As filed with the Securities and Exchange Commission on July 3, 2002
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Magnum Hunter Resources, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada 1311 74-2952918
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or No.)
Organization)
For Co-Registrants, see "Table of Co-Registrants" on following page.
600 East Las Colinas Blvd. Morgan F. Johnston, Esq.
Suite 1200 600 East Las Colinas Blvd.
Irving, Texas 75039 Suite 1200
(972) 401-0752 Irving, Texas 75039
(Address, Including Zip (972) 401-0752
Code, and Telephone (Name, Address, Including
Number, Including Area Zip Code, and Telephone
Code, of Registrant's Number, Including Area
Principal Executive Code, of Agent for
Offices) Service)
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Copies to:
Joe Dannenmaier
Wesley P. Williams
Justin C. Sullivan
Thompson & Knight L.L.P.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum
Title of each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share Offering Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------------------------------
9.60% Senior Notes due 2012......... $300,000,000 100% $300,000,000 $27,600
- ------------------------------------------------------------------------------------------------------
Guarantees of 9.60% Senior Notes due
2012.............................. (3) (3) (3) (3)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to rule 457(f) of the rules and regulations under the Securities
Act of 1933, as amended.
(2) Calculated in accordance with Rule 457(f) of the rules and regulations
under the Securities Act of 1933, as amended, to be $27,600, which is equal
to 0.000092 multiplied by the proposed maximum aggregate offering price of
$300,000,000.
(3) Pursuant to Rule 457(n) of the rules and regulations under the Securities
Act of 1933, as amended, no separate fee for the guarantees is payable.
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The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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TABLE OF CO-REGISTRANTS
Each of the following subsidiaries of Magnum Hunter Resources, Inc., and
each other subsidiary that is or becomes a guarantor of certain of the
securities registered hereby, is hereby deemed to be a Registrant.
Jurisdiction of Primary Standard I.R.S. Employer
Incorporation or Industrial Identification
Exact Name as Specified in Their Charters(1) Organization Classification Number Number
- -------------------------------------------- ---------------- --------------------- ---------------
Magnum Hunter Production, Inc........ Texas 1311 75-2589131
Gruy Petroleum Management Co......... Texas 1311 75-1074365
Hunter Gas Gathering, Inc............ Texas 1311 73-1222501
Conmag Energy Corporation............ Texas 1311 75-2715164
Trapmar Properties, Inc.............. Texas 1311 75-1896997
Pintail Energy, Inc.................. Delaware 1311 01-0615093
Prize Operating Company.............. Delaware 1311 73-1565426
PEC (Delaware), Inc.................. Delaware 1311 73-1567808
Prize Energy Resources, L.P.......... Delaware 1311 73-1565425
Oklahoma Gas Processing, Inc......... Delaware 1311 73-1566476
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(1) The address and telephone number of the principal executive offices, and
the information regarding agent for service, are the same as those of
Magnum Hunter Resources, Inc.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
[LOGO]
SUBJECT TO COMPLETION, DATED July 3, 2002
PRELIMINARY PROSPECTUS
Magnum Hunter Resources, Inc.
Offer to Exchange all of Our Outstanding
9.60% Senior Notes due 2012 for
9.60% Senior Notes due 2012, Which Have Been Registered
Under the Securities Act of 1933
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We are offering to exchange all of our outstanding unregistered 9.60% senior
notes due 2012 for registered 9.60% senior notes due 2012. We refer to the
registered senior notes as the new notes and the unregistered senior notes as
the old notes. We issued the old notes on March 15, 2002. As of the date of
this prospectus, an aggregate principal amount of $300 million of old notes is
outstanding. Please consider the following:
. Our offer to exchange the old notes for the new notes expires at 5:00
p.m., New York City time, on , 2002, unless we extend the offer.
. You should carefully review the procedures for tendering the old notes
beginning on page 26 of this prospectus. If you do not follow these
procedures, we may not exchange your old notes for new notes.
. We will not receive any proceeds from the exchange offer.
. If you do not tender your old notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
. You may withdraw tendered old notes at any time before the expiration of
the exchange offer.
The terms of the new notes will be substantially identical to the old notes,
except for the elimination of some transfer restrictions, registration rights
and liquidated damages provisions relating to the old notes. We will pay
interest on the new notes on March 15 and September 15 of each year, beginning
September 15, 2002, at a rate of 9.60% per year. We may redeem some or all of
the new notes at any time, at a price described in this prospectus. Some of our
wholly owned subsidiaries have guaranteed the new notes on a senior unsecured
basis.
There is currently no public market for the new notes. We do not intend to
list the new notes on any securities exchange. Therefore, we do not anticipate
that an active public market for the new notes will develop.
You should read the section entitled "Risk Factors" beginning on page 9 for
a discussion of specific factors that you should consider before participating
in this exchange offer.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense. Each broker-dealer that receives new notes for its own
account in exchange for old notes must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where such old
notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a period of
180 days after the consummation of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The date of this prospectus is , 2002.
TABLE OF CONTENTS
Page
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FORWARD-LOOKING STATEMENTS....................................... ii
SUMMARY.......................................................... 1
RISK FACTORS..................................................... 9
USE OF PROCEEDS.................................................. 18
SELECTED CONSOLIDATED HISTORICAL AND UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA................................................. 19
RATIO OF EARNINGS TO FIXED CHARGES............................... 21
THE EXCHANGE OFFER............................................... 22
DESCRIPTION OF CERTAIN INDEBTEDNESS.............................. 34
DESCRIPTION OF NEW NOTES......................................... 37
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS......... 71
PLAN OF DISTRIBUTION............................................. 76
LEGAL MATTERS.................................................... 77
EXPERTS.......................................................... 77
ENGINEERS........................................................ 77
WHERE YOU CAN FIND MORE INFORMATION.............................. 77
INCORPORATION OF DOCUMENTS BY REFERENCE.......................... 78
This prospectus incorporates important business and financial information
about Magnum Hunter that is not included in or delivered with this prospectus.
See "Where You Can Find More Information" for more information regarding these
matters.
i
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into this
prospectus include forward-looking statements which are subject to risks and
uncertainties. All statements, other than statements of historical facts,
included in this prospectus or the documents incorporated by reference that
address activities, events or developments that we expect, project, believe or
anticipate will or may occur in the future are forward-looking statements.
These include such matters as:
. benefits, effects or results of the merger with Prize Energy Corp.
("Prize");
. cost reductions, operating efficiencies or synergies and the integration
of operations in connection with the merger with Prize;
. future stock market valuations;
. tax and accounting treatment of the merger and the warrants offering;
. repayment of debt;
. business strategies;
. expansion and growth of operations after the merger with Prize;
. future operating results and financial condition; and
. oil and gas reserves.
We have based these statements on our assumptions and analyses in light of
our experience and perception of historical trends, current conditions,
expected future developments and other factors we believe are appropriate in
the circumstances. These statements are subject to a number of assumptions,
risks and uncertainties, including:
. general economic and business conditions;
. prices of crude oil, natural gas and natural gas liquids and industry
expectations about future prices;
. the business opportunities, or lack of opportunities, that may be
presented to and pursued by us;
. the ability to integrate our operations with Prize; and
. changes in laws or regulations.
Certain of these factors are in addition to the risks described in "Risk
Factors" in this prospectus and the documents incorporated by reference and
elsewhere in this prospectus. Most of these factors are beyond our control. We
caution you that forward-looking statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in these statements. You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as of
the date of the particular statement, and we undertake no obligation to
publicly update or revise any forward-looking statements.
ii
SUMMARY
The following summary contains information about Magnum Hunter and the
offering of the new notes. It does not contain all of the information that may
be important to you in making a decision to exchange your old notes. For a more
complete understanding of Magnum Hunter and this exchange offer, we urge you to
read this entire prospectus and the documents incorporated by reference into
this prospectus, including the "Risk Factors"section. In this prospectus, when
we use the terms "Magnum Hunter,""we"or "our,"we mean Magnum Hunter Resources,
Inc. and all its subsidiaries on a consolidated basis, unless the context
requires otherwise.
Magnum Hunter Resources
We are an independent energy company engaged in the exploration,
exploitation and development, acquisition and operation of oil and gas
properties with a geographic focus in the Mid-Continent Region, the Permian
Basin and the Gulf of Mexico/Gulf Coast. Our management has implemented a
business strategy that emphasizes acquisitions of long-lived proved reserves
with significant exploitation and development opportunities where we generally
could control the operations of the properties. As part of this strategy, from
1996 through 2001, we acquired significant properties from Burlington Resources
Inc., Spirit Energy 76, a business unit of Union Oil Company of California,
Vastar Resources, Inc. and Mallon Resources Corporation. In addition to our
focus on selected exploratory drilling prospects in the Gulf of Mexico as
described below, we intend to continue to concentrate our efforts on additional
producing property acquisitions strategically located within our geographic
area of operations. We also intend to continue to develop our substantial
inventory of drilling and workover opportunities located onshore. We have
identified over 358 development drilling locations (including both production
and injection wells) and workover opportunities on our properties to which
proved reserves have been attributed, substantially all of which are low-risk
in-fill drilling opportunities.
In 1998, we acquired an approximate 40% beneficial ownership interest in TEL
Offshore Trust, a trust created under the laws of the state of Texas. The
principal asset of TEL Offshore Trust consists of a 99.99% interest in the TEL
Offshore Trust partnership. Chevron USA Inc. owns the remaining .01% interest
in the partnership. The partnership owns an overriding royalty interest
equivalent to a 25% net profits interest in certain oil and gas properties
located offshore Louisiana in the shallow waters in the Gulf of Mexico. As of
March 31, 2002, we owned approximately 36% of the units of beneficial ownership
in TEL Offshore Trust.
Additionally, we own over 480 miles of gas gathering systems and a 50% or
greater ownership interest in three natural gas processing plants that are
located adjacent to certain producing properties owned and operated by us
located in the states of Texas, Oklahoma and Arkansas.
At December 31, 2001, we had an interest in 3,241 wells and had estimated
proved reserves of 378 Bcfe with a PV-10 of $311.9 million. Approximately 70%
of these reserves were proved developed reserves: 31% were attributable to the
Mid-Continent Region, 33% were attributable to the Permian Basin, and 36% were
attributable to the Gulf of Mexico/Gulf Coast region. At December 31, 2001, our
proved reserves had an estimated reserve life of approximately 11.3 years and
were 66% natural gas. We serve as operator for approximately 70% of our
properties, based on the gross number of producing wells in which we own an
interest and 75% of our properties, based upon the year-end PV-10 value.
As a result of our property acquisitions and successful drilling activities
during 2001, we have achieved growth as described below:
. Proved reserves increased 3% to 378 Bcfe at year-end 2001 from 367 Bcfe
at year-end 2000; and
. Average daily production increased 22% to 91,292 MMcfe during fiscal 2001
from 74,777 MMcfe in fiscal 2000. We had an exit rate of approximately
100 MMcfe at year-end 2001.
1
Recent Activities
Merger with Prize Energy Corp. On March 15, 2002 we acquired Prize Energy
Corp., which was merged into one of our wholly-owned subsidiaries. Prize was a
publicly traded independent oil and gas company engaged primarily in the
acquisition, enhancement and exploitation of producing oil and gas properties.
Prize owned oil and gas properties principally located in three core operating
areas, which were in the Permian Basin of West Texas and Southeastern New
Mexico, the onshore Gulf Coast area of Texas and Louisiana and the
Mid-Continent area of Oklahoma and the Texas Panhandle. Over 80% of Prize's oil
and gas property base was located in Texas.
The merger resulted in an exchange of 2.5 shares of Magnum Hunter common
stock and $5.20 in cash for each share of Prize common stock, with the
stockholders of Prize becoming stockholders of Magnum Hunter. As a result of
the merger, we became owned approximately 52% by our then current stockholders
and 48% by the former stockholders of Prize, without taking into account
subsequent stock sales and the options and warrants that remained outstanding
at the time of the merger.
In connection with our merger with Prize, we issued $300 million of 9.6%
unsecured senior notes due 2012 and established a new senior bank credit
facility with a borrowing base of $300 million secured by the assets of the
combined company. Proceeds from the senior notes offering and initial
borrowings under the new senior bank credit facility were used to refinance the
outstanding indebtedness under the existing senior bank credit facilities of
both Magnum Hunter and Prize, fund the cash component of the merger
consideration in the merger with Prize and pay costs and fees associated with
the merger.
On March 15, 2002, we amended and restated our Senior Bank Credit Facility
in conjunction with the merger with Prize. The amended facility provides for
total borrowings of $500 million, up from $225 million, and raises the
borrowing base limit from $160 million to $300 million. The amended facility
requires us to comply with certain financial tests and maintain certain
financial ratios. We were not in compliance with the Funded Debt to EBITDA
Ratio (as defined by the facility) at March 31, 2002. We have obtained a waiver
from our lenders as of March 31, 2002 and have negotiated an amendment dated as
of July 3, 2002 which adjusted the Funded Debt to EBITDA Ratio (as defined by
the facility) to be less restrictive for the next four quarters ending
March 31, 2003. We believe we will be able to comply with the revised financial
covenants.
Magnum Hunter Warrants Offering. We have distributed to our stockholders of
record on January 10, 2002, warrants to purchase 7,228,457 shares of our common
stock at an exercise price of $15.00 per share and expiring three years from
the date of distribution. The warrant distribution occurred on or about March
21, 2002 and the warrants are traded on the American Stock Exchange. The
stockholders and warrantholders of Prize did not receive any of these warrants
in the merger or otherwise.
Recent Commodity Hedging Transactions. Periodically, we enter into
commodity price hedging transactions to reduce the effects of fluctuations in
crude oil and natural gas prices. At March 31, 2002, we had 72% of our natural
gas production and 69% of our crude oil production hedged through December 31,
2002. None of these hedges were with Enron, which recently filed for bankruptcy.
Business Strategy
Our overall strategy is to increase our reserves, production, cash flow and
earnings utilizing a properly balanced program of:
. selective exploration;
2
. the exploitation and development of acquired properties; and
. strategic acquisitions of additional proved reserves.
The following are key elements of our strategy:
Exploration. We plan to continue to participate in drilling Gulf of Mexico
exploratory wells in an effort to add shorter-lived, higher output production
to our reserve mix. The continued use of 3-D seismic information as a tool in
our exploratory drilling in the Gulf of Mexico will be significant. We have
recently built a significant inventory of undrilled offshore lease blocks. We
plan to continue to align ourselves with other active Gulf of Mexico industry
partners who have similar philosophies and goals with respect to a "fast
track"program of placing new production online. This typically involves
drilling wells near existing infrastructure such as production platforms,
facilities and pipelines. We also maintain an active onshore exploration
program primarily concentrated in West Texas and Southeastern New Mexico where
we have various other operations in core areas. From time to time, we
participate in higher risk new exploration projects generated by third parties
in areas along the Gulf Coast of Texas and Louisiana.
Exploitation and Development of Existing Properties. As a result of the
merger with Prize, we now have a substantial inventory of over 1,000
development/exploitation projects which include development drilling, workovers
and recompletion opportunities. We will continue to seek to maximize the value
of our existing properties through development activities including in-fill
drilling, waterflooding and other enhanced recovery techniques. Typically, our
exploitation projects do not have significant time limitations due to the
existing mineral acreage being held by current production. By operating
substantially all of our properties, our management is provided maximum
flexibility with respect to the timing of capital expended to develop these
opportunities.
Property Acquisitions. Although we currently have an extensive inventory of
exploitation and development opportunities, we will continue to pursue
strategic acquisitions which fit our objectives of increasing proved reserves
in similar geographic regions that contain development or exploration potential
combined with maintaining operating control. We plan to continue to pursue an
acquisition strategy of acquiring long-lived assets where operating synergies
may be obtained and production enhancements, either on the surface or below
ground, may be achieved.
Management of Overhead and Operating Costs. We will continue to emphasize
strict cost controls in all aspects of our business and will continue to seek
to operate our properties wherever possible utilizing a minimum number of
personnel. By operating approximately 75% of our properties on a PV-10 basis we
will generally be able to control direct operating and drilling costs as well
as to manage the timing of development and exploration activities. This
operating control also provides greater flexibility as to the timing
requirements to fund new capital expenditures. By strictly controlling our
general and administrative expenses, management strives to maximize our net
operating margin.
Expansion of Gas Gathering and Processing Operations. We have implemented
several programs to expand and increase the efficiency of our gas gathering
systems and gas processing plants. We will consider opportunities to acquire or
develop additional gas gathering and processing facilities that are primarily
associated with our current production.
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Magnum Hunter is incorporated under the laws of Nevada. Our executive
offices are located at 600 East Las Colinas Blvd., Suite 1100, Irving, Texas
75039, and our telephone number is (972) 401-0752.
3
The Exchange Offer
Following is a summary of the principal terms of our exchange offer. A more
detailed description is contained in this prospectus under the heading "The
Exchange Offer"beginning on page 21.
The exchange offer.......... We are offering to exchange $1,000 principal
amount of our 9.60% Senior Notes due 2012, which
have been registered under the Securities Act,
for each $1,000 principal amount of our
outstanding unregistered 9.60% Senior Notes due
2012. As of the date of this prospectus, $300
million in aggregate principal amount of the old
notes are outstanding.
We have registered the new notes under the
Securities Act and they are substantially
identical to the old notes, except for the
elimination of some transfer restrictions,
registration rights and liquidated damages
provisions relating to the old notes.
Resale of the new notes..... We believe that the new notes issued to you
pursuant to the exchange offer may be offered for
sale, resold and otherwise transferred by you,
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, if you:
. are acquiring the new notes in the ordinary
course of your business;
. are not engaging in, and do not intend to
engage in, a distribution of the new notes;
. do not have an arrangement or understanding
with any person to participate in a
distribution of the new notes; and
. are not an "affiliate"of ours within the
meaning of Rule 405 under the Securities Act.
If any of these conditions is not satisfied and
you transfer any new notes without delivering a
proper prospectus or without qualifying for an
exemption from registration, you may incur
liability under the Securities Act. In addition,
if you are a broker-dealer seeking to receive new
notes for your own account in exchange for old
notes that you acquired as a result of
market-making or other trading activities, you
must acknowledge that you will deliver this
prospectus in connection with any offer to
resell, or any resale or other transfer of the
new notes that you receive in the exchange offer.
See "Plan of Distribution."
Expiration date............. The exchange offer will expire at 5:00 p.m., New
York City time, on , 2002, unless we extend
the exchange offer.
Withdrawal rights........... You may withdraw the tender of your old notes at
any time prior to the expiration date of the
exchange offer. We will return to you any of your
old notes that we do not accept for exchange for
any reason without expense to you promptly after
the exchange offer expires or terminates.
4
Accrued interest on the new
notes and the old notes... Interest on the new 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 March 15, 2002. Holders
whose old notes are accepted for exchange will be
deemed to have waived the right to receive any
interest on the old notes.
Conditions of the exchange
offer..................... The exchange offer is subject to customary
conditions that may be waived by us; however, the
exchange offer is not conditioned upon any
minimum aggregate principal amount of old notes
being tendered for exchange. 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. For additional information, see
"The Exchange Offer--Conditions of the Exchange
Offer."
Procedures for tendering the
old notes................. If you are a holder of old notes who wishes to
accept the exchange offer:
. 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 set forth under "The Exchange
Offer--Exchange Agent;" or
. arrange for The Depository Trust Company to
transmit certain required information,
including an agent's message forming part 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.
By tendering your old notes in either manner, you
will be representing, among other things, that:
. the new notes you receive pursuant to the
exchange offer are being acquired in the
ordinary course of your business;
. you are not currently participating in, do
not intend to participate in, and have no
arrangement or understanding with any person
to participate in, the distribution of the
new notes issued to you in the exchange
offer; and
. you are not an "affiliate" of ours, or if you
are an affiliate, you will comply with the
registration and prospectus delivery
requirements of the Securities Act.
5
Special procedures for
beneficial owners......... If your old notes are registered in the name of a
broker, dealer, commercial bank, trust company or
other nominee and you wish to tender your old
notes, you should contact the registered holder
promptly and instruct the registered holder to
tender your old notes 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
make appropriate arrangements to register
ownership of the old notes in your name or obtain
a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed prior to the expiration
date.
Guaranteed delivery
procedures................ If you wish to tender your old notes and cannot
cause the old notes, the letter of transmittal or
any other required documents to be transmitted
to, and received by, the exchange agent prior to
the expiration of the exchange offer, you may
tender your old notes according to the guaranteed
delivery procedures described in this prospectus
under the heading "The Exchange Offer--Procedures
for Tendering Old Notes; Guaranteed Delivery."
Acceptance of the old notes
and delivery of the new
notes..................... Subject to the satisfaction or waiver of the
conditions to the exchange offer, we will accept
for exchange any and all old notes that are
properly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the expiration date.
The new notes will be delivered promptly
following the expiration date. For additional
information, see "The Exchange Offer--Acceptance
of Old Notes for Exchange."
Federal income tax
considerations............ The exchange of old notes for new notes in the
exchange offer should not be a taxable event for
U.S. federal income tax purposes. See "Material
United States Income Tax Considerations."
Use of proceeds............. We will not receive any proceeds from the
issuance of the new notes. We will pay for all
expenses incident to the exchange offer.
Consequences of failing to
exchange your old notes... The exchange offer satisfies our obligations and
your rights under the registration rights
agreement. Except in limited circumstances, after
the exchange offer is completed, you will not be
entitled to any registration rights with respect
to your old notes unless:
. you comply with the registration and
prospectus delivery requirements of the
Securities Act of 1933; or
. you qualify for an exemption from the
Securities Act of 1933 registration
requirements.
Exchange agent.............. Deutsche Bank Trust Company Americas is serving
as the exchange agent.
6
The New Notes
The form and terms of the respective new notes will be identical in all
material respects to the form and terms of the old notes, except that the new
notes will not bear legends restricting their transfer and will not have any of
the registration and related liquidated damages rights of the old notes under
the registration rights agreement, which rights will terminate upon
consummation of the exchange offer. The new notes will evidence the same
indebtedness as the old notes which they replace and will be issued under, and
be entitled to the benefits of, the indenture dated as of March 15, 2002. For a
more complete description of the terms of the new notes, see "Description of
New Notes."
Issuer...................... Magnum Hunter Resources, Inc.
Notes offered............... $300,000,000 aggregate principal amount of 9.60%
Senior Notes due 2012.
Maturity date............... March 15, 2012.
Interest payment dates...... Every March 15 and September 15 beginning
September 15, 2002. Interest on the new 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
March 15, 2002.
Ranking..................... The new notes will be our unsecured senior
obligations and will rank equally with our
existing and future senior indebtedness and
senior to any future subordinated indebtedness.
The guarantees by our subsidiaries that guarantee
the new notes will be unsecured senior
obligations and will rank equally with existing
and future senior indebtedness of the
subsidiaries that guarantee the new notes. The
new notes and guarantees will be effectively
subordinate to our and our guarantor
subsidiaries' existing and future secured
indebtedness, including our new credit facility.
Guarantees.................. Our obligations under the new notes will be
unconditionally guaranteed by substantially all
of our current subsidiaries.
Optional redemption......... Except as described below, we cannot redeem the
new notes until March 15, 2007. Thereafter we may
redeem some or all of the new notes at the
redemption prices listed in the "Description of
the New Notes"section under the heading "Optional
Redemption,"plus unpaid accrued interest to the
date of redemption
Optional redemption after
equity offerings.......... At any time (which may be more than once) on or
before March 15, 2005, we may redeem up to 35% of
the outstanding new notes with money that we
raise in one or more equity offerings, as long as:
. we pay 109.600% of the face amount of the new
notes, plus interest;
. we redeem the new notes within 60 days of
completing the equity offering; and
. at least 65% of the aggregate principal
amount of new notes issued remains
outstanding afterwards.
