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company that is organized
under the laws of the United States of America or any state thereof or the
District of Columbia that is a member of the Federal Reserve System and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $250 million and whose long-term debt is rated "A"
(or such similar equivalent rating) or higher by Moody's or S&P or (b) any
money-market fund having assets in excess of $500 million all of which
consist of obligations of the types described in clauses (1), (2), (3), (4)
and (5) hereof;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) Investments in commercial paper, maturing not more than one year
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 with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P; and
(5) 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 S&P or "A" by Moody's.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
will be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below; and
(2) 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
in the manner and subject to the conditions described under "-- Certain
Covenants -- Restricted and Unrestricted Subsidiaries."
"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
that 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) is owned by the Company
or one or more Wholly Owned Subsidiaries.
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GLOBAL NOTES AND BOOK-ENTRY SYSTEM
THE GLOBAL SECURITIES
The exchange notes will be issued in the form of one or more registered
notes in global form, without interest coupons. Such global notes will be
deposited on the issue date with DTC and registered in the name of Cede & Co.,
as nominee of DTC, or will remain in the custody of the Trustee under the
Indenture pursuant to the FAST Balance Certificate Agreement between DTC and the
Trustee. Beneficial interests in the global notes may not be exchanged for
certificated notes except in the circumstances described below. All interests in
global notes may be subject to the procedures and requirements of DTC.
Exchanges of beneficial interests in one global security for interests in
another global security will be subject to the applicable rules and procedures
of DTC and its direct and indirect participants. Any beneficial interest in one
of the global notes that is transferred to a person who takes delivery in the
form of an interest in another global security will, upon transfer, cease to be
an interest in that global security and become an interest in the global
security to which the beneficial interest is transferred and, accordingly, will
thereafter be subject to all transfer restrictions, if any, and other procedures
applicable to beneficial interests in the global security to which the
beneficial interest is transferred for as long as it remains an interest in that
global security.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC as set forth below
are provided solely as a matter of convenience. These operations and procedures
are solely within the control of the respective settlement systems and are
subject to change by them from time to time. We do not take any responsibility
for these operations or procedures, and investors are urged to contact the
relevant system or its participants directly to discuss these matters.
DTC has advised us that it is a limited purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities for its participants and
facilitates the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, which eliminates the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a direct or indirect custodial
relationship with a participant ("indirect participants"). The rules applicable
to DTC and its participants are on file with the Commission.
Upon the issuance of the global note representing the exchange notes, DTC
or its custodian will credit, on its internal system, the respective principal
amount of the individual beneficial interests represented by the global note to
the accounts of the persons who have accounts with DTC. Ownership of beneficial
interests in the global note will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants.
Ownership of beneficial interests in the global note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants and indirect participants (with respect to interests of persons
other than participants).
So long as DTC or its nominee is the registered owner or holder of the
global note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the exchange notes represented by the global note
for all purposes under the Indenture and the exchange notes. Except as set forth
herein, owners of beneficial interests in the global note will not be entitled
to have exchange notes represented by the global note registered in their names,
will not receive or be entitled to receive physical delivery of exchange notes
in definitive certificated form, and will not be considered holders of the
exchange notes for any purposes under the Indenture. Accordingly, each person
owning a beneficial interest in the global note must rely on the
75
procedures of DTC and, if such person is not a participant, on the procedures of
the participant through which such person directly or indirectly owns its
interest, to exercise any rights of a holder under the Indenture. We understand
that under existing industry practices, if we request any action of holders or
any owner of a beneficial interest in the global note desires to give any notice
or take any action that a holder is entitled to give or take under the
indenture, DTC would authorize the participants holding the relevant beneficial
interests to give such notice to take such action, and such participants would
authorize beneficial owners owning through such participants to give such notice
or take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
Payments of the principal of, premium, if any, and interest on the global
note will be made to DTC or its nominee, as the case may be, as the registered
owner. Neither we, the trustee nor any paying agent will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the global note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
of, premium, if any, or interest in respect of the global note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of the global
note, as shown on the records of DTC or its nominee. We also expect that
payments by participants to owners of beneficial interests in the global note
held through 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. The
participants will be responsible for such payments.
