Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-127390
_____________________________________________________________________________
DELTA PETROLEUM CORPORATION
[ L O G O ]
Offer to Exchange up to
$150,000,000 of 7% Senior Subordinated Notes due 2015,
Issued by Delta Petroleum Corporation on March 15, 2005
for
$150,000,000 of 7% Senior Subordinated Notes due 2015
the offer and exchange of which have been registered under the
Securities Act of 1933
Terms of the Exchange Offer
* We are offering to exchange up to $150,000,000 of our outstanding 7%
Senior Subordinated Notes due 2015 which were issued by us on
March 15, 2005, and which we refer to herein as the "old notes," for new
notes with substantially identical terms, the offer and sale of which
have been registered under the Securities Act of 1933.
* We will exchange all outstanding old notes that you validly tender
and do not validly withdraw before the exchange offer expires for an
equal principal amount of new notes.
* There is no public market for the old notes or the new notes.
* We are incurring all expenses associated with this registration.
* The exchange offer expires at 5:00 p.m., New York City time, on
September 26, 2005, unless extended. We do not currently intend to extend
the exchange offer.
* Tenders of old notes may be withdrawn at any time prior to the
expiration of the exchange offer in accordance with the procedures set
forth herein.
* We believe that the exchange of new notes for old notes should not be
an exchange or otherwise a taxable event to a holder for United States
federal income tax purposes.
* We will not receive any proceeds from the exchange offer.
Terms of the New 7% Senior Subordinated Notes
due 2015 Offered in the Exchange Offer
Maturity
* The new notes will mature on April 1, 2015.
Interest
* Interest on the new notes is payable on April 1 and October 1 of
each year, beginning October 1, 2005.
* Interest will accrue from March 15, 2005.
Redemption
* Prior to April 1, 2008, we may redeem up to 35% of the original
aggregate principal amount of the new notes at a redemption price
of 107% of the principal amount, plus accrued and unpaid interest,
with the proceeds of certain equity offerings.
* On or after April 1, 2010, we may redeem some or all of the new notes
pursuant to the redemption prices specified under the caption
"Description of the New Notes - Optional Redemption."
Change of Control
* Subject to certain conditions, if we experience a change of control,
we may be required to repurchase some or all of the new notes at
a purchase price of 101% of the principal amount, plus accrued and
unpaid interest.
Ranking
* The new notes and the guarantees are our and our guarantor
subsidiaries' general, unsecured obligations and are subordinated
to our and our subsidiaries' senior debt and will be subordinated
to future senior debt that we and our subsidiaries are permitted
to incur under our senior credit facilities and the indenture
governing the new notes.
See "Risk Factors" beginning on page 12 for a discussion of factors you
should consider before participating in the exchange offer.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
Each broker-dealer that receives new notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. The letter of transmittal
accompanying this prospectus 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 the broker-dealer as a result
of market-making activities or other trading activities. We and the guarantors
have agreed that, starting on the expiration date of this exchange offer and
ending on the close of business 180 days after the expiration date, we and the
guarantors 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 August 26, 2005
2
TABLE OF CONTENTS
Page
Forward-Looking Statements ........................................ 4
Prospectus Summary ................................................ 4
Risk Factors ...................................................... 12
Exchange Offer .................................................... 28
Use of Proceeds ................................................... 37
Capitalization .................................................... 37
Description of the New Notes ...................................... 38
United States Federal Income Tax Considerations ................... 93
Plan of Distribution .............................................. 93
Legal Matters ..................................................... 94
Experts ........................................................... 94
Reserve Engineers ................................................. 95
Where You Can Find Additional Information ......................... 95
Incorporation by Reference ........................................ 96
3
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference in this
prospectus contain forward-looking statements. These statements include
statements relating to our plans, strategies, objectives, expectations,
intentions and adequacy of resources and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
When used herein, the words "anticipate," "believe," "estimate,"
"expect," "intend," "will" and similar expressions as they relate to us or our
management are intended to identify such statements as "forward-looking
statements." Such statements reflect the current views of Delta Petroleum
Corporation and our management with respect to future events and are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements.
Our actual results may differ materially from the results predicted or
from any other forward-looking statements made by, or on behalf of, us and
reported results should not be considered as an indication of future
performance. The potential risks and uncertainties include, among other
things, production variance from expectations, volatility of oil and natural
gas prices, hedging results, the need to develop and replace reserves, the
substantial capital expenditures required to fund operations, exploration
risks, environmental risks, uncertainties about estimates of reserves,
competition, litigation, our sources of liquidity, access to capital,
government regulation, political risks, our ability to implement our business
strategy, costs and results of drilling new projects, mechanical and other
inherent risks associated with oil and natural gas production, weather,
availability of drilling equipment and changes in interest rates, as well as
other risks described under "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
events, levels of activity, performance or achievements. We do not assume
responsibility for the accuracy and completeness of the forward-looking
statements. We do not intend to update any of the forward-looking statements
after the date of this prospectus to conform them to actual results.
4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus and the documents incorporated by reference. Because it is a
summary, it does not contain all of the information that you should consider
before deciding to exchange your old notes for new notes. You should read the
entire prospectus and the documents incorporated by reference carefully,
including the section entitled "Risk Factors" and the financial statements and
related notes to those financial statements incorporated by reference in this
prospectus. Unless otherwise noted herein, as used in this prospectus, "we,"
"our," "ours," "us" and the "Company" refer to Delta Petroleum Corporation and
its subsidiaries, except where the context otherwise requires or as otherwise
indicated.
Our Company
We are a Denver, Colorado based independent energy company engaged
primarily in the exploration for, and the acquisition, development,
production, and sale of, natural gas and crude oil. Our core areas of
operation are the Gulf Coast and Rocky Mountain regions, which comprise the
majority of our proved reserves, production and long-term growth prospects. We
have a significant drilling inventory that consists of proved and unproved
locations, the majority of which are located in our Rocky Mountain development
projects. We expect that our drilling efforts and capital expenditures will
focus increasingly on the Rockies, where approximately two-thirds of our
fiscal 2006 capital budget is allocated and three-fourths of our undeveloped
acreage is located. We retain a high degree of operational control over our
asset base, with an average working interest in excess of 90% as of March 31,
2005. This provides us with controlling interests in a multi-year inventory
of drilling locations, positioning us for continued reserve and production
growth through our drilling operations. We also currently have an ownership
interest in a drilling company, providing the benefit of a preferential right
to use its drilling rigs in the Rocky Mountain region. We concentrate our
exploration and development efforts in fields where we can apply our technical
exploration and development expertise, and where we have accumulated
significant operational control and experience.
Our principal executive offices are located at 370 17th Street Suite
4300, Denver, Colorado 80202. Our telephone number is (303) 293-9133.
Recent Developments
There have been no material changes in our business since June 30, 2004
that have not been reported in our reports on Forms 10-Q and 8-K, except as
follows:
Prior to March 21, 2005 we owned a fifty percent interest in Big Dog
Drilling Co., LLC ("Big Dog"), and Edward Mike Davis owned the remaining fifty
percent. On March 21, 2005 we purchased his ownership interest in Big Dog in
exchange for 100,000 shares of our common stock and our interest in Shark
Trucking Co., LLC. At the time of the transaction with Mr. Davis, Big Dog
owned two drilling rigs. On April 15, 2005, we contributed both of these rigs
to DHS Drilling Company ("DHS") in exchange for a 90% ownership interest in
that entity. On May 16, 2005, an unaffiliated oil and gas company made an
equity investment in DHS which resulted in our ownership interest being
reduced to 49.5%.
DHS currently has five drilling rigs in operation that have depth ratings
of approximately 7,500 to 18,000 feet. Five additional rigs are in the
process of being acquired or assembled by DHS and are currently expected to
become operational during the summer and fall of 2005. We have the right to
use all of the rigs on a priority basis, although approximately half will
initially work for third party operators. At the outset, all of the rigs will
operate in the Rocky Mountain basins.
5
The officers of DHS include Bill Sauer, Jr., Harold Hastings and certain
officers of Delta. Bill Sauer, Jr. and Harold Hastings were most recently with
Sauer Drilling Company ("Sauer") during which time Sauer was primarily owned
by Tom Brown, Inc.
DHS operates out of Casper, Wyoming and its principal office is located
at 675 N. 3rd Avenue in Casper, Wyoming.
The Exchange Offer
On March 15, 2005, we completed a private offering of the old notes,
which were additional debt securities under an indenture pursuant to which we
issued the previously issued notes. We entered into a registration rights
agreement with the initial purchasers in the private offering of the old notes
in which we agreed, among other things, to deliver this prospectus to you and
to use our reasonable best efforts to consummate the exchange offer within 180
days following the date of the original issuance of the old notes. The
following is a summary of the exchange offer.
Exchange offer We are offering to exchange new notes for old notes.
Expiration date The exchange offer will expire at 5:00 p.m. New York
City time, on _______, 2005, unless we decide to
extend it. We do not currently intend to extend the
exchange offer. The exchange offer must remain open
for not less than thirty days (or longer if required
by applicable law) after the date notice of the
exchange offer is mailed to holders of the old notes.
Conditions to the
exchange offer The registration rights agreement does not require
us to accept old notes for exchange if the exchange
offer or the making of any exchange by a holder of
the old notes would violate any applicable law or
interpretation of the staff of the Securities and
Exchange Commission. The tender of a minimum
aggregate principal amount of old notes is not a
condition to the exchange offer.
Procedures for
tendering old notes To participate in the exchange offer, you must
follow the automated tender offer program, or ATOP,
procedures established by The Depository Trust
Company, or DTC, for tendering notes held in book-
entry form. The ATOP procedures require that the
exchange agent receive, prior to the expiration
date of the exchange offer, a computer-generated
message known as an "agent's message" that is
transmitted through ATOP and that DTC confirm that:
* DTC has received instructions to exchange your
notes; and
* you agree to be bound by the terms of the
letter of transmittal.
6
For more information on tendering your old notes,
please refer to the sections in this prospectus
entitled "Exchange Offer-Terms of the Exchange
Offer," "Procedures for Tendering" and "Book-Entry
Transfer."
Guaranteed delivery
procedures None.
Withdrawal of tenders You may withdraw your tender of old notes at any
time prior to the expiration date. To withdraw, you
must submit a notice of withdrawal to the exchange
agent using ATOP procedures before 5:00 p.m., New
York City time, on the expiration date of the
exchange offer.
Acceptance of old
notes and delivery
of new notes If you fulfill all conditions required for proper
acceptance of old notes, we will accept any and
all old notes that you properly tender in the
exchange offer on or before 5:00 p.m., New York City
time, on the expiration date. We will return any old
notes that we do not accept for exchange to you
without expense as promptly as practicable after
the expiration date. We will also deliver the new
notes as promptly as practicable after the expiration
date. Please refer to the section in this prospectus
entitled "Exchange Offer - Terms of the Exchange
Offer."
Resale We believe that the new notes issued pursuant to
the exchange offer may be offered for resale,
resold and otherwise transferred by you (unless you
are an "affiliate" of ours within the meaning of Rule
405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions
of the Securities Act so long as you are acquiring
the new notes in the ordinary course of your business
and you have not engaged in, do not intend to engage
in, and have no arrangement or understanding with
any person to participate in, a distribution of the
new notes.
Each participating broker-dealer that receives new
notes for its own account under the exchange offer
for old notes that were acquired by the broker-
dealer as a result of other trading activity must
acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. See
"Plan of Distribution."
Any holder of old notes who:
* is our affiliate;
* does not acquire new notes in the ordinary
course of its business; or
* exchanges old notes in the exchange offer with
the intention to participate, or for the purpose
of participating, in a distribution of new notes
7
must, in the absence of an exemption, comply with
the registration and prospectus delivery
requirements of the Securities Act in connection
with the resale of the new notes.
Fees and expenses We will bear all expenses related to the exchange
offer. Please refer to the section in this prospectus
entitled "Exchange Offer-Fees and Expenses."
Use of proceeds The issuance of the new notes will not provide us
with any new proceeds. We are making this exchange
offer solely to satisfy our obligations under our
registration rights agreement.
Consequences of
failure to exchange
old notes If you do not exchange your old notes in this
exchange offer, you will no longer be able to
require us to register the old notes under the
Securities Act except in the limited circumstances
provided under our registration rights agreement. In
addition, you will not be able to resell, offer to
resell or otherwise transfer the old notes unless we
have registered the old notes under the Securities
Act, or unless you resell, offer to resell or
otherwise transfer them under an exemption from
the registration requirements of, or in a transaction
not subject to, the Securities Act.
Tax considerations We believe that the exchange of new notes for old
notes should not be an exchange or otherwise a
taxable event to a holder for United States federal
income tax purposes. Please read "United States
Federal Income Tax Considerations."
Exchange agent We have appointed U.S. Bank National Association as
exchange agent for the exchange offer. You should
direct questions, requests for assistance and
requests for additional copies of this prospectus
(including the letter of transmittal) to the exchange
agent at the following address: U.S. Bank National
Association, 60 Livingston Avenue, St. Paul,
Minnesota 55107, Attention: Specialized Financing,
or to the office of U.S. Bank National Association
in the Borough of Manhattan. Eligible institutions
may make requests by facsimile at 651-495-8158.
Terms of the New Notes
The new notes will be identical to the old notes except that the offer
and exchange of the new notes is registered under the Securities Act and the
new notes will not have restrictions on transfer, registration rights or
provisions for additional interest. The new notes will evidence the same debt
as the old notes, and the same indenture will govern the new notes, the old
notes and the previously issued notes. When we use the term "notes," we mean
the new notes together with the old notes.
The following summary contains basic information about the new notes and
is not intended to be complete. It does not contain all the information that
is important to you. For a more complete understanding of the new notes,
please refer to the section of this document entitled "Description of the New
Notes."
8
Issuer Delta Petroleum Corporation
Notes offered $150 million aggregate principal amount of 7%
Senior Subordinated Notes due 2015.