7
Change of control offer..... If we experience a change of control, we must
give holders of the new notes the opportunity to
sell us their notes at 101% of their principal
amount, plus unpaid accrued interest.
Asset sale proceeds......... If we or our subsidiaries engage in asset sales,
we generally must either invest the net cash
proceeds from such sales in our business within a
period of time, prepay the debt under our new
credit facility, repurchase our existing senior
notes or make an offer to purchase a principal
amount of the new notes equal to the excess net
cash proceeds. The purchase price of the new
notes will be 100% of their principal amount,
plus unpaid accrued interest.
Certain indenture provisions The indenture governing the new notes contains
covenants limiting our (and our restricted
subsidiaries') ability to:
. incur additional indebtedness;
. make restricted payments (including paying
dividends on, redeeming or repurchasing our
capital stock);
. make investments or acquisitions;
. sell our assets;
. grant liens on our assets;
. engage in transactions with affiliates; and
. merge or consolidate or transfer
substantially all of our assets.
These covenants are subject to a number of
important limitations and exceptions.
Use of proceeds............. We will not receive any cash proceeds from the
exchange offer. For a description of the use of
proceeds from the offering of the old notes, see
"Use of Proceeds."
Absence of a public market
for the new notes......... The new notes are new securities. There has been
no public market for the old notes, and we do not
anticipate that an active market for the new
notes will develop. The new notes will not be
listed on any securities exchange or included in
any automated quotation system. As a result, we
cannot assure you that any active or liquid
market will develop for the new notes.
Risk Factors................ See "Risk Factors" for a description of certain
of the risks associated with the new notes.
8
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information contained or incorporated by reference in this
prospectus before deciding to participate in the exchange offer.
Risks Related to the Exchange Offer and Our Indebtedness
You may be adversely affected if you do not exchange your old notes.
If you do not exchange your old notes for new notes pursuant to the exchange
offer, you will continue to be subject to the transfer restrictions on your old
notes. Except in limited circumstances, you will have no further registrations
rights. The transfer restrictions on your old notes arise because we issued the
old notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act of 1933 and applicable state
securities laws. In general, you may only offer or sell the old notes if they
are registered under the Securities Act of 1933 and applicable state securities
laws, or offered and sold pursuant to an exemption from those requirements. We
do not intend to register the old notes under the Securities Act of 1933. In
addition, if you exchange your old notes in the exchange offer for the purpose
of participating in a distribution of the new notes, you may be deemed to have
received restricted securities. In those circumstances, you will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with any resale transaction. To the extent
old notes are tendered and accepted in the exchange offer, the trading market,
if any, for the old notes would be adversely affected. See "The Exchange
Offer--Consequences of Failure to Exchange Old Notes."
You must tender the old notes in accordance with proper procedures in order
to ensure the exchange will occur.
We will only exchange old notes for new notes if you follow the proper
procedures, as detailed in this prospectus. We will issue the new notes in
exchange for the old notes if the exchange agent receives the old notes or a
book-entry confirmation, a properly completed and executed transmittal letter,
or an agent's message, and all other required documentation in a timely manner.
If you want to tender your old notes in exchange for new notes, you should
allow sufficient time to ensure timely delivery. Neither we nor the exchange
agent is under any duty to give you notification of defects or irregularities
with respect to tenders of old notes for exchange. In addition, if you are an
affiliate of ours or you tender the old notes in the exchange offer in order to
participate in a distribution of the new notes, you will be required to comply
with the registration and prospectus delivery requirements of the Securities
Act of 1933 in connection with any resale transaction. For additional
information, please refer to the sections entitled "The Exchange Offer" and
"Plan of Distribution."
We have a significant amount of debt.
In connection with our merger with Prize, we issued $300 million of 9.6%
senior notes due 2012 and established a new credit facility with a borrowing
base of $300 million secured by the assets of the combined company. Proceeds
from the senior notes offering and borrowings under the new credit facility
were used to refinance the outstanding indebtedness under the existing senior
credit facilities of both Magnum Hunter and Prize, fund the cash component of
the merger consideration in the merger with Prize and pay costs and fees
associated with the merger. As a result of the merger, the combination of our
outstanding 10.00% senior notes due 2007, our new issuance of the 9.6% senior
notes due 2012 and our new senior bank credit facility, created outstanding
long term debt of approximately $634.9 million as of March 31, 2002. Because we
must dedicate a substantial portion of our cash flow from operations to the
payment of interest on our debt, that portion of our cash flow is not available
for other purposes. The covenants contained in our new credit facility and the
indentures relating to our two issuances of senior notes require us to meet
financial tests and limit our ability to borrow additional funds or to acquire
or dispose of assets. Also, our ability to obtain additional financing in the
future may be impaired by our substantial leverage. Additionally, the senior,
as opposed to subordinated, status of our 10% senior notes due 2007 and our
9.6% senior notes due 2012, our high debt to equity ratio, and the pledge of
substantially all of our assets as collateral for our new credit facility will,
for the foreseeable future, make it difficult for us to obtain financing on an
unsecured basis or to obtain secured financing other than "purchase money"
indebtedness collateralized by the acquired assets.
9
Our new credit facility and the indentures governing our senior notes impose
restrictions on us that may limit the discretion of our management in
operating our business that, in turn, could impair our ability to repay our
obligations under the new notes.
Our new credit facility and the indentures governing our senior notes
contain various restrictive covenants that limit our management's discretion in
operating our business. In particular, these covenants limit our ability to,
among other things:
. incur additional debt;
. make restricted payments (including paying dividends on, redeeming or
repurchasing our capital stock);
. make investments or acquisitions;
. grant liens on assets;
. sell our assets;
. engage in transactions with affiliates; and
. merge, consolidate or transfer substantially all of our assets.
Under some circumstances, including if we fail to meet certain financial
tests, the indentures governing our senior notes prohibit us from borrowing the
full amount of availability under our new credit facility.
Our new credit facility also requires us to maintain specified financial
ratios and satisfy some financial tests. Our ability to maintain or meet these
financial ratios and tests may be affected by events beyond our control,
including changes in general economic and business conditions, and we cannot
assure you that we will maintain or meet these ratios and tests or that the
lenders under the new credit facility will waive any failure to meet these
ratios or tests. A breach of any of these covenants could result in an event of
default under the new credit facility, in which case, the lenders could elect
to declare all amounts borrowed under the new credit facility, together with
unpaid accrued interest, to be immediately due and payable and to terminate all
commitments under the new credit facility.
We may not be able to generate a sufficient amount of cash flow to meet our
debt service obligations.
Our ability to make scheduled payments or to refinance our obligations with
respect to our debt will depend on our financial and operating performance,
which, in turn, is subject to prevailing economic conditions and to certain
financial, business and other factors beyond our control. If our cash flow and
capital resources are insufficient to fund our debt service obligations, we may
be forced to reduce or delay scheduled expansions and capital expenditures,
sell material assets or operations, obtain additional capital or restructure
our debt. We cannot assure you that our operating performance, cash flow and
capital resources will be sufficient for payment of our debt in the future. In
the event that we are required to dispose of material assets or operations or
restructure our debt to meet our debt service and other obligations, we cannot
assure you as to the terms of any such transaction or how soon any such
transaction could be completed.
The new notes are unsecured and effectively subordinated to our secured
indebtedness.
The new notes will not be secured. Our new credit facility is secured by
substantially all of our assets and the assets of our subsidiaries. If we
become insolvent or are liquidated, or if payment under any of this facility or
any of our other secured debt obligations is accelerated, our lenders would be
entitled to exercise the remedies available to a secured lender under
applicable law and will have a claim on those assets before the holders of the
new notes. As a result, the new notes are effectively subordinated to our
secured indebtedness to the extent of the value of the assets securing that
indebtedness and the holders of the new notes may recover ratably less than the
lenders of our secured debt in the event of our bankruptcy or liquidation.
10
In the event of our bankruptcy or liquidation, holders of the new notes will
be paid from any assets remaining after payments to any holders of debt of
certain of our subsidiaries.
The new notes will be structurally subordinated to the liabilities of our
subsidiaries that are not guarantors. If we are declared bankrupt or insolvent,
or are liquidated, the holders of any debt of our non-guarantor subsidiaries
will be entitled to be paid from the assets of the non-guarantor subsidiaries
before any payment may be made with respect to the new notes. If any of the
foregoing events occur, we cannot assure you that we will have sufficient
assets to pay amounts due on the debt of our non-guarantor subsidiaries and the
new notes.
We are dependent upon cash from our subsidiaries to meet our debt service
obligations.
We conduct a significant portion of our operations through our subsidiaries.
Our ability to meet our debt service obligations will be dependent on receipt
of cash from our direct and indirect subsidiaries. We have one or more
subsidiaries that are not guarantors, and such non-guarantor subsidiaries do
not have obligations with respect to the new notes. However, at present, such
non-guarantor subsidiaries do not generate a significant portion of our
operating income and cash flow. Future borrowings by our non-guarantor
subsidiaries may contain restrictions or prohibitions on the payment of
dividends by such subsidiaries to us.
We may not be able to finance change of control offers.
If we were to experience a change of control, as defined in the indenture
governing the new notes or the indenture governing our 10% Senior Notes, one or
both of those indentures would require us to purchase all of the new notes and
10% Senior Notes, respectively, then outstanding at 101% of their principal
amount, plus unpaid accrued interest to the date of repurchase. If a change of
control were to occur, we cannot assure you that we would have sufficient funds
to purchase the new notes and our 10% Senior Notes. In addition, our new credit
facility restricts our ability to repurchase the new notes and our 10% Senior
Notes, even when we are required to do so by the indentures in connection with
a change of control. A change of control could therefore result in a default
under the new credit facility and could cause the acceleration of the new
senior credit facility debt. The inability to repay such debt, if accelerated,
and to repurchase all of the tendered notes, would constitute an event of
default under the indentures.
The guarantees may not be enforceable because of fraudulent conveyance laws.
The incurrence of the guarantees by the guarantors may be subject to review
under U.S. federal bankruptcy law or relevant state fraudulent conveyance law
if a bankruptcy case or lawsuit is commenced by or on behalf of the guarantors'
unpaid creditors. Under these laws, if in such a case or lawsuit a court were
to find that, at the time such guarantor incurred a guarantee of the new notes,
such guarantor:
. incurred the guarantee of the new notes with the intent of hindering,
delaying or defrauding current or future creditors; or
. received less than reasonably equivalent value or fair consideration for
incurring the guarantee of the new notes and such guarantor:
-- was insolvent or was rendered insolvent;
-- was engaged, or about to engage, in a business or transaction for
which its remaining assets constituted unreasonably small capital to
carry on its business; or
-- intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under the relevant fraudulent transfer or
conveyance statutes);
then such court could avoid the guarantee of such guarantor or subordinate the
amounts owing under such guarantee to such guarantor's presently existing or
future debt or take other actions detrimental to you.
It may be asserted that the guarantors incurred their guarantees for our
benefit and they incurred the obligations under the guarantees for less than
reasonably equivalent value or fair consideration.
11
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, a company would be considered insolvent if, at the
time it incurred the debt or issued the guarantee, either:
. the sum of its debts (including contingent liabilities) is greater than
its assets, at fair valuation; or
. the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute
and matured.
If a guarantee is avoided as a fraudulent conveyance, or found to be
unenforceable for any other reason, you will not have a claim against that
obligor and will only be a creditor of us or any guarantor whose obligation was
not set aside or found to be unenforceable.
There is no public market for the new notes.
We do not intend to list the new notes on any national securities exchange
or to seek the admission thereof to trading on the Nasdaq Market. The initial
purchasers have advised us that they currently intend to make a market in the
new notes. However, the initial purchasers are not obligated to make a market
in the new notes and any market making may be discontinued at any time without
notice. Therefore, there can be no assurance as to the development of any
market or the liquidity of any market that may develop for the notes.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the notes. We cannot assure you that the market for the new notes,
if any, will not be subject to similar disruptions. Any such disruptions may
adversely affect you as a holder of the new notes.
Risks Associated with our Merger with Prize
We may not achieve the expected benefits of the merger.
The merger was intended to achieve specific goals. The likelihood of
achieving those goals represented the subjective judgment of our senior
management and board of directors. Some of those goals may not be achieved or,
if achieved, may not be achieved in the time frame in which they were expected.
Whether the combined company will actually realize these anticipated benefits
depends on future events and circumstances beyond the control of the combined
company, including the following:
. A decline in economic conditions in general or in the oil and gas
industry in particular could cause our combined company to fail to meet
the expectations of our board of directors for revenue, earnings and cash
flow.
. Differing opinions of securities analysts and investors regarding the
prospects for our combined company's business and our future financial
condition could reduce the likelihood that our combined company will
enjoy the hoped-for increase in stock market valuation multiples relative
to the stock market valuation multiples of smaller competitors.
. The other risk factors discussed below may prevent the achievement of the
believed advantages of the merger.
Because of these and other factors, it is possible that our combined company
will not realize some or all of the expected benefits of the merger.
We may face difficulties in integrating the operations of Magnum Hunter and
Prize.
Before the merger, Magnum Hunter and Prize operated separately. Magnum
Hunter's management team has no experience in running the combined business. We
may not be able to integrate all of the operations of
12
Magnum Hunter and Prize within the time frame anticipated and without an
unexpected loss of key employees, customers or suppliers, a loss of revenues,
an increase in operating or other costs or other difficulties. In addition, we
may not be able to realize all of the operating efficiencies, synergies, cost
savings or other benefits originally anticipated from the merger. Any
unexpected costs or delays incurred in connection with the integration could
have an adverse effect on our business, results of operations or financial
condition.
As a result of the merger with Prize, our risk profile is different from that
of Magnum Hunter and Prize before the merger.
We were relatively more active in onshore exploration and in offshore
exploration and production than Prize, which did not engage in these
activities. As a result, the combined company will have a different risk
profile than either company had before the merger.
The combined company's oil and gas business involves a variety of operating
risks, including unexpected formations or pressures, uncontrollable flows of
oil, gas, brine or well fluids into the environment (including groundwater
contamination), blowouts, fires, explosions, pollution, marine hazards and
other risks, any of which could cause personal injuries, loss of life, damage
to properties and substantial losses. Although we carry, and will continue to
carry, insurance at levels that we believe are reasonable, we will not be fully
insured against all risks. We will not carry business interruption insurance
except on rare occasions. Losses and liabilities arising from uninsured or
under-insured events could materially affect the combined company's financial
condition and operations.
The price of our common stock may decline as a result of the merger with
Prize.
The number of issued shares of Magnum Hunter common stock increased
substantially as a result of the merger with Prize, from 35,972,484 shares on
March 1, 2002 to approximately 70,065,447 shares as of March 15, 2002. If
holders of a significant number of these new shares elect not to retain their
shares, the market price of our common stock may vary sharply or decline for
reasons unrelated to the financial performance of the combined company.
Risks Relating to Our Business
A decrease in oil and natural gas prices will adversely affect our business.
Our revenues, profitability and the carrying value of our oil and gas
properties depend substantially upon prevailing prices of, and demand for, oil
and gas and the costs of acquiring, finding, developing and producing reserves.
Oil and gas prices also substantially affect our ability to maintain or
increase our borrowing capacity, to repay current or future indebtedness, and
to obtain additional capital on attractive terms. Historically, the markets for
oil and gas have been volatile and are likely to continue to be volatile in the
future. In 1999 and 2000, oil and natural gas prices increased compared to
prices in the previous two years. However, beginning in mid-2001, oil and
natural gas prices began declining. Prices for oil and gas fluctuate widely in
response to:
. relatively minor changes in the supply of, and demand for, oil and gas;
. market uncertainty; and
. a variety of additional factors, all of which are beyond our control.
These additional factors include domestic and foreign political conditions,
the price and availability of domestic and imported oil and gas, the level of
consumer and industrial demand, weather, domestic and foreign government
relations, the price and availability of alternative fuels and overall economic
conditions. Also, our ability to market our production depends in part upon the
availability, proximity and capacity of gathering systems, pipelines and
processing facilities. Volatility in oil and gas prices could affect our
ability to market our production through such systems, pipelines or facilities.
Currently, we sell substantially all our gas production to
13
gas marketing firms or end users either on the spot market on a month-to-month
basis at prevailing spot market prices or under long-term contracts based on
current spot market prices.
Under the full cost accounting method, we are required to take a non-cash
charge against earnings if capitalized costs of acquisition, exploration and
development, net of depletion, depreciation and amortization, less deferred
income taxes, exceed the present value of our proved reserves and the lower of
cost or fair value of unproved properties after income tax effects. Once
incurred, a write down of oil and gas properties is not reversible at a later
date even if oil and gas prices increase.
At December 31, 2000, NYMEX prices were $26.80 per Bbl for oil and $9.78 per
Mcf for gas. At December 31, 2001, NYMEX prices were $19.78 per Bbl for oil, a
decline of 26% from year-end 2000, and $2.72 per Mcf for gas, a decline of 72%
from year-end 2000. Our capitalized costs again exceeded the PV-10 limitation
utilizing commodity prices in effect at December 31, 2001 under the full cost
method of accounting by $76.0 million. However, no writedown for impairment of
our oil and gas properties is required, due to higher oil and gas prices that
have been recorded in the market subsequent to December 31, 2001.
You should not place undue reliance on our reserve data because they are
estimates.
This prospectus incorporates by reference estimates of our oil and gas
reserves and the future net cash flows that were prepared by independent
petroleum consultants as of December 31, 2001. There are numerous uncertainties
inherent in estimating quantities of proved reserves of oil and natural gas and
in projecting future rates of production and the timing of development
expenditures, including many factors beyond our control. The estimates
incorporated by reference into this prospectus rely on various assumptions,
including, for example, constant oil and gas prices, operating expenses,
capital expenditures and the availability of funds, and are therefore
inherently imprecise indications of future net cash flows. Actual future
production, cash flows, taxes, operating expenses, development expenditures and
quantities of recoverable oil and gas reserves may vary substantially from
those assumed in the estimates. Any significant variance in these assumptions
could materially affect he estimated quantity and value of reserves.
Maintaining reserves and revenues in the future depends on successful
exploration and development.
Our future success depends upon our ability to find or acquire additional
oil and gas reserves that are economically recoverable. Unless we successfully
explore or develop or acquire properties containing proved reserves, our proved
reserves will generally decline as we produce them. The decline rate varies
depending upon reservoir characteristics and other factors. Our future oil and
gas reserves and production, and, therefore, cash flow and income, depend
greatly upon our success in exploiting our current reserves and acquiring or
finding additional reserves. We cannot assure you that our planned development
projects and acquisition activities will result in significant additional
reserves or that we will successfully drill productive wells at economic
returns to replace our current and future production.
We may not be able to meet our capital requirements.
We will need to continue to make substantial capital expenditures for the
acquisition, enhancement, exploitation and production of oil and natural gas
reserves. Without successful enhancement, exploitation and acquisition
activities, our reserves and revenues will decline over time. We intend to
finance our capital expenditures, other than significant acquisitions, from
internally generated funds provided by operations and borrowings under our new
credit facility. Our ability to borrow under the new credit facility in the
future may be limited by redetermination of the borrowing base or our failure
to meet certain financial tests under the indentures governing the new notes
and our existing 10% Senior Notes. If our cash flow from operations and
availability under the new credit facility are not sufficient to satisfy
capital expenditure requirements, there can be no assurance that additional
debt or equity financing will be available to allow us to fund our continued
growth.
14
Our exploration and development activities are subject to significant risks.
Our oil and gas business involves a variety of operating risks, including
unexpected formations or pressures, uncontrollable flows of oil, gas, brine or
well fluids into the environment (including groundwater contamination),
blowouts, fires, explosions, pollution, marine hazards and other risks, any of
which could cause personal injuries, loss of life, damage to properties and
substantial losses.
We cannot assure you that the new wells we drill will be productive or that
we will recover all or any portion of our investment in wells drilled. Drilling
for oil and natural gas may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce net reserves to
return a profit after drilling, operating and other costs. The cost of
drilling, completing and operating wells is often uncertain. Numerous factors,
including title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment, may curtail,
delay or cancel drilling operations.
We have also recently been more active in offshore exploration and
production. Offshore operations are also subject to a variety of operating
risks peculiar to the marine environment, such as capsizing, collisions or
damage or loss from hurricanes or other adverse weather conditions. These
conditions can cause substantial damage to facilities and interrupt production.
As a result, we could incur substantial liabilities.
In accordance with customary industry practices, we maintain insurance
against some, but not all, of such risks and losses. Although we carry
insurance at levels that we believe are reasonable, we are not fully insured
against all risks. We do not carry business interruption insurance except on
rare occasions. Losses and liabilities arising from uninsured or under-insured
events could materially affect our financial condition and operations.
We conduct waterflood projects and other secondary recovery operations.
Secondary recovery operations involve certain risks, especially the use of
waterflooding techniques. Our inventory of development prospects include
waterflood projects. With respect to our properties located in the Permian
Basin, we have identified significant potential expenditures related to further
developing existing waterfloods. Waterflooding involves significant capital
expenditures and uncertainty as to the total amount of recoverable secondary
reserves. In waterflood operations, there is generally a delay between the
initiation of water injection into a formation containing hydrocarbons and any
increase in production. The operating cost per unit of production of waterflood
projects is generally higher during the initial phases of such projects due to
the purchase of injection water and related costs. Costs are also higher during
the later stages of the life of the project as production declines. The degree
of success, if any, of any secondary recovery program depends on a large number
of factors, including the amount of primary production, the porosity and
permeability of the formation, the technique used, the location of injector
wells and the spacing of both producing and injector wells.
We hedge our oil and gas production.
Periodically, we have entered into hedging transactions to reduce the
effects of fluctuations in crude oil and natural gas prices. At March 31, 2002,
we had 72% of our natural gas production and 69% of our crude oil production
hedged through December 31, 2002. The hedging activities of the combined
company, while intended to reduce sensitivity to changes in market prices of
oil and gas, are subject to a number of risks including instances in which we
or the counterparties to our hedging contracts fail to perform. Additionally,
the fixed price sales and hedging contracts limit the benefits the combined
company will realize if actual prices rise above the contract prices.
Our operations are subject to many laws and regulations.
The oil and gas industry is heavily regulated. Extensive federal, state,
local and foreign laws and regulations relating to the exploration for and
development, production, gathering and marketing of oil and gas affect our
15
operations. Some of the regulations set forth standards for discharge permits
for drilling operations, drilling and abandonment bonds or other financial
responsibility requirements, reports concerning operations, the spacing of
wells, unitization and pooling of properties and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and gas wells below actual production
capacity to conserve supplies of oil and gas.
Numerous environmental laws, including but not limited to those governing
the management of waste, the protection of water and air quality, the discharge
of materials into the environment, and the preservation of natural resources,
impact and influence our operations. If we fail to comply with environmental
laws regarding the discharge of oil, gas, or other materials into the air, soil
or water we may be subject to liabilities to the government and third parties,
including civil and criminal penalties. These regulations may require us to
incur costs to remedy the discharge. Laws and regulations protecting the
environment have become more stringent in recent years, and may, in some
circumstances, result in liability for environmental damage regardless of
negligence or fault. New laws or regulations, or modifications of or new
interpretations of existing laws and regulations, may increase substantially
the cost of compliance or adversely affect our oil and gas operations and
financial condition. From time to time, we have agreed to indemnify sellers of
producing properties against some liabilities for environmental claims
associated with these properties. Material indemnity claims may also arise with
respect to properties acquired by or from us. While we do not anticipate
incurring material costs in connection with environmental compliance and
remediation, we cannot guarantee that we will not incur material costs.
Marketability of our oil and natural gas production may be affected by
factors beyond our control.