A global note is exchangeable for certificated notes if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the global notes and DTC fails to appoint a successor
depositary within 90 days of such notice or (b) at any time has ceased to
be a clearing agency registered under the Exchange Act;
(2) we, at our option, notify the Trustee in writing that we elect to
cause the issuance of the certificated notes; or
(3) there has occurred and is continuing an Event of Default with
respect to the exchange notes.
In addition, beneficial interests in a global note may be exchanged for
certificated notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, certificated notes
delivered in exchange for any global note or beneficial interests in global
notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary in accordance with its customary
procedures.
Although DTC has agreed to the procedures described above in order to
facilitate transfers of interests in the global note among participants of DTC,
it is under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither we 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.
According to DTC, the foregoing information with respect to DTC has been
provided by it for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind. The information
contained herein concerning DTC and its book-entry system has been obtained from
sources that we believe are reliable, although DTC has declined to pass upon the
accuracy of the statements contained herein.
SAME-DAY FUNDS
We will make all payments of principal, premium, if any, and interest on
the global notes in immediately available funds to DTC.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences associated with the exchange of old notes for exchange
notes and the beneficial ownership and disposition of the exchange notes. This
discussion is based on the Code, Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as in effect on the
date hereof and all of which are subject to change, possibly with retroactive
effect, or different interpretations. This discussion only addresses tax
considerations for beneficial owners of the senior notes that hold the senior
notes as "capital assets," within the meaning of the Code. Moreover, this
discussion is for general information only and does not address all of the tax
consequences that may be relevant to specific beneficial owners of the senior
notes in light of their particular circumstances or to beneficial owners of the
senior notes subject to special treatment under U.S. federal income tax laws
(such as banks, insurance companies, tax-exempt entities, retirement plans,
dealers in securities, brokers, expatriates, partnerships or other pass-through
entities, persons who hold their senior notes as part of a straddle, hedge,
conversion transaction or other integrated investment, persons whose functional
currency is not the U.S. dollar, persons subject to the alternative minimum tax
or persons deemed to sell the senior notes under the constructive sale
provisions of the Code). This discussion does not address any U.S. state and
local or non-U.S. tax considerations relating to the purchase, ownership and
disposition of the senior notes.
As used in this discussion, the term "U.S. Holder" means a beneficial owner
of a senior note that is, for U.S. federal income tax purposes:
- an individual who is a citizen or resident of the U.S.;
- a corporation created or organized in or under the laws of the U.S. or of
any State or political subdivision thereof or therein, including the
District of Columbia;
- an estate the income of which is subject to U.S. federal income tax
regardless of the source thereof; or
- a trust with respect to which a court within the U.S. is able to exercise
primary supervision over its administration and one or more U.S. persons
have the authority to control all of its substantial decisions, or
certain electing trusts that were in existence on August 19, 1996 and
were treated as domestic trusts on that date.
The term "Non-U.S. Holder" means a beneficial owner of a senior note that
is, for U.S. federal income tax purposes, a nonresident alien or a corporation,
trust or estate that is not a U.S. Holder. Prospective purchasers of senior
notes that are partnerships or who would hold the senior notes through a
partnership or similar pass-through entity should consult their tax advisors
regarding the U.S. federal income tax consequences to them of holding senior
notes.
EXCHANGE OF NOTES
The exchange of old notes for exchange notes pursuant to this exchange
offer will not constitute a taxable event for U.S. federal income tax purposes.
Consequently, no gain or loss will be recognized by a holder of the old notes
upon receipt of an exchange note. A holder's adjusted tax basis in the exchange
note will be the same as the adjusted tax basis in the old note exchanged
therefor. A holder's holding period of the exchange note will include the
holding period of the old note exchanged therefor.