Maturity date April 1, 2015.
Interest payment
dates April 1 and October 1 of each year, commencing on
October 1, 2005.
Mandatory redemption None
Optional redemption Except as otherwise described below, the new
notes will not be redeemable at our option prior to
April 1, 2010. Thereafter, the new notes will be
subject to redemption at our option, in whole or in
part, at the redemption prices set forth under the
heading "Description of the New Notes-Optional
Redemption," plus accrued and unpaid interest
thereon to the applicable redemption date. In
addition, prior to April 1, 2008, we may, at our
option, on any one or more occasions, redeem up
to 35% of the original aggregate principal amount
of the notes at a redemption price equal to 107%
of the principal amount thereof, plus accrued and
unpaid interest, if any, to the redemption date,
with all or a portion of the net proceeds of public
sales of equity interests of the Company; provided
that at least 65% of the original aggregate
principal amount of the notes remains outstanding
immediately after the occurrence of such redemption.
See "Description of the New Notes-Optional
Redemption."
Change of control Upon a "Change of Control," you as a holder of the
notes will have the right to require us to make an
offer to repurchase all or a portion of the notes
at a purchase price of 101% of their aggregate
principal amount, plus accrued and unpaid
interest, if any, to the date of repurchase.
Our credit agreement prohibits us from repurchasing
any notes pursuant to a change of control offer
prior to the repayment in full of the senior debt
under our credit agreement. Therefore, if a change
of control were to occur, there can be no assurance
that we or the subsidiary guarantors will have the
financial resources or be permitted under the terms
of our or their indebtedness to repurchase the
notes. If any "event of default" occurs, the
trustee or holders of at least 25% in principal
amount of the notes then outstanding may declare the
principal of and the accrued and unpaid interest on
such notes to be due and payable immediately.
However, such repayment would be subject to the
subordination provisions in our Indenture. See
"Description of the New Notes-Subordination" and
"-Repurchase at the Option of Holders-Change of
Control," and "-Events of Default and Remedies."
9
Ranking The new notes will be general, unsecured
obligations and will be subordinated in right of
payment to our senior debt, which includes
borrowings under our Senior Credit Agreement and
any other permitted indebtedness which does not
expressly provide that it is on parity with or
subordinated in right of payment to the new notes.
The new notes and the old notes along with the
previously issued notes will constitute a single
class of securities under the Indenture. See
"Capitalization" and "Description of the New
Notes-Subordination."
Subsidiary guarantees Our payment obligations under the new notes will be
jointly, severally and unconditionally guaranteed
on a senior subordinated basis by each of our
restricted subsidiaries and any future restricted
subsidiaries. The guarantees will be subordinated to
senior debt of the subsidiary guarantors to the same
extent and in the same manner as the new notes are
subordinated to senior debt. See "Description of the
New Notes-Guarantees."
Certain covenants The new notes will be issued pursuant to the same
Indenture as the old notes and the previously issued
notes. This Indenture contains certain covenants that
will, among other things, limit the ability of us and
our restricted subsidiaries to incur additional
indebtedness and issue disqualified stock, pay
dividends, make distributions, make investments, make
certain other restricted payments, enter into certain
transactions with affiliates, dispose of certain
assets, incur liens securing indebtedness of any
kind (other than permitted liens) and engage in
mergers and consolidations. See "Description of
the New Notes-Certain Covenants."
Transfer restrictions;
absence of a public
market for the new
notes The new notes generally will be freely transferable,
but will also be new securities for which there is no
existing market. We cannot assure you as to the
development or liquidity of any market for trading.
We do not intend to apply for a listing of the new
notes on any securities exchange or any automated
dealer quotation system.
Risk Factors You should carefully consider all of the information
in this prospectus. In particular, you should evaluate
the specific risk factors set forth under "Risk
Factors," beginning on page 12, for a discussion of
risks involved with an investment in the new notes.
10
Ratio of Earnings to Fixed Charges
Nine
Months
Ended
Fiscal Year Ended June 30, March 31,
2000 2001 2002 2003 2004 2004
---- ---- ---- ---- ---- ---------
Ratio of earnings to
fixed charges -- -- -- -- 1.3x 4.0x
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
consists of income (loss) before discontinued operations and cumulative effect
of change in accounting principle, plus fixed charges (excluding capitalized
interest). "Fixed charges" consists of interest and financing expense,
amortization of deferred financing costs and the estimated interest factor
attributable to rental expense. For the fiscal years ended June 30, 2000,
2001, 2002 and 2003, our ratio of earnings to fixed charges was less than
1-to-1 and our coverage deficiency was approximately $4.6 million, $1.5
million, $7.5 million and $2.0 million, respectively.
11
RISK FACTORS
You should carefully consider and evaluate all the information included
or incorporated by reference in this prospectus, including the risks described
below, before you decide to participate in the exchange offer. Our business,
financial condition and results of operations could be materially adversely
affected by any of these risks. The trading price of the new notes could
decline, and you may lose all or part of your investment. The risks described
below are not the only ones facing our company. Additional risks not presently
known to us or that we currently deem immaterial, individually or in the
aggregate, may also impair our business operations.
This prospectus and the documents incorporated by reference also contain
forward-looking statements that involve risks and uncertainties, some of which
are described in the documents incorporated by reference in this prospectus.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
and uncertainties faced by us described below or incorporated by reference in
this prospectus.
Risks Related to our Business and Industry
Oil and natural gas prices are volatile and a decrease could adversely affect
our revenues, cash flows and profitability.
Our revenues, profitability and future rate of growth depend
substantially upon the market prices of oil and natural gas, which fluctuate
widely. Sustained declines in oil and gas prices may adversely affect our
financial condition, liquidity and results of operations. Factors that can
cause market prices of oil and natural gas to fluctuate include:
- relatively minor changes in the supply of and demand for oil
and natural gas;
- market uncertainty;
- the level of consumer product demands;
- weather conditions;
- U.S. and foreign governmental regulations;
- the price and availability of alternative fuels;
- political and economic conditions in oil producing
countries, particularly those in the Middle East, including
actions by the Organization of Petroleum Exporting Countries;
- the foreign supply of oil and natural gas; and
- the price of oil and gas imports, consumer preferences
and overall U.S. and foreign economic conditions.
We are not able to predict future oil and natural gas prices. At various
times, excess domestic and imported supplies have depressed oil and gas
prices. Lower prices may reduce the amount of oil and natural gas that we can
produce economically and may also require us to write down the carrying value
of our oil and gas properties. Substantially all of our oil and natural gas
sales are made in the spot market or pursuant to contracts based on spot
market prices, not long-term fixed price contracts. Any substantial or
extended decline in the prices of or demand for oil or natural gas would have
a material adverse effect on our financial condition and results of
operations.
12
We may not be able to replace production with new reserves.
Our reserves will decline significantly as they are produced unless we
acquire properties with proved reserves or conduct successful development and
exploration drilling activities. Our future oil and natural gas production is
highly dependent upon our level of success in finding or acquiring additional
reserves that are economically feasible and developing existing proved
reserves, which we may not be successful in doing.
If oil or natural gas prices decrease or exploration and development efforts
are unsuccessful, we may be required to take writedowns.
In the past, we have been required to writedown the carrying value of our
oil and gas properties, and there is a risk that we will be required to take
additional writedowns in the future which would reduce our earnings and
stockholders' equity. A write down could occur when oil and gas prices are low
or if we have substantial downward adjustments to our estimated proved
reserves, increases in our estimates of development costs or deterioration in
our exploration and development results.
We account for our crude oil and natural gas exploration and development
activities utilizing the successful efforts method of accounting. Under this
method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Oil and gas lease
acquisition costs are also capitalized. Exploratory drilling costs are
initially capitalized, but charged to expense if and when the well is
determined not to have found reserves in commercial quantities. If the
carrying amount of our oil and gas properties exceeds the estimated
undiscounted future net cash flows, we will adjust the carrying amount of the
oil and gas properties to their fair value.
We review our oil and gas properties for impairment whenever events and
circumstances indicate a decline in the recoverability of their carrying
value. Once incurred, a writedown of oil and gas properties is not reversible
at a later date even if gas or oil prices increase. Given the complexities
associated with oil and gas reserve estimates and the history of price
volatility in the oil and gas markets, events may arise that would require us
to record an impairment of the recorded carrying values associated with our
oil and gas properties. As a result of our review, we recognized an impairment
of $1.5 million for fiscal 2002. Any such future charge will reduce our
earnings and stockholders' equity.
We may not be able to fund our planned capital expenditures.
We spend and will continue to spend a substantial amount of capital for
the acquisition, exploration, exploitation, development and production of oil
and gas reserves. Our exploration and development capital budget ranges from
$60.0 to $80.0 million for fiscal 2005. If low oil and natural gas prices,
lack of adequate gathering or transportation facilities, operating
difficulties or other factors, many of which are beyond our control, cause our
revenues and cash flows from operating activities to decrease, we may be
limited in our ability to spend the capital necessary to complete our capital
expenditures program. In addition, if our borrowing base under our senior
credit facility is re-determined to a lower amount, this could adversely
affect our ability to fund our planned capital expenditures. After utilizing
our available sources of financing, we may be forced to raise additional
equity or debt proceeds to fund such expenditures. Additional equity or debt
financing or cash flow provided by operations may not be available to meet our
capital expenditure requirements.
13
The exploration, development and operation of oil and gas properties involve
substantial risks that may result in a total loss of investment.
The business of exploring for and, to a lesser extent, developing and
operating oil and gas properties involves a high degree of business and
financial risk, and thus a substantial risk of investment loss that even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. Oil and gas drilling and production activities may be shortened,
delayed or canceled as a result of a variety of factors, many of which are
beyond our control. These factors include:
- unexpected drilling conditions;
- pressure or irregularities in formations;
- equipment failures or accidents;
- weather conditions;
- shortages in experienced labor; and
- shortages or delays in the delivery of equipment.
As of June 30, 2004, approximately 42% of our proved reserves were
undeveloped and had a book value of $86.7 million. The cost to develop these
reserves is estimated to be approximately $67.0 million. In addition, we have
$49 million of capitalized costs on properties with no proved reserves. We may
drill wells that are unproductive or, although productive, do not produce oil
and/or gas in economic quantities. Acquisition and completion decisions
generally are based on subjective judgments and assumptions that are
speculative. It is impossible to predict with certainty the production
potential of a particular property or well. Furthermore, a successful
completion of a well does not ensure a profitable return on the investment. A
variety of geological, operational, or market-related factors, including, but
not limited to, unusual or unexpected geological formations, pressures,
equipment failures or accidents, fires, explosions, blowouts, cratering,
pollution and other environmental risks, shortages or delays in the
availability of drilling rigs and the delivery of equipment, loss of
circulation of drilling fluids or other conditions may substantially delay or
prevent completion of any well or otherwise prevent a property or well from
being profitable. A productive well may become uneconomic in the event water
or other deleterious substances are encountered which impair or prevent the
production of oil and/or gas from the well. In addition, production from any
well may be unmarketable if it is contaminated with water or other deleterious
substances.
Our industry experiences numerous operating hazards that could result in
substantial losses.
The exploration, development and operation of oil and gas properties also
involve a variety of operating risks including the risk of fire, explosions,
blowouts, cratering, pipe failure, abnormally pressured formations, natural
disasters, acts of terrorism or vandalism, and environmental hazards,
including oil spills, gas leaks, pipeline ruptures or discharges of toxic
gases. These industry-operating risks can result in injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties, and suspension of operations which could result
in substantial losses.
We maintain insurance against some, but not all, of the risks described
above. Such insurance may not be adequate to cover losses or liabilities.
Also, we cannot predict the continued availability of insurance at premium
levels that justify its purchase. The terrorist attacks on September 11, 2001
and the changes in the insurance markets attributable to those attacks have
made some types of insurance more difficult to obtain. We have been unable to
secure the level and types of insurance we would otherwise have secured prior
to the terrorist attacks. We may not be able to maintain insurance in the
future at rates we consider reasonable. The occurrence of a significant event
that is not fully insured or indemnified against could materially and
adversely affect our financial condition and operations.
14
Our level of indebtedness could adversely affect our ability to raise
additional capital to fund our operations, limit our ability to react to
changes in the economy or our industry and prevent us from meeting our
obligations under our senior unsecured notes.
As of March 31, 2005, our total outstanding indebtedness was
approximately $182,696,000. Our degree of leverage could have important
consequences for you, including the following:
- it may limit our ability to obtain additional debt or equity
financing for working capital, capital expenditures, further
exploration, debt service requirements, acquisitions and general
corporate or other purposes;
- a substantial portion of our cash flows from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes,
including our operations, capital expenditures and future business
opportunities;
- the debt service requirements of other indebtedness in the future
could make it more difficult for us to satisfy our financial
obligations, including those related to the notes;
- certain of our borrowings, including borrowings under our senior
credit facility, are at variable rates of interest, exposing us
to the risk of increased interest rates;
- it may limit our ability to adjust to changing market conditions
and place us at a competitive disadvantage compared to our
competitors that have less debt; and
- we may be vulnerable in a downturn in general economic
conditions or in our business, or we may be unable to carry
out capital spending and exploration activities that are
important to our growth.
- We may be able to incur substantially more debt in the future,
which may intensify the risks described in this prospectus. The
indenture governing the notes and our senior credit facility do not
prohibit us from doing so. As of March 31, 2005, we had
approximately $27 million outstanding under our senior
credit facility and additional availability of approximately $33
million.
A default under our senior credit facility could cause us to lose our
properties.
In order to obtain our senior credit facility, we granted first priority
liens to the lending banks on most of our oil and gas properties and the
related equipment, inventory, accounts and proceeds. Our senior credit
facility includes terms and covenants that place limitations on certain types
of activities, including restrictions or requirements with respect to
additional debt, liens, asset sales, hedging activities, investments,
dividends, mergers and acquisitions, and also includes financial covenants.