The marketability of our production depends in part upon the availability,
proximity and capacity of natural gas gathering systems, pipelines and
processing facilities. Most of our natural gas is delivered through gathering
systems and pipelines that we do not own. Federal and state regulation of oil
and natural gas production and transportation, tax and energy policies, changes
in supply and demand and general economic conditions all could adversely affect
our ability to produce and market our oil and natural gas.
Our acquisitions involve certain risks.
We have grown significantly through acquisitions and intend to continue
acquiring oil and gas properties in the future. Although we review and analyze
the properties that we acquire, such reviews are subject to uncertainties. It
generally is not possible to review in detail every individual property
involved in an acquisition. Our assessments of matters such as recoverable
reserves and potential environmental liabilities is necessarily inexact. We do
not always conduct inspections on every well, and ordinarily focus our review
on the higher-valued properties. However, even a detailed review of all
properties and records may not reveal existing or potential problems, and
inspection of a specific well might not result in detection of potential
problems, such as mechanical integrity of equipment and environmental
conditions, that may require significant remedial expenditures.
As the Prize merger demonstrates, we have begun to focus our acquisition
efforts on larger packages of oil and gas properties. Acquisitions of larger
oil and gas properties may involve substantially higher costs and may pose
additional issues regarding operations and management. We cannot assure you
that we will be able to successfully integrate all of the oil and gas
properties that we acquire into our operations or that we will achieve desired
profitability objectives.
We are subject to substantial competition.
We encounter substantial competition in acquiring properties, drilling for
new reserves, marketing oil and gas, securing trained personnel and operating
our properties. Many competitors have financial and other resources that
substantially exceed our resources. Our competitors in acquisitions,
development, exploration and
16
production include major oil companies, natural gas utilities, numerous
independents, individual proprietors and others. Our competitors may be able to
pay more for desirable leases and may be able to evaluate, bid for and purchase
a greater number of properties or prospects than our financial or personnel
resources will permit.
Our business may be adversely affected if we lose our key personnel.
We depend greatly upon three key individuals within our management team:
Gary C. Evans, Richard R. Frazier and Charles R. Erwin. The loss of the
services of any of these individuals could materially impact our operations.
Certain of our principal stockholders can significantly influence all matters
requiring the approval of our stockholders, and their interests in our
business may be different than yours.
Natural Gas Partners V, L.P. owns approximately 26% of our outstanding
common stock. As a result of this voting power, this stockholder has the
ability to significantly influence the outcome of substantially all matters
which may be put to a vote of our stockholders, including the election of our
directors, amendments to our articles of incorporation and bylaws and approval
of significant corporate transactions, including mergers and sales of
substantially all of our assets. This may also delay or prevent a change in our
management or voting control. You should consider that the interests of Natural
Gas Partners V, L.P. as an equity investor will likely differ from your
interests in material respects.
17
USE OF PROCEEDS
We intend the exchange offer to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
offering of the old notes. We will not receive any cash proceeds from the
issuance of the new notes pursuant to the exchange offer. Old notes surrendered
in exchange for the new notes will be retired and cancelled and cannot be
reissued. As a result, the issuance of the new notes will not result in any
increase or decrease in our indebtedness. We have agreed to bear the expenses
of the exchange offer. No underwriter is being used in connection with the
exchange offer.
The net proceeds from the issuance and sale of the old notes was
approximately $291.7 million. We used all of the net proceeds of the sale of
the old notes, together with the borrowings under the new credit facility, to
refinance the outstanding indebtedness under the existing senior bank credit
facilities of both Magnum Hunter and Prize, fund the cash component of the
merger consideration in the merger with Prize and pay costs and fees associated
with the merger.
18
SELECTED CONSOLIDATED HISTORICAL
AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA AND OPERATING DATA
The following table presents selected historical consolidated and unaudited
pro forma combined financial data for Magnum Hunter for the periods indicated.
The unaudited pro forma combined financial data is derived from the unaudited
pro forma combined financial information incorporated by reference into this
prospectus. The unaudited pro forma combined financial statements give effect
to (i) the merger of Prize with a subsidiary of Magnum Hunter, as if it had
occurred on January 1, 2000 and January 1, 2001, as applicable, with respect to
operating and other data.
The data have been derived from the consolidated financial statements and
related notes of Magnum Hunter and other information concerning Magnum Hunter
included in this prospectus or incorporated by reference, or otherwise
contained in the annual and quarterly reports that Magnum Hunter has filed with
the SEC. You should read this historical and pro forma information together
with the consolidated financial statements and related notes of Magnum Hunter
in the annual reports and other information that Magnum Hunter has filed with
the SEC and incorporated by reference. The results of operations for the
unaudited three month period ended March 31, 2002 are not necessarily
indicative of the operating results for the full year.
Year Ended Three Months Ended
December 31, March 31,
---------------------------------------------------------- --------------------------
Pro Pro
Historical Forma Historical Forma
------------------------------------------------ -------- ---------------- --------
(dollars in thousands, except ratios)
1997 1998 1999 2000 2001 2001 2001 2002 2002
-------- -------- -------- -------- -------- -------- ------- ------- --------
Statement of Operations Data
Operating revenues:
Oil and gas sales.............. $ 34,569 $ 43,565 $ 60,673 $106,052 $133,083 $313,814 $42,953 $39,150 $ 63,955
Gas gathering, marketing
and processing............... 10,297 6,954 8,185 20,010 17,895 17,895 7,102 3,582 4,310
Oilfield management services... 3,968 881 768 1,448 1,828 1,828 515 392 392
-------- -------- -------- -------- -------- -------- ------- ------- --------
Total operating revenues.... 48,834 51,400 69,626 127,510 152,806 333,537 50,570 43,124 68,657
Operating costs and expenses:
Oil and gas production
lifting costs................ 7,901 14,265 15,431 16,401 20,388 63,398 4,650 8,948 16,398
Production taxes and other
costs........................ 4,911 6,417 8,144 12,558 12,994 29,778 4,015 4,303 6,795
Gas gathering, marketing
and processing............... 7,909 5,750 5,870 15,685 16,101 16,101 6,572 2,680 2,992
Oilfield management services... 3,745 467 350 903 1,277 1,277 362 276 276
Depreciation, depletion and
amortization................. 12,363 21,757 22,072 25,556 43,999 96,966 7,415 15,096 24,134
Provision for non-cash
impairment of oil and gas
reserves..................... -- 42,745 -- -- -- -- -- -- --
Loss (gain) on sale of
assets....................... (386) 52 (272) (28) (58) 1,042 (2) -- --
General and administrative..... 2,390 2,961 2,919 6,106 10,054 23,027 1,712 2,524 5,608
-------- -------- -------- -------- -------- -------- ------- ------- --------
Total Operating Costs
and Expenses............... 38,833 94,414 54,514 77,181 104,755 231,589 24,724 33,827 56,203
-------- -------- -------- -------- -------- -------- ------- ------- --------
Operating profit (loss)........ 10,001 (43,014) 15,112 50,329 48,051 101,948 25,846 9,297 12,454
Equity in earnings (loss)
of affiliate................. 6 (116) (103) 1,307 1,085 1,085 618 301 301
Other income................... 376 624 354 477 283 1,050 94 57 639
Provision for impairment of
Investments.................. -- -- -- -- (7,123) (7,123) -- -- --
Other Non-cash hedging
adjustment................... -- -- -- -- -- 4,120 889 (593) (1,531)
Interest expense............... (13,788) (18,207) (22,103) (22,298) (19,868) (51,584) (4,866) (7,505) (12,413)
-------- -------- -------- -------- -------- -------- ------- ------- --------
Income (loss) before income
tax, minority interest
and extraordinary loss....... (3,405) (60,713) (6,740) 29,815 22,428 49,496 22,581 1,557 (550)
(Provision) benefit for
income taxes................. 1,296 13,670 -- (7,555) (8,608) (18,359) (8,553) 6,510 7,309
-------- -------- -------- -------- -------- -------- ------- ------- --------
Income (loss) before
minority interest and
extraordinary loss........... (2,109) (47,043) (6,740) 22,260 13,820 31,137 14,028 8,067 6,759
Minority interest in
subsidiary loss.............. (19) (37) (86) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- ------- --------
Income (loss) before
extraordinary loss........... (2,128) (47,080) (6,826) 22,260 13,820 31,137 14,028 8,067 6,759
Extraordinary loss, net of
tax.......................... (1,384) -- -- -- (304) (304) -- (621) (621)
-------- -------- -------- -------- -------- -------- ------- ------- --------
Net income (loss).............. (3,512) (47,080) (6,826) 22,260 13,516 30,833 14,028 7,446 6,138
Preferred dividend (1)......... (875) (875) (4,509) (9,708) -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- ------- --------
Income (loss) available to
common stockholders.......... $ (4,387) $(47,955) $(11,335) $ 12,552 $ 13,516 $ 30,833 $14,028 $ 7,446 $ 6,138
======== ======== ======== ======== ======== ======== ======= ======= ========
19
Year Ended
December 31,
----------------------------------------------------------------------------
Pro
Historical Forma
--------------------------------------------------------------- -----------
(dollars in thousands, except ratios)
1997 1998 1999 2000 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) per common
share--basic.............. $ (0.21) $ (2.27) $ (0.57) $ 0.60 $ 0.50 $ 0.45
Income (loss) per common
share--diluted............ $ (0.21) $ (2.27) $ (0.57) $ 0.60 $ 0.48 $ 0.43
Common shares used in per
share calculation
Basic....................... 14,535,805 21,151,442 19,743,738 20,856,854 34,819,614 68,882,577
Diluted..................... 14,535,805 21,151,442 19,743,738 32,834,270 37,108,976 71,313,881
Other Financial and Operating
Data:
Capital expenditures (2).... $ 160,059 $ 70,187 $ 59,968 $ 64,311 $ 204,370 $ 330,987
EBITDA (3).................. 22,740 22,112 37,538 76,362 92,333 204,084
Net cash provided by
operating activities...... 5,652 13,688 17,435 49,466 104,074 193,076
Net cash provided by (used
in) investing activities.. (168,329) (74,010) (58,469) (20,008) (203,989) (388,941)
Net cash (used in) provided
by financing activities... $ 164,020 $ 62,145 $ 37,746 $ (31,014) $ 102,661 $ 188,376
Average daily production:
Oil/liquids (Bbls)....... 2,019 3,126 3,581 3,556 3,863 14,236
Natural gas (Mcf)........ 26,340 38,682 52,126 53,641 68,112 148,047
Total (Mcfe)............. 38,454 57,438 73,612 74,978 91,293 233,460
Balance Sheet (at end of
period):
Working capital (deficiency) $ 2,610 $ (1,203) $ (1,314) $ 4,121 $ (23,607) $ (908)
Net property, plant and
equipment................. 221,259 228,436 265,195 260,532 419,837 1,030,558
Total assets................ 251,069 265,724 304,022 315,612 454,385 1,193,232
Total debt.................. 166,242 233,020 234,806 191,139 284,539 603,885
Total stockholders' equity.. $ 72,152 $ 19,697 $ 51,552 $ 93,416 $ 117,974 $ 378,566
Three Months Ended
March 31,
-------------------------------------
Pro
Historical Forma
------------------------ -----------
2001 2002 2002
----------- ----------- -----------
Income (loss) per common
share--basic.............. $ 0.41 $ 0.18 $ 0.15
Income (loss) per common
share--diluted............ $ 0.37 $ 0.17 $ 0.14
Common shares used in per
share calculation
Basic....................... 34,582,683 41,777,431 41,777,431
Diluted..................... 37,410,509 43,024,235 43,024,235
Other Financial and Operating
Data:
Capital expenditures (2).... $ 29,859 $ 18,989 $ 27,289
EBITDA (3).................. 33,355 24,450 35,696
Net cash provided by
operating activities...... 29,612 (23,982) (6,799)
Net cash provided by (used
in) investing activities.. (29,043) (62,436) (58,609)
Net cash (used in) provided
by financing activities... $ 213 $ 87,514 $ 87,514
Average daily production:
Oil/liquids (Bbls)....... 3,356 7,444 13,051
Natural gas (Mcf)........ 61,522 100,756 155,503
Total (Mcfe)............. 81,678 145,433 233,809
Balance Sheet (at end of
period):
Working capital (deficiency) $ 3,009 $ 4,393 N/A
Net property, plant and
equipment................. 282,976 1,031,905 N/A
Total assets................ 331,162 1,177,846 N/A
Total debt.................. 189,182 635,351 N/A
Total stockholders' equity.. $ 109,257 $ 365,347 N/A
- --------
(1) Includes the effect in the year 2000 of the payment of a $5.5 million fee
upon redemption of $25.0 million (liquidation value) of Magnum Hunter's
1999 Series A 8% convertible preferred stock. The fee was treated as a
dividend, reducing income available to common stockholders for the year
2000.
(2) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets.
Additionally, the year 2000 amount includes the cost of property acquired
through the issuance of common stock with a fair value of $3.5 million on
the acquisition date.
(3) EBITDA is defined as income (loss) from continuing operations before income
taxes, minority interest and equity in earnings of affiliate, plus the sum
of depreciation, depletion and amortization and interest expense. EBITDA is
presented because it is commonly accepted in the oil and gas industry as a
financial indicator of a company's ability to service or incur debt and
because it is a component of Magnum Hunter's debt covenants. EBITDA is also
presented because investors routinely request such information. Management
of Magnum Hunter interprets trends in EBITDA in a similar manner as trends
in net income. EBITDA should be used as a supplement, to, and not as
substitute for, net income and cash provided by operating activities,
determined in accordance with generally accepted accounting principles, as
measures of Magnum Hunter's profitability and liquidity. There may be
operational or financial demands and requirements that reduce management's
discretion over the use of EBITDA. EBITDA as used by Magnum Hunter may not
be comparable to similarly titled measured by other companies.
20
RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our consolidated ratio of earnings to fixed
charges and earnings to fixed charges plus dividends for the periods indicated.
Three Months
Ended
Year Ended December 31 March 31
------------------------------- -----------
1997 1998(1) 1999 2000 2001 2001 2002
----- ------- ----- ----- ----- ----- -----
Ratio of earnings to fixed charges 0.69x (2.17)x 0.55x 1.44x 2.06x 5.47x 1.17x
- --------
(1) We had a loss for the year ended December 31, 1998 for purposes of
computing this ratio. Earnings for such year were insufficient to cover
fixed charges by approximately $42,292,000.
21
THE EXCHANGE OFFER
This section of the prospectus describes the proposed exchange offer. While
we believe that the description covers the material terms of the exchange
offer, this summary may not contain all of the information that is important to
you. You should carefully read this entire document and the other documents
referred to herein for a more complete understanding of the exchange offer.
Purpose of the Exchange Offer
In connection with the issuance of the old notes, we entered into a
registration rights agreement which provides for the exchange offer. A copy of
the registration rights agreement is filed as an exhibit to the registration
statement of which this prospectus is a part. Under the registration rights
agreement we agreed that we would, subject to certain exceptions:
. within 90 days after the issue date of the old notes, file a registration
statement with the SEC with respect to a registered offer to exchange the
old notes for new notes having terms substantially identical in all
material respects to the old notes (except that the new notes will not
contain terms with respect to transfer restrictions);
. use our reasonable best efforts to cause the registration statement to be
declared effective under the Securities Act within 180 days after the
issue date of the old notes;
. following the declaration of the effectiveness of the registration
statement, promptly offer the new notes in exchange for surrender of the
old notes; and
. keep the exchange offer open for not less than 30 days (or longer if
required by applicable law) after the date notice of the exchange offer
is mailed to the holders of the old notes.
For each old note tendered to us pursuant to the exchange offer, we will
issue to the holder of such old note an new note having a principal amount
equal to that of the surrendered old note. Interest on each new note will
accrue from the last interest payment date on which interest was paid on the
old note surrendered in exchange therefor, or, if no interest has been paid on
such old note, from the date of its original issue.
Under existing SEC interpretations, the new notes will be freely
transferable by holders other than our affiliates after the exchange offer
without further registration under the Securities Act if the holder of the new
notes represents to us in the exchange offer that it is acquiring the new notes
in the ordinary course of its business, that it has no arrangement or
understanding with any person to participate in the distribution of the new
notes and that it is not an affiliate of ours, as such terms are interpreted by
the SEC; provided, however, that broker-dealers receiving new notes in the
exchange offer will have a prospectus delivery requirement with respect to
resales of such new notes. The SEC has taken the position that such
participating broker-dealers may fulfill their prospectus delivery requirements
with respect to new notes (other than a resale of an unsold allotment from the
original sale of the old notes) with the prospectus contained in this
registration statement. Each broker-dealer that receives new notes for its own
account in exchange for old notes, where such old notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. See "Plan of Distribution."
Under the registration rights agreement, we are required to allow
participating broker-dealers and other persons, if any, with similar prospectus
delivery requirements to use the prospectus contained in this registration
statement in connection with the resale of such new notes for 180 days
following the effective date of such registration statement (or such shorter
period during which participating broker-dealers are required by law to deliver
such prospectus).
A holder of old notes (other than certain specified holders) who wishes to
exchange old notes for new notes in the exchange offer will be required to
represent that any new notes to be received by it will be acquired in the
22
ordinary course of its business and that at the time of the commencement of the
exchange offer it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the new notes and that it is not an "affiliate" of ours, as defined in Rule 405
of the Securities Act, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
In the event that:
. any change of law or in applicable interpretations thereof by the staff
of the SEC do not permit us to effect an exchange offer;
. the exchange offer is not consummated within 210 days of the issue date
of the old notes;
. in certain circumstances, certain holders of unregistered new notes so
request; or
. in the case of any holder of old notes that participates in the exchange
offer, such holder does not receive new notes on the date of the exchange
that may be sold without restriction under state or federal securities
laws (other than due solely to the status of such holder as an affiliate
of ours or within the meaning of the Securities Act),
then in each case, we will (x) promptly deliver to the holders and the trustee
written notice thereof and (y) at our sole expense, (a) use our reasonable best
efforts to file a shelf registration statement covering resales of the old
notes within the time period set forth in the registration rights agreement,
(b) use our best efforts to keep effective the shelf registration statement
until the earliest of (1) two years after the issue date of the old notes, (2)
such time as all of the old notes covered by the shelf registration statement
are eligible to be sold to the public pursuant to Rule 144(k) of the Securities
Act or any successor statute.
We will, in the event 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 new notes, as the case may be. A
holder selling such old notes or new notes pursuant to 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).
If we fail to meet the targets listed above, then additional interest shall
become payable in respect of the applicable old notes and new notes as follows:
(1) if (A) neither the registration statement of which this prospectus
forms a part nor a shelf registration statement covering resales of the old
notes is filed with the SEC on or prior to the 90th day after the issue date
of the old notes or (B) notwithstanding that we have consummated or will
consummate the exchange offer, we are required to file a shelf registration
statement and such shelf registration statement is not filed on or prior to
the date required by the registration rights agreement, then, commencing on
the day after either such required filing date, additional interest shall
accrue on the principal amount of the notes at a rate of 0.50% per annum for
the first 90 days immediately following each such filing date, such
additional interest rate increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period; or
(2) if (A) neither the registration statement of which this prospectus
forms a part nor a shelf registration statement covering resales of the old
notes is not declared effective by the SEC on or prior to the 180th day
after the issue date of the old notes or (B) notwithstanding that we have
consummated or will consummate the exchange offer, we are required to file a
shelf registration statement and such shelf registration statement
23
is not declared effective by the SEC on or prior to the date required by the
registration rights agreement, then, commencing on the day after either such
required effective date, additional interest shall accrue on the principal
amount of the notes at a rate of 0.50% per annum for the first 90 days
immediately following each such date, such additional interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; or
(3) if (A) we have not exchanged all validly tendered old notes in accordance
with the terms of the exchange offer on or prior to the 210th day after the
issue date of the old notes or (B) if applicable, the shelf registration
statement covering resales of the old notes has been declared effective and
such shelf registration statement ceases to be effective at any time prior
to the second anniversary of the issue date of the old notes (other than
after such time as all applicable notes have been disposed of thereunder or
are eligible to be sold pursuant to Rule 144(k)), then additional interest
shall accrue on the principal amount of the applicable notes at a rate of
0.50% per annum for the first 90 days commencing on (x) the 210th day after
the issue date of the old notes, in the case of (A) above, or (y) the day
such shelf registration statement ceases to be effective, in the case of
(B) above, such additional interest rate increasing by an additional 0.50%
per annum at the beginning of each subsequent 90-day period;
provided, however, that the additional interest rate on the applicable old
notes and new notes may not accrue under more than one of the foregoing clauses
(1)-(3) at any one time and at no time shall the aggregate amount of additional
interest accruing exceed in the aggregate 1.0% per annum; provided, further,
however, that (a) upon the filing of the registration statement of which this
prospectus forms a part or a shelf registration statement (in the case of
clause (1) above), (b) upon the effectiveness of the registration statement of
which this prospectus forms a part or a shelf registration statement (in the
case of clause (2) above), or (c) upon the exchange of all validly tendered old
notes (in the case of clause (3) (A) above, or upon the effectiveness of the
shelf registration statement which had ceased to remain effective (in the case
of clause (3) (B) above), additional interest on the notes as a result of such
clause (or the relevant subclause thereof), as the case may be, shall cease to
accrue.
Any amounts of additional interest due pursuant to clause (1), (2) or (3)
above will be payable in cash on the original interest payment dates.
All references in the indenture governing the old notes and the new notes,
in any context, to any interest or other amount payable on or with respect to
the old notes or the new notes shall be deemed to include any additional
interest pursuant to the registration rights agreement.
If we effect the exchange offer, we will be entitled to close the exchange
offer 30 days after the commencement thereof provided that we have accepted all
old notes theretofore validly tendered in accordance with the terms of the
exchange offer.
Background of the Exchange Offer
An aggregate of $300,000,000 principal amount of 9.60% senior notes due 2012
are currently issued and outstanding. The maximum principal amount of new notes
that will be issued in exchange for old notes is $300,000,000. The terms of the
new notes and the old notes are identical in all material respects, except for
transfer restrictions and registration rights that do not apply to the new
notes, and will contain different administrative terms.
The new notes will bear interest at a rate of 9.60% per year, payable
semiannually on March 15 and September 15 of each year, beginning on March 15,
2002. Interest on each new note will accrue from the last interest payment date
on which interest was paid on the old note surrendered in exchange therefor,
or, if no interest has been paid on such note, from the date of its original
issue. Holders of new notes will not receive any
24
interest on old notes tendered and accepted for exchange. In order to exchange
your old notes for transferable new notes in the exchange offer, you will be
required to make the following representations:
. the new notes will be acquired in the ordinary course of your business;
. you have no arrangements with any person to participate in the
distribution of the new notes; and
. you are not our "affiliate" as defined in Rule 405 of the Securities Act,
or if you are an affiliate of ours, you will comply with the applicable
registration and prospectus delivery requirements of the Securities Act.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not validly withdrawn in the exchange offer, and the
exchange agent will deliver the new notes promptly after the expiration date of
the exchange offer. We expressly reserve the right to delay acceptance of any
of the tendered old notes or terminate the exchange offer and not accept for
exchange any tendered old notes not already accepted if any conditions set
forth under "--Conditions of the Exchange Offer" have not been satisfied or
waived by us or do not comply, in whole or in part, with any applicable law.
If you tender your old notes, you will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the old notes. We
will pay all charges, expenses and transfer taxes in connection with the
exchange offer, other than certain taxes described below under "--Transfer
Taxes."
Expiration Date; Extensions; Termination; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on [ ]
, 2002, unless we extend it. We expressly reserve the right to extend the
exchange offer on a daily basis or for such period or periods as we may
determine in our sole discretion from time to time by giving oral, confirmed in
writing, or written notice to the exchange agent and by making a public
announcement by press release prior to 9:00 a.m., New York City time, on the
first business day following the previously scheduled expiration date. During
any extension of the exchange offer, all old notes previously tendered, not
validly withdrawn and not accepted for exchange will remain subject to the
exchange offer and may be accepted for exchange by us.