U.S. HOLDERS
PAYMENT OF INTEREST
In general, interest payable on a senior note will be taxable to a U.S.
Holder as ordinary interest income at the time it is received or accrued, in
accordance with such U.S. Holder's method of accounting for U.S. federal income
tax purposes.
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MARKET DISCOUNT
Under the market discount rules of the Code, a U.S. Holder who purchases a
senior note at a market discount will generally be required to treat any gain
recognized on the sale, exchange, retirement or other taxable disposition of the
senior note as ordinary income to the extent of the accrued market discount that
has not been previously included in income. Market discount is generally defined
as the amount by which a U.S. Holder's purchase price for a senior note is less
than the senior note's stated redemption price at maturity (generally, the
senior note's principal amount) of the senior note on the date of purchase,
subject to a statutory de minimis exception. In general, market discount accrues
on a ratable basis over the remaining term of the senior note unless a U.S.
Holder makes an irrevocable election to accrue market discount on a constant
yield to maturity basis.
A U.S. Holder who acquires a senior note at a market discount may be
required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or continued to purchase or carry such
senior note until the U.S. Holder disposes of the senior note in a taxable
transaction. A U.S. Holder who has elected under applicable Code provision to
include market discount in income annually as such discount accrues will not,
however, be required to treat any gain recognized as ordinary income or to defer
any deductions for interest expense under these rules. This election to include
market discount in income currently, once made, applies to all market discount
obligations acquired on or after the first day of the taxable year to which the
election applies and may not be revoked without the consent of the IRS.
Holders should consult their tax advisors as to the portion of any gain
that would be taxable as ordinary income under the market discount rules and any
other consequences of the market discount rules that may apply to them in
particular.
AMORTIZABLE BOND PREMIUM
A U.S. Holder who purchases a senior note for an amount in excess of its
principal amount will be considered to have purchased the senior note at a
premium. A U.S. Holder may elect to amortize the premium over the remaining term
of the senior note on a constant yield method. The amount amortized in any year
will be treated as a reduction of the U.S. Holder's interest income from the
senior note. A U.S. Holder who elects to amortize the premium on a senior note
must reduce its tax basis in the senior note by the amount of the premium
amortized in any year. An election to amortize bond premium applies to all
taxable debt obligations then owned and thereafter acquired by the U.S. Holder
and may be revoked only with the consent of the IRS. Bond premium on a senior
note held by a U.S. Holder who does not make such an election will decrease the
capital gain or increase the capital loss otherwise recognized on the
disposition of the senior note.
SALE, EXCHANGE, RETIREMENT OR OTHER DISPOSITION OF THE SENIOR NOTES
Upon the sale, exchange, retirement or other disposition of a senior note,
a U.S. Holder will generally 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 and unpaid interest, which will be taxable
as interest income (as described above)) and such U.S. Holder's adjusted tax
basis in the senior note. Subject to the market discount rules summarized above,
such gain or loss generally will be capital gain or loss and will be long-term
capital gain or loss if, at the time of the disposition, the U.S. Holder's
holding period for the senior note is more than one year. Long-term capital
gains recognized by an individual or non-corporate U.S. Holder are generally
subject to a reduced U.S. federal income tax rate. Capital losses are subject to
limits on deductibility.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, payments made on the senior notes and proceeds from the sale or
other disposition of the senior notes may be subject to backup withholding,
currently at a rate of 28% (increased to 31% beginning in 2011). In general,
backup withholding will apply to a non-corporate U.S. Holder if such U.S.
Holder:
- fails to furnish, under penalties of perjury, its Taxpayer Identification
Number, or TIN (which for an individual is the holder's Social Security
number);
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed to properly report payments of
interest and dividends; or
- under certain circumstances, fails to certify, under penalties of
perjury, that it has furnished a correct TIN and is a U.S. person and has
not been notified by the IRS that it is subject to backup withholding due
to underreporting of interest or dividends, or otherwise fails to comply
with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. Holder generally will be allowed as a refund or a credit against such U.S.