Under certain conditions amounts outstanding under our senior credit
facility may be accelerated. Bankruptcy and insolvency events with respect to
us or certain of our subsidiaries will result in an automatic acceleration of
the indebtedness under the senior credit facility. Subject to notice and cure
periods in certain cases, other events of default under the senior credit
facility will result in acceleration of the indebtedness at the option of the
lending banks. Such other events of default include, among other things,
non-payment, breach of warranty, non-performance of obligations under the
senior credit facility (including financial covenants), default on other
indebtedness, certain pension plan events, certain adverse judgments, certain
changes of control, and a failure of the liens securing the senior credit
facility. Any of these events could potentially cause us to lose substantially
all of our properties.
15
For so long as the revolving commitment is in existence, we will also be
required to comply with loan covenants that will limit our flexibility in
conducting our business and which could cause us significant problems in the
event of a downturn in the oil and gas market. If an event of default occurs
and continues after the expiration of any cure period that is provided for in
our senior credit facility, the entire principal amount due under it, all
accrued interest and any other liabilities that we might have to the lending
banks under the senior credit facility will all become immediately due and
payable, all without notice of default of any kind. The foregoing information
is provided to alert readers that there is risk associated with our existing
debt obligations. It is not intended to provide a summary of the terms of our
agreements with our lenders.
Acquisitions are a part of our business strategy and are subject to the risks
and uncertainties of evaluating recoverable reserves and potential
liabilities.
We could be subject to significant liabilities related to acquisitions by
us. The successful acquisition of producing properties requires an assessment
of a number of factors, many of which are beyond our control. These factors
include recoverable reserves, future oil and gas prices, operating costs and
potential environmental and other liabilities, title issues and other factors.
It generally is not feasible to review in detail every individual property
included in an acquisition. Ordinarily, a review is focused on higher valued
properties. Further, even a detailed review of all properties and records may
not reveal existing or potential problems, nor will it permit us to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. We do not always inspect every well we acquire, and
environmental problems, such as groundwater contamination, are not necessarily
observable even when an inspection is performed. We cannot assure you that our
recent and/or future acquisition activity will not result in disappointing
results.
In addition, there is intense competition for acquisition opportunities
in our industry. Competition for acquisitions may increase the cost of, or
cause us to refrain from, completing acquisitions. Our strategy of completing
acquisitions is dependent upon, among other things, our ability to obtain debt
and equity financing and, in some cases, regulatory approvals. Our ability to
pursue our acquisition strategy may be hindered if we are not able to obtain
financing or regulatory approvals.
Acquisitions often pose integration risks and difficulties. In connection
with recent and future acquisitions, the process of integrating acquired
operations into our existing operations may result in unforeseen operating
difficulties and may require significant management attention and financial
resources that would otherwise be available for the ongoing development or
expansion of existing operations. Possible future acquisitions could result in
our incurring additional debt, contingent liabilities and expenses, all of
which could have a material adverse effect on our financial condition and
operating results.
We may not be able to obtain adequate financing to execute our operating
strategy.
We have historically addressed our short and long-term liquidity needs
through the use of cash flow provided by operating activities, the use of bank
credit facilities and the issuance of equity securities. Without adequate
financing, we may not be able to successfully execute our operating strategy.
We continue to examine the following alternative sources of capital:
- bank borrowings or the issuance of debt securities; and
- the issuance of common stock, preferred stock or other equity
securities.
16
The availability of these sources of capital will depend upon a number of
factors, some of which are beyond our control. These factors include general
economic and financial market conditions, oil and natural gas prices and our
market value and operating performance. We may be unable to execute our
operating strategy if we cannot obtain adequate capital.
We depend on key personnel.
We currently have only three employees that serve in senior management
roles, and the loss of any one of them could severely harm our business. In
particular, Roger A. Parker and John R. Wallace are responsible for the
operation of our oil and gas business and Kevin K. Nanke is our chief
financial officer. We do not have key man insurance on the lives of any of
these individuals. Furthermore, competition for experienced personnel is
intense. If we cannot retain our current personnel or attract additional
experienced personnel, our ability to compete could be adversely affected.
We may not be permitted to develop some of our offshore California properties
or, if we are permitted, the substantial cost to develop these properties
could result in a reduction of our interest in these properties or cause us to
incur penalties.
Certain of our offshore California undeveloped properties, in which we
have ownership interests ranging from 2.49% to 100.00%, are attributable to
our interests in four of our five federal units (plus one additional lease)
located offshore of California near Santa Barbara. These properties have a
cost basis of approximately $10.9 million. The development of these properties
is subject to extensive regulation and is currently the subject of litigation.
Pursuant to a ruling in California v. Norton, later affirmed by the Ninth
Circuit Court of Appeals, the U.S. Government was required to make a
consistency determination relating to the 1999 lease suspension requests under
a 1990 amendment to the Coastal Zone Management Act. In the event that there
is some future adverse ruling under the Coastal Zone Management Act that we
decide not to appeal or that we appeal without success, it is likely that some
or all of our interests in these leases would become impaired and written off
at that time. It is also possible that other events could occur during the
Coastal Zone Management Act review or appellate process that would cause our
interests in the leases to become impaired, and we will continuously evaluate
those factors as they occur.
In addition, the cost to develop these properties will be substantial.
The cost to develop all of these offshore California properties in which we
own an interest, including delineation wells, environmental mitigation,
development wells, fixed platforms, fixed platform facilities, pipelines and
power cables, onshore facilities and platform removal over the life of the
properties (assumed to be 38 years), is estimated to be in excess of $3
billion. Our share of such costs, based on our current ownership interest, is
estimated to be over $200 million. Operating expenses for the same properties
over the same period of time, including platform operating costs, well
maintenance and repair costs, oil, gas and water treating costs, lifting costs
and pipeline transportation costs, are estimated to be approximately $3.5
billion, with our share, based on our current ownership interest, estimated to
be approximately $300 million. There will be additional costs of a currently
undetermined amount to develop the Rocky Point Unit. Each working interest
owner will be required to pay its proportionate share of these costs based
upon the amount of the interest that it owns. If we are unable to fund our
share of these costs or otherwise cover them through farmouts or other
arrangements, then we could either forfeit our interest in certain wells or
properties or suffer other penalties in the form of delayed or reduced
revenues under our various unit operating agreements, which could impact the
ultimate realization of this investment. The estimates discussed above may
differ significantly from actual results.
17
You should not place undue reliance on reserve information because it is only
an estimate.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and cash flows from such reserves, including factors beyond
our control and the control of our independent reserve engineers, Ralph E.
Davis Associates, Inc. and Mannon Associates. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact manner. The accuracy of an estimate of
quantities of oil and gas reserves, or of cash flows attributable to such
reserves, is a function of the available data, assumptions regarding future
oil and gas prices, expenditures for future development and exploitation
activities, and engineering and geological interpretation and judgment.
Reserves and future cash flows may also be subject to material downward or
upward revisions based upon production history, development and exploitation
activities, oil and gas prices and regulatory changes. Actual future
production, revenue, taxes, development expenditures, operating expenses,
quantities of recoverable reserves and value of cash flows from those reserves
may vary significantly from our assumptions and estimates. In addition,
reserve engineers may make different estimates of reserves and cash flows
based on the same available data.
The estimated quantities of proved reserves and the discounted present
value of future net cash flows attributable to those reserves for the fiscal
years ended June 30, 2002, 2003 and 2004 included in our periodic reports
filed with the SEC were prepared by our reserve engineers in accordance with
the rules of the SEC, and are not intended to represent the fair market value
of such reserves. As required by the SEC, the estimated discounted present
value of future net cash flows from proved reserves is generally based on
prices and costs as of the date of the estimate, while actual future prices
and costs may be materially higher or lower. In addition, the 10% discount
factor, which the SEC requires to be used to calculate discounted future net
revenues for reporting purposes, is not necessarily the most appropriate
discount factor based on the cost of capital in effect from time to time and
risks associated with our business and the oil and gas industry in general.
We are exposed to additional risks through our drilling business.
We currently own a controlling interest in a drilling business. Our
operations through that entity will subject us to many additional hazards that
are inherent to the drilling business, including, for example, blowouts,
cratering, fires, explosions, loss of well control, loss of hole, damaged or
lost drill strings and damage or loss from inclement weather. No assurance can
be given that our insurance will be sufficient to protect us against liability
for all consequences of well disasters, personal injury, extensive fire damage
or damage to the environment. No assurance can be given that our drilling
business will be able to maintain adequate insurance in the future at rates it
considers reasonable or that any particular types of coverage will be
available. The occurrence of events, including any of the above-mentioned
risks and hazards, that are not fully insured could subject our drilling
business to significant liability. It is also possible that we might sustain
significant losses through the operation of the drilling business even if none
of such events occurs.
Hedging transactions may limit our potential gains.
In order to manage our exposure to price risks in the marketing of oil
and gas, we periodically enter into oil and gas price hedging arrangements,
typically costless collars. While intended to reduce the effects of volatile
oil and gas prices, such transactions, depending on the hedging instrument
used, may limit our potential gains if oil and gas prices were to rise
substantially over the price established by the hedge. In addition, such
transactions may expose us to the risk of financial loss in certain
circumstances, including instances in which:
18
- production is substantially less than expected;
- the counterparties to our futures contracts fail to perform
under the contracts; or
- a sudden, unexpected event materially impacts gas or oil prices.
We may not receive payment for a portion of our future production.
Our revenues are derived principally from uncollateralized sales to
customers in the oil and gas industry. The concentration of credit risk in a
single industry affects our overall exposure to credit risk because customers
may be similarly affected by changes in economic and other conditions. We do
not attempt to obtain credit protections such as letters of credit, guarantees
or prepayments from our purchasers. We are unable to predict, however, what
impact the financial difficulties of any of our purchasers may have on our
future results of operations and liquidity.
We have no long-term contracts to sell oil and gas.
We do not have any long-term supply or similar agreements with
governments or other authorities or entities for which we act as a producer.
We are therefore dependent upon our ability to sell oil and gas at the
prevailing wellhead market price. There can be no assurance that purchasers
will be available or that the prices they are willing to pay will remain
stable.
There is currently a shortage of available drilling rigs and equipment which
could cause us to experience higher costs and delays that could adversely
affect our operations.
Although equipment and supplies used in our business are usually
available from multiple sources, there is currently a general shortage of
drilling equipment and supplies. We believe that these shortages are likely to
intensify. The costs and delivery times of equipment and supplies are
substantially greater now than in prior periods and are currently escalating.
We have acquired a controlling interest in a drilling company to allow us to
have priority access to drilling rigs. We believe that our ownership interest
in the drilling company will allow us to have priority access to several large
drilling rigs. We are also attempting to establish arrangements with others to
assure adequate availability of certain other necessary drilling equipment and
supplies on satisfactory terms, but there can be no assurance that we will be
able to do so. Accordingly, there can be no assurance that we will not
experience shortages of, or material price increases in, drilling equipment
and supplies, including drill pipe, in the future. Any such shortages could
delay and adversely affect our ability to meet our drilling commitments.
The marketability of our production depends mostly upon the availability,
proximity and capacity of gas gathering systems, pipelines and processing
facilities, which are owned by third parties.
The marketability of our production depends upon the availability,
operation and capacity of gas gathering systems, pipelines and processing
facilities, which are owned by third parties. The unavailability or lack of
capacity of these systems and facilities could result in the shut-in of
producing wells or the delay or discontinuance of development plans for
properties. We currently own several wells that are capable of producing but
are currently shut-in pending the construction of gas gathering systems,
pipelines and processing facilities. United States federal, state and foreign
regulation of oil and gas production and transportation, tax and energy
policies, damage to or destruction of pipelines, general economic conditions
and changes in supply and demand could adversely affect our ability to produce
and market oil and natural gas. If market factors changed dramatically, the
financial impact on us could be substantial. The availability of markets and
the volatility of product prices are beyond our control and represent a
significant risk.
19
Our industry is highly competitive, making our results uncertain.
We operate in the highly competitive areas of oil and gas exploration,
development and production. We compete for the purchase of leases from the
U.S. government and from other oil and gas companies. These leases include
exploration prospects as well as properties with proved reserves. We face
competition in every aspect of our business, including, but not limited to:
- acquiring reserves and leases;
- obtaining goods, services and employees needed to operate and
manage our business;
- access to the capital necessary to drill wells and acquire
properties; and
- marketing oil and natural gas.
Competitors include multinational oil companies, independent production
companies and individual producers and operators. Many of our competitors have
greater financial, technological and other resources than we do.
New technologies may cause our current exploration and drilling methods to
become obsolete, resulting in an adverse effect on our production.
The oil and natural gas industry is subject to rapid and significant
advancements in technology, including the introduction of new products and
services using new technologies. As competitors use or develop new
technologies, we may be placed at a competitive disadvantage, and competitive
pressures may force us to implement new technologies at a substantial cost. In
addition, competitors may have greater financial, technical and personnel
resources that allow them to enjoy technological advantages and may in the
future allow them to implement new technologies before we can. We cannot be
certain that we will be able to implement technologies on a timely basis or at
a cost that is acceptable to us. One or more of the technologies that we
currently use or that we may implement in the future may become obsolete, and
we may be adversely affected.
Terrorist attacks aimed at our facilities could adversely affect our business.
The United States has been the target of terrorist attacks of
unprecedented scale. The U.S. government has issued warnings that U.S. energy
assets may be the future targets of terrorist organizations. These
developments have subjected our operations to increased risks. Any future
terrorist attack at our facilities, or those of our purchasers, could have a
material adverse effect on our business.
We may incur substantial costs to comply with the various U.S. federal, state
and local laws and regulations that affect our oil and gas operations.