To the extent we are legally permitted to do so, we expressly reserve the
absolute right, in our sole discretion, but are not required, to:
. waive any condition of the exchange offer; and
. amend any terms of the exchange offer.
Any waiver or amendment to the exchange offer will apply to all old notes
tendered, regardless of when or in what order the old notes were tendered. If
we make a material change in the terms of the exchange offer or if we waive a
material condition of the exchange offer, we will disseminate additional
exchange offer materials, and we will extend the exchange offer to the extent
required by law.
We expressly reserve the right, in our sole discretion, to terminate the
exchange offer if any of the conditions set forth under "--Conditions of the
Exchange Offer" exist. Any such termination will be followed promptly by a
public announcement. In the event we terminate the exchange offer, we will give
immediate notice to the exchange agent, and all old notes previously tendered
and not accepted for exchange will be returned promptly to the tendering
holders.
In the event that the exchange offer is withdrawn or otherwise not
completed, new notes will not be given to holders of old notes who have validly
tendered their old notes.
25
Resale of New Notes
Based on interpretations of the SEC set forth in no-action letters issued to
third parties, we believe that new notes issued under the exchange offer in
exchange for old notes may be offered for resale, resold and otherwise
transferred by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, if:
. you are not an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act;
. you are acquiring new notes in the ordinary course of your business; and
. you do not intend to participate in the distribution of the exchange
notes.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes:
. you cannot rely on those interpretations of the SEC; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, and the secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
under the Securities Act.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K. This prospectus
may be used for an offer to resell, a resale or other re-transfer of new notes
only as specifically set forth in the section captioned "Plan of Distribution."
Only broker-dealers that acquired the new notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives new notes for its own account in exchange for
old notes, where such old notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the new notes.
Please read the section captioned "Plan of Distribution" for more details
regarding the transfer of new notes.
Acceptance of Old Notes for Exchange
We will accept for exchange old notes validly tendered pursuant to the
exchange offer, or defectively tendered, if such defect has been waived by us,
after the later of:
. the expiration date of the exchange offer; and
. the satisfaction or waiver of the conditions specified below under
"--Conditions of the Exchange Offer."
We will not accept old notes for exchange subsequent to the expiration date
of the exchange offer. Tenders of old notes will be accepted only in principal
amounts equal to $1,000 or integral multiples thereof.
We expressly reserve the right, in our sole discretion, to:
. delay acceptance for exchange of old notes tendered under the exchange
offer, subject to Rule 14e-1 under the Exchange Act, which requires that
an offeror pay the consideration offered or return the securities
deposited by or on behalf of the holders promptly after the termination
or withdrawal of a tender offer; or
. terminate the exchange offer and not accept for exchange any old notes
not accepted for exchange, if any of the conditions set forth below under
"--Conditions of the Exchange Offer" have not been satisfied or waived by
us or in order to comply in whole or in part with any applicable law.
26
In all cases, new notes will be issued only after timely receipt by the
exchange agent of certificates representing old notes, or confirmation of
book-entry transfer, a properly completed and duly executed letter of
transmittal, or a manually signed facsimile thereof, and any other required
documents. For purposes of the exchange offer, we will be deemed to have
accepted for exchange validly tendered old notes, or defectively tendered old
notes with respect to which we have waived such defect, if, as and when we give
oral, confirmed in writing, or written notice to the exchange agent. Promptly
after the expiration date, we will deposit the new notes with the exchange
agent, who will act as agent for the tendering holders for the purpose of
receiving the new notes and transmitting them to the holders. The exchange
agent will deliver the new notes to holders of old notes accepted for exchange
after the exchange agent receives the new notes.
If, for any reason, we delay acceptance for exchange of validly tendered old
notes or we are unable to accept for exchange validly tendered old notes, then
the exchange agent may, nevertheless, on its behalf, retain tendered old notes,
without prejudice to our rights described in this prospectus under the captions
"--Expiration Date; Extensions; Termination; Amendments," "--Conditions of the
Exchange Offer" and "--Withdrawal of Tenders," subject to Rule 14e-1 under the
Securities Exchange Act of 1934, which requires that an offeror pay the
consideration offered or return the securities deposited by or on behalf of the
holders thereof promptly after the termination or withdrawal of a tender offer.
If any tendered old notes are not accepted for exchange for any reason, or
if certificates are submitted evidencing more old notes than those that are
tendered, certificates evidencing old notes that are not exchanged will be
returned, without expense, to the tendering holder, or, in the case of old
notes tendered by book-entry transfer into the exchange agent's account at a
book-entry transfer facility under the procedure set forth under "--Procedures
for Tendering Old Notes-Book-Entry Transfer," such old notes will be credited
to the account maintained at such book-entry transfer facility from which such
old notes were delivered, unless otherwise requested by such holder under
"--Special Delivery Instructions" in the letter of transmittal, promptly
following the exchange date or the termination of the exchange offer.
Tendering holders of old notes exchanged in the exchange offer will not be
obligated to pay brokerage commissions or transfer taxes with respect to the
exchange of their old notes other than as described under the caption
"--Transfer Taxes" or as set forth in the letter of transmittal. We will pay
all other charges and expenses in connection with the exchange offer.
Procedures for Tendering Old Notes
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee or held through a
book-entry transfer facility and who wishes to tender old notes should contact
such registered holder promptly and instruct such registered holder to tender
old notes on such beneficial owner's behalf.
Tender of Old Notes Held Through The Depository Trust Company. The exchange
agent and The Depository Trust Company, or DTC, have confirmed that the
exchange offer is eligible for the DTC automated tender offer program.
Accordingly, DTC participants may electronically transmit their acceptance of
the exchange offer by causing DTC to transfer old notes to the exchange agent
in accordance with DTC's automated tender offer program procedures for
transfer. DTC will then send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC and received
by the exchange agent that forms part of the book-entry confirmation. The
agent's message states that DTC has received an express acknowledgment from the
participant in DTC tendering old notes that are the subject of that book-entry
confirmation, that the participant has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce such agreement
against such participant. In the case of an agent's message relating to
guaranteed delivery, the term means a message transmitted by DTC and received
by the exchange agent, which states that DTC has received an express
acknowledgment from the participant in DTC tendering old notes that they have
received and agree to be bound by the notice of guaranteed delivery.
27
Tender of Old Notes Held in Physical Form. For a holder to validly tender
old notes held in physical form:
. the exchange agent must receive at its address set forth in this
prospectus a properly completed and validly executed letter of
transmittal, or a manually signed facsimile thereof, together with any
signature guarantees and any other documents required by the instructions
to the letter of transmittal; and
. the exchange agent must receive certificates for tendered old notes at
such address, or such old notes must be transferred pursuant to the
procedures for book-entry transfer described above. A confirmation of
such book-entry transfer must be received by the exchange agent prior to
the expiration date of the exchange offer. A holder who desires to tender
old notes and who cannot comply with the procedures set forth herein for
tender on a timely basis or whose old notes are not immediately available
must comply with the procedures for guaranteed delivery set forth below.
LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD BE SENT ONLY TO THE EXCHANGE
AGENT, AND NOT TO US OR TO ANY BOOK-ENTRY TRANSFER FACILITY.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER TENDERING OLD NOTES. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, WE
SUGGEST THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE AGENT
PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD
NOTES WILL BE ACCEPTED.
Signature Guarantees. A signature on a letter of transmittal or a notice of
withdrawal must be guaranteed by an eligible institution. Eligible institutions
include banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. The signature need
not be guaranteed by an eligible institution if the old notes are tendered:
. by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
. for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the registered
holder of any old notes, the old notes must be endorsed or accompanied by a
properly completed bond power. The bond power must be signed by the registered
holder as the registered holder's name appears on the old notes and an eligible
institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, these
persons should so indicate when signing. Unless we waive this requirement, they
should also submit evidence satisfactory to us of their authority to deliver
the letter of transmittal.
Book-Entry Transfer. The exchange agent will seek to establish a new
account or utilize an existing account with respect to the old notes at DTC
promptly after the date of this prospectus. Any financial institution that is a
participant in the book-entry transfer facility system and whose name appears
on a security position listing it as the owner of the old notes may make
book-entry delivery of old notes by causing the book-entry transfer facility to
transfer such old notes into the exchange agent's account. HOWEVER, ALTHOUGH
28
DELIVERY OF OLD NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER INTO THE
EXCHANGE AGENT'S ACCOUNT AT A BOOK-ENTRY TRANSFER FACILITY, A PROPERLY
COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL, OR A MANUALLY SIGNED
FACSIMILE THEREOF, MUST BE RECEIVED BY THE EXCHANGE AGENT AT ITS ADDRESS SET
FORTH IN THIS PROSPECTUS ON OR PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE
OFFER, OR ELSE THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW MUST BE
COMPLIED WITH. The confirmation of a book-entry transfer of old notes into the
exchange agent's account at a book-entry transfer facility is referred to in
this prospectus as a "book-entry confirmation." Delivery of documents to the
book-entry transfer facility in accordance with that book-entry transfer
facility's procedures does not constitute delivery to the exchange agent.
Guaranteed Delivery. If you wish to tender your old notes and:
. certificates representing your old notes are not lost but are not
immediately available;
. time will not permit your letter of transmittal, certificates
representing your old notes and all other required documents to reach the
exchange agent on or prior to the expiration date of the exchange offer;
or
. the procedures for book-entry transfer cannot be completed on or prior to
the expiration date of the exchange offer;
you may tender your old notes if:
. your tender is made by or through an eligible institution; and
. on or prior to the expiration date of the exchange offer, the exchange
agent has received from the eligible institution a properly completed and
validly executed notice of guaranteed delivery, by manually signed
facsimile transmission, mail or hand delivery, in substantially the form
provided with this prospectus:
. setting forth your name and address, the registered number(s) of your
old notes and the principal amount of old notes tendered;
. stating that the tender is being made by guaranteed delivery; and
. guaranteeing that, within three New York Stock Exchange trading days
after the date of the notice of guaranteed delivery, the letter of
transmittal or facsimile thereof, properly completed and validly
executed, together with certificates representing the old notes, or a
book-entry confirmation, and any other documents required by the letter
of transmittal and the instructions thereto, will be deposited by the
eligible institution with the exchange agent; and
. the exchange agent receives the properly completed and validly executed
letter of transmittal or facsimile thereof with any required signature
guarantees, together with certificates for all old notes in proper form
for transfer, or a book-entry confirmation, and any other required
documents, within three New York Stock Exchange trading days after the
date of the notice of guaranteed delivery.
Other Matters. New notes will be issued in exchange for old notes accepted
for exchange only after timely receipt by the exchange agent of:
. certificates for, or a timely book-entry confirmation with respect to,
your old notes;
. a properly completed and duly executed letter of transmittal or facsimile
thereof with any required signature guarantees, or, in the case of a
book-entry transfer, an agent's message; and
. any other documents required by the letter of transmittal.
All questions as to the form of all documents and the validity, including
time of receipt, and acceptance of all tenders of old notes will be determined
by us, in our sole discretion, the determination of which shall be final
29
and binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL
NOT BE CONSIDERED VALID. We reserve the absolute right to reject any or all
tenders of old notes that are not in proper form or the acceptance of which, in
our opinion, would be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
Unless waived by us, any defect or irregularity in connection with tenders
of old notes must be cured within the time that we determine. Tenders of old
notes will not be deemed to have been made until all defects and irregularities
have been waived by us or cured. Neither us, the exchange agent, or any other
person will be under any duty to give notice of any defects or irregularities
in tenders of old notes, or will incur any liability to holders for failure to
give any such notice.
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
. any new notes that you receive will be acquired in the ordinary course of
your business;
. you have no arrangement or understanding with any person or entity to
participate in the distribution of the new notes;
. if you are not a broker-dealer, that you are not engaged in and do not
intend to engage in the distribution of the new notes;
. if you are a broker-dealer that will receive new notes for your own
account in exchange for old notes that were acquired as a result of
market-making activities or other trading activities, that you will
deliver a prospectus, as required by law, in connection with any resale
of those new notes; and
. you are not an "affiliate" of ours, as defined in Rule 405 of the
Securities Act, or, if you are an affiliate, you will comply with any
applicable registration and prospectus delivery requirements of the
Securities Act.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw your
tender of old notes at any time prior to the expiration date of the exchange
offer.
For a withdrawal to be effective:
. the exchange agent must receive a written notice of withdrawal at the
address set forth below under "--Exchange Agent"; or
. you must comply with the appropriate procedures of DTC's automated tender
offer program system.
Any notice of withdrawal must:
. specify the name of the person who tendered the old notes to be
withdrawn; and
. identify the old notes to be withdrawn, including the principal amount of
the old notes to be withdrawn.
If certificates for old notes have been delivered or otherwise identified to
the exchange agent, then, prior to the release of those certificates, the
withdrawing holder must also submit:
. the serial numbers of the particular certificates to be withdrawn; and
. a signed notice of withdrawal with signatures guaranteed by an eligible
institution, unless the withdrawing holder is an eligible institution.
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If old notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal, and our determination
shall be final and binding on all parties. We will deem any old notes so
withdrawn not to have been validly tendered for exchange for purposes of the
exchange offer.
We will return any old notes that have been tendered for exchange but that
are not exchanged for any reason to their holder without cost to the holder. In
the case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC, according to the procedures described above, those old notes
will be credited to an account maintained with DTC for the old notes. This
return or crediting will take place as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. You may re-tender
properly withdrawn old notes by following one of the procedures described under
"--Procedures for Tendering Old Notes" at any time on or prior to the
expiration date of the exchange offer.
Conditions of the Exchange Offer
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes and we may terminate or amend the exchange
offer as provided in this prospectus before accepting any old notes for
exchange if in our reasonable judgment:
. the exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation of
the staff of the SEC;
. any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that would reasonably be expected to materially impair our ability
to proceed with the exchange offer or material adverse development has
occured in any existing proceeding with respect to us or the subsidiary
guarantors; or
. all governmental approvals we deem necessary for the consummation of the
exchange offer shall not have occured.
We will not be obligated to accept for exchange the old notes of any holder
that has not made to us:
. the representations described under the captions "--Procedures for
Tendering Old Notes" and "Plan of Distribution"; and
. any other representations that may be reasonably necessary under
applicable Securities and Exchange Commission rules, regulations or
interpretations to make available to us an appropriate form for
registration of the new notes under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we
may delay acceptance of any old notes by giving oral or written notice of an
extension to their holders. During an extension, all old notes previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange. We will return any old notes that we do not accept for exchange for
any reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions of the exchange offer specified above.
By public announcement we will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the old notes as
promptly as practicable. If we amend the exchange offer in a manner that we
consider material, we will disclose the amendment in the manner required by
applicable law.
31
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. If we
fail at any time to exercise any of the foregoing rights, this failure will not
constitute a waiver of that right. Each of these rights will be deemed an
ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue
new notes in exchange for any old notes, if at any time a stop order is
threatened or in effect with respect to the registration statement of which
this prospectus constitutes a part or the qualification of the indenture under
the Trust Indenture Act of 1939.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the transfer and
exchange of old notes pursuant to the exchange offer. The tendering holder,
however, will be required to pay any transfer taxes, whether imposed on the
record holder or any other person, if:
. delivery of the new notes, or certificates for old notes for principal
amounts not exchanged, are to be made to any person other than the record
holder of the old notes tendered;
. tendered certificates for old notes are recorded in the name of any
person other than the person signing any letter of transmittal; or
. a transfer tax is imposed for any reason other than the transfer and
exchange of old notes under the exchange offer.
Consequences of Failure to Exchange
If you do not exchange your old notes for new notes in the exchange offer,
you will remain subject to restrictions on transfer of the old notes:
. as set forth in the legend printed on the old notes as a consequence of
the issuance of the new notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
. as otherwise set forth in the offering circular distributed in connection
with the private offering of the old notes.
In general, you may not offer or sell the old notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the old notes under the Securities Act. Based on
interpretations of the SEC, you may offer for resale, resell or otherwise
transfer new notes issued in the exchange offer without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that:
. you are not an "affiliate" within the meaning of Rule 405 under the
Securities Act;
. you acquired the new notes in the ordinary course of your business; and
. you have no arrangement or understanding with respect to the distribution
of the new notes to be acquired in the exchange offer.
If you tender old notes in the exchange offer for the purpose of
participating in a distribution of the new notes:
. you cannot rely on the applicable interpretations of the SEC; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered
by an effective registration statement containing the selling security
holder information required by Item 507 or 508, as applicable, of
Regulation S-K under the Securities Act.
32
Exchange Agent
Deutsche Bank Trust Company Americas has been appointed as exchange agent
for the exchange offer. You should direct questions and requests for
assistance, requests for additional copies of this prospectus, the letter of
transmittal or any other documents to the exchange agent. You should send
certificates for old notes, letters of transmittal and any other required
documents to the exchange agent addressed as follows:
By Hand: By Mail: By Overnight Mail or Courier:
Deutsche Bank Trust Company Americas DB Services Tennessee, Inc. DB Services Tennessee, Inc.
C/O The Depository Trust Clearing Reorganization Unit Corporate Trust & Agency Services
Corporation P.O. Box 292737 Reorganization Unit
55 Water Street, 1st floor Nashville, TN 37229-2737 648 Grassmere Park Road
Jeanette Park Entrance Nashville, TN 37211
New York, NY 10041
Via Facsimile: (615) 835-3701
Confirm by Telephone: (615) 835-3572
For Information Call: (800) 735-7777
Delivery of the letter of transmittal to an address other than as shown
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of the letter of transmittal.
Other
Participation in the exchange offer is voluntary, and you should carefully
consider whether to exchange old notes for new notes. We urge you to consult
your financial and tax advisors in making your own decision on what action to
take.
We may in the future seek to acquire untendered old notes in open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise, on terms that may differ from the terms of the exchange offer. We
have no present plans to acquire any old notes that are not tendered in the
exchange offer or to file a registration statement to permit resales or any
untendered old notes.
33
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description summarizes the material terms of our senior credit
facilities. The description may not contain all of the information that may be
important to you. To understand the agreements related to the senior credit
facilities fully, you should carefully read the agreements relating to the
senior credit facilities, copies of which are available as described under
"Where You Can Find More Information." The following description is qualified
in its entirety by reference to the agreements.
Senior Secured Credit Facility
General
In March 2002, we amended and restated our senior bank credit facility in
conjunction with the merger with Prize. The new credit facility provides for
total borrowings of $500 million, up from $225 million, and raises the
borrowing base from $160 million to $300 million. Additionally, the expiration
date of the facility was amended and extended to March 2006. After March 15,
2002, the new credit facility was used to (i) fund the cash component of the
merger consideration payable to the Prize shareholders, (ii) pay costs
associated with the merger, and (iii) for general corporate purposes.
The new credit facility was treated as a new credit facility with respect to
the funds flow on the effective date of March 15, 2002. As such, the existing
balances on the old facility prior to March 15 were paid off with the proceeds
received on March 15, 2002. The original capitalized debt issuance costs of
$621,000, net of tax, related to the new credit facility were written off as an
extraordinary loss from early extinguishment of debt during the quarter ended
March 31, 2002. Upon the completion of the sale of the old notes and the Prize
merger, the availability under the bank financing was reduced, and is
approximately $300.0 million (the "new credit facility").
The new credit facility will mature in three years with no required
principal payments until maturity, provided the outstanding principal does not
exceed the borrowing base determination established from time-to-time by the
lenders. Amounts under the new credit facility may be repaid and reborrowed
prior to the final maturity date.
Availability under the new credit facility is governed by a borrowing base,
which is based on the value of certain of our and our subsidiaries' proved
reserves of oil and natural gas. The borrowing base is currently $300.0 million.
Bankers Trust Company, a subsidiary of Deutsche Bank AG and an affiliate of
Deutsche Banc Alex. Brown Inc., is the administrative agent for the new credit
facility; an affiliate of CIBC World Markets Corp. will be the syndication
agent; and BNP Paribas will be the documentation agent.
Guarantees; Security
Each of our existing, wholly owned material subsidiaries (including those
added through the Prize merger), other than Hunter Butcher, Canvasback and
Redhead, are "restricted subsidiaries" under the new credit facility, as
certain future subsidiaries will be. These restricted subsidiaries guarantee
the new credit facility. The new credit facility and related guarantees, and
any permitted commodity or interest rate hedging agreements with any new credit
facility lender, are secured by a first priority lien on substantially all
assets owned now or in the future by Magnum Hunter and its restricted
subsidiaries. We have also pledged all of the stock of each of our restricted
subsidiaries.
Interest; Fees
The interest under the new credit facility is payable at rates per annum
equal to, at our option: (1) a base rate equal to higher of (a) Deutsche Bank
Trust Company Americas' prime rate or (b) the overnight federal funds rate
34
plus 0.5%, plus, in each case, the applicable margin spread; or (2) the
Eurodollar rate plus the applicable margin spread. Unused commitment fees are
due quarterly.
The applicable margin spread and the per annum percentage used to calculate
the unused commitment fee are determined by reference to a pricing schedule
which is based upon our usage of our borrowing base under the new credit
facility. The applicable margin ranges for eurodollar loans between 125 basis
points and 225 basis points, depending upon the pricing schedule. Undrawn
commitment fees generally range between 25 basis points and 37.5 basis points
per annum.
Base rate loans may be prepaid at any time without a premium or penalty.
Eurodollar loans may be prepaid prior to the end of the applicable interest
period upon our reimbursement of certain breakage costs.
We have the ability to issue letters of credit under the new credit facility.
Covenants and Events of Default
The new credit facility contains affirmative and negative covenants
customary for agreements of this type, including, among others, covenants
restricting our ability to (i) incur additional indebtedness, (ii) create liens
on our assets, (iii) make certain investments and loans, (iv) pay dividends and
other distributions, (v) consolidate, merge or sell assets, (vi) limitation on
hedging activities, and (vii) change the character of our business.
We are also required to comply with certain financial tests and maintain
certain financial ratios. These financial tests and ratios include requirements
to maintain (i) a Maximum Leverage Ratio, (ii) a Minimum Interest Coverage
Ratio and (iii) a Minimum Current Ratio (in each case as defined in the new
credit facility).
The new credit facility also includes customary events of default. Events of
default under the new credit facility include non-payment of principal,
interest or fees, violation of covenants, inaccuracy of representations and
warranties in any material respect, bankruptcy and insolvency events,
cross-defaults and a default in the event of a change of control. An event of
default under the facility will permit the lenders to accelerate the maturity
of the indebtedness under the facility, and may result in one or more
cross-defaults under other indebtedness of Magnum Hunter, including the notes
and our 10% Senior Notes. Similarly, a default under the indenture or the
indenture governing our 10% Senior Notes will constitute an event of default
under the new revolving credit facility.
10% Senior Notes due 2007
General
On May 29, 1997, we issued $140.0 million of 10% Senior Notes due June 1,
2007 in a private placement. We subsequently exchanged the notes with publicly
tradable notes pursuant to a registered exchange offer under the Securities
Act. In June 2001, we repurchased $10.5 million of the 10% Senior Notes.
Interest
Interest on the 10% Senior Notes generally accrues at the rate of 10% per
annum and is payable semi-annually in cash on each June 1 and December 1.
Change in Control
In the event of a change of control of Magnum Hunter, each holder of the 10%
Senior Notes will have the right to require Magnum Hunter to repurchase such
holder's 10% Senior Notes at a price equal to 101% of their principal amount,
plus accrued interest, if any, to the date of purchase.
35
Redemption
The 10% Senior Notes will be redeemable, in whole or in part, at the option
of Magnum Hunter, on or at any time after June 1, 2002, at a declining premium.