Holder's U.S. federal income tax liability, provided that the required
procedures are followed.
A U.S. Holder will also be subject to information reporting with respect to
payments on the senior notes and proceeds from the sale or other disposition of
the senior notes, unless such U.S. Holder is a corporation or other exempt
recipient and appropriately establishes an exemption.
NON-U.S. HOLDERS
For purposes of the following discussion, interest on the senior notes, and
gain on the sale, exchange, retirement or other disposition of the senior notes,
will be considered "U.S. trade or business income" of a Non-U.S. Holder if such
income or gain is effectively connected with the conduct of a trade or business
in the United States by such Non-U.S. Holder.
PAYMENT OF INTEREST
Subject to the discussion below concerning backup withholding, a Non-U.S.
Holder will not be subject to U.S. federal income or withholding tax in respect
of interest paid on the senior notes if the interest qualifies for the
"portfolio interest exemption." This will be the case if each of the following
requirements is satisfied:
- the interest is not U.S. trade or business income;
- the Non-U.S. Holder does not actually or constructively own 10% or more
of the voting stock of the issuer;
- the Non-U.S. Holder is not a controlled foreign corporation, within the
meaning of the Code, that is actually or constructively related to the
issuer; and
- the Non-U.S. Holder provides the withholding agent with the appropriate
certification.
The certification requirement generally will be satisfied if the Non-U.S. Holder
provides the withholding agent with a statement on IRS Form W-8BEN (or suitable
substitute or successor form), together with all appropriate attachments, signed
under penalties of perjury, identifying the Non-U.S. Holder and stating, among
other things, that the Non-U.S. Holder is not a U.S. person. Prospective
Non-U.S. Holders should consult their tax advisors regarding alternative methods
for satisfying the certification requirement.
If the portfolio interest exemption is not satisfied with respect to a
Non-U.S. Holder, a 30% withholding tax will apply to interest paid on the senior
notes to such Non-U.S. Holder, unless another exemption is applicable. For
example, an applicable income tax treaty may reduce or eliminate such tax, in
which event a Non-U.S. Holder claiming the benefit of such treaty must provide
the withholding agent with a properly executed IRS Form W-8BEN (or suitable
substitute or successor form). Alternatively, an exemption applies
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if the interest is U.S. trade or business income and the Non-U.S. Holder
provides an appropriate statement to that effect on IRS Form W-8ECI (or suitable
substitute or successor form). In the latter case, such Non-U.S. Holder
generally will be subject to U.S. federal income tax with respect to all income
from the senior notes in the same manner as U.S. Holders, as described above,
unless an applicable income tax treaty provides otherwise. Additionally,
Non-U.S. Holders that are corporations could be subject to a branch profits tax
with respect to any such U.S. trade or business income at a rate of 30% (or at a
reduced rate under an applicable income tax treaty).
SALE, EXCHANGE, RETIREMENT OR OTHER DISPOSITION OF THE SENIOR NOTES
Generally, a Non-U.S. Holder will not be subject to U.S. federal income tax
on gain realized upon the sale, exchange, retirement or other disposition of a
senior note, unless (i) such Non-U.S. Holder is an individual present in the
United States for 183 days or more in the taxable year of the sale, exchange,
retirement or other disposition and certain other conditions are met or (ii) the
gain is U.S. trade or business income. If the first exception applies, the
Non-U.S. Holder generally will be subject to U.S. federal income tax at a rate
of 30% (or at a reduced rate under an applicable income tax treaty) on the
amount by which capital gains allocable to U.S. sources (including gains from
the sale, exchange, retirement or other disposition of the senior note) exceed
capital losses allocable to U.S. sources. If the second exception applies, the
Non-U.S. Holder generally will be subject to U.S. federal income tax with
respect to such gain in the same manner as U.S. Holders, as described above,
unless an applicable income tax treaty provides otherwise. Additionally,
Non-U.S. Holders that are corporations could be subject to a branch profits tax
with respect to gain that is U.S. trade or business income at a rate of 30% (or
at a reduced rate under an applicable income tax treaty).