Our oil and gas operations are subject to stringent U.S. federal, state
and local laws and regulations relating to the release or disposal of
materials into the environment or otherwise relating to environmental
protection or the oil and gas industry generally. Legislation affecting the
industry is under constant review for amendment or expansion, frequently
increasing our regulatory burden. Compliance with such laws and regulations
often increases our cost of doing business and, in turn, decreases our
profitability. Failure to comply with these laws and regulations may result in
the assessment of administrative, civil and criminal penalties, the incurrence
of investigatory or remedial obligations, or the imposition of injunctive
relief.
The environmental laws and regulations to which we are subject may:
20
- require applying for and receiving a permit before drilling
commences;
- restrict the types, quantities and concentration of substances
that can be released into the environment in connection with
drilling and production activities;
- limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas; and
- impose substantial liabilities for pollution resulting from our
operations.
Changes in environmental laws and regulations occur frequently, and any
changes that result in more stringent or costly waste handling, storage,
transport, disposal or cleanup requirements could require us to make
significant expenditures to maintain compliance, and may otherwise have a
material adverse effect on our earnings, results of operations, competitive
position or financial condition. Over the years, we have owned or leased
numerous properties for oil and gas activities upon which petroleum
hydrocarbons or other materials may have been released by us or by predecessor
property owners or lessees who were not under our control. Under applicable
environmental laws and regulations, including CERCLA, RCRA and analogous state
laws, we could be held strictly liable for the removal or remediation of
previously released materials or property contamination at such locations
regardless of whether we were responsible for the release or if our operations
were standard in the industry at the time they were performed.
Risks related to the Exchange Offer and the New Notes
If you do not properly tender your old notes, you will continue to hold
unregistered old notes and your ability to transfer old notes will be
adversely affected.
We will only issue new notes in exchange for old notes that you timely
and properly tender. Therefore, you should allow sufficient time to ensure
timely delivery of the old notes and carefully follow the instructions on how
to tender your old notes. Neither we nor the exchange agent are required to
tell you of any defects or irregularities with respect to your tender of the
old notes.
If you do not exchange your old notes for new notes pursuant to the
exchange offer, the old notes you hold will continue to be subject to the
existing transfer restrictions. In general, you may not offer or sell the old
notes except under an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not plan to
register old notes under the Securities Act. Further, if you continue to hold
any old notes after the exchange offer is consummated, you may not be able to
sell the old notes because there will be fewer old notes outstanding.
We may not be able to generate sufficient cash to service all of our
indebtedness, including the notes, and be forced to take other actions to
satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial and operating performance, which is
subject to prevailing economic and competitive conditions and to certain
financial, business and other factors beyond our control. We cannot assure you
that we will maintain a level of cash flows from operating activities
sufficient to permit us to pay the principal, premium, if any, and interest on
our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay capital expenditures,
sell assets or operations, seek additional capital or restructure or refinance
our indebtedness, including the notes. We cannot assure you that we would be
able to take any of these actions, that these actions would be successful and
permit us to meet our scheduled debt service obligations or that these actions
would be permitted under the terms of our existing or future debt agreements
including the senior credit facility and the indenture that will govern the
notes. In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other obligations. The
senior credit facility and the indenture that will govern the notes will
restrict our ability to dispose of assets and use the proceeds from the
disposition. We may not be able to consummate those dispositions or to obtain
the proceeds which we could realize from them and these proceeds may not be
adequate to meet any debt service obligations then due. See "Description of
the new notes."
21
If we cannot make scheduled payments on our debt, we will be in default
and, as a result:
- our debt holders could declare all outstanding principal and
interest to be due and payable;
- the lenders under our senior credit facility could terminate
their commitments to loan us money and foreclose against the
assets securing their borrowings; and
- we could be forced into bankruptcy or liquidation, which could
result in you losing your investment in the notes.
If we default on our obligations to pay our indebtedness we may not be able to
make payments on the new notes.
Any default under the agreements governing our indebtedness, including a
default under our senior credit facility that is not waived by the required
lenders, and the remedies sought by the holders of such indebtedness, could
render us unable to pay principal, premium, if any, and interest on the new
notes and substantially decrease the market value of the new notes. If we are
unable to generate sufficient cash flow and are otherwise unable to obtain
funds necessary to meet required payments of principal, premium, if any, and
interest on our indebtedness, or if we otherwise fail to comply with the
various covenants, including financial and operating covenants, in the
instruments governing our indebtedness (including covenants in our indenture
and our senior credit facility), we could be in default under the terms of the
agreements governing such indebtedness, including our senior credit facility
and our indenture. In the event of such default, the holders of such
indebtedness could elect to declare all the funds borrowed thereunder to be
due and payable, together with accrued and unpaid interest, the lenders under
our senior credit facility could elect to terminate their commitments
thereunder, cease making further loans and institute foreclosure proceedings
against our assets, and we could be forced into bankruptcy or liquidation. If
our operating performance declines, we may in the future need to obtain
waivers from the required lenders under our senior credit facility to avoid
being in default. If we breach our covenants under our senior credit facility
and seek a waiver, we may not be able to obtain a waiver from the required
lenders. If this occurs, we would be in default under our senior credit
facility, the lenders could exercise their rights, as described above, and we
could be forced into bankruptcy or liquidation. See "Description of other
indebtedness" and "Description of notes."
The new notes and the guarantees will be effectively subordinated to all of
our secured debt, and, if a default occurs, we may not have sufficient funds
to fulfill our obligations under the new notes and the guarantees.
The new notes are general senior unsecured obligations that rank equally
in right of payment with all of our existing and future unsecured and
unsubordinated indebtedness. The new notes will be effectively subordinated to
all our and our subsidiary guarantors' secured indebtedness to the extent of
the value of the assets securing that indebtedness. As of March 31, 2005, we
had approximately $27 million outstanding under our senior credit facility and
additional availability of approximately $33 million. All of those borrowings
are secured by substantially all of our assets and rank effectively senior to
the new notes and the guarantees. In addition, the indenture governing the new
notes will, subject to some limitations, permit us to incur additional secured
indebtedness and the new notes will be effectively junior to any additional
secured indebtedness we may incur.
22
In the event of our bankruptcy, liquidation, reorganization or other
winding up, our assets that secure our secured indebtedness will be available
to pay obligations on the new notes only after all secured indebtedness,
together with accrued interest, has been repaid in full from our assets.
Likewise, because our senior credit facility is a secured obligation, our
failure to comply with the terms of the senior credit facility would entitle
those lenders to declare all the funds borrowed thereunder, together with
accrued interest, immediately due and payable. If we were unable to repay such
indebtedness, the lenders could foreclose on substantially all of our assets
that serve as collateral. In this event, our secured lenders would be entitled
to be repaid in full from the proceeds of the liquidation of those assets
before those assets would be available for distribution to other creditors,
including holders of the new notes. Holders of the new notes will participate
in our remaining assets ratably with all holders of our unsecured indebtedness
that is deemed to be of the same class as the notes, and potentially with all
of our other general creditors. We advise you that there may not be sufficient
assets remaining to pay amounts due on any or all the new notes then
outstanding. The guarantees of the new notes will have a similar ranking with
respect to secured and unsecured senior indebtedness of the subsidiary
guarantors as the new notes do with respect to our secured and unsecured
senior indebtedness, as well as with respect to any unsecured obligations
expressly subordinated in right of payment to the guarantees.
The notes will be structurally subordinated to all indebtedness and other
liabilities of our existing and future subsidiaries that are not guarantors of
the notes.
You will not have any claim as a creditor against Amber Resources Company
of Colorado ("Amber"), our subsidiary that is not a guarantor of the new notes
or against any of our future subsidiaries that do not become guarantors of the
new notes. Indebtedness and other liabilities, including trade payables,
whether secured or unsecured, of those subsidiaries will be effectively senior
to your claims against those subsidiaries. For the fiscal year ended June 30,
2004 and the nine months ended March 31, 2005, our non-guarantor subsidiary
represented none of our total revenue and a minimal amount of our total
operating expense. In addition, the indenture governing the notes will,
subject to some limitations, permit our existing or future non-guarantor
subsidiaries to incur additional indebtedness and will not contain any
limitation on the amount of other liabilities, such as trade payables, that
may be incurred by these subsidiaries.
We may not be able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, we
will be required to offer to repurchase all outstanding notes at 101% of their
principal amount plus accrued and unpaid interest. We may not be able to
repurchase the new notes upon a change of control because we may not have
sufficient funds. Further, we may be contractually restricted under the terms
of our senior credit facility or other future senior indebtedness from
repurchasing all of the notes tendered by holders upon a change of control.
Accordingly, we may not be able to satisfy our obligations to purchase your
notes unless we are able to refinance or obtain waivers under our senior
credit facility. Our failure to repurchase the new notes upon a change of
control would cause a default under the indenture and a cross-default under
the senior credit facility. Our senior credit facility also provides that a
change of control, as defined in such agreement, will be a default that
permits lenders to accelerate the maturity of borrowings thereunder and, if
such debt is not paid, to enforce security interests in the collateral
securing such debt, thereby limiting our ability to raise cash to purchase the
notes, and reducing the practical benefit of the offer-to-purchase provisions
to the holders of the new notes. Any of our future debt agreements may contain
similar provisions. In addition, the change of control provisions in the
indenture may not protect you from certain important corporate events, such as
a leveraged recapitalization (which would increase the level of our
indebtedness), reorganization, restructuring, merger or other similar
transaction, unless such transaction constitutes a "Change of Control" under
the indenture. Such a transaction may not involve a change in voting power or
beneficial ownership or, even if it does, may not involve a change that
constitutes a "Change of Control" as defined in the indenture that would
trigger our obligation to repurchase the notes. Therefore, if an event occurs
that does not constitute a "Change of Control" as defined in the indenture, we
will not be required to make an offer to repurchase the notes and you may be
required to continue to hold your notes despite the event. See "Description of
other indebtedness" and "Description of notes-Change of control."
23
Despite current indebtedness levels, we may still be able to incur
substantially more debt. This could further exacerbate the risks described
above.
We and our subsidiary guarantors may be able to incur substantial
additional indebtedness in the future. The terms of the indenture do not fully
prohibit us or our subsidiary guarantors from doing so. If we incur any
additional indebtedness, including trade payables, that ranks equally with the
notes, the holders of that debt will be entitled to share ratably with you in
any proceeds distributed in connection with any insolvency, liquidation,
reorganization, dissolution or other winding-up of us. This may have the
effect of reducing the amount of proceeds paid to you. Additionally, as of
March 31, 2005, we had approximately $27 million outstanding under our senior
credit facility and additional availability of approximately $33 million. All
of those borrowings are secured by substantially all of our assets and would
rank effectively senior to the new notes and the guarantees. If new debt is
added to our current debt levels, the related risks that we and our subsidiary
guarantors now face could intensify. The subsidiaries that guarantee the new
notes are also guarantors under our senior credit facility. See "Description
of notes" and "Description of other indebtedness."
You may find it difficult to sell your new notes.
You may find it difficult to sell your new notes because an active
trading market for the new notes may not develop. There is no existing trading
market for the new notes. We do not know the extent to which investor interest
will lead to the development of a trading market or how liquid that market
might be. As a result, the market price of the new notes could be adversely
affected.
Federal and state fraudulent transfer laws may permit a court to void the new
notes and the guarantees and, if that occurs, you may not receive any payments
on the new notes.
The issuance of the new notes and the guarantees may be subject to review
under federal and state fraudulent transfer and conveyance statutes. While the
relevant laws may vary from state to state, under such laws the payment of
consideration will be a fraudulent conveyance if (1) we paid the consideration
with the intent of hindering, delaying or defrauding creditors or (2) we or
any of our subsidiary guarantors, as applicable, received less than reasonably
equivalent value or fair consideration in return for issuing either the new
notes or a guarantee and, in the case of (2) only, one of the following is
also true:
- we or any of our subsidiary guarantors were or was insolvent
or rendered insolvent by reason of the incurrence of the
indebtedness; or
- payment of the consideration left us or any of our subsidiary
guarantors with an unreasonably small amount of capital to
carry on the business; or
24
- we or any of our subsidiary guarantors intended to, or believed
that we or it would, incur debts beyond our or its ability to
pay as they mature.
If a court were to find that the issuance of the new notes or a guarantee
was a fraudulent conveyance, the court could void the payment obligations
under the new notes or such guarantee or subordinate the new notes or such
guarantee to presently existing and future indebtedness of ours or such
guarantor, or require the holders of the new notes to repay any amounts
received with respect to the new notes or such guarantee. In the event of a
finding that a fraudulent conveyance occurred, you may not receive any
repayment on the new notes. Further, the voidance of the new notes could
result in an event of default with respect to our other debt and that of our
subsidiaries that could result in acceleration of such debt.
Generally, an entity would be considered insolvent if at the time it
incurred indebtedness:
- the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all its assets; or
- the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on
its existing debts liabilities, including contingent liabilities,
as they become absolute and mature; or
- it could not pay its debts as they become due.
We cannot be certain as to the standards a court would use to determine
whether or not we or the subsidiary guarantors were solvent at the relevant
time, or regardless of the standard that a court uses, that the issuance of
the new notes and the guarantees would not be subordinated to our or any
guarantor's other debt.
If the guarantees were legally challenged, any guarantee could also be
subject to the claim that, since the guarantee was incurred for our benefit,
and only indirectly for the benefit of the guarantor, the obligations of the
applicable guarantor were incurred for less than fair consideration. A court
could thus void the obligations under the guarantees, subordinate them to the
applicable guarantor's other debt or take other action detrimental to the
holders of the new notes.
25
EXCHANGE OFFER
We sold the old notes on March 15, 2005, pursuant to a purchase agreement
dated March 9, 2005, by and among us and the initial purchasers named therein.
The old notes were subsequently offered by the initial purchasers to qualified
institutional buyers pursuant to Rule 144A under the Securities Act and
outside the United States to persons other than U.S. persons in reliance on
Regulation S under the Securities Act.