Covenants
The 10% Senior Notes are general unsecured obligations of Magnum Hunter and
are pari passu in right of payment to existing and future senior indebtedness
and obligations of Magnum Hunter, including the new revolving credit facility
and the notes offered hereby. The indenture governing the 10% Senior Notes
contains certain covenants that limit the ability of Magnum Hunter and our
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make investments and certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, incur
liens, pay dividends or make certain payments to our subsidiaries, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our assets. All of such
covenants are subject to significant qualification and exceptions.
36
DESCRIPTION OF NEW NOTES
The old notes were issued under an indenture dated as of March 15, 2002 by
and among the Company, the Subsidiary Guarantors and Deutsche Bank Trust
Company Americas, formerly known as Bankers Trust Company, as Trustee (the
"Trustee"). Upon the issuance of the new notes, the Indenture will be subject
to and governed by the provisions of the Trust Indenture Act of 1939 as amended
(the "TIA").
The new notes will be issued under the same Indenture as the old notes, and
the old notes, the new notes, and any additional notes issued from time to time
in accordance with the terms of the Indenture (if any) will constitute a single
series of debt securities under the Indenture. In the event that the exchange
offer is consummated, any old notes that remain outstanding after consummation
of the exchange offer, the private exchange notes and the new notes issued in
the exchange offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding
principal amount of new notes have taken certain actions or exercised certain
rights under the Indenture. Unless the context requires otherwise, for all
purposes of the Indenture and this "Description of New Notes," references to
the "notes" shall mean the new notes.
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the TIA, and to all of the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the form of Indenture may be obtained from the Company. The definitions
of certain capitalized terms used in the following summary are set forth below
under "--Certain Definitions." For purposes of this "Description of Notes"
section, references to the "Company" include only Magnum Hunter Resources, Inc.
and not its Subsidiaries.
The new notes will be unsecured senior obligations of the Company ranking
pari passu in right of payment to all unsubordinated indebtedness of the
Company and will rank senior in right of payment to all subordinated
indebtedness of the Company. The Guarantees will be unsecured senior
obligations of the Subsidiary Guarantors and will rank pari passu in right of
payment to all unsubordinated indebtedness of the Subsidiary Guarantors and
will rank senior in right of payment to all subordinated indebtedness of the
Subsidiary Guarantors. However, the new notes will be effectively subordinated
to secured indebtedness of the Company and the Subsidiary Guarantors to the
extent of the value of the assets securing such indebtedness.
The new notes will be issued in fully registered form only, without coupons,
in denominations of $1,000 and integral multiples thereof. Initially, the
Trustee will act as paying agent and registrar for the new notes. The new notes
may be presented for registration of transfer and exchange at the offices of
the registrar, which initially will be the Trustee's corporate trust office.
The Company may change any paying agent and registrar without notice to holders
of the new notes (the "Holders"). The Company will pay principal (and premium,
if any) on the new notes at the Trustee's corporate office in New York, New
York. At the Company's option, interest may be paid at the Trustee's corporate
trust office or by check mailed to the registered addresses of the Holders. Any
old notes that remain outstanding after the completion of the exchange offer,
together with the new notes issued in connection with the exchange offer, will
be treated as a single class of securities under the Indenture.
Principal, Maturity and Interest
The notes will mature on March 15, 2012 and are limited in aggregate
principal amount to $300.0 million. Additional notes may be issued from time to
time, subject to the limitations set forth under the subheading "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness." Interest on
the notes will accrue at the rate of 9.60% per annum and will be payable
semi-annually in cash on each March 15 and September 15, commencing on
September 15, 2002, to the Persons who are registered Holders at the close of
business on the March 1 and September 1, respectively, immediately preceding
the applicable interest payment date. Interest on the notes will accrue from
and including the most recent date to which interest has been paid or, if no
interest has
37
been paid, from and including the date of issuance. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
The notes will not be entitled to the benefit of any mandatory sinking fund.
Redemption
Optional Redemption. The notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after March 15, 2007,
upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the 12-month period commencing on March 15 of the years set
forth below, plus, in each case, accrued interest, if any, thereon to the date
of redemption:
Year Percentage
---- ----------
2007............... 104.800%
2008............... 103.200%
2009............... 101.600%
2010 and thereafter 100.000%
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to March 15, 2005, the Company may, at its option, use all or
a portion of the net cash proceeds of one or more Equity Offerings (as defined
below) to redeem up to 35% of the aggregate principal amount of the notes
issued under the Indenture at a redemption price equal to 109.600% of the
aggregate principal amount of the notes to be redeemed, plus accrued interest,
if any, thereon to the date of redemption; provided, that:
(1) at least 65% of the aggregate principal amount of notes issued under
the Indenture remains outstanding immediately after giving effect to any
such redemption; and
(2) the Company makes such redemption not more than 60 days after the
consummation of any such Equity Offering.
Selection and Notice of Redemption
In the event that less than all of the notes are to be redeemed at any time,
selection of such notes, or portions thereof, for redemption will be made by
the Trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or,
(2) if the notes are not then listed on a national securities exchange,
on a pro rata basis, by lot or by such other method as the Trustee shall
deem fair and appropriate.
No notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of an Equity Offering,
selection of the notes or portions thereof for redemption shall be made by the
Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to the procedures of DTC), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least
30 but not more than 60 days before the redemption date to each Holder of notes
to be redeemed at its registered address. If any note is to be redeemed in part
only, the notice of redemption that relates to such note shall state the
portion of the principal amount thereof to be redeemed. A new note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original note. On and after
the applicable redemption date, interest will cease to accrue on notes or
portions thereof called for redemption as long as the Company has deposited
with the paying agent for the notes funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
38
Guarantees
Each Subsidiary Guarantor will unconditionally guarantee, on an unsecured
senior basis, jointly and severally, to each Holder and the Trustee, the full
and prompt performance of the Company's obligations under the Indenture and the
notes, including the payment of principal of and interest on the notes (a
"Guarantee").
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture will result in the
obligations of such Subsidiary Guarantor under its Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under Federal or state law.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor that is a Restricted
Subsidiary without limitation, or with or to other Persons upon the terms and
conditions set forth in the Indenture. See "--Certain Covenants--Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Subsidiary Guarantor is sold by the Company and/or one or more of its
Restricted Subsidiaries and the sale complies with the provisions set forth in
"--Certain Covenants--Limitation on Asset Sales," such Subsidiary Guarantor's
Guarantee will be released.
Separate financial statements of the Subsidiary Guarantors are not included
herein because such Subsidiary Guarantors are jointly and severally liable with
respect to the Company's obligations under the Indenture and the notes, and the
aggregate net assets, earnings and equity of the Subsidiary Guarantors and the
Company are substantially equivalent to the net assets, earnings and equity of
the Company on a consolidated basis.
Holding Company Structure
The Company is a holding company for its Subsidiaries, with no material
operations of its own. Accordingly, the Company is dependent upon the
distribution of the earnings of its Subsidiaries, whether in the form of
dividends, advances or payments on account of intercompany obligations, to
service its debt obligations. In addition, the claims of the Holders of notes
are subject to the prior payment of all secured indebtedness of the Guarantors.
There can be no assurance that, after providing for all such secured claims,
there would be sufficient assets available from the Company and its
Subsidiaries to satisfy the claims of the Holders of notes.
Change of Control
The Indenture provides that upon the occurrence of a Change of Control, each
Holder will have the right to require that the Company purchase all or a
portion of such Holder's notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest, if any, thereon to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A Change of Control Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law. Holders electing
to have a note purchased pursuant to a Change of Control Offer will be required
to surrender the note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the note completed, to the paying agent for the
notes at the address specified in the notice prior to the close of business on
the third Business Day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the notes that might be delivered by Holders
39
seeking to accept the Change of Control Offer. In the event the Company is
required to purchase outstanding notes pursuant to a Change of Control Offer,
the Company expects that it would seek third party financing to the extent it
does not have available funds to meet its purchase obligations. However, there
can be no assurance that the Company would be able to obtain such financing.
Additionally, the occurrence of a Change of Control would constitute an event
of default under the existing Senior Credit Facility which would permit the
lenders thereunder to accelerate all indebtedness under the existing Senior
Credit Facility.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to the Company's obligation to make a Change of Control
Offer. Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of
any such transaction in certain circumstances may require repurchase of the
notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout
of the Company by the management of the Company. While such restrictions cover
a wide variety of arrangements which have traditionally been used to effect
highly leveraged transactions, the Indenture may not afford the Holders of
notes protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. Other than Permitted
Indebtedness, the Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume,
guarantee, acquire, become liable, contingently or otherwise, with respect to,
or otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (including, without limitation, Acquired Indebtedness); provided,
however, that if no Default or Event of Default shall have occurred and be
continuing at the time of or as a consequence of the incurrence of any such
Indebtedness, the Company and the Restricted Subsidiaries or any of them may
incur Indebtedness, in each case, if on the date of the incurrence of such
Indebtedness, after giving pro forma effect to the incurrence thereof and the
receipt and application of the proceeds therefrom, the Company's Consolidated
EBITDA Coverage Ratio would have been greater than 2.50 to 1.0.
For purposes of determining any particular amount of Indebtedness under this
covenant, guarantees of Indebtedness otherwise included in the determination of
such amount shall not also be included.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Company or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Company or
a Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Company will not, and will not permit any Subsidiary Guarantor to, incur
any Indebtedness which by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated in right of payment to
40
any Indebtedness of the Company or such Subsidiary Guarantor, as the case may
be, other than the notes and the Guarantees unless such Indebtedness is also by
its terms (or by the terms of any agreement governing such Indebtedness) made
expressly subordinate in right of payment to the notes or the Guarantee of such
Subsidiary Guarantor, as the case may be, pursuant to subordination provisions
that are at least as favorable to the holders of the notes or such guarantee as
the subordination provisions of such Indebtedness (or agreement).
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions made to the Company or any Restricted Subsidiary
and other than any dividends or distributions payable solely in Qualified
Capital Stock of the Company) on or in respect of shares of the Capital
Stock of the Company or any Restricted Subsidiary to holders of such Capital
Stock;
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Restricted Subsidiary other than through
the exchange therefor solely of Qualified Capital Stock of the Company;
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company or a Subsidiary Guarantor that is subordinate or
junior in right of payment to the notes or such Subsidiary Guarantor's
Guarantee, as the case may be; or
(4) make any Investment (other than a Permitted Investment) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being referred
to as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto,
(i) a Default or an Event of Default shall have occurred and be
continuing;
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with
"--Limitation on Incurrence of Additional Indebtedness" above; or
(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made on or after January 1, 2002 (the
amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith
by the Board of Directors of the Company) shall exceed the sum of:
(u) $25.0 million; plus
(v) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Company earned on or after January 1, 2002 and on or prior to the last date
of the Company's fiscal quarter immediately preceding such Restricted
Payment (the "Reference Date") (treating such period as a single accounting
period); plus
(w) 100% of the aggregate net cash proceeds, or the fair market value of
Property other than cash, received by the Company from any Person (other
than a Restricted Subsidiary of the Company) from the issuance and sale on
or after January 1, 2002 and on or prior to the Reference Date of Qualified
Capital Stock of the Company; plus
(x) without duplication of any amounts included in clause (iii)(w)
above, 100% of the aggregate net cash proceeds of any equity contribution
received by the Company from a holder of the Company's Capital Stock
(excluding, in the case of clauses (iii)(w) and (x), any net cash proceeds
from an Equity Offering to the extent used to redeem the notes); plus
(y) an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, interest payments, repayments of
loans or advances, or other transfers of cash or Properties (including
transfers as a result of a merger or liquidation), in each case to the
Company or to any Restricted
41
Subsidiary of the Company from Unrestricted Subsidiaries (but without
duplication of any such amount included in calculating cumulative
Consolidated Net Income of the Company), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (in each case valued as
provided in "--Limitation on Designation of Unrestricted Subsidiaries"
below), not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary and which was treated as a
Restricted Payment under the Indenture; plus
(z) without duplication of the immediately preceding subclause (y), an
amount equal to the lesser of the cost or net cash proceeds received upon
the sale or other disposition of any Investment made on or after January 1,
2002 which had been treated as a Restricted Payment (but without duplication
of any such amount included in calculating cumulative Consolidated Net
Income of the Company).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit:
(1) the payment of any dividend or redemption payment within 60 days
after the date of declaration of such dividend or the applicable redemption
if the dividend or redemption payment, as the case may be, would have been
permitted on the date of declaration;
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Capital Stock of the Company, either (i)
solely in exchange for Qualified Capital Stock of the Company or (ii)
through the application of net proceeds of a sale for cash (other than to a
Restricted Subsidiary of the Company) of Qualified Capital Stock of the
Company within 90 days before or within 5 days after such acquisition;
(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company or Subsidiary
Guarantor that is subordinate or junior in right of payment to the notes or
such Subsidiary Guarantor's Guarantee, as the case may be, either (i) solely
in exchange for Qualified Capital Stock of the Company, or (ii) through the
application of net proceeds of a substantially concurrent sale for cash
(other than to a Restricted Subsidiary of the Company) of (a) Qualified
Capital Stock of the Company or (b) Refinancing Indebtedness;
(4) if no Default or Event of Default shall have occurred and be
continuing, the payment of dividends on the TCW Preferred Stock; and
(5) the initial designation of Hunter Butcher International Limited
Liability Company, Canvasback Energy, Inc. and Redhead Energy, Inc. as
Unrestricted Subsidiaries (such designation shall be deemed to have occurred
on December 31, 2001).
In determining the aggregate amount of Restricted Payments on or after
January 1, 2002 in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2), (3) and (4) shall be
included in such calculation.
Limitation on Asset Sales. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Company's Board of Directors or senior
management of the Company);
(2) at least 75% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in
the form of cash or Cash Equivalents and is received at the time of such
disposition; and
42
(3) upon the consummation of an Asset Sale, the Company shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to
such Asset Sale within 360 days of receipt thereof either:
(a) to repay or prepay Indebtedness outstanding under the Senior
Credit Facility and, if that Indebtedness is revolving credit
Indebtedness, to correspondingly reduce the funding commitment under the
Senior Credit Facility with respect to the revolving credit Indebtedness
repaid or prepaid;
(b) to repay or prepay any Indebtedness of the Company that is
secured by a Lien permitted to be incurred pursuant to "--Limitation on
Liens" below;
(c) to make an investment in properties or assets that replace the
properties or assets that were the subject of such Asset Sale or in
properties or assets that will be used in the business of the Company
and its Restricted Subsidiaries as existing on the Issue Date or in
businesses reasonably related thereto ("Replacement Assets");
(d) to make an investment in Crude Oil and Natural Gas Related
Assets;
(e) to repurchase of the Company's 10% Senior Notes due 2007
pursuant to a net proceeds offer similar to the Net Proceeds Offer
described below; or
(f) to make a combination of prepayment and investment permitted by
the foregoing clauses (3)(a) through (3)(e).
On the 361st day after an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company determines not to apply the Net Cash Proceeds
relating to such Asset Sale as set forth in clauses (3)(a) through (3)(f) of
the immediately preceding paragraph (each a "Net Proceeds Offer Trigger Date"),
such aggregate amount of Net Cash Proceeds which have been received by the
Company or such Restricted Subsidiary but which have not been applied on or
before such Net Proceeds Offer Trigger Date as permitted in clauses (3)(a)
through (3)(f) of the immediately preceding paragraph (each a "Net Proceeds
Offer Amount") shall be applied by the Company or such Restricted Subsidiary,
as the case may be, to make an offer to purchase (a "Net Proceeds Offer") on a
date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45
days following the applicable Net Proceeds Offer Trigger Date, from all Holders
and, to the extent required by the terms of any Pari Passu Indebtedness the
holders of such Pari Passu Indebtedness, on a pro rata basis, that principal
amount of notes (and Pari Passu Indebtedness) purchasable with the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the notes (and
Pari Passu Indebtedness) to be purchased, plus accrued and unpaid interest, if
any, thereon to the date of purchase; provided, however, that if at any time
any non-cash consideration received by the Company or any Restricted
Subsidiary, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest received
with respect to any such non-cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant.
The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $10,000,000
resulting from one or more Asset Sales (at which time, the entire unutilized
Net Proceeds Offer Amount, and not just the amount in excess of $10,000,000,
shall be applied as required pursuant to this paragraph).
Notwithstanding the first two paragraphs of this covenant, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent that:
(1) the consideration for such Asset Sale constitutes Replacement Assets
and/or Crude Oil and Natural Gas Related Assets and/or the assumption of
obligations secured by Liens that burden some or all of the assets being
sold; provided that, in the case of any such assumption, (a) the Person
assuming such obligations shall have no recourse with respect to such
obligations to the Company or any of its Restricted Subsidiaries and (b) no
assets of the Company or any of its Restricted Subsidiaries (other than
those assets being sold) are subject to such Liens; and
43
(2) such Asset Sale is for fair market value; provided, that at least
75% of the total consideration received by the Company or any of its
Restricted Subsidiaries in connection with any such Asset Sale shall be in
the form of Replacement Assets, Crude Oil and Natural Gas Related Assets,
the assumption of Liens described in clause (1) above, cash or Cash
Equivalents and that any Net Cash Proceeds so received shall be subject to
the provisions of clause (3) of the first paragraph and to the provisions of
the second paragraph of this covenant.
Notice of each Net Proceeds Offer will be mailed to the record Holders as
shown on the register of Holders within 30 days following the Net Proceeds
Offer Trigger Date, with a copy to the Trustee, and shall comply with the
procedures set forth in the Indenture. Upon receiving notice of the Net
Proceeds Offer, Holders may elect to tender their notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender notes and holders of Pari Passu Indebtedness property tender
such Indebtedness with an aggregate principal amount exceeding the Net Proceeds
Offer Amount, notes of tendering Holders and Pari Passu Indebtedness will be
purchased on a pro rata basis (based on principal amounts of notes and Pari
Passu Indebtedness tendered). A Net Proceeds Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by law.
The Company's ability to repurchase notes in a Net Proceeds Offer is
presently restricted by the terms of the Senior Credit Facility and may
hereafter be prohibited or otherwise limited by the terms of any then existing
borrowing arrangements and the Company's financial resources.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale"provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale"provisions of the Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on or in respect of
its Capital Stock;
(2) make loans or advances, or to pay any Indebtedness or other
obligation owed, to the Company or any other Restricted Subsidiary;
(3) guarantee any Indebtedness or any other obligation of the Company or
any Restricted Subsidiary; or
(4) transfer any of its property or assets to the Company or any other
Restricted Subsidiary (each such encumbrance or restriction, a "Payment
Restriction"),
except for such encumbrances or restrictions existing under or by reason of:
(a) applicable law;
(b) the Indenture or any other indentures governing Pari Passu
Indebtedness; provided, however, that the provisions relating to such
encumbrances or restriction contained in any such other indenture are no
less favorable to the Holders in any material respect as determined by the
Board of Directors of the Company in their reasonable and good faith
judgment than the provisions relating to such encumbrances or restrictions
contained in the Indenture;
(c) the Senior Credit Facility;
44
(d) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary;
(e) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to such Restricted Subsidiary, or the
properties or assets of such Restricted Subsidiary, other than the Person or
the properties or assets of the Person so acquired;
(f) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date;
(g) customary restrictions with respect to a Restricted Subsidiary of
the Company pursuant to an agreement that has been entered into for the sale
or disposition of Capital Stock or assets of such Restricted Subsidiary to
be consummated in accordance with the terms of the Indenture solely in
respect of the assets or Capital Stock to be sold or disposed of;
(h) any instrument governing a Permitted Lien, to the extent and only to
the extent such instrument restricts the transfer or other disposition of
assets subject to such Permitted Lien; or
(i) an agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (b), (c), (e) or (f) above; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such Refinancing Indebtedness are no less favorable to the
Holders in any material respect as determined by the Board of Directors of
the Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in the applicable
agreement referred to in such clause (b), (c), (e) or (f).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not cause or permit any of its Restricted Subsidiaries to issue any Preferred
Stock of any Restricted Subsidiary (other than to the Company or to a
Restricted Subsidiary) or permit any Person (other than the Company or a
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. Other than Permitted Liens, the Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of any
kind against or upon any property or assets of the Company or any of its
Restricted Subsidiaries (whether owned on the Issue Date or acquired after the
Issue Date) unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the notes or any Guarantee, the
notes or such Guarantee, as the case may be, are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens at
least to the same extent as the notes are senior in priority to such
Indebtedness; and
(2) in all other cases, the notes and the Guarantees are equally and
ratably secured.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary to sell, assign, transfer,
lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries), whether as an entirety or substantially as an
entirety to any Person unless:
(a) either:
(1) the Company shall be the surviving or continuing corporation; or
(2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and its Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity"):
45
(x) shall be a corporation organized and validly existing under
the laws of the United States or any state thereof or the District of
Columbia; and
(y) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and delivered to
the Trustee, the due and punctual payment of the principal of,
premium, if any, and interest on all of the notes and the performance
of every covenant of the notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or
observed;
(b) immediately after giving effect to such transaction and the
assumption contemplated by clause (a)(2)(y) above (including giving effect
to any Indebtedness incurred or anticipated to be incurred in connection
with or in respect of such transaction), the Company or such Surviving
Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to
"--Limitation on Incurrence of Additional Indebtedness" above;
(c) immediately after giving effect to such transaction and the
assumption contemplated by clause (a)(2)(y) above (including, without
limitation, giving effect to any Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and
(d) the Company or the Surviving Entity, as the case may be, shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer,
lease, conveyance or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture
complies with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have been
satisfied; provided, however, that such counsel may rely, as to matters of
fact, on a certificate or certificates of officers of the Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the
foregoing, in which the Company is not the continuing corporation, the
successor Person formed by such consolidation or into which the Company is
merged or to which such conveyance, lease or transfer is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under the Indenture and the notes with the same effect as if such surviving
entity had been named as such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "--Limitation on Asset Sales") will not, and
the Company will not cause or permit any Subsidiary Guarantor to, consolidate
with or merge with or into any Person other than the Company or another
Subsidiary Guarantor that is a Restricted Subsidiary unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation or
other legal entity organized and existing under the laws of the United
States or any state thereof or the District of Columbia;
(2) such entity assumes by execution of a supplemental indenture all of
the obligations of the Subsidiary Guarantor under its Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
46
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, the Company could satisfy
the provisions of clause (b) of the first paragraph of this covenant.
Any merger or consolidation of a Subsidiary Guarantor with and into the
Company (with the Company being the surviving entity) or another Subsidiary
Guarantor that is a Restricted Subsidiary need only comply with clause (d) of
the first paragraph of this covenant.
Limitations on Transactions with Affiliates. The Company will not, and will
not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into, amend or permit or suffer to exist any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property, the guaranteeing of any Indebtedness
or the rendering of any service) with, or for the benefit of, any of their
respective Affiliates (each an "Affiliate Transaction"), other than (x)
Affiliate Transactions permitted under the third paragraph of this covenant and
(y) Affiliate Transactions that are on terms that are fair and reasonable to
the Company or the applicable Restricted Subsidiary and are no less favorable
to the Company or the applicable Restricted Subsidiary than those that might
reasonably have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company or
such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $5,000,000
shall be approved by the Board of Directors of the Company, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that
involves an aggregate fair market value of more than $15,000,000, the Company
shall, prior to the consummation thereof, obtain a favorable opinion as to the
fairness of such transaction or series of related transactions to the Company
or the relevant Restricted Subsidiary, as the case may be, from a financial
point of view, from an Independent Advisor and file the same with the Trustee.
The requirements set forth in the first and second paragraphs of this
covenant shall not apply to:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or
any Restricted Subsidiary as determined in good faith by the Board of
Directors or senior management of the Company or such Restricted Subsidiary,
as the case may be;
(2) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by the Indenture; and
(3) Restricted Payments permitted by the Indenture.