INFORMATION REPORTING AND BACKUP WITHHOLDING
Certain Non-U.S. Holders may be subject to information reporting and backup
withholding with respect to interest payments on the senior notes. Treasury
regulations provide that such information reporting and backup withholding
generally will not apply to interest payments on the senior notes to a Non-U.S.
Holder if such Non-U.S. Holder certifies that it is not a U.S. person under
penalties of perjury or otherwise establishes an exemption.
Additional information reporting and backup withholding requirements with
respect to the payment of the proceeds from the disposition of a senior note
(including a redemption) by a Non-U.S. Holder are as follows:
- If the proceeds are paid to or through the U.S. office of a broker, they
generally will be subject to information reporting and backup withholding
unless the Non-U.S. Holder certifies that it is not a U.S. person under
penalties of perjury or otherwise establishes an exemption.
- If the proceeds are paid to or through a non-U.S. office of a broker that
is not a U.S. person and is not a foreign person with certain specified
U.S. connections (a "U.S. related person"), they will not be subject to
information reporting or backup withholding.
- If the proceeds are paid to or through a non-U.S. office of a broker that
is a U.S. person or a U.S. related person, they generally will be subject
to information reporting (but not backup withholding) unless the Non-U.S.
Holder certifies that it is not a U.S. person under penalties of perjury
or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder generally will be allowed as a refund or a credit against such
Non-U.S. Holder's U.S. federal income tax liability, provided that the required
procedures are followed.
In addition to the foregoing, the amount of interest paid on or with
respect to the senior notes held by each Non-U.S. Holder during each calendar
year and the amount of tax, if any, withheld from such payments must be reported
to such Non-U.S. Holder and the IRS. Copies of the information returns reporting
such
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interest and withholding also may be made available by the IRS to the tax
authorities in the country in which a Non-U.S. Holder is a resident under the
provisions of an applicable income tax treaty.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF ITS PARTICULAR
CIRCUMSTANCES AND TAX SITUATION. A HOLDER SHOULD CONSULT SUCH HOLDER'S TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE OWNERSHIP AND
DISPOSITION OF THE SENIOR NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of those notes. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in exchange for old notes
that had been acquired as a result of market-making or other trading activities.
We have agreed that, for a period of 180 days after the expiration date of the
exchange offer, we will make this prospectus, as it may be amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on those notes or a combination of those methods, at
market prices prevailing at the time of resale, at prices related to prevailing
market prices or at negotiated prices. Any resales may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of the exchange notes. Any broker-dealer that resells exchange notes
received by it for its own account pursuant to the exchange offer and any broker
or dealer that participates in a distribution of the exchange notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any resale of exchange notes and any commissions or concessions
received by these persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after the expiration date of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incidental to
the exchange offer, including certain fees and expenses of one counsel for the
holders of senior notes, other than commissions and concessions of any broker or
dealer. We also have agreed that we will indemnify holders of the senior notes,
including any broker-dealers, against certain liabilities, including liabilities
under the Securities Act.
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LEGAL MATTERS
Certain legal matters with respect to the exchange notes offered hereby
will be passed upon for us by Cahill Gordon & Reindel LLP, New York, New York.
EXPERTS
The consolidated financial statements of Energy Partners, Ltd. and
subsidiaries as of December 31, 2002 and 2001, and for each of the years in the
three-year period ended December 31, 2002, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The audit report covering the December 31, 2001
consolidated financial statements refers to a change in method of accounting for
derivative instruments and hedging activities.
The estimated reserve data of Netherland, Sewell & Associates, Inc. and
Ryder Scott Company, L.P., independent petroleum engineering consultants,
incorporated by reference in this prospectus have been incorporated by reference
in reliance on the authority of said firms as experts in petroleum engineering.
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