Purpose and Effect of the Exchange Offer
In connection with the issuance of the old notes, we entered into a
registration rights agreement under which we agreed to:
* file a registration statement with the Securities and Exchange
Commission with respect to a registered offer to exchange the old
notes for new notes of ours having terms substantially identical
in all material respects to the old notes except with respect to
transfer restrictions;
* to cause the registration statement to be declared effective
under the Securities Act within 180 days after the issue date
of the old notes;
* use our reasonable best efforts to consummate the exchange offer
within 30 days after the effective date of the registration
statement;
* keep the exchange offer open for not less than 20 business
days after the date notice of the exchange offer is mailed to the
holders of the old notes; and
* to file a shelf registration for the resale of the old notes if
we cannot consummate the exchange offer within the time period
listed above and certain other circumstances described in this
prospectus.
For each old note tendered to us pursuant to the exchange offer, we will
issue to the holder of such old note a new note having a principal amount
equal to that of the surrendered old note. Interest on each new note will
accrue from the last date upon which we paid interest on the old note, unless
no interest has been paid on the old note, in which case, interest shall be
paid from the original issuance date of the old note.
Under existing interpretations of the staff of the Securities and
Exchange Commission issued to third parties, 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 our affiliate, as such terms are interpreted by the
Securities and Exchange Commission; 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 staff of the
Securities and Exchange Commission has taken the position in interpretations
issued to third parties that 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 the registration statement covering the new notes.
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."
26
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 the
registration statement in connection with the resale of the 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
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 our "affiliate," 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:
* the Company and the Guarantors determine that registration of the
exchange offer is not available or may not be completed as soon
as practicable after the last exchange date because it would
violate any applicable law or applicable interpretations of
the staff of the Securities and Exchange Commission;
* for any other reason the exchange offer is not consummated within
210 days after the issue date of the old notes; or
* any initial purchaser so requests in connection with any offer
or sale of the old notes;
then we will, at our cost, use our reasonable best efforts to file and use our
reasonable best efforts to have declared effective a shelf registration
statement covering resales of the old notes as soon as practicable after such
determination, date or request.
We will use our reasonable best efforts to keep the shelf registration
statement effective until two years after the issue date of the old notes,
subject to certain exceptions. We will, if we file a shelf registration
statement, 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 will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the registration rights agreement which are applicable to
such holder (including certain indemnification obligations).
In the event that either the exchange offer is not completed or the shelf
registration statement, if required, is not declared effective on or prior to
September 11, 2005, the interest rate on the old notes will be increased by
1.00% per annum until the exchange offer is completed or the shelf
registration statement, if required hereby, is declared effective by the SEC
or the old notes become freely tradable under the Securities Act.
If the shelf registration statement, if required hereby, has been
declared effective and thereafter either ceases to be effective or the
prospectus contained therein ceases to be usable at any time prior to the date
on which the old notes become freely tradable under the Securities Act or such
earlier period that will terminate when all of the old notes have been sold
pursuant to the shelf registration statement, and such failure to remain
effective or usable exists for more than 30 days (whether or not consecutive)
in any 12-month period, then the interest rate on the old notes will be
increased by 1.00% per annum commencing on the 31st day in such 12-month
period and ending on such date that the shelf registration statement has again
been declared effective or the prospectus again becomes usable.
27
Resale of New Notes
Based on no action letters of the staff of the Securities and Exchange
Commission issued to third parties, we believe that new notes may be offered
for resale, resold and otherwise transferred by you without further compliance
with the registration and prospectus delivery provisions of the Securities Act
if:
* you are not our "affiliate" within the meaning of Rule 405 under
the Securities Act;
* such new notes are acquired in the ordinary course of your
business; and
* you do not intend to participate in the distribution of such
new notes.
The staff of the Securities and Exchange Commission, however, has not
considered the exchange offer for the new notes in the context of a no action
letter, and the staff of the Securities and Exchange Commission may not make a
similar determination as in the no action letters issued to these third
parties.
If you tender in the exchange offer with the intention of participating
in any manner in a distribution of the new notes:
* you cannot rely on such interpretations by the Securities
and Exchange Commission staff issued to third parties; and
* you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a
secondary resale transaction.
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. This registration
statement should contain the selling security holder's information required by
Item 507 of Regulation S-K under the Securities Act. This prospectus may be
used for an offer to resell, resale or other retransfer of new notes only as
specifically described in this prospectus. Only broker-dealers that acquired
the old 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.
Terms of the Exchange Offer
Subject to the terms and conditions described in this prospectus and in
the letter of transmittal, we will accept for exchange any old notes properly
tendered and not withdrawn prior to the expiration date. We will issue new
notes in principal amount equal to the principal amount of old notes
surrendered under the exchange offer. Old notes may be tendered only for new
notes and only in integral multiples of $1,000. The exchange offer is not
applicable to any of the previously issued notes.
The exchange offer is not conditioned upon any minimum aggregate
principal amount of old notes being tendered for exchange.
28
As of the date of this prospectus, $150 million aggregate principal
amount of the old notes is outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of old notes. There will
be no fixed record date for determining registered holders of old notes
entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement, the applicable requirements of the
Securities Act and the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission. Old notes that the
holders thereof do not tender for exchange in the exchange offer will remain
outstanding and continue to accrue interest. These old notes will be entitled
to the rights and benefits such holders have under the Indenture relating to
the old notes and the registration rights agreement.
We will be deemed to have accepted for exchange properly tendered old
notes when we have given oral or written notice of the acceptance to the
exchange agent and complied with the applicable provisions of the registration
rights agreement. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the new notes from us.
If you tender old notes in the exchange offer, you will not be required
to pay brokerage commissions or fees or, subject to the letter of transmittal,
transfer taxes with respect to the exchange of old notes. We will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with the exchange offer. It is important that you read the section
labeled "-Fees and Expenses" for more details regarding fees and expenses
incurred in the exchange offer.
We will return any old notes that we do not accept for exchange for any
reason without expense to their tendering holder promptly after the expiration
or termination of 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 such new notes. See "Plan of Distribution."
Expiration Date
The exchange offer will expire at 5:00 p.m., New York City time, on
September 26, 2005 unless, in our sole discretion, we extend it.
Extensions, Delays in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or various times, to extend
the period of time during which the exchange offer is open. We may delay
acceptance of any old notes by giving oral or written notice of such extension
to their holders if the exchange offer is so extended. During any such
extensions, all old notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange upon the expiration of the
extended exchange offer.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders
of old notes of the extension no later than 9:00 a.m., New York City time, on
the business day after the previously scheduled expiration date.
If any of the conditions described below under "-Conditions to the
Exchange Offer" have not been satisfied, we reserve the right, in our sole
discretion
29
* to delay accepting for exchange any old notes,
* to extend the exchange offer, or
* to terminate the exchange offer,
by giving oral or written notice of such delay, extension or termination to
the exchange agent. However, we may not delay acceptance for exchange of any
old notes after the expiration of the exchange offer. Subject to the terms of
the registration rights agreement, we also reserve the right to amend the
terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the registered holders
of old notes. If we amend the exchange offer in a manner that we determine to
constitute a material change, we will promptly disclose such amendment by
means of a prospectus supplement. The supplement will be distributed to the
registered holders of the old notes. Depending upon the significance of the
amendment and the manner of disclosure to the registered holders, we will
extend the exchange offer if the exchange offer would otherwise expire during
such period.
Conditions to the Exchange Offer
We will not be required to accept for exchange, or exchange any new notes
for, any old notes if 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 Securities and Exchange Commission.
Similarly, we may terminate the exchange offer as provided in this prospectus
before accepting old notes for exchange in the event of such a potential
violation.
In addition, 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 "-Purpose and Effect of the Exchange Offer," "-Procedures for Tendering"
and "Plan of Distribution" and such other representations as may be reasonably
necessary under applicable Securities and Exchange Commission rules,
regulations or staff interpretations to allow us to use an appropriate form to
register the new notes under the Securities Act.
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 to the exchange offer specified
above. 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.
These conditions are for our sole benefit, and we may assert them or
waive them in whole or in part at any time prior to or on the expiration of
the offer in our sole discretion. If we fail at any time to exercise any of
these rights, this failure will not mean that we have waived our rights. Each
such right will be deemed an ongoing right that we may assert at any time
prior to or on the expiration of the offer.
In addition, we will not accept for exchange any old notes tendered, and
will not issue new notes in exchange for any such old notes, if at such time
any stop order has been threatened or is in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the Indenture relating to the new notes under the Trust
Indenture Act of 1939.
30
Procedures for Tendering
How to tender generally
To participate in the exchange offer, you must properly tender your old
notes to the exchange agent as described below. We will only issue new notes
in exchange for old notes that you timely and properly tender. Therefore, you
should allow sufficient time to ensure timely delivery of the old notes, and
you should follow carefully the instructions on how to tender your old notes.
It is your responsibility to properly tender your old notes. We have the
right to waive any defects. However, we are not required to waive defects, and
neither we nor the exchange agent is required to notify you of defects in your
tender.
If you have any questions or need help in exchanging your old notes,
please call the exchange agent whose address and phone number are described in
the letter of transmittal.
All of the old notes were issued in book-entry form, and all of the old
notes are currently represented by a global certificates held by Cede & Co.
for the account of DTC. We have confirmed with DTC that the old notes may be
tendered using ATOP. The exchange agent will establish an account with DTC for
purposes of the exchange offer promptly after the commencement of the exchange
offer, and DTC participants may electronically transmit their acceptance of
the exchange offer by causing DTC to transfer their old notes to the exchange
agent using the ATOP procedures. In connection with the transfer, DTC will
send an "agent's message" to the exchange agent. The agent's message will
state that DTC has received instructions from the participant to tender old
notes and that the participant agrees to be bound by the terms of the letter
of transmittal.
By using the ATOP procedures to exchange old notes, you will not be
required to deliver a letter of transmittal to the exchange agent. However,
you will be bound by its terms just as if you had signed it.
There is no procedure for guaranteed late delivery of the old notes.
Determinations under the exchange offer
We will determine in our sole discretion all questions as to the
validity, form, eligibility, time of receipt, acceptance of tendered old notes
and withdrawal of tendered old notes. Our determinations will be final and
binding. We reserve the absolute right to reject any old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the rights 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, all defects or irregularities in connection with
tenders of old notes must be cured within such time as we shall determine.
Although we intend to notify holders of defects or irregularities with
respect to tenders of old notes, neither we, the exchange agent nor any other
person will incur any liability for failure to give such notification. Tenders
of old notes will not be deemed made until such defects or irregularities have
been cured or waived. Any old notes received by the exchange agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned to the tendering holder as soon as
practicable following the expiration date.
When we will issue new notes
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent timely
receives:
31
* a book-entry confirmation of such old notes into the
exchange agent's account at DTC; and
* a properly transmitted agent's message.
Return of old notes not accepted or exchanged
If we do not accept any tendered old notes for exchange or if old notes
are submitted for a greater principal amount than the holder desires to
exchange, the unaccepted or non-exchanged old notes will be returned without
expense to their tendering holder. Such non-exchanged old notes will be
credited to an account maintained with DTC. These actions will occur promptly
after the expiration or termination of the exchange offer.
Your representations to us
By 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
within the meaning of the Securities Act;
* 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, you acquired
those notes as a result of market-making activities or other
trading activities and you will deliver a prospectus, as
required by law, in connection with any resale of such new notes;
and
* you are not our "affiliate," as defined in Rule 405 of the
Securities Act or if you are our "affiliate" that you will
comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time prior to the expiration date. For a withdrawal to be
effective you must comply with the appropriate ATOP procedures. Any notice of
withdrawal must specify the name and number of the account at DTC to be
credited with withdrawn old notes and otherwise comply with the ATOP
procedures.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal. 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.
Any old notes that have been tendered for exchange but that are not
exchanged for any reason will be credited to an account maintained with DTC
for the old notes. This crediting will take place as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. You may
retender properly withdrawn old notes by following the procedures described
under "-Procedures for Tendering" above at any time on or prior to the
expiration date.
32
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, we may make additional
solicitation by telegraph, telephone or in person by our officers and regular
employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its
related reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer. They include:
* Securities and Exchange Commission registration fees;
* fees and expenses of the exchange agent and trustee;
* accounting and legal fees and printing costs; and
* related fees and expenses.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. The tendering holder, however, will be
required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if a transfer tax is imposed for any reason other than
the exchange of old notes under the exchange offer.
Consequences of Failure to Exchange
If you do not exchange new notes for your old notes under the exchange
offer, you will remain subject to the existing restrictions on transfer of the
old notes. In general, you may not offer or sell the old notes unless they are
registered under the Securities Act or unless the offer or sale is exempt from
the 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.
Accounting Treatment
We will record the new notes in our accounting records at the same
carrying value as the old notes. This carrying value is the aggregate
principal amount of the old notes, as reflected in our accounting records on
the date of exchange. Accordingly, we will not recognize any gain or loss for
accounting purposes in connection with the exchange offer. The expenses of the
exchange offer will be amortized over the term of the new notes.
Other
Participation in the exchange offer is voluntary, and you should
carefully consider whether to accept. You are urged to consult your financial
and tax advisors in making your own decision on what action to take.
33
We may in the future seek to acquire untendered old notes in open market
or privately negotiated transactions, through subsequent exchange offers or
otherwise. 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 of any untendered old notes.
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."
34
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the new notes in the exchange offer. In consideration for issuing
the new notes as contemplated by this prospectus, we will receive old notes in
a like principal amount. The form and terms of the new notes are identical in
all respects to the form and terms of the old notes, except the offer and
exchange of the new notes have been registered under the Securities Act and
the new notes will not have restrictions on transfer, registration rights or
provisions for additional cash interest. Old notes surrendered in exchange for
the new notes will be retired and cancelled and will not be reissued.
Accordingly, the issuance of the new notes will not result in any increase in
our outstanding indebtedness.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2005.