Limitation on Restricted and Unrestricted Subsidiaries. As the Company or
any of its Subsidiaries forms or acquires Subsidiaries, each newly formed or
acquired Subsidiary shall be designated by the Company's Board of Directors as
a Restricted Subsidiary or an Unrestricted Subsidiary, provided that (1) any
Subsidiary of any already existing Unrestricted Subsidiary shall be (and shall
be deemed designated as) an Unrestricted Subsidiary, (2) subject to the
foregoing clause (1), any designation of an Unrestricted Subsidiary shall be
effective only if the Investment in that Subsidiary is made in compliance with
the covenant described above under "--Limitation on Restricted Payments," and
(3) subject to the foregoing clause (1), any failure by the Company's Board of
Directors to affirmatively make such a designation of a Subsidiary shall be
deemed a designation (in compliance with the Indenture) of such Subsidiary as a
Restricted Subsidiary.
47
After a Subsidiary of the Company has been designated as an Unrestricted
Subsidiary, the Board of Directors of the Company may, if no Default or Event
of Default would arise therefrom, redesignate such Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that:
(1) any such redesignation shall be deemed to be an incurrence as of the
date of such redesignation by the Company and its Restricted Subsidiaries of
the Indebtedness (if any) of such redesignated Subsidiary for purposes of
"--Limitation on Incurrence of Additional Indebtedness" above;
(2) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding, other than Indebtedness which would be Permitted Indebtedness,
no such designation shall be permitted if immediately after giving effect to
such redesignation and the incurrence of any such additional Indebtedness
the Company could not incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to "--Limitation on Incurrence of
Additional Indebtedness" above; and
(3) such Subsidiary assumes by execution of a supplemental indenture all
of the obligations of a Subsidiary Guarantor under a Guarantee.
After a Subsidiary of the Company has been designated as a Restricted
Subsidiary, the Board of Directors of the Company also may, if no Default or
Event of Default would arise therefrom, redesignate such Restricted Subsidiary
to be an Unrestricted Subsidiary if such redesignation is at that time
permitted under "--Limitation on Restricted Payments" above. Upon any such
permitted redesignation, such Restricted Subsidiary's Guarantee will be
released.
Any such designation or redesignation of an Unrestricted Subsidiary by the
Board of Directors shall be evidenced to the Trustee by the filing with the
Trustee of a certified copy of the resolution of the Board of Directors giving
effect to such designation or redesignation and an Officers' Certificate
certifying that such designation or redesignation complied with the foregoing
conditions and setting forth in reasonable detail the underlying calculations.
For purposes of the covenant described under "--Limitation on Restricted
Payments" above:
(1) an "Investment" shall be deemed to have been made at the time any
Restricted Subsidiary is designated as an Unrestricted Subsidiary in an
amount (proportionate to the Company's equity interest in such Subsidiary)
equal to the net worth of such Restricted Subsidiary at the time that such
Restricted Subsidiary is designated as an Unrestricted Subsidiary ("net
worth" to be calculated based upon the fair market value of the assets of
such Subsidiary as of any such date of designation); and
(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
Notwithstanding the foregoing, the Board of Directors may not designate or
redesignate any Subsidiary of the Company to be an Unrestricted Subsidiary if,
after such designation or redesignation:
(1) the Company or any Restricted Subsidiary:
(a) provides credit support for, or a guarantee of, any Indebtedness
of such Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness); or
(b) is directly or indirectly liable for any Indebtedness of such
Subsidiary; or
(2) such Subsidiary owns any Capital Stock of, or owns or holds any Lien
on any property of, any Restricted Subsidiary which is not a Subsidiary of
the Subsidiary to be so designated.
Additional Subsidiary Guarantees. If any of the Company's Restricted
Subsidiaries that is not a Subsidiary Guarantor is a guarantor of Pari Passu
Indebtedness or of the Company's 10% Senior Notes due 2007, then the Company
shall cause such Restricted Subsidiary to become a Subsidiary Guarantor. If the
Company or any of its Restricted Subsidiaries transfers or causes to be
transferred, in one transaction or a series of related
48
transactions, any property to any Restricted Subsidiary that is not a
Subsidiary Guarantor, or if the Company or any of its Restricted Subsidiaries
shall organize, acquire or otherwise invest in or hold an Investment in another
Restricted Subsidiary, that causes the total consolidated assets owned by all
Restricted Subsidiaries that are not Subsidiary Guarantors to exceed in the
aggregate 2% of the total consolidated assets of the Company, then the Company
shall cause one or more of such transferees or acquired or other Restricted
Subsidiaries to become Subsidiary Guarantors to the extent necessary to cause
the total consolidated assets owned by all Restricted Subsidiaries that are not
Subsidiary Guarantors not to exceed in the aggregate 2% of the total
consolidated assets of the Company. If required to become a Subsidiary
Guarantor pursuant to either of the immediately preceding sentences, such
transferee or acquired or other Restricted Subsidiary shall:
(1) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the notes and the Indenture on the terms set forth in the Indenture;
and
(2) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary shall be a Subsidiary Guarantor for all purposes of
the Indenture.
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
material business other than the Crude Oil and Natural Gas Business.
Reports to Holders. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of 314(a) of the
TIA.
Events of Default
The following events are defined in the Indenture as "Events of Default:"
(1) the failure to pay interest (including any Additional Interest) on
the notes when the same becomes due and payable and the default continues
for a period of 30 days;
(2) the failure to pay the principal on any notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the notes
(except in the case of a default with respect to observance or performance
of any of the terms or provisions of "--Change of Control" or "Certain
Covenants--Merger, Consolidation and Sale of Assets" or "--Limitation on
Asset Sales" which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(4) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Company or any Restricted Subsidiary), whether
such Indebtedness now exists or is created after the Issue Date, which
default (i) is caused by a failure to pay
49
principal of or premium, if any, or interest on such Indebtedness after any
applicable grace period provided in such Indebtedness on the date of such
default (a "payment default") or (ii) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a payment default or the
maturity of which has been so accelerated, aggregates at least $10 million;
(5) one or more judgments in an aggregate amount in excess of $10
million (unless covered by insurance by a reputable insurer as to which the
insurer has not disclaimed coverage) shall have been rendered against the
Company or any of its Restricted Subsidiaries and such judgments remain
undischarged, unpaid and unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable;
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(7) any of the Guarantees cease to be in full force and effect or any of
the Guarantees are declared to be null and void or invalid and unenforceable
or any of the Subsidiary Guarantors denies or disaffirms its liability under
its Guarantees (other than by reason of release of a Subsidiary Guarantor in
accordance with the terms of the Indenture).
The Indenture provides that, if an Event of Default (other than an Event of
Default specified in clause (6) above relating to the Company) shall occur and
be continuing, the Trustee or the Holders of at least 25% in principal amount
of outstanding notes may declare the principal of, premium, if any, and accrued
and unpaid interest on all the notes to be due and payable by notice in writing
to the Company and the Trustee specifying the Event of Default and that it is a
"notice of acceleration," and the same shall become immediately due and
payable. If an Event of Default specified in clause (6) above relating to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding notes shall ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the notes may rescind and cancel such
declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
such acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the description of Events of Default above,
the Trustee shall have received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived; provided,
however, that such counsel may rely, as to matters of fact, on a certificate
or certificates of officers of the Company.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Indenture provides that, at any time prior to the declaration of
acceleration of the notes, the Holders of a majority in principal amount of the
notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any notes.
50
The Indenture provides that, Holders of the notes may not enforce the
Indenture or the notes except as provided in the Indenture and under the TIA.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee is under no obligation to exercise any of its rights or powers under
the Indenture at the request, order or direction of any of the Holders, unless
such Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default or
Event of Default) that has occurred and, if applicable, describe such Default
or Event of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding notes ("Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding notes, and
satisfied all of its obligations with respect to the notes, except for:
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the notes when such payments
are due;
(2) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the Subsidiary Guarantors released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the notes. In the
event Covenant Defeasance occurs, certain events (other than non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"--Events of Default"will no longer constitute an Event of Default with respect
to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders cash in United States dollars, non-callable
United States government obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest on the notes on the stated date for payment thereof or on
the applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that:
(a) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling; or
51
(b) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any
other agreement or instrument to which the Company or any of its Restricted
Subsidiaries is a party or by which the Company or any of its Restricted
Subsidiaries is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with; provided, however,
that such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company;
(8) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; provided, however, that such counsel may rely, as to matters of
fact, on a certificate or certificates of officers of the Company; and
(9) certain other customary conditions precedent are satisfied.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
notes, as expressly provided for in the Indenture) as to all outstanding notes
when:
(1) either:
(a) all the notes, theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the
Trustee for cancellation; or
(b) all notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the notes to the date of deposit
together with irrevocable instructions from the Company directing the
Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
52
(2) the Company has paid all other sums payable under the Indenture by
the Company; and
(3) the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with; provided, however, that such counsel may rely, as to
matters of fact, on a certificate or certificates of officers of the Company.
Modification of the Indenture
From time to time, the Company, the Subsidiary Guarantors and the Trustee,
without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies,
to comply with any requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the TIA or to make any change
that would provide any additional benefit or rights to the Holders or that does
not adversely affect the rights of any Holder. In formulating its opinion on
such matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel;
provided, however, that in delivering such opinion of counsel, such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of
the Company. Other modifications and amendments of the Indenture may be made
with the consent of the Holders of a majority in principal amount of the then
outstanding notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may:
(1) reduce the amount of notes whose Holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any notes, or change the date on which any notes may be
subject to redemption or repurchase, or reduce the redemption or repurchase
price therefor;
(4) make any notes payable in money other than that stated in the notes;
(5) make any change in provisions of the Indenture protecting the right
of each Holder to receive payment of principal of and interest on such Note
on or after the due date thereof or to bring suit to enforce such payment,
or permitting Holders of a majority in principal amount of notes to waive
Defaults or Events of Default;
(6) amend, change or modify in any material respect the obligation of
the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate a Net Proceeds Offer with respect
to any Asset Sale that has been consummated or modify any of the provisions
or definitions with respect thereto;
(7) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the notes or any Guarantee in a manner
which adversely affects the Holders; or
(8) release any Subsidiary Guarantor from any of its obligations under
its Guarantee or the Indenture otherwise than in accordance with the terms
of the Indenture.
Governing Law
The Indenture will provide that the Indenture, the notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
required thereby.
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The Trustee
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it by the Indenture, and
use the same degree of care and skill in its exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a
Subsidiary Guarantor, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security
or otherwise. Subject to the TIA, the Trustee will be permitted to engage in
other transactions; provided, however, that if the Trustee acquires any
conflicting interest as described in the TIA, it must eliminate such conflict
or resign.
Certain Definitions
Set forth below is a summary of certain of the defined terms to be used in
the Indenture. Reference is made to the form of Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (1) existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or (2) which becomes Indebtedness of the Company or
a Restricted Subsidiary in connection with the acquisition of assets from such
Person, in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination:
(1) the sum of:
(a) discounted future net revenues from proved oil and gas reserves
of the Company and its consolidated Subsidiaries, calculated in
accordance with Commission guidelines (before any state or federal
income tax), as estimated by a nationally recognized firm of independent
petroleum engineers as of a date no earlier than the date of the
Company's latest annual consolidated financial statements, as increased
by, as of the date of determination, the estimated discounted future net
revenues from:
(i) estimated proved oil and gas reserves acquired since the date
of such year-end reserve report; and
(ii) estimated oil and gas reserves attributable to upward
revisions of estimates of proved oil and gas reserves since the date
of such year-end reserve report due to exploration, development or
exploitation activities,
in each of cases (ii) and (iii) calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve
report), and decreased by, as of the date of determination, the
estimated discounted future net revenues from:
(iii) estimated proved oil and gas reserves produced or disposed
of since the date of such year-end reserve report and
(iv) estimated oil and gas reserves attributable to downward
revisions of estimates of proved oil and gas reserves since the date
of such year-end reserve report due to changes in geological
conditions or other factors which would, in accordance with standard
industry practice, cause such revisions,
54
in each of cases (iii) and (iv) calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve
report); provided, however, that, in the case of each of the
determinations made pursuant to clauses (i) through (iv), such increases
and decreases shall be as estimated by the Company's petroleum
engineers, unless in the event that there is a Material Change as a
result of such acquisitions, dispositions or revisions, then the
discounted future net revenues utilized for purposes of this clause
(1)(a) shall be confirmed in writing, by a nationally recognized firm of
independent petroleum engineers (which may be the Company's independent
petroleum engineers who prepare the Company's annual reserve report);
plus
(b) the capitalized costs that are attributable to oil and natural
gas properties of the Company and its Subsidiaries to which no proved
oil and gas reserves are attributable, based on the Company's books and
records as of a date no earlier than the date of the Company's latest
annual or quarterly financial statements; plus
(c) the Net Working Capital on a date no earlier than the date of
the Company's latest consolidated annual or quarterly financial
statements; plus
(d) with respect to each other tangible asset of the Company or its
consolidated Restricted Subsidiaries specifically including, but not to
the exclusion of any other qualifying tangible assets, the Company's or
its consolidated Restricted Subsidiaries' gas gathering and processing
facilities and unproved oil and natural gas properties (less any
remaining deferred income taxes which have been allocated to such gas
gathering and processing facilities in connection with the acquisition
thereof), land, equipment, leasehold improvements, investments carried
on the equity method, restricted cash and the carrying value of
marketable securities, the greater of (i) the net book value of such
other tangible asset on a date no earlier than the date of the Company's
latest consolidated annual or quarterly financial statements or (ii) the
appraised value, as estimated by a qualified Independent Advisor, of
such 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; minus
(2) minority interests and, to the extent not otherwise taken into
account in determining Adjusted Consolidated Net Tangible Assets, any gas
balancing liabilities of the Company and its consolidated Restricted
Subsidiaries reflected in the Company's latest audited financial statements.
In addition to, but without duplication of, the foregoing, for purposes of
this definition, "Adjusted Consolidated Net Tangible Assets" shall be
calculated after giving effect, on a pro forma basis, to (A) any Investment
not prohibited by the Indenture, to and including the date of the
transaction giving rise to the need to calculate Adjusted Consolidated Net
Tangible Assets (the "Assets Transaction Date"), in any other Person that,
as a result of such Investment, becomes a Restricted Subsidiary of the
Company, (B) the acquisition, to and including the Assets Transaction Date
(by merger, consolidation or purchase of stock or assets), of any business
or assets, including, without limitation, Permitted Industry Investments,
and (C) any sales or other dispositions of assets permitted by the Indenture
(other than sales of Hydrocarbons or other mineral products in the ordinary
course of business) occurring on or prior to the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or under common control with, such specified Person and
(b) any Related Person of such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "Certain
Covenants--Limitation on Transactions with Affiliates."
"Asset Acquisition" means (1) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary, or shall be merged with or into the
55
Company or any Restricted Subsidiary, or (2) the acquisition by the Company or
any Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Company or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary of:
(1) any Capital Stock of any Restricted Subsidiary; or
(2) any other property or assets (including any interests therein) of
the Company or any Restricted Subsidiary, including any disposition by means
of a merger, consolidation or similar transaction;
provided, however, that Asset Sales shall not include:
(a) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company in a transaction which is made
in compliance with the provisions of "--Certain Covenants--Merger,
Consolidation and Sale of Assets;"
(b) any Investment in an Unrestricted Subsidiary which is made in
compliance with the provisions of "--Certain Covenants--Limitation on
Restricted Payments" above;
(c) disposals or replacements of obsolete equipment in the ordinary course
of business;
(d) the sale, lease, conveyance, disposition or other transfer (each, a
"Transfer") by the Company or any Restricted Subsidiary of assets or property
to the Company or one or more Restricted Subsidiaries;
(e) any disposition of Hydrocarbons or other mineral products for value in
the ordinary course of business;
(f) any Transfer of an interest in an oil, gas or mineral property pursuant
to a farm-out, farm-in, joint operation, area of mutual interest agreement or
other similar or customary arrangement or agreement that the Company or any
Restricted Subsidiary determines in good faith to be necessary for the economic
development of such Property; and
(g) the Transfer by the Company or any Restricted Subsidiary of assets or
property in the ordinary course of business; provided, however, that the
aggregate amount (valued at the fair market value of such assets or property at
the time of such Transfer) of all such assets and property Transferred pursuant
to this clause (g) shall not exceed $5.0 million during any fiscal year of the
Company.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"Capital Stock" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person and including any warrants,
options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing; and
(2) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
56
"Capitalized Lease Obligation" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) that is required to be classified and accounted for as a
capital lease obligation at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation ("S&P")
or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any United States branch of a foreign bank having at
the date of acquisition thereof combined capital and surplus of not less
than $250 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) money market mutual or similar funds having assets in excess of $100
million.
"Change of Control" means the occurrence of one or more of the following
events: (a) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any Person (a "Transferee") or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group") (whether or not
otherwise in compliance with the provisions of the Indenture), but excluding
any such sale, lease, exchange or other transfer as part of a transaction in
compliance with "--Merger, Consolidation and Sale of Assets" if the holders of
the Company's Capital Stock immediately prior to such transaction own at least
a majority (by voting power) of the Capital Stock of such Transferee
immediately after such transaction; (b) the approval by the holders of Capital
Stock of the Company of any plan or proposal for the liquidation or dissolution
of the Company (whether or not otherwise in compliance with the provisions of
the Indenture); (c) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (d) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period with directors whose replacement shall not have been approved (by
recommendation, nomination or election, as the case may be) by a vote of at
least a majority of the Board of Directors of the Company then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "--Change
of Control."
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
57
"Commission" means the Securities and Exchange Commission.
"Company Properties" means all Properties, and equity, partnership or other
ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not
prohibited by the terms of the Indenture.
"Consolidated EBITDA" means, for any period, the sum (without duplication)
of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes of the Company and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sales or dispositions outside
the ordinary course of business);
(b) Consolidated Interest Expense;
(c) the amount of any Preferred Stock dividends paid by the Company
and its Restricted Subsidiaries; and
(d) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on
a consolidated basis for the Company and its Restricted Subsidiaries in
accordance with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to the Company, the
ratio of Consolidated EBITDA of the Company during the four full fiscal
quarters for which financial information in respect thereof is available (the
"Four Quarter Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated EBITDA Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges of the Company for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect (without duplication) on a pro
forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of the Company or
any of its Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any incurrence
or repayment of other Indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period; and
(2) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for
Acquired Indebtedness, and also including, without limitation, any
Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first day of
the Four Quarter Period.
If the Company or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if the
58
Company or the Restricted Subsidiary, as the case may be, had directly incurred
or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated
EBITDA Coverage Ratio:"
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of
a prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four Quarter Period; and
(3) notwithstanding clauses (1) and (2) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to accrue
at the rate per annum resulting after giving effect to the operation of such
agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense (including any premium or penalty paid
in connection with redeeming or retiring Indebtedness of the Company and its
Restricted Subsidiaries prior to the stated maturity thereof pursuant to the
agreements governing such Indebtedness), plus
(2) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of the Company (other than dividends paid in Qualified
Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
federal, state and local income tax rate of the Company, expressed as a
decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of the Company and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without limitation, (a) any amortization
of original issue discount, (b) the net costs, losses or gains under
Interest Swap Obligations, (c) all capitalized interest, (d) the interest
portion of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Company and its
Restricted Subsidiaries during such period, as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any period,
the aggregate net income (or loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom:
(1) after-tax gains from Asset Sales or abandonments or reserves
relating thereto;
(2) after-tax items classified as extraordinary or nonrecurring gains;
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or
is merged or consolidated with the Company or any Restricted Subsidiary;
59
(4) the net income (but not loss) of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by charter, contract,
operation of law or otherwise;
(5) the net income of any Person in which the Company has an interest,
other than a Restricted Subsidiary, except to the extent of cash dividends
or distributions actually paid to the Company or to a Restricted Subsidiary
by such Person;
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued);
(7) in the case of a successor to the Company by consolidation or merger
or as a transferee of the Company's assets, any net income (or loss) of the
successor corporation prior to such consolidation, merger or transfer of
assets; and
(8) any non-cash charges related to a ceiling test write-down under GAAP.
"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, depletion, amortization and other non-cash
expenses of the Company and its Restricted Subsidiaries reducing Consolidated
Net Income of the Company for such period, determined on a consolidated basis
in accordance with GAAP (excluding any such charges constituting an
extraordinary item or loss or any such charge which requires an accrual of or a
reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary
of such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
"Covenant Defeasance" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"Crude Oil and Natural Gas Business" means:
(1) the acquisition, exploration, development, operation and disposition
of interests in oil, natural gas and other Hydrocarbon properties;
(2) the gathering, marketing, treating, processing, storage, selling and
transporting of any production from such interests or properties of the
Company or of others; and
(3) activities incidental to the foregoing.
"Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that are designed to manage the risks of oil and natural gas price
fluctuations.
"Crude Oil and Natural Gas Properties" means all Properties, including
equity or other ownership interests therein, owned by any Person to which
"proved oil and gas reserves," as defined in Rule 4-10 of Regulation S-X of the
Securities Act, have been attributed.
"Crude Oil and Natural Gas Related Assets" means any Investment or capital
expenditure (but not including additions to working capital or repayments of
any revolving credit or working capital borrowings) by the Company or any
Subsidiary of the Company which is related to the business of the Company and
its Subsidiaries as it is conducted on the date of the Asset Sale giving rise
to the Net Cash Proceeds to be reinvested.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
60
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
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, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is mandatorily redeemable at the sole option of the holder thereof, in whole
or in part, in either case, on or prior to the final maturity of the notes.
"Equity Offering" means an offering of Qualified Capital Stock of the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Company (or, for transactions of $5 million or less, an officer of the
Company or a Restricted Subsidiary) acting reasonably and in good faith and, if
determined by the Board of Directors of the Company, shall be evidenced by a
Board Resolution of the Company delivered to the Trustee; provided, however,
that if the aggregate non-cash consideration to be received by the Company or
any Restricted Subsidiary from any Asset Sale shall reasonably be expected to
exceed $15 million or if the net worth of any Restricted Subsidiary to be
designated as an Unrestricted Subsidiary shall reasonably be expected to exceed
$15 million, then fair market value shall be determined by an Independent
Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"Holder" means any Person holding a Note.
"Hydrocarbons" means oil, natural gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all constituents, elements or compounds thereof and products
processed therefrom.
"incur" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication:
(1) all obligations of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable);
(5) all obligations for the reimbursement of any obligor on a letter of
credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
61
(7) all obligations of any other Person of the type referred to in
clauses (1) through (6) above which are secured by any Lien on any property
or asset of such Person, the amount of such obligation being deemed to be
the lesser of the fair market value of such property or asset or the amount
of the Obligation so secured;
(8) all obligations under Crude Oil and Natural Gas Hedge Agreements,
Currency Agreements and Interest Swap Obligations; and
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed redemption price or repurchase price.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Capital Stock
as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the Company.
The "amount" or "principal amount" of Indebtedness at any time of
determination as used herein shall, except as set forth below, be determined in
accordance with GAAP:
(1) any Indebtedness issued at a price that is less than the principal
amount at maturity thereof shall be the face amount of the liability in
respect thereof;
(2) any Capitalized Lease Obligation shall be the amount determined in
accordance with the definition thereof;
(3) any Interest Swap Obligations included in the definition of
Permitted Indebtedness shall be zero;
(4) all other unconditional obligations shall be the amount of the
liability thereof determined in accordance with GAAP; and
(5) all other contingent obligations shall be, the maximum liability at
such date of such Person.