This table should be read in conjunction with our consolidated financial
statements and related notes incorporated by reference in this prospectus.
March 31, 2005
(Dollars in thousands)
Cash and cash equivalents $ 7,850
Debt:
Senior credit facility 27,000
Other debt, net 374
Senior notes due 2015, net (1) 149,253
--------
Total debt $176,627
--------
Stockholders' equity:
Common stock, $0.01 par value, 300,000,000
shares authorized; 41,488,000 shares issued
and outstanding 415
Additional paid-in capital 234,111
Accumulated other comprehensive income (loss) (8,962)
Unearned compensation (977)
Accumulated deficit (8,846)
--------
Total stockholders' equity 215,741
--------
Total capitalization $392,368
--------
____________________
(1) The $150 million aggregate principal amount of senior notes was issued at
a discount of $750,000, which will be amortized over the ten year life of the
notes.
35
DESCRIPTION OF THE NEW NOTES
The form and terms of the new notes are the same as the form and terms of
the old notes, except that the offer and exchange of the new notes have been
registered under the Securities Act, and the new notes will not bear legends
restricting the transfer thereof, will not be entitled to registration rights
under the registration rights agreement, and will not contain provisions
relating to additional interest. Delta Petroleum Corporation will issue the
new notes under an Indenture among itself, the Subsidiary Guarantors and U.S.
Bank National Association. The terms of the new notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939.
Certain terms used in this description are defined under the subheading
"-Certain Definitions." In this description, the words "the Company," "we,"
"our" and "us" refer only to Delta Petroleum Corporation, and any successor
obligor on the notes, and not to any of its subsidiaries. As used in this
section, the term "notes" refers to both old notes and new notes.
The previously issued notes, the old notes, the new notes and any
additional notes issued from time to time in accordance with the terms of the
Indenture will constitute a single class of debt securities under the
Indenture. If the exchange offer is consummated, holders of old notes who do
not exchange new notes for their old notes will vote together with holders of
the previously issued notes, the new notes and, if applicable, any holders of
additional notes for all relevant purposes under the Indenture. Accordingly,
in determining whether the required holders have given any notice, consent or
waiver or taken any other action permitted under the Indenture, any old notes
that remain outstanding after the exchange offer will be aggregated with the
previously issued notes, the new notes and, if applicable, any additional
notes, and the holders of the previously issued notes, the old notes, the new
notes and the additional notes will vote together as a single class. All
references in this prospectus to specified percentages in aggregate principal
amount of the notes that are outstanding means, at any time after the exchange
is consummated, the percentage in aggregate principal amount of the previously
issued notes, the old notes, the new notes and the additional notes then
outstanding.
The following description is a summary of the provisions of the Indenture
that we believe to be material and of interest to you and does not restate
that agreement in its entirety. We encourage you to read the Indenture because
that agreement, and not this description, will define your rights as a holder
of the new notes. We have filed a copy of the Indenture as an exhibit to the
registration statement on Form S-4 (Reg. No. 333-127390) filed with the
Securities Exchange Commission on August 10, 2005.
General
The Notes. The Notes:
* are general unsecured, senior obligations of the Company;
* are limited to an aggregate principal amount of $150.0 million,
subject to our ability to issue Additional Notes;
* mature on April 1, 2015;
* will be issued in denominations of $1,000 and integral
multiples of $1,000;
* will be represented by one or more registered Notes in global
form, but in certain circumstances may be represented by Notes in
definitive form. See "Book-entry, delivery and form;"
* rank equally in right of payment to any future senior
Indebtedness of the Company, without giving effect to
collateral arrangements;
36
* are unconditionally guaranteed on a senior basis by Piper
Petroleum Company, Delta Exploration Company, Inc., and Castle
Texas Exploration Limited Partnership, representing each
wholly-owned subsidiary of the Company. See "Subsidiary
guarantees"; and
* are expected to be eligible for trading in the PORTAL market.
Interest. Interest on the Notes will compound semi-annually and will:
* accrue at the rate of 7% per annum;
* accrue from the date of original issuance or, if interest
has already been paid, from the most recent interest payment date;
* be payable in cash semi-annually in arrears on April 1 and
October 1, commencing on October 1, 2005;
* be payable to the holders of record on the March 15 and
September 15 immediately preceding the related interest
payment dates; and
* be computed on the basis of a 360-day year comprised of
twelve 30-day months.
We also will pay additional interest to holders of the Notes if we fail to
complete the Exchange Offer described in the Registration Rights Agreement
within 180 days or if certain other conditions contained in the Registration
Rights Agreement are not satisfied.
Payments on the notes; paying agent and registrar
We will pay principal of, premium, if any, and interest on the Notes at the
office or agency designated by the Company in the Borough of Manhattan, The
City of New York, except that we may, at our option, pay interest on the Notes
by check mailed to holders of the Notes at their registered address as it
appears in the Registrar's books. We have initially designated the corporate
trust office of the Trustee in New York, New York to act as our Paying Agent
and Registrar. We may, however, change the Paying Agent or Registrar without
prior notice to the holders of the Notes, and the Company or any of its
Restricted Subsidiaries may act as Paying Agent or Registrar.
We will pay principal of, premium, if any, and interest on, Notes in global
form registered in the name of or held by The Depository Trust Company or its
nominee in immediately available funds to The Depository Trust Company or its
nominee, as the case may be, as the registered holder of such global Note.
Transfer and exchange
A holder may transfer or exchange Notes in accordance with the Indenture. The
Registrar and the Trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents. No service charge will be
imposed by the Company, the Trustee or the Registrar for any registration of
transfer or exchange of Notes, but the Company may require a holder to pay a
sum sufficient to cover any transfer tax or other governmental taxes and fees
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Note selected for redemption. Also, the Company is
not required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed. The registered holder of a Note will be
treated as the owner of it for all purposes.
37
Optional redemption
Except as described below, the Notes are not redeemable until April 1, 2010.
On and after April 1, 2010, the Company may redeem all or, from time to time,
a part of the Notes upon not less than 30 nor more than 60 days' notice, at
the following redemption prices (expressed as a percentage of principal
amount) plus accrued and unpaid interest on the Notes, if any, to the
applicable redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the twelve-month period beginning on April 1 of the
years indicated below:
Year Percentage
2010 103.500%
2011 102.333%
2012 101.167%
2013 and thereafter 100.000%
Prior to April 1, 2008 the Company may on any one or more occasions redeem up
to 35% of the original principal amount of the Notes with the Net Cash
Proceeds of one or more Equity Offerings at a redemption price of 107.000% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided that
(1) there is a Public Market at the time of such redemption;
(2) at least 65% of the original principal amount of the Notes remains
outstanding after each such redemption; and
(3) the redemption occurs within 60 days after the closing of such Equity
Offering.
If the optional redemption date is on or after an interest record date and on
or before the related interest payment date, the accrued and unpaid interest,
if any, will be paid to the Person in whose name the Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders whose Notes will be subject to redemption by the Company.
In addition, the Notes may be redeemed, in whole or in part, at any time prior
to April 1, 2010 at the option of the Company upon not less than 30 nor more
than 60 days' prior notice mailed by first-class mail to each holder of Notes
at its registered address, at a redemption price equal to 100% of the
principal amount of the Notes redeemed plus the Applicable Premium as of, and
accrued and unpaid interest to, the applicable redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date).
"Applicable Premium" means, with respect to any Note on any applicable
redemption date, the greater of:
(1) 1.0% of the then outstanding principal amount of such Note; and
(2) the excess of:
38
(a) the present value at such redemption date of (i) the redemption
price of such note at April 1, 2010 (such redemption price being set forth in
the table appearing above under the caption "Optional redemption") plus (ii)
all required interest payments due on such Note through April 1, 2010,
computed using a discount rate equal to the Treasury Rate plus 50 basis points
over
(b) the then outstanding principal amount of such Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
redemption date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the redemption date to April 1, 2010; provided, however, that if
the period from the redemption date to April 1, 2010 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such
yields are given, except that if the period from the redemption date to April
1, 2010 is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed, then on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion will deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note will state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note.
The Company is not required to make mandatory redemption payments or sinking
fund payments with respect to the Notes.
Ranking
The Notes will be general unsecured obligations of the Company that rank
senior in right of payment to all existing and future Indebtedness that is
expressly subordinated in right of payment to the Notes. The Notes will rank
equally in right of payment with all existing and future liabilities of the
Company that are not so subordinated and will be effectively subordinated to
all of our secured Indebtedness and liabilities of our Subsidiaries that do
not guarantee the Notes. In the event of bankruptcy, liquidation,
reorganization or other winding up of the Company or its Subsidiary Guarantors
or upon a default in payment with respect to, or the acceleration of, any
Indebtedness under the Senior Secured Credit Agreement or other secured
Indebtedness, the assets of the Company and its Subsidiary Guarantors that
secure secured Indebtedness will be available to pay obligations on the Notes
and the Subsidiary Guarantees only after all Indebtedness under such Credit
Facility and other secured Indebtedness has been repaid in full from such
assets. We advise you that there may not be sufficient assets remaining to pay
amounts due on any or all the Notes and the Subsidiary Guarantees then
outstanding.
39
As of March 31, 2005:
* we and our subsidiary guarantors had approximately $182.6
million of total indebtedness;
* approximately $27.0 million constituted secured indebtedness
and we have additional availability under the senior credit
facility available to us of $33.0 million to which the notes
would be effectively subordinated; and
* our non-guarantor subsidiary had total liabilities of $1.2
million (including trade payables but excluding inter-company
liabilities), that would be structurally senior to the notes
and Big Dog and Shark had approximately $5.4 million of
total assets (including trade payables but excluding
inter-company liabilities), that would be structurally senior
to the notes.
Subsidiary guarantees
The Subsidiary Guarantors will, jointly and severally, unconditionally
guarantee on a senior basis the Company's obligations under the Notes and all
obligations under the Indenture. Such Subsidiary Guarantors will agree to pay,
in addition to the amount stated above, any and all costs and expenses
(including reasonable counsel fees and expenses) Incurred by the Trustee or
the holders in enforcing any rights under the Subsidiary Guarantees. The
obligations of Subsidiary Guarantors under the Subsidiary Guarantees will rank
equally in right of payment with other Indebtedness of such Subsidiary
Guarantor, except to the extent such other Indebtedness is expressly
subordinate to the obligations arising under the Subsidiary Guarantee.
As of March 31, 2005, outstanding Indebtedness of Subsidiary Guarantors was
approximately $23.0 million, none of which would have been secured. Although
the Indenture will limit the amount of indebtedness that Restricted
Subsidiaries may Incur, such indebtedness may be substantial. The obligations
of each Subsidiary Guarantor under its Subsidiary Guarantee will be limited as
necessary to prevent that Subsidiary Guarantee from constituting a fraudulent
conveyance or fraudulent transfer under applicable law.
In the event a Subsidiary Guarantor is sold or disposed of (whether by merger,
consolidation, the sale of its Capital Stock or the sale of all or
substantially all of its assets (other than by lease)) and whether or not the
Subsidiary Guarantor is the surviving corporation in such transaction to a
Person which is not the Company or a Restricted Subsidiary of the Company,
such Subsidiary Guarantor will be released from its obligations under its
Subsidiary Guarantee if:
(1) the sale or other disposition is in compliance with the Indenture,
including the covenants "Certain covenants Limitation on sales of assets and
Subsidiary stock" and "Certain covenants Limitation on sales of capital stock
of Restricted Subsidiaries;" and
(2) all the obligations of such Subsidiary Guarantor under all Credit
Facilities and related documentation and any other agreements relating to any
other indebtedness of the Company or its Restricted Subsidiaries terminate
upon consummation of such transaction.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture, its Subsidiary Guarantee and the Registration Rights
Agreement if the Company designates such Subsidiary as an Unrestricted
Subsidiary and such designation complies with the other applicable provisions
of the Indenture.
40
Change of control
If a Change of Control occurs, unless the Company has exercised its right to
redeem all of the Notes as described under "Optional redemption," each holder
will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such holder's Notes at a
purchase price in cash equal to 101% of the principal amount of the Notes plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date).
Within 30 days following any Change of Control, unless the Company has
exercised its right to redeem all of the Notes as described under "Optional
redemption", the Company will mail a notice (the "Change of Control Offer") to
each holder, with a copy to the Trustee, stating:
(1) that a Change of Control has occurred and that such holder has the
right to require the Company to purchase such holder's Notes at a purchase
price in cash equal to 101% of the principal amount of such Notes plus accrued
and unpaid interest, if any, to the date of purchase (subject to the right of
holders of record on a record date to receive interest on the relevant
interest payment date) (the "Change of Control Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Change of Control
Payment Date"); and
(3) the procedures determined by the Company, consistent with the
Indenture, that a holder must follow in order to have its Notes repurchased.
On the Change of Control Payment Date, the Company will, to the extent lawful:
(1) accept for payment all Notes or portions of Notes (in integral
multiples of $1,000) properly tendered pursuant to the Change of Control
Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all Notes or portions of Notes so tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal amount
of Notes or portions of Notes being purchased by the Company.
The paying agent will promptly mail to each holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
holder a new Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof.
If the Change of Control Payment Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest, will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders who tender pursuant to the Change of Control Offer.
41
The Change of Control provisions described above will be applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders to require that the Company repurchase or
redeem the Notes in the event of a takeover, recapitalization or similar
transaction.
Prior to mailing a Change of Control Offer, and as a condition to such mailing
(i) the requisite holders of each issue of Indebtedness issued under an
indenture or other agreement that may be violated by such payment shall have
consented to such Change of Control Offer being made and waived the event of
default, if any, caused by the Change of Control or (ii) the Company will
repay all outstanding Indebtedness issued under an indenture or other
agreement that may be violated by a payment to the holders of Notes under a
Change of Control Offer or (iii) the Company must offer to repay all such
Indebtedness, and make payment to the holders of such Indebtedness that accept
such offer, and obtain waivers of any event of default from the remaining
holders of such Indebtedness. The Company covenants to effect such repayment
or obtain such consent within 30 days following any Change of Control, it
being a default of the Change of Control provisions of the Indenture if the
Company fails to comply with such covenant. A default under the Indenture will
result in a cross-default under the Senior Secured Credit Agreement.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described in the Indenture by virtue of the conflict.
The Company's ability to repurchase Notes pursuant to a Change of Control
Offer may be limited by a number of factors. The occurrence of any of the
events that constitute a Change of Control will constitute a default under the
Senior Secured Credit Agreement. In addition, certain events that may
constitute a change of control under the Senior Secured Credit Agreement and
cause a default under that agreement will not constitute a Change of Control
under the Indenture. Future Indebtedness of the Company and its Subsidiaries
may also contain prohibitions of certain events that would constitute a Change
of Control or require such Indebtedness to be repurchased upon a Change of
Control. Moreover, the exercise by the holders of their right to require the
Company to repurchase the Notes could cause a default under such Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
the holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. Even if sufficient
funds were otherwise available, the terms of the Senior Secured Credit
Agreement will, and future Indebtedness may, prohibit the Company's prepayment
or repurchase of Notes before their scheduled maturity. Consequently, if the
Company is not able to prepay the Indebtedness under the Senior Secured Credit
Facility and any such other Indebtedness containing similar restrictions or
obtain requisite consents, as described above, the Company will be unable to
fulfill its repurchase obligations if holders of Notes exercise their
repurchase rights following a Change of Control, resulting in a default under
the Indenture. A default under the Indenture may result in a cross-default
under the Senior Secured Credit Agreement.
42
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of
"Change of Control" includes a disposition of all or substantially all of the
property and assets of the Company and its Restricted Subsidiaries taken as a
whole to any Person. Although there is a limited body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. Accordingly, in certain circumstances there
may be a degree of uncertainty as to whether a particular transaction would
involve a disposition of "all or substantially all" of the property or assets
of a Person. As a result, it may be unclear as to whether a Change of Control
has occurred and whether a holder of Notes may require the Company to make an
offer to repurchase the Notes as described above. Prior to the occurrence of a
Change of Control, certain provisions under the Indenture relative to the
Company's obligation to make an offer to repurchase the Notes as a result of a
Change of Control may be waived or modified with the written consent of the
holders of a majority in principal amount of the Notes.
Certain covenants
Limitation on Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness (including Acquired Indebtedness); provided,
however, that the Company and the Subsidiary Guarantors may Incur Indebtedness
if on the date thereof:
(1) the Consolidated Coverage Ratio for the Company and its Restricted
Subsidiaries is at least 2.50 to 1.00; and
(2) no Default or Event of Default will have occurred or be continuing or
would occur as a consequence of Incurring the Indebtedness or transactions
relating to such Incurrence.
The first paragraph of this covenant will not prohibit the Incurrence of the
following Indebtedness:
(1) Indebtedness of the Company Incurred pursuant to a Credit Facility in
an aggregate amount up to the greater of (a) $125.0 million or (b) so long as
the Consolidated Coverage Ratio for the Company and its Restricted
Subsidiaries is at least 2.00 to 1.00 after giving effect to any such
Incurrence, 20.0% of Adjusted Consolidated Net Tangible Assets determined as
of the date of the Incurrence of such Indebtedness;
(2) Guarantees by the Subsidiary Guarantors of Indebtedness Incurred in
accordance with the provisions of the Indenture; provided that in the event
such Indebtedness that is being Guaranteed is a Subordinated Obligation or a
Guarantor Subordinated Obligation, then the related Guarantee shall be
subordinated in right of payment to the Subsidiary Guarantee;
(3) Indebtedness of the Company owing to and held by any Wholly-Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the
Company or any Wholly-Owned Subsidiary; provided, however,
(a) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash of
all obligations with respect to the Notes;
43
(b) if a Subsidiary Guarantor is the obligor on such Indebtedness and
the Company or a Subsidiary Guarantor is not the obligee, such Indebtedness is
subordinated in right of payment to the Subsidiary Guarantees of such
Subsidiary Guarantor; and
(c) (i) any subsequent issuance or transfer of Capital Stock or any
other event which results in any such Indebtedness being beneficially held by
a Person other than the Company or a Wholly-Owned Subsidiary of the Company;
and
(ii) any sale or other transfer of any such Indebtedness to a
Person other than the Company or a Wholly-Owned Subsidiary of the Company
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be;
(4) Indebtedness represented by (a) the Notes issued on the Issue Date,
the Subsidiary Guarantees and the exchange notes and exchange guarantees
issued in a registered exchange offer pursuant to the Registration Rights
Agreement, (b) any Indebtedness (other than the Indebtedness described in
clauses (1), (2), (3), (6), (8), (9) and (10)) outstanding on the Issue Date
and (c) any Refinancing Indebtedness Incurred in respect of any Indebtedness
described in this clause (4) or clause (5) or Incurred pursuant to the first
paragraph of this covenant;
(5) Indebtedness of a Subsidiary Guarantor Incurred and outstanding on
the date on which such Subsidiary Guarantor was acquired by the Company (other
than Indebtedness Incurred (a) to provide all or any portion of the funds
utilized to consummate the transaction or series of related transactions
pursuant to which such Subsidiary Guarantor became a Restricted Subsidiary or
was otherwise acquired by the Company or (b) otherwise in connection with, or
in contemplation of, such acquisition); provided, however, that at the time
such Restricted Subsidiary is acquired by the Company, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to the first
paragraph of this covenant after giving effect to the Incurrence of such
Indebtedness pursuant to this clause (5);
(6) Indebtedness under Currency Agreements, Commodity Agreements and
Interest Rate Agreements; provided, that such Agreements are entered into for
bona fide hedging purposes of the Company or its Restricted Subsidiaries (as
determined in good faith by the Board of Directors or senior management of the
Company) and, in the case of Currency Agreements or Commodity Agreements, such
Currency Agreements or Commodity Agreements are related to business
transactions of the Company or its Restricted Subsidiaries entered into in the
ordinary course of business and, in the case of Interest Rate Agreements, such
Interest Rate Agreements substantially correspond in terms of notional amount,
duration and interest rates, as applicable, to Indebtedness of the Company or
its Restricted Subsidiaries Incurred without violation of the Indenture;
(7) the Incurrence by the Company or any of its Subsidiary Guarantors of
Indebtedness represented by Capitalized Lease Obligations, mortgage financings
or purchase money obligations with respect to assets other than Capital Stock
or other Investments, in each case Incurred for the purpose of financing all
or any part of the purchase price or cost of construction or improvements of
property used in the business of the Company or such Subsidiary Guarantor, in
an aggregate principal amount not to exceed $10.0 million at any time
outstanding;
(8) Indebtedness Incurred in respect of workers' compensation claims,
self-insurance obligations, bid, reimbursement, performance, surety and
similar bonds and completion guarantees provided by the Company or a
Restricted Subsidiary in the ordinary course of business including supporting
Guarantees and letters of credit (in each case other than for an obligation
for money borrowed);
44
(9) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, Incurred or assumed in connection with the
disposition of any business, assets or Capital Stock of a Restricted
Subsidiary, provided that the maximum aggregate liability in respect of all
such Indebtedness shall at no time exceed the gross proceeds actually received
by the Company and its Restricted Subsidiaries in connection with such
disposition;
(10) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (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
five business days of Incurrence; and
(11) in addition to the items referred to in clauses (1) through (10)
above, Indebtedness of the Company and its Subsidiary Guarantors in an
aggregate outstanding principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(11) and then outstanding, will not exceed $20.0 million at any time
outstanding.
The Company will not Incur any Indebtedness under the preceding paragraph if
the proceeds thereof are used, directly or indirectly, to refinance any
Subordinated Obligations of the Company unless such Indebtedness will be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations. No Subsidiary Guarantor will Incur any indebtedness if the
proceeds thereof are used, directly or indirectly, to refinance any Guarantor
Subordinated Obligations of such Subsidiary Guarantor unless such Indebtedness
will be subordinated to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee to at least the same extent as such Guarantor
Subordinated Obligations. No Restricted Subsidiary may Incur any Indebtedness
if the proceeds are used to refinance Indebtedness of the Company.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness Incurred pursuant to and in compliance
with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the first and second paragraphs of this
covenant, the Company, in its sole discretion, will classify (and may later
reclassify) such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of such clauses;
(2) all Indebtedness outstanding on the date of the Indenture under the
Senior Secured Credit Agreement shall be deemed initially Incurred on the
Issue Date under clause (1) of the second paragraph of this covenant and not
clause (4) of the second paragraph of this covenant;
(3) Guarantees of, or obligations in respect of letters of credit
relating to, Indebtedness which is otherwise included in the determination of
a particular amount of Indebtedness shall not be included;
(4) if obligations in respect of letters of credit are Incurred pursuant
to a Credit Facility and are being treated as Incurred pursuant to clause (1)
of the second paragraph above and the letters of credit relate to other
Indebtedness, then such other Indebtedness shall not be included;
(5) the principal amount of any Disqualified Stock of the Company or a
Restricted Subsidiary, or Preferred Stock of a Restricted Subsidiary that is
not a Subsidiary Guarantor, will be equal to the greater of the maximum
mandatory redemption or repurchase price (not including, in either case, any
redemption or repurchase premium) or the liquidation preference thereof;
45
(6) Indebtedness permitted by this covenant need not be permitted solely
by reference to one provision permitting such Indebtedness but may be
permitted in part by one such provision and in part by one or more other
provisions of this covenant permitting such Indebtedness; and
(7) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock or
Disqualified Stock will not be deemed to be an Incurrence of Indebtedness for
purposes of this covenant. The amount of any Indebtedness outstanding as of
any date shall be (i) the accreted value thereof in the case of any
Indebtedness issued with original issue discount and (ii) the principal amount
or liquidation preference thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
In addition, the Company will not permit any of its Unrestricted Subsidiaries
to Incur any Indebtedness or issue any shares of Disqualified Stock, other
than Non-Recourse Debt. If at any time an Unrestricted Subsidiary becomes a
Restricted Subsidiary, any Indebtedness of such Subsidiary shall be deemed to
be Incurred by a Restricted Subsidiary as of such date (and, if such
Indebtedness is not permitted to be Incurred as of such date under this
"Limitation on Indebtedness" covenant, the Company shall be in Default of this
covenant).