"Independent Advisor" means a reputable accounting, appraisal or nationally
recognized investment banking, engineering or consulting firm (a) which does
not, and whose directors, officers and employees or Affiliates do not, have a
direct or indirect material financial interest in the Company and (b) which, in
the judgment of the Board of Directors of the Company, is otherwise
disinterested, independent and qualified to perform the task for which it is to
be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect:
(1) loan, advance or other extension of credit (including, without
limitation, a guarantee) or capital contribution to (by means of any
transfer of cash or other property (valued at the fair market value thereof
as of the date of transfer) others or any payment for property or services
for the account or use of others);
(2) purchase or acquisition by such Person of any Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued
by, any Person (whether by merger, consolidation,
62
amalgamation or otherwise and whether or not purchased directly from the
issuer of such securities or evidences of Indebtedness);
(3) guarantee or assumption of the Indebtedness of any other Person
(other than the guarantee or assumption of Indebtedness of such Person or a
Restricted Subsidiary of such Person which guarantee or assumption is made
in compliance with the provisions of "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness" above), and
(4) other items that would be classified as investments on a balance
sheet of such Person prepared in accordance with GAAP.
Notwithstanding the foregoing, "Investment" shall exclude extensions of
trade credit by the Company and its Restricted Subsidiaries on commercially
reasonable terms in accordance with normal trade practices of the Company or
such Restricted Subsidiary, as the case may be. The amount of any Investment
shall not be adjusted for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. If the Company or
any Restricted Subsidiary sells or otherwise disposes of any Capital Stock of
any Restricted Subsidiary such that, after giving effect to any such sale or
disposition, it ceases to be a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Capital Stock of such Restricted
Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the notes.
"Legal Defeasance" has the meaning set forth under "--Legal Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement to
give any security interest).
"Material Change" means an increase or decrease of more than 10% during a
fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and natural gas reserves
of the Company and consolidated Subsidiaries (before any state or federal
income tax); provided, however, that the following will be excluded from the
Material Change calculation:
(1) any acquisitions during the quarter of oil and natural gas reserves
that have been estimated by independent petroleum engineers and on which a
report or reports exist;
(2) any disposition of properties existing at the beginning of such
quarter that have been disposed of as provided in "Limitation on Asset
Sales;" and
(3) any reserves added during the quarter attributable to the drilling
or recompletion of wells not included in previous reserve estimates, but
which will be included in future quarters.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking
into account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts (determined by the Chief Financial Officer of the
Company) to be provided by the Company or any Restricted Subsidiary, as the
case may be, as a reserve, in accordance with GAAP, against any post closing
adjustments or liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale.
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"Net Proceeds Offer" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Working Capital" means all current assets of the Company and its
consolidated Subsidiaries, minus all current liabilities of the Company and its
consolidated Subsidiaries, except current liabilities included in Indebtedness,
in each case as set forth in financial statements of the Company prepared in
accordance with GAAP.
"Pari Passu Indebtedness" means any Indebtedness of the Company or any
Subsidiary Guarantor that ranks pari passu in right of payment with the notes
or such Guarantees, as applicable (other than the Company's 10% Senior Notes
due 2007).
"Payment Restriction" has the meaning set forth under "--Certain
Covenants--Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of the following:
(1) the old notes, new notes, the Private Exchange Notes, if any, and
the Guarantees;
(2) Indebtedness incurred pursuant to the Senior Credit Facility in an
aggregate principal amount at any time outstanding not to exceed $325.0
million under this clause (2);
(3) Interest Swap Obligations of the Company or a Restricted Subsidiary
covering Indebtedness of the Company or any of its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered into to
manage the exposure of the Company and its Restricted Subsidiaries to
fluctuations in interest rates with respect to Indebtedness incurred in
accordance with the Indenture to the extent the net notional principal
amount of such Interest Swap Obligations does not exceed the principal
amount of the Indebtedness to which such Interest Swap Obligation relates;
(4) Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided,
however, that if as of any date any Person other than the Company or a
Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness under this clause (4)
by the issuer of such Indebtedness;
(5) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided, however, that (i) any Indebtedness of the
Company to any Restricted Subsidiary that is not a Subsidiary Guarantor is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the notes and (ii) if as of
any date any Person other than a Restricted Subsidiary owns or holds any
such Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness under this clause (5) by the Company;
(6) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two Business Days of incurrence;
64
(7) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, or for payment obligations in connection with
self-insurance, bid, performance, appeal or surety bonds or for completion
or performance guarantees or obligations or for similar requirements in the
ordinary course of business;
(8) Refinancing Indebtedness;
(9) Capitalized Lease Obligations and Purchase Money Indebtedness of the
Company or any of its Restricted Subsidiaries incurred after the Issue Date
not to exceed $15.0 million at any one time outstanding;
(10) obligations arising in connection with Crude Oil and Natural Gas
Hedge Agreements of the Company or a Restricted Subsidiary;
(11) Indebtedness under Currency Agreements; provided, however, that in
the case of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder; and
(12) additional Indebtedness of the Company or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not to
exceed the greater of (i) $20.0 million or (ii) 5.0% of Adjusted
Consolidated Net Tangible Assets of the Company.
In the event that an item of Indebtedness or proposed Indebtedness (including
without limitation Acquired Indebtedness) meets the criteria of more than one
of the categories of Permitted Indebtedness described in clauses (1) through
(12) above, or is entitled to be incurred under the above covenant entitled
"--Limitation on Incurrence of Additional Indebtedness" even if not Permitted
Indebtedness, the Company will be permitted to classify or later reclassify (in
whole or in part in its sole discretion) such item of Indebtedness in any
manner that complies with that covenant.
"Permitted Industry Investments" means:
(1) capital expenditures, including, without limitation, acquisitions of
Company Properties and interests therein;
(2) entry into operating agreements, joint ventures, working interests,
royalty interests, mineral leases, unitization agreements, pooling
arrangements or other similar or customary agreements, transactions,
properties, interests or arrangements, and Investments and expenditures in
connection therewith or pursuant thereto, in each case made or entered into
in the ordinary course of the oil and natural gas business and exchanges of
Company Properties for other Company Properties of at least equivalent value
as determined in good faith by the Board of Directors of the Company; and
(3) Investments of operating funds on behalf of co-owners of Crude Oil
and Natural Gas Properties of the Company or the Subsidiaries pursuant to
joint operating agreements.
"Permitted Investments" means:
(1) Investments by the Company or any Restricted Subsidiary in any
Person that is or will become immediately after such Investment a Restricted
Subsidiary or that will merge or consolidate into the Company or a
Restricted Subsidiary that is not subject to any Payment Restriction;
(2) Investments in the Company by any Restricted Subsidiary; provided,
however, that any Indebtedness evidencing any such Investment held by a
Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the notes and the Indenture;
(3) Investments in cash and Cash Equivalents;
65
(4) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with "--Certain Covenants--Limitation on Asset Sales" above;
(5) Permitted Industry Investments;
(6) Investments to the extent that Qualified Capital Stock of the
Company is the consideration paid or provided by the Company; and
(7) additional Investments made after the Issue Date in an aggregate
amount not to exceed $10.0 million at any one time outstanding.
"Permitted Liens" means each of the following types of Liens:
(1) Liens existing as of the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date (and any extensions, replacements
or renewals thereof covering property or assets secured by such Liens on the
Issue Date);
(2) Liens securing Indebtedness outstanding under the Senior Credit
Facility;
(3) Liens securing the notes and the Guarantees;
(4) Liens of the Company or a Restricted Subsidiary on assets of any
Restricted Subsidiary;
(5) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under
the Indenture and which has been incurred in accordance with the provisions
of the Indenture; provided, however, that such Liens (x) are no less
favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (y) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness
so Refinanced;
(6) Liens for taxes, assessments or governmental charges or claims
either not delinquent or contested in good faith by appropriate proceedings
and as to which the Company or a Restricted Subsidiary, as the case may be,
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(7) statutory and contractual Liens of landlords to secure rent arising
in the ordinary course of business to the extent such Liens relate only to
the tangible property of the lessee which is located on such property and
Liens of carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen and other Liens imposed by law incurred in the ordinary course of
business for sums not yet delinquent or being contested in good faith, if
such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(8) Liens incurred or deposits made in the ordinary course of business
(i) in connection with workers' compensation, unemployment insurance and
other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or (ii) to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return-of-money bonds and other
similar obligations (including letters of credit in connection therewith but
exclusive of obligations for the payment of borrowed money);
(9) judgment and attachment Liens not giving rise to an Event of Default;
(10) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Company or any of
its Restricted Subsidiaries;
(11) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or asset
which is not leased property subject to such Capitalized Lease Obligation;
66
(12) Liens securing Purchase Money Indebtedness of the Company or any
Restricted Subsidiary; provided, however, that (i) the Purchase Money
Indebtedness shall not be secured by any property or assets of the Company
or any Restricted Subsidiary other than the property and assets so acquired
or constructed (except for proceeds, improvements, rents and similar items
relating to the property or assets so acquired or constructed) and (ii) the
Lien securing such Indebtedness shall be created within 90 days of such
acquisition or construction;
(13) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(14) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(15) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture and Liens securing Crude Oil and Natural Gas Hedge Agreements;
(16) Liens securing Acquired Indebtedness incurred in accordance with
"--Certain Covenants-- Limitation on Incurrence of Additional Indebtedness"
above; provided, however, that (i) such Liens secured such Acquired
Indebtedness at the time of and prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary and were not granted
in connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary and (ii) such Liens
do not extend to or cover any property or assets of the Company or of any of
its Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary (except for
proceeds, improvements, rents and similar items relating to the property or
assets so secured) and are no more favorable to the lienholders than those
securing the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary;
(17) Liens on, or related to, properties and assets of the Company and
its Subsidiaries to secure all or a part of the costs incurred in the
ordinary course of business of exploration, drilling, development,
production, processing, gas gathering, transportation, marketing or storage,
or operation thereof;
(18) Liens on pipeline or pipeline facilities, Hydrocarbons or
properties and assets of the Company and its Subsidiaries which arise out of
operation of law;
(19) royalties, overriding royalties, revenue interests, net revenue
interests, net profit interests, reversionary interests, production
payments, production sales contracts, preferential rights of purchase,
operating agreements, working interests and other similar interests,
properties, arrangements and agreements, all as ordinarily exist with
respect to Properties and assets of the Company and its Subsidiaries or
otherwise as are customary in the oil and gas business;
(20) with respect to any Properties and assets of the Company and its
Subsidiaries, Liens arising under, or in connection with, or related to,
farm-out, farm-in, joint operation, area of mutual interest agreements
and/or other similar or customary arrangements, agreements or interests that
the Company or any Subsidiary determines in good faith to be necessary for
the economic development of such Property;
(21) any (a) interest or title of a lessor or sublessor under any lease;
(b) restriction or encumbrance that the interest or title of such lessor or
sublessor may be subject to (including, without limitation, ground leases or
other prior leases of the demised premises, mortgages, mechanics' liens, tax
liens, and easements), or (c) subordination of the interest of the lessee or
sublessee under such lease to any restrictions or encumbrance referred to in
the preceding clause (b);
(22) Liens in favor of collecting or payor banks having a right of
setoff, revocation, refund or chargeback with respect to money or
instruments of the Company or any Restricted Subsidiary on deposit with or
in possession of such bank; and
67
(23) Liens incurred in the ordinary course of business and not exceeding
$15.0 million in the aggregate at any one time.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Private Exchange Notes" means unsecured senior notes of the Company,
guaranteed by the Subsidiary Guarantors, issued in exchange for the old notes
and identical in all material respects to the new notes, except for the
placement of a restrictive legend on such Private Exchange Notes.
"Property" means, with respect to any Person, any interests of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including, without limitation, Capital Stock, partnership
interests and other equity or ownership interests in any other Person.
"Purchase Money Indebtedness" means Indebtedness the net proceeds of which
are used to finance the cost (including the cost of construction) of property
or assets acquired in the normal course of business by the Person incurring
such Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced"and "Refinancing"shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance
with "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness"
above (other than pursuant to clause (2), (3), (4), (5), (6), (7), (9), (10),
(11) or (12) of the definition of Permitted Indebtedness), in each case that
does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Company and its Restricted Subsidiaries in
connection with such Refinancing); or
(2) create Indebtedness with (x) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced or (y) a final maturity earlier than the final maturity of
the Indebtedness being Refinanced; provided, however, that (a) if such
Indebtedness being Refinanced is Indebtedness of the Company or a Subsidiary
Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely
of the Company and/or such Subsidiary Guarantor and (b) if such Indebtedness
being Refinanced is subordinate or junior to the notes or a Guarantee, then
such Refinancing Indebtedness shall be subordinate to the notes or such
Guarantee, as the case may be, at least to the same extent and in the same
manner as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Subsidiary Guarantors and the
Initial Purchasers.
"Related Person" of any Person means any other Person directly or indirectly
owning 10% or more of the outstanding voting Common Stock of such Person (or,
in the case of a Person that is not a corporation, 10% or more of the equity
interest in such Person).
68
"Replacement Assets" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company as an Unrestricted
Subsidiary pursuant to and in compliance with "--Certain Covenants--Limitation
on Restricted and Unrestricted Subsidiaries" above. Any such designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any Property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired which has been or is to be sold or transferred by the Company or such
Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"Senior Credit Facility" means the Fourth Amended and Restated Credit
Agreement dated as of March 15, 2002, by and among the Company, Bankers Trust
Company, as Administrative Agent and each of the Lenders named therein, or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreements extending the maturity of, refinancing,
replacing, increasing or otherwise restructuring all or any portion of the
Indebtedness under such agreements.
"Significant Subsidiary" means a Restricted Subsidiary of the Company that
is also a "significant subsidiary"as defined in Rule 1-02(w) of Regulation S-X
under the Securities Act.
"Subsidiary," with respect to any Person, means any corporation of which the
outstanding Capital Stock having at least a majority of the votes entitled to
be cast in the election of directors under ordinary circumstances shall at the
time be owned, directly or indirectly, by such Person or any other Person of
which at least a majority of the voting interests under ordinary circumstances
is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means each of the Company's Restricted Subsidiaries
as of the Issue Date (other than Inesco Corporation, SPL Gas Marketing Inc.,
Midland Hunter Petroleum Limited Liability Company and Pintail Oil & Gas, Inc.)
and each of the Company's Restricted Subsidiaries that in the future executes a
supplemental indenture in which such Restricted Subsidiary agrees to be bound
by the terms of the Indenture as a Subsidiary Guarantor; provided, however,
that any Person constituting a Subsidiary Guarantor as described above shall
cease to constitute a Subsidiary Guarantor when its Guarantee is released in
accordance with the terms of the Indenture.
"Surviving Entity" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"TCW Preferred Stock" means the one million shares of the Company's 1996
Series A Convertible Preferred Stock, $0.001 par value per share and a $10.00
stated par value per share with a quarterly dividend rate of $0.21875 per share.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with "--Certain Covenants--Limitation on
Restricted and Unrestricted Subsidiaries" above; provided, however, the
Unrestricted Subsidiaries shall initially include Hunter Butcher International
Limited
69
Liability Company, Canvasback Energy, Inc. and Redhead Energy, Inc. Any such
designation may be revoked by a Board Resolution of the Company delivered to
the Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (1) the then outstanding
aggregate principal amount of such Indebtedness into (2) the sum of the total
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
70
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income and
estate tax considerations relating to the purchase, ownership and disposition
of the new notes by holders thereof, and the exchange of the old notes by such
holder for new notes, but does not purport to be a complete analysis of all the
potential tax considerations relating thereto. This summary is based upon the
provisions of the Internal Revenue Code of 1986, as amended, or the Code,
regulations, rulings and judicial decisions as of the date hereof. These
authorities may be changed, possibly retroactively, so as to result in United
States federal income tax consequences different from those set forth below. We
have not sought any ruling from the Internal Revenue Service, or the IRS, or an
opinion of counsel with respect to the statements made and the conclusions
reached in the following summary, and there can be no assurance that the IRS
will agree with such statements and conclusions.
This summary assumes that the new notes are held as capital assets and
holders are initial purchasers of the old notes who purchased the old notes at
their initial offering price. This summary does not address the tax
considerations arising under the laws of any foreign, state or local
jurisdiction. In addition, this discussion does not address tax considerations
applicable to a holder's particular circumstances or to holders that may be
subject to special tax rules, including, without limitation:
. holders subject to the alternative minimum tax;
. banks;
. tax-exempt organizations;
. insurance companies;
. dealers in securities or commodities;
. traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
. financial institutions;
. holders whose "functional currency" is not the U.S. dollar;
. U.S. expatriates;
. persons that will hold the new notes as a position in a hedging
transaction, "straddle", "conversion transaction" or other risk reduction
transaction; or
. persons deemed to sell the new notes under the constructive sale
provisions of the Code.
If a partnership holds new notes, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership holding
our new notes, you should consult your tax advisor.
THIS SUMMARY OF CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT YOUR
TAX ADVISOR WITH RESPECT TO THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX
LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER
THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY
STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
71
Consequences to U.S. Holders
The following is a summary of the United States federal tax consequences
that will apply to you if you are a U.S. holder of the new notes. Certain
consequences to "non-U.S. holders" of the new notes are described under
"--Consequences to Non-U.S. Holders" below. "U.S. holder" means a beneficial
owner of a new note that is:
. a citizen or resident of the United States;
. a corporation (or an entity that is treated as a corporation for U.S.
federal tax purposes) created or organized in or under the laws of the
United States or any political subdivision of the United States;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust that (1) is subject to the supervision of a court within the
United States and that has one or more United States persons with
authority to control all substantial decisions of the trust or (2) has a
valid election in effect under applicable Treasury Regulations to be
treated as a United States person.
Exchange Offer
The new notes should not differ materially in kind or extent from the old
notes and, as a result, your exchange of old notes for new notes should not
constitute a taxable disposition of the old notes for United States federal
income tax purposes. As a result, you should not recognize taxable income, gain
or loss on such exchange, your holding period for the new notes should
generally include the holding period for the old notes so exchanged, and your
adjusted tax basis in the new notes should generally be the same as your
adjusted tax basis in the old notes so exchanged.
Payments of Interest
Stated interest on the new notes will generally be taxable to you as
ordinary income at the time it is paid or accrued in accordance with your
method of accounting for tax purposes.
Amortizable Bond Premium
Generally, if you purchase a new note for an amount that exceeds the sum of
all amounts payable on the new note after the purchase date other than stated
interest, you will be considered to have purchased the new note at a premium.
You generally may elect to amortize the premium over the remaining term (or an
applicable call date as discussed below) of the new note on a yield to maturity
basis. The amortizable bond premium is treated as an offset to interest income
on the new note for United States federal income tax purposes. If you elect to
amortize bond premium, you must reduce your tax basis in the new note by the
deductions allowable for amortizable bond premium. An election to amortize bond
premium is revocable only with the consent of the IRS and applies to all
obligations owned or acquired by you on or after the first day of the taxable
year to which the election applies. We may redeem the new notes at any time, as
described in this prospectus under "Description of the New Notes--Redemption;
Optional Redemption." You will calculate the amount of amortizable bond premium
based on the amount payable at the applicable call date, but only if use of the
call date (in lieu of the stated maturity date) results in a smaller
amortizable bond premium for the period ending on the call date. If a new note
purchased at a premium is redeemed before its maturity and you have elected to
deduct the bond premium, you may be permitted to deduct any remaining
unamortized bond premium as an ordinary loss in the taxable year of the
redemption.
If you do not elect to amortize bond premium, that premium will decrease the
gain or increase the loss you would otherwise recognize on disposition of the
new note.
Market Discount
If you purchase a new note for less than its principal amount, the
difference will be treated as a "market discount" for U.S. federal income tax
purposes unless the difference is a de minimis amount. Under the market
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discount rules, you will be required to treat any principal payment on a new
note, or any gain on its sale, exchange, retirement or other disposition, as
ordinary income to the extent of the accrued market discount that was not
previously included in gross income. If the new note is disposed of in a
non-taxable transaction (other than a non-recognition transaction described in
Section 1276 of the Code), accrued market discount will be taxable to you as
ordinary income as if you had sold the new note at its fair market value. In
addition, you may be required to defer, until the maturity of a new note or its
earlier disposition (including a non taxable transaction other than a
transaction described in Section 1276 of the Code), the deduction of all or a
portion of the interest expense in respect of any indebtedness incurred or
maintained to purchase or carry the new note. Market discount will be
considered to accrue on a straight-line basis during the period from the date
of acquisition to the maturity date of the new note unless you elect to accrue
market discount on a constant interest rate basis.
You may elect to include market discount in gross income as the discount
accrues, either on a straight-line basis or on a constant interest rate basis.
This current inclusion election, once made, applies to all market discount
obligations acquired by you on or after the first day of the first taxable year
to which the election applies, and may not be revoked without the consent of
the IRS. If you make such an election, the foregoing rules with respect to the
recognition of ordinary income on sales and other dispositions of such debt
instruments and on any partial principal payment with respect to the new notes,
and the deferral of interest deductions on indebtedness incurred or maintained
to purchase or carry such debt instruments, would not apply.
Sale, Exchange or Disposition of New Notes
Subject to the discussion of the exchange offer above, you will generally
recognize gain or loss upon the sale, exchange or other disposition of a new
note equal to the difference between the amount realized upon the sale,
exchange or other disposition (less an amount attributable to any accrued
stated interest not previously included in income, which will be taxable as
interest income) and your adjusted tax basis in the new note. Your adjusted tax
basis in a new note will generally equal the amount you paid for the new note,
as adjusted by the bond premium and market discount rules described above. Any
gain or loss recognized on a disposition of the new note will be capital gain
or loss. If you are an individual and have held the new note for more than one
year, such capital gain will generally be subject to tax at a maximum rate of
20%. Your ability to deduct capital losses may be limited.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal and interest on the new notes and the proceeds of sale of
a new note unless you are an exempt recipient (such as a corporation). A 30%
backup withholding tax will apply to such payments if you fail to provide your
taxpayer identification number or certification of exempt status or have been
notified by the IRS that you are subject to backup withholding.
Any amounts withheld under the backup withholding rules will generally be
allowed as a refund or a credit against your United States federal income tax
liability provided the required information is furnished to the IRS.
Consequences to Non-U.S. Holders
The following is a summary of the United States federal tax consequences
that will apply to you if you are a non-U.S. holder of new notes. The term
"non-U.S. holder" means a beneficial owner of a new note that is not a U.S.
holder.
Special rules may apply to certain non-U.S. holders such as "controlled
foreign corporations," "passive foreign investment companies" and "foreign
personal holding companies." Such entities should consult their own tax
advisors to determine the United States federal, state, local and other tax
consequences that may be relevant to them.
73
Payments of Interest
The 30% United States federal withholding tax will not apply to any payment
to you of principal or interest on a new note provided that:
. you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock that are entitled to
vote within the meaning of the Code and applicable Treasury Regulations;
. you are not a controlled foreign corporation that is related to us
through stock ownership as provided in the Code and applicable Treasury
Regulations;
. you are not a bank whose receipt of interest on the notes is in
connection with an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of your business; and
. (a) you provide your name and address, and certify, under penalties of
perjury, that you are not a United States person (which certification may
be made on an IRS Form W-8BEN) or (b) a securities clearing organization,
bank, or other financial institution that holds customers' securities in
the ordinary course of its business holds the new note on your behalf and
certifies, under penalties of perjury, that it has received IRS Form
W-8BEN from you or from another qualifying financial institution
intermediary, and provides a copy of the IRS Form W-8BEN. If you hold
your new notes through certain foreign intermediaries or certain foreign
partnerships, such foreign intermediaries or partnerships must also
satisfy the certification requirements of applicable Treasury Regulations.
If you cannot satisfy the requirements described above, payments of interest
will be subject to the 30% United States federal withholding tax, unless you
provide us with a properly executed (1) IRS Form W-8BEN claiming an exemption
from or reduction in withholding under the benefit of an applicable tax treaty
or (2) IRS Form W-8ECI stating that interest paid on the new note is not
subject to withholding tax because it is effectively connected with your
conduct of a trade or business in the United States. In addition, you may,
under certain circumstances, be required to obtain a United States Taxpayer
identification number ("TIN").