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-denominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-denominated restriction shall be deemed not to have been exceeded so
long as the principal amount of such refinancing Indebtedness does not exceed
the principal amount of such Indebtedness being refinanced. Notwithstanding
any other provision of this covenant, the maximum amount of Indebtedness that
the Company may Incur pursuant to this covenant shall not be deemed to be
exceeded solely as a result of fluctuations in the exchange rate of
currencies. The principal amount of any Indebtedness Incurred to refinance
other Indebtedness, if Incurred in a different currency from the Indebtedness
being refinanced, shall be calculated based on the currency exchange rate
applicable to the currencies in which such Refinancing Indebtedness is
denominated that is in effect on the date of such refinancing.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries,
directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in respect
of its Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except:
46
(a) dividends or distributions payable in Capital Stock of the
Company (other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock of the Company; and
(b) dividends or distributions payable to the Company or a Restricted
Subsidiary (and if such Restricted Subsidiary is not a Wholly-Owned
Subsidiary, to its other holders of common Capital Stock on a pro rata basis);
(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of the Company or any direct or indirect parent of the Company held by
Persons other than the Company or a Restricted Subsidiary (other than in
exchange for Capital Stock of the Company (other than Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations or Guarantor Subordinated
Obligations (other than the purchase, repurchase, redemption, defeasance or
other acquisition or retirement of Subordinated Obligations or Guarantor
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of purchase, repurchase, redemption, defeasance or
other acquisition or retirement); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Restricted Investment referred to
in clauses (1) through (4) shall be referred to herein as a "Restricted
Payment"), if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(a) Default shall have occurred and be continuing (or would result
therefrom); or
(b) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to the first paragraph under the "Limitation on Indebtedness"
covenant after giving effect, on a pro forma basis, to such Restricted
Payment; or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would exceed
the sum of:
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from the beginning of the first fiscal quarter commencing
after the Issue Date to the end of the most recent fiscal quarter ending prior
to the date of such Restricted Payment for which financial statements are in
existence (or, in case such Consolidated Net Income is a deficit, minus 100%
of such deficit);
(ii) 100% of the aggregate Net Cash Proceeds received by the Company
from the issue or sale of its Capital Stock (other than Disqualified Stock) or
other capital contributions subsequent to the Issue Date (other than Net Cash
Proceeds received from an issuance or sale of such Capital Stock to a
Subsidiary of the Company or an employee stock ownership plan, option plan or
similar trust to the extent such sale to an employee stock ownership plan,
option plan or similar trust is financed by loans from or Guaranteed by the
Company or any Restricted Subsidiary unless such loans have been repaid with
cash on or prior to the date of determination);
47
(iii) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company) subsequent
to the Issue Date of any Indebtedness of the Company or its Restricted
Subsidiaries convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the
fair-market value of any other property, distributed by the Company upon such
conversion or exchange); and
(iv) the amount equal to the net reduction in Restricted Investments
made by the Company or any of its Restricted Subsidiaries in any Person
resulting from:
(A) repurchases or redemptions of such Restricted Investments
by such Person, proceeds realized upon the sale of such Restricted Investment
to an unaffiliated purchaser, repayments of loans or advances or other
transfers of assets (including by way of dividend or distribution) by such
Person to the Company or any Restricted Subsidiary; or
(B) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investment") 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, which amount in each case under
this clause (iv) was included in the calculation of the amount of Restricted
Payments; provided, however, that no amount will be included under this clause
(iv) to the extent it is already included in Consolidated Net Income.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement of Capital Stock, Disqualified Stock or Subordinated Obligations
of the Company or Guarantor Subordinated Obligations of any Subsidiary
Guarantor made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified
Stock and other than Capital Stock issued or sold to a Subsidiary or an
employee stock ownership plan or similar trust to the extent such sale to an
employee stock ownership plan or similar trust is financed by loans from or
Guaranteed by the Company or any Restricted Subsidiary unless such loans have
been repaid with cash on or prior to the date of determination); provided,
however, that (a) such purchase, repurchase, redemption, defeasance,
acquisition or retirement will be excluded in subsequent calculations of the
amount of Restricted Payments and (b) the Net Cash Proceeds from such sale of
Capital Stock will be excluded from clause (c)(ii) of the preceding paragraph;
(2) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement of Subordinated Obligations of the Company or Guarantor
Subordinated Obligations of any Subsidiary Guarantor made by exchange for, or
out of the proceeds of the substantially concurrent sale of, Subordinated
Obligations of the Company or any purchase, repurchase, redemption, defeasance
or other acquisition or retirement of Guarantor Subordinated Obligations made
by exchange for or out of the proceeds of the substantially concurrent sale of
Guarantor Subordinated Obligations that, in each case, is permitted to be
Incurred pursuant to the covenant described under " Limitation on
Indebtedness" and that in each case constitutes Refinancing Indebtedness;
provided, however, that such purchase, repurchase, redemption, defeasance,
acquisition or retirement will be excluded in subsequent calculations of the
amount of Restricted Payments;
48
(3) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement of Disqualified Stock of the Company or a Restricted Subsidiary
made by exchange for or out of the proceeds of the substantially concurrent
sale of Disqualified Stock of the Company or such Restricted Subsidiary, as
the case may be, that, in each case, is permitted to be Incurred pursuant to
the covenant described under " Limitation on Indebtedness" and that in each
case constitutes Refinancing Indebtedness; provided, however, that such
purchase, repurchase, redemption, defeasance, acquisition or retirement will
be excluded in subsequent calculations of the amount of Restricted Payments;
(4) so long as no Default or Event of Default has occurred and is
continuing, any purchase or redemption of Subordinated Obligations or
Guarantor Subordinated Obligations of a Subsidiary Guarantor from Net
Available Cash to the extent permitted under " Limitation on sales of assets
and Subsidiary stock" below; provided, however, that such purchase or
redemption will be excluded in subsequent calculations of the amount of
Restricted Payments;
(5) dividends paid within 60 days after the date of declaration if at
such date of declaration such dividend would have complied with this
provision; provided, however, that such dividends will be included in
subsequent calculations of the amount of Restricted Payments;
(6) so long as no Default or Event of Default has occurred and is
continuing,
(a) the purchase, redemption or other acquisition, cancellation or
retirement for value of Capital Stock, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Capital Stock of
the Company or any Restricted Subsidiary held by any existing or former
employees or management of the Company or any Subsidiary of the Company or
their assigns, estates or heirs, in each case in connection with the
repurchase provisions under employee stock option or stock purchase agreements
or other agreements to compensate management employees; provided that such
redemptions or repurchases pursuant to this clause will not exceed $1.0
million in the aggregate during any calendar year and $3.0 million in the
aggregate for all such redemptions and repurchases; provided, however, that
the amount of any such repurchase or redemption will be included in subsequent
calculations of the amount of Restricted Payments; and
(b) loans or advances to employees or directors of the Company or any
Subsidiary of the Company the proceeds of which are used to purchase Capital
Stock of the Company, in an aggregate amount not in excess of $1.0 million at
any one time outstanding; provided, however, that the Company and its
Subsidiaries will comply in all material respects with all applicable
provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations
promulgated in connection therewith in connection with such loans or advances;
provided, further, that the amount of such loans and advances will be included
in subsequent calculations of the amount of Restricted Payments;
(7) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of the Company issued in accordance with the
terms of the Indenture to the extent such dividends are included in the
definition of "Consolidated Interest Expense"; provided, however, that the
payment of such dividends will be excluded from the calculation of Restricted
Payments;
(8) repurchases of Capital Stock deemed to occur upon the exercise of
stock options, warrants or other convertible securities if such Capital Stock
represents a portion of the exercise price thereof; provided, however, that
such repurchases will be excluded from subsequent calculations of the amount
of Restricted Payments;
49
(9) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of any Subordinated Obligation (i) at a purchase price
not greater than 101% of the principal amount of such Subordinated Obligation
in the event of a Change of Control in accordance with provisions similar to
the "Change of control" provisions contained herein or (ii) at a purchase
price not greater than 100% of the principal amount thereof in accordance with
provisions similar to the " Limitation on sales of assets and Subsidiary
stock" covenant; provided that, prior to or simultaneously with such purchase,
repurchase, redemption, defeasance or other acquisition or retirement, the
Company has made the Change of Control Offer or Asset Disposition Offer, as
applicable, as provided with respect to the Notes and has completed the
repurchase or redemption of all Notes validly tendered for payment in
connection with such Change of Control Offer or Asset Disposition Offer;
provided, however, that such repurchases will be excluded from subsequent
calculations of the amount of Restricted Payments; and
(10) Restricted Payments in an amount not to exceed $5.0 million at any
one time outstanding; provided, however, that the amount of such Restricted
Payments will be included in subsequent calculations of the amount of
Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted
Payment. The fair market value of any cash Restricted Payment shall be its
face amount and the fair market value of any non-cash Restricted Payment shall
be determined conclusively by the Board of Directors of the Company acting in
good faith whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if
such fair market value is estimated in good faith by the Board of Directors of
the Company to exceed $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, Incur or suffer to exist any Lien (other
than Permitted Liens) upon any of its property or assets (including Capital
Stock of Restricted Subsidiaries), whether owned on the date of the Indenture
or acquired after that date, which Lien is securing any Indebtedness, unless
contemporaneously with the Incurrence of such Liens effective provision is
made to secure the Indebtedness due under the Indenture and the Notes or, in
respect of Liens on any Restricted Subsidiary's property or assets, any
Subsidiary Guarantee of such Restricted Subsidiary, equally and ratably with
(or prior to in the case of Liens with respect to Subordinated Obligations or
Guarantor Subordinated Obligations, as the case may be) the Indebtedness
secured by such Lien for so long as such Indebtedness is so secured.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale/Leaseback Transaction unless:
50
(1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale/Leaseback Transaction at least
equal to the fair market value (as evidenced by a resolution of the Board of
Directors of the Company) of the property subject to such transaction;
(2) the Company or such Restricted Subsidiary could have Incurred
Indebtedness in an amount equal to the Attributable Indebtedness in respect of
such Sale/Leaseback Transaction pursuant to the covenant described under "
Limitation on Indebtedness;"
(3) the Company or such Restricted Subsidiary would be permitted to
create a Lien on the property subject to such Sale/Leaseback Transaction
without securing the Notes by the covenant described under " Limitation on
Liens;" and
(4) the Sale/Leaseback Transaction is treated as an Asset Disposition and
all of the conditions of the Indenture described under " Limitation on sales
of assets and Subsidiary stock" (including the provisions concerning the
application of Net Available Cash) are satisfied with respect to such
Sale/Leaseback Transaction, treating all of the consideration received in such
Sale/Leaseback Transaction as Net Available Cash for purposes of such
covenant.
Limitation on restrictions on distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to the Company or any
Restricted Subsidiary (it being understood that the priority of any Preferred
Stock in receiving dividends or liquidating distributions prior to dividends
or liquidating distributions being paid on Common Stock shall not be deemed a
restriction on the ability to make distributions on Capital Stock);
(2) make any loans or advances to the Company or any Restricted
Subsidiary (it being understood that the subordination of loans or advances
made to the Company or any Restricted Subsidiary to other Indebtedness
Incurred by the Company or any Restricted Subsidiary shall not be deemed a
restriction on the ability to make loans or advances); or
(3) transfer any of its property or assets to the Company or any
Restricted Subsidiary.
51
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date, including, without limitation, the
Indenture and the Senior Secured Credit Agreement in effect on such date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Capital Stock or
Indebtedness Incurred by a Restricted Subsidiary on or before the date on
which such Restricted Subsidiary was acquired by the Company (other than
Capital Stock or Indebtedness Incurred as consideration in, or to provide all
or any portion of the funds utilized to consummate, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or in contemplation of
the transaction) and outstanding on such date provided, that any such
encumbrance or restriction shall not extend to any assets or property of the
Company or any other Restricted Subsidiary other than the assets and property
so acquired;
(iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refunding, replacement or
refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) of this paragraph or this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) of this paragraph
or this clause (iii); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any such
agreement are no less favorable in any material respect to the holders of the
Notes than the encumbrances and restrictions contained in such agreements
referred to in clauses (i) or (ii) of this paragraph on the Issue Date or the
date such Restricted Subsidiary became a Restricted Subsidiary, whichever is
applicable;
(iv) in the case of clause (3) of the first paragraph of this covenant,
any encumbrance or restriction:
(a) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, or the assignment or transfer of any such lease, license or
other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the Indenture securing Indebtedness of the Company or a
Restricted Subsidiary to the extent such encumbrances or restrictions restrict
the transfer of the property subject to such mortgages, pledges or other
security agreements; or
(c) pursuant to customary provisions restricting dispositions of
real property interests set forth in any reciprocal easement agreements of the
Company or any Restricted Subsidiary;
(v) purchase money obligations for property acquired in the ordinary
course of business and (b) Capitalized Lease Obligations permitted under the
Indenture, in each case, that impose encumbrances or restrictions of the
nature described in clause (3) of the first paragraph of this covenant on the
property so acquired;
(vi) any restriction with respect to a Restricted Subsidiary (or any of
its property or assets) imposed pursuant to an agreement entered into for the
direct or indirect sale or disposition of all or substantially all the Capital
Stock or assets of such Restricted Subsidiary (or the property or assets that
are subject to such restriction) pending the closing of such sale or
disposition;
52
(vii) customary encumbrances or restrictions imposed pursuant to any
agreement referred to in the definition of "Permitted Business Investment;"
(viii) net worth provisions in leases and other agreements entered into
by the Company or any Restricted Subsidiary in the ordinary course of
business; and
(ix) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order.
Limitation on sales of assets and Subsidiary stock
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Disposition at least equal to
the fair market value (such fair market value to be determined on the date of
contractually agreeing to such Asset Disposition), as determined in good faith
by the Board of Directors (including as to the value of all noncash
consideration), of the shares and assets subject to such Asset Disposition;
(2) at least 75% of the consideration from such Asset Disposition
received by the Company or such Restricted Subsidiary, as the case may be, is
in the form of cash or Cash Equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company or such Restricted Subsidiary, as the
case may be:
(a) first, to the extent the Company or any Restricted Subsidiary, as
the case may be, elects (or is required by the terms of any Indebtedness), to
prepay, repay or purchase Indebtedness of the Company (other than any
Disqualified Stock or Subordinated Obligations) or Indebtedness of a
Wholly-Owned Subsidiary (other than any Disqualified Stock or a Guarantor
Subordinated Obligation of a Wholly-Owned Subsidiary Guarantor) (in each case
other than Indebtedness owed to the Company or an Affiliate of the Company)
within 360 days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; provided, however, that, in connection
with any prepayment, repayment or purchase of Indebtedness pursuant to this
clause (a), the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased; and
(b) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (a), to the extent the Company or
such Restricted Subsidiary elects, to invest in Additional Assets within 360
days from the later of the date of such Asset Disposition or the receipt of
such Net Available Cash;
provided that pending the final application of any such Net Available Cash in
accordance with clauses (a) or (b) above, the Company and its Restricted
Subsidiaries may temporarily reduce Indebtedness or otherwise invest such Net
Available Cash in any manner not prohibited by the Indenture.
53
Any Net Available Cash from Asset Dispositions that is not applied or invested
as provided in the preceding paragraph will be deemed to constitute "Excess
Proceeds." On the 361st day after an Asset Disposition, if the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will be required
to make an offer ("Asset Disposition Offer") to all holders of Notes and to
the extent required by the terms of other Pari Passu Indebtedness, to all
holders of other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Pari Passu
Indebtedness with the proceeds from any Asset Disposition ("Pari Passu
Notes"), to purchase the maximum principal amount of Notes and any such Pari
Passu Notes to which the Asset Disposition Offer applies that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to
100% of the principal amount of the Notes and Pari Passu Notes plus accrued
and unpaid interest to the date of purchase, in accordance with the procedures
set forth in the Indenture or the agreements governing the Pari Passu Notes,
as applicable, in each case in integral multiples of $1,000. To the extent
that the aggregate amount of Notes and Pari Passu Notes so validly tendered
and not properly withdrawn pursuant to an Asset Disposition Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes, subject to the other covenants contained in the
Indenture. If the aggregate principal amount of Notes surrendered by holders
thereof and other Pari Passu Notes surrendered by holders or lenders,
collectively, exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis on the basis of the aggregate
principal amount of tendered Notes and Pari Passu Notes. Upon completion of
such Asset Disposition Offer, the amount of Excess Proceeds shall be reset at
zero.
The Asset Disposition Offer will remain open for a period of 20 Business Days
following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Disposition Offer Period"). No later
than five Business Days after the termination of the Asset Disposition Offer
Period (the "Asset Disposition Purchase Date"), the Company will purchase the
principal amount of Notes and Pari Passu Notes required to be purchased
pursuant to this covenant (the "Asset Disposition Offer Amount") or, if less
than the Asset Disposition Offer Amount has been so validly tendered, all
Notes and Pari Passu Notes validly tendered in response to the Asset
Disposition Offer.
If the Asset Disposition Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders who tender Notes pursuant to the Asset Disposition Offer.
On or before the Asset Disposition Purchase Date, the Company will, to the
extent lawful, accept for payment, on a pro rata basis to the extent
necessary, the Asset Disposition