If you are engaged in a trade or business in the United States and interest
on a new note is effectively connected with the conduct of that trade or
business, you will be required to pay United States federal income tax on that
interest on a net income basis (although you will be exempt from the 30%
withholding tax provided the certification requirement described above is met)
in the same manner as if you were a United States person as defined under the
Code. In addition, if you are a foreign corporation, you may be subject to a
branch profits tax equal to 30% (or lower applicable treaty rate) of your
earnings and profits for the taxable year, subject to adjustments, that are
effectively connected with your conduct of a trade or business in the United
States. For this purpose, interest that is effectively connected with your
conduct of a trade or business in the United States will be included in
earnings and profits.
Generally, payments of interest to you would be subject to reporting
requirements, even though these payments are not subject to a 30% United States
federal withholding tax.
Sale, Exchange or Disposition of New Notes
Any gain realized upon the sale, exchange or other disposition of a new note
(except with respect to accrued and unpaid interest, which would be taxable as
described above) generally will not be subject to United States federal income
tax unless:
. that gain is effectively connected with your conduct of a trade or
business in the United States;
. you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other
conditions are met; or
. you are subject to Code provisions applicable to certain United States
expatriates.
74
A holder described in the first bullet point above will be required to pay
United States federal income tax on the net gain derived from the sale, and if
such holder is a foreign corporation, it may also be required to pay a branch
profits tax at a 30% rate or a lower applicable treaty rate if so specified by
an applicable income tax treaty. A holder described in the second bullet point
above will be subject to a flat 30% United States federal income tax on the
gain derived from the sale, which may be offset by United States source capital
losses, even though the holder is not considered a resident of the United
States.
United States Federal Estate Tax
The United States federal estate tax will not apply to the new notes owned
by you at the time of your death, provided that (1) you do not own actually or
constructively 10% or more of the total combined voting power of all classes of
our voting stock (within the meaning of the Code and the Treasury Regulations)
and (2) interest on the new note would not have been, if received at the time
of your death, effectively connected with your conduct of a trade or business
in the United States.
Information Reporting and Backup Withholding
The amount of interest paid to you on the new note and the amount of tax
withheld, if any, will generally be reported to you and the IRS. You will
generally not be subject to backup withholding with respect to payments that we
make to you provided that we do not have actual knowledge that you are a United
States person and you have made appropriate certifications as to your foreign
status, or you otherwise establish an exemption.
You will generally not be subject to backup withholding or information
reporting with respect to any payment of the proceeds of the sale of a new note
effected outside the United States by a foreign office of a foreign "broker"(as
defined in applicable Treasury Regulations). However, if such a broker:
. derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,
. is a controlled foreign corporation for United States federal income tax
purposes, or
. is a foreign partnership that, at any time during its taxable year, has
more than 50% of its income or capital interests owned by United States
persons or is engaged in the conduct of a United States trade or business,
then you will be subject to information reporting, but not backup withholding
unless such broker has documentary evidence in its records that you are not a
United States person and certain other conditions are met, or you otherwise
establish an exemption. You will be subject to backup withholding and
information reporting with respect to any payment of the proceeds of a sale of
a new note effected by the United States office of a broker unless you properly
certify under penalties of perjury as to your foreign status and certain other
conditions are met or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
75
PLAN OF DISTRIBUTION
Based on interpretations of the SEC set forth in no-action letters issued to
third parties, we believe that new notes issued under the exchange offer in
exchange for old notes may be offered for resale, resold and otherwise
transferred by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, if:
. you are not an "affiliate"of ours within the meaning of Rule 405 under
the Securities Act;
. you are acquiring new notes in the ordinary course of your business; and
. you do not intend to participate in the distribution of the new notes.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes:
. you cannot rely on those interpretations of the SEC; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, and the secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
under the Securities Act.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
the old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
exchange offer is completed, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
resale of new notes. In addition, until 90 days after the date of this
prospectus, all dealers effecting transactions in the new notes may be required
to deliver a prospectus.
We will not receive any proceeds from any sales of the new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination of methods of
resale, at market prices prevailing at the time of resale, at prices related to
those prevailing market prices or at negotiated prices. Any resale may be made
directly to the purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from the broker-dealer
and/or the purchasers of the new notes. Any broker-dealer that resells the new
notes that were received by it for its own account pursuant to the exchange
offer and any broker or dealer that participates in a distribution of the new
notes may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any resale of new notes and any commissions or
concessions received by any of those 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 exchange offer is completed 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 the expenses incident to
the exchange offer, other than commissions or concessions of any brokers or
dealers and the fees of any advisors or experts retained by the holders of old
notes, and will indemnify the holders of the old notes (including any
broker-dealers) against related liabilities, including liabilities under the
Securities Act.
76
LEGAL MATTERS
Certain matters relating to the exchange offer will be passed on for us by
Thompson & Knight L.L.P., Woodburn & Wedge and Morgan F. Johnston, General
Counsel for Magnum Hunter.
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated by reference from Magnum Hunter Resources, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2001 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports, which
are incorporated by reference herein and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Prize Energy Corp. as of December
31, 2001 and for the year then ended incorporated by reference from Magnum
Hunter Resources, Inc.'s Current Report on Form 8-K dated July 2, 2002 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated by reference herein and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The consolidated balance sheets of Prize and its subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 2000 and
for the period from inception (January 15, 1999) to December 31, 1999 and the
statements of revenues and direct operating expenses for the producing
properties acquired by Prize from Pioneer Natural Resources USA, Inc. for the
year ended December 31, 1998 have been audited by Ernst & Young LLP,
independent auditors, as stated in their reports which are incorporated by
reference herein and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
ENGINEERS
The estimated reserve evaluations and related calculations for Magnum Hunter
of DeGolyer and MacNaughton, Ryder Scott Company, L.P., Pollard, Gore &
Harrison and Cawley Gillespie & Associates, Inc., each independent petroleum
engineering consultants, included and incorporated by reference in this
prospectus have been included in reliance on the authority of said firms as
experts in petroleum engineering.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended. Accordingly, we file annual, quarterly and periodic
reports, proxy statements and other information with the SEC relating to our
business, financial statements and other matters. You may read and copy any
documents we have filed with the SEC at prescribed rates at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
You can obtain copies of these materials at prescribed rates by writing to the
SEC's Public Reference Section at 450 Fifth Street, N.W. Washington, D.C.
20549, or by calling (800) SEC-0300. Our SEC filings are also available to you
free of charge at the SEC's web site at http://www.sec.gov. Information
contained in our web site is not part of this offering memorandum. Magnum
Hunter's common stock is listed on the New York Stock Exchange under the symbol
"MHR."
We have filed with the SEC a registration statement on Form S-4 (together
with all amendments and exhibits, the "Registration Statement") under the
Securities Act of 1933, as amended with respect to the exchange offer. This
prospectus does not contain all of the information in the Registration
Statement. You will find additional information about us and the new notes in
the Registration Statement. Any statements made in this prospectus concerning
the provisions of legal documents are not necessarily complete and you should
read the documents which are filed as exhibits to the Registration Statement or
otherwise filed with the SEC.
77
INCORPORATION OF DOCUMENTS BY REFERENCE
This prospectus incorporates documents, including important business and
financial information, by reference that are not part of this prospectus or
delivered with this prospectus. This means that we are disclosing important
information to you by referring you to those documents. You should be aware
that information in a document incorporated by reference may have been modified
or superseded by information that is included in other documents that were
filed at a later date and which are also incorporated by reference or included
in this prospectus.
We incorporate by reference in this prospectus the following documents filed
by us with the SEC:
. our Annual Report on Form 10-K for the fiscal year ended December 31,
2001;
. our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002,
as amended by Form 10-Q/A filed with the SEC on July 3, 2002; and
. our Current Report on Form 8-K filed with the SEC on July 2, 2002.
We also incorporate by reference in this prospectus the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 for Prize Energy Corp.
All documents and reports filed by Magnum Hunter with the SEC after the date
of this prospectus and before the termination of the exchange offer shall be
deemed incorporated herein by reference and shall be deemed to be a part hereof
from the date of filing of such documents and reports. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this prospectus to
the extent that a statement contained herein or in any subsequently filed
document or report that also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
Upon written or oral request, we will provide you with a copy of any of the
incorporated documents without charge (not including exhibits to the documents
unless the exhibits are specifically incorporated by reference into the
documents). You may submit such a request for this material at the following
address and telephone number:
Magnum Hunter Resources, Inc.
Attention: Corporate Secretary
600 East Las Colinas Blvd.
Suite 1100
Irving, Texas 75039
(972) 401-0752
78
GLOSSARY OF OIL AND GAS TERMS
"Bbl" or "barrel" means 42 U.S. gallons.
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion equivalent cubic feet of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf of natural gas to 1 Bbl of
oil.
"BOE" means equivalent barrels of oil, calculated at a ratio of 6 Mcf of
natural gas to 1 Bbl of oil.
"Completion" means the installation of permanent equipment for the
production of oil or gas.
"Exploratory well" means a well drilled to find and produce oil in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
"Gross," when used with respect to acres or wells, refers to the total acres
or wells in which Magnum Hunter has a working interest.
"Infill drilling" means the drilling of an additional well or wells provided
for by an existing spacing order to more adequately drain a reservoir.
"MBbls" means thousand barrels.
"Mcf" means thousand cubic feet.
"Mcfe" means thousand equivalent cubic feet of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet equivalent, determined using the ratio of 6
Mcf of natural gas to 1 Bbl of oil.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by
Magnum Hunter.
"Net revenue interest" means a share of the working interest that does not
bear any portion of the expense of drilling and completing a well and that
represents the holder's share of production after satisfaction of all royalty,
overriding royalty, oil payments and other nonoperating interests.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development, and production of an oil or gas well or lease.
"Productive Well" means a well that is producing oil or gas or that is
capable of production in paying quantities.
"Producing reserves" means proved developed reserves that can be expected to
be recovered from currently producing zones under the continuation of present
operating methods.
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"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any; and (B)
the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas, and natural
gas liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors;
(C) crude oil, natural gas, and natural gas liquids that may occur in
undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids
that may be recovered from oil shales, coal, gilsonite and other such
sources.
"PV-10" means the present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with SEC
guidelines, net of estimated production and future development costs but before
deducting federal income taxes, using prices and costs as of the date of
estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
"Recompletion" means the completion for production of an existing well bore
in another formation or producting horizon from that in which the well has been
previously completed.
"Reserve life" means the estimated productive life of a proved reservoir
based upon the economic limit of such reservoir producing hydrocarbons in
paying quantities assuming certain price and cost parameters. For purposes of
this document, reserve life is calculated by dividing the proved reserves (on
an Mcfe basis) at the end of the period by projected production volumes for the
next 12 months.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time
80
the lease is granted, or overriding royalties, which are usually reserved by an
owner of the leasehold in connection with a transfer to a subsequent owner.
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
"Workover" means operations on a producing well to restore or increase
production.
81
- --------------------------------------------------------------------------------
Offer to Exchange all of Our Outstanding
9.60% Senior Notes due 2012 for
9.60% Senior Notes due 2012, Which Have Been Registered
Under the Securities Act of 1933
of
[LOGO]
Magnum Hunter
Resources, Inc.
-----------------
PROSPECTUS
-----------------
, 2002
- --------------------------------------------------------------------------------
No person has been authorized to give any information or make any
representations in connection with this offering other than those contained in
this prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by Magnum
Hunter. Neither the delivery of this prospectus nor any sale hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of Magnum Hunter since the date of this prospectus or that the
information contained in this prospectus is correct as of any time subsequent
to its date. This prospectus does not constitute an offer to sell nor or the
solicitation of an offer to buy such securities in any circumstances in which
such offer or solicitation is unlawful.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Set forth below is a description of certain provisions of the articles of
incorporation and bylaws of us and the corporate guarantors and the partnership
agreements of our non-corporate guarantors. These descriptions are intended as
a summary only and are qualified in their entirety by the appropriate articles
of incorporation, bylaws, partnership agreements and state law.
(a) Magnum Hunter
The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty in certain specified circumstances.
Nevada law permits indemnification if a director or officer acts in good faith
in a manner reasonably believed to be in, or not opposed to, the best interests
of the corporation. A director or officer must be indemnified as to any matter
in which he successfully defends himself. Indemnification is prohibited as to
any matter in which the director or officer is adjudged liable.
The articles of incorporation of Magnum Hunter provide, consistent with the
provisions of the Nevada Revised Statutes, that no director of the Magnum
Hunter will be personally liable to Magnum Hunter or any of its stockholders
for monetary damages arising from the director's breach of fiduciary duty as a
director. This does not apply, however, with respect to any action for unlawful
payments of dividends, stock purchases or redemptions, nor does it apply if the
director has acted in a manner involving intentional misconduct, fraud, or a
knowing violation of law or, in failing to act, has acted in a manner involving
intentional misconduct, fraud, or a knowing violation of law. The provisions of
the articles of incorporation eliminating liability of directors for monetary
damages do not affect the standard of conduct to which directors must adhere,
nor do such provisions affect the availability of equitable relief. In
addition, such limitations on personal liability do not affect the availability
of monetary damages under claims based on federal law.
(b) The Guarantors
The Texas Business Corporation Act empowers corporations incorporated in
Texas to indemnify any person who was, is or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a director
or officer against judgments, penalties (including excise and similar taxes),
fines, settlements and reasonable expenses (including court costs and
attorneys' fees) actually incurred by the person in connection with the
proceeding. Each Texas corporation is required pursuant to the Texas Business
Corporation Act to indemnify a director or officer against reasonable expenses
(including court costs and attorneys' fees) incurred by him in connection with
a proceeding in which he is a named defendant or respondent because he is or
was a director or officer if he has been wholly successful, on the merits or
otherwise, in the defense of the proceeding. The Texas Business Corporation Act
provides that indemnification pursuant to its provisions is not exclusive of
other rights of indemnification to which a person may be entitled under any
bylaw, agreement, vote of shareholders or disinterested directors, or otherwise.
The articles of incorporation of Gruy Petroleum Management Co. provide,
consistent with the provisions of the Texas Business Corporation Act, that no
director of the Gruy Petroleum Management Co. will be personally liable to Gruy
Petroleum Management Co. or any of its shareholders for monetary damages
arising from the director's breach of fiduciary duty as a director. This does
not apply, however, with respect to any action for unlawful payments of
dividends, stock purchases or redemptions, nor does it apply if the director
has acted in a manner involving intentional misconduct, fraud, or a knowing
violation of law or, in failing to act, has acted in a
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manner involving intentional misconduct, fraud, or a knowing violation of law.
The provisions of the articles of incorporation eliminating liability of
directors for monetary damages do not affect the standard of conduct to which
directors must adhere, nor do such provisions affect the availability of
equitable relief. In addition, such limitations on personal liability do not
affect the availability of monetary damages under claims based on federal law.
The bylaws of each of Magnum Hunter Production, Inc., Gruy Petroleum
Management Co., Hunter Gas Gathering, Inc., Conmag Energy Corporation and
Trapmar Properties, Inc. provide for indemnification of the directors and
officers of each such respective corporation to the fullest extent permitted by
the Texas Business Corporation Act.
Section 102(b) of the Delaware General Corporation Law allows a corporation
to include in its certificate of incorporation a provision to eliminate or
limit the personal liability of a director to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except in cases where the director breached his or her duty of loyalty to the
registrant or its stockholders, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of a law, willfully or
negligently authorized the unlawful payment of a dividend or approved an
illegal stock repurchase (as provided in Section 174 of the Delaware General
Corporation Law) or obtained an improper personal benefit.
The certificate of incorporation of each of Pintail Energy, Inc., PEC
(Delaware), Inc., Prize Operating Company, the sole general partner of Prize
Energy Resources, L.P. and Oklahoma Gas Processing, Inc. provide, consistent
with the provisions of the Delaware General Corporation Law, that no director
of each respective corporation will be personally liable to the respective
corporation or any of their respective stockholders for monetary damages
arising from the director's breach of fiduciary duty as a director. This does
not apply, however, with respect to any action for unlawful payments of
dividends, stock purchases or redemptions, nor does it apply if the director
(i) has breached his duty of loyalty to the respective corporation and its
respective stockholders; (ii) does not act or, in failing to act, has not acted
in good faith; (iii) has acted in a manner involving intentional misconduct or
a knowing violation of law or, in failing to act, has acted in a manner
involving intentional misconduct or a knowing violation of law; or (iv) has
derived an improper personal benefit. The provisions of each certificate of
incorporation eliminating liability of directors for monetary damages do not
affect the standard of conduct to which directors must adhere, nor do such
provisions affect the availability of equitable relief. In addition, such
limitations on personal liability do not affect the availability of monetary
damages under claims based on federal law.
Item 21(a). Exhibits.
The information required by this Item 21(a) is set forth in the Index to
Exhibits accompanying this Registration Statement and is incorporated herein by
reference.
Item 22. Undertakings.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
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prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Exchange Act that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The registrants hereby undertake that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrants'
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrants of expenses incurred or paid by a director, officer or controlling
person of the registrants in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrants hereby undertake to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
registrants has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Irving, Texas, on the
3rd day of July, 2002.
MAGNUM HUNTER RESOURCES, INC. .
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chairman, President, and
Chief Executive Officer
MAGNUM HUNTER PRODUCTION, INC.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
HUNTER GAS GATHERING, INC.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
GRUY PETROLEUM MANAGEMENT CO.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
CONMAG ENERGY CORPORATION
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
TRAPMAR PROPERTIES, INC.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
II-4
PINTAIL ENERGY, INC.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
PEC (DELAWARE), INC.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
PRIZE OPERATING COMPANY
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
PRIZE ENERGY RESOURCES, L.P.
By: PEC Operating Company, its
general partner
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
OKLAHOMA GAS PROCESSING, INC.
By: /s/ GARY C. EVANS
-----------------------------
Gary C. Evans
Chief Executive Officer
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POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Gary C. Evans and Morgan F. Johnston, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and for his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments
and any registration statement pursuant to Rule 462(b)) to this registration
statement on Form S-4 and to file the same with all exhibits thereto and any
other documents in connection therewith, with the Securities and Exchange
Commission under the Securities Act granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
MAGNUM HUNTER RESOURCES, INC.
Signature Title Date
--------- ----- ----
/s/ GARY C. EVANS Chairman, President and Chief July 3, 2002
- ----------------------------- Executive Officer
Gary C. Evans (principal executive
officer)
/s/ CHRIS TONG Senior Vice President and July 3, 2002
- ----------------------------- Chief Financial Officer
Chris Tong (principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ MATTHEW C. LUTZ Director July 3, 2002
- -----------------------------
Matthew C. Lutz
/s/ GERALD W. BOLFING Director July 3, 2002
- -----------------------------
Gerald W. Bolfing
/s/ JOHN H. TRESCOT, JR. Director July 3, 2002
- -----------------------------
John H. Trescot, Jr.
/s/ JAMES E. UPFIELD Director July 3, 2002
- -----------------------------
James E. Upfield
/s/ JERRY BOX Director July 3, 2002
- -----------------------------
Jerry Box
/s/ JAMES R. LATTIMER III Director July 3, 2002
- -----------------------------
James R. Lattimer III
/s/ ROBERT KELLEY Director July 3, 2002
- -----------------------------
Robert Kelley
II-6
MAGNUM HUNTER PRODUCTION, INC.
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
GRUY PETROLEUM MANAGEMENT CO.
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
HUNTER GAS GATHERING, INC.
/s/ GARY C. EVANS Director, President and Chief July 3, 2002
- ----------------------------- Executive Officer
Gary C. Evans (principal executive
officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director July 3, 2002
- -----------------------------
Richard R. Frazier
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CONMAG ENERGY CORPORATION
/S/ GARY C. Evans Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
TRAPMAR PROPERTIES, INC.
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
PINTAIL ENERGY, INC.
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
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PEC (DELAWARE), INC.
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
PRIZE OPERATING COMPANY (which serves as general partner of Prize Energy
Resources, L.P.)
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
OKLAHOMA GAS PROCESSING, INC.
/s/ GARY C. EVANS Director and Chief Executive July 3, 2002
- ----------------------------- Officer (principal
Gary C. Evans executive officer)
/s/ CHRIS TONG Director, Senior Vice July 3, 2002
- ----------------------------- President and Chief
Chris Tong Financial Officer
(principal financial
officer)
/s/ DAVID S. KRUEGER Vice President and Chief July 3, 2002
- ----------------------------- Accounting Officer
David S. Krueger (principal accounting
officer)
/s/ RICHARD R. FRAZIER Director, President and Chief July 3, 2002
- ----------------------------- Operating Officer
Richard R. Frazier
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INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
4.1 Indenture, dated as of March 15, 2002, among Magnum Hunter Resources, Inc., the guarantors
named therein and Bankers Trust Company, as trustee, relating to $300,000,000 aggregate principal
amount of 9.6% Notes Due 2012 (filed as Exhibit 4 to Magnum Hunter's Annual Report on Form 10-
K for the year ended December 31, 2001, and incorporated herein by reference).
4.2 Form of 6.9% Series B Senior Note due 2012 (included in Exhibit 4.1).
4.3* Registration Rights Agreement, dated March 15, 2002, by and among Mangum Hunter Resources,
Inc., the guarantors named therein and Deutsche Banc Alex. Brown Inc., Lehman Brothers Inc.,
CIBC World Markets Corp., BNP Paribas Securities Corp., SWS Securities, Inc., Monness, Crespi,
Hardt & Co., Inc., RBC Dominion Securities Corporation, San Jacinto Securities, Inc., Frost
Securities, Inc., Ryan Beck & Co., LLC and Hartsfield Capital Securities, Inc.
4.4* Purchase Agreement dated March 13, 2002, by and among Magnum Hunter Resources, Inc., the
guarantors named therein, Deutsche Banc Alex. Brown Inc., Lehman Brothers Inc., CIBC World
Markets Corp., BNP Paribas Securities Corp., SWS Securities, Inc., Monness, Crespi, Hardt & Co.,
Inc., RBC Dominion Securities Corporation, San Jacinto Securities, Inc., Frost Securities, Inc., Ryan
Beck & Co., LLC and Hartsfield Capital Securities, Inc.
5.1* Opinion of Thompson & Knight L.L.P.
5.2* Opinion of Woodburn & Wedge
5.3* Opinion of the Morgan F. Johnston, General Counsel of Magnum Hunter
12.1* Statement Setting Forth Computation of Ratios of Earnings to Fixed Charges
23.1* Consent of Deloitte & Touche LLP, independent auditors.
23.2* Consent of Deloitte & Touche LLP, independent auditors.
23.3* Consent of Ernst & Young LLP, independent auditors.
23.4* Consent of Pollard, Gore & Harrison, independent petroleum consultants.
23.5* Consent of Ryder Scott Company, independent petroleum consultants.
23.6* Consent of Cawley Gillespie & Associates, Inc., independent petroleum consultants.
23.7* Consent of DeGolyer and MacNaughton, independent petroleum consultants.
23.8* Consent of Thompson & Knight L.L.P. (contained in its opinion filed as Exhibit 5.1).
23.9* Consent of Woodburn & Wedge (contained in its opinion filed as Exhibit 5.2).
23.10* Consent of Morgan F. Johnston, General Counsel of Magnum Hunter (contained in opinion filed as
Exhibit 5.3).
24.1* Power of attorney of Magnum Hunter and each subsidiary guarantor (included on the signature page
of this Registration Statement).
25.1* Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of First
Union National Bank.
25.2* Bylaws of Deutsche Bank Trust Company Americas.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Investors.
- --------
* Filed herewith.
II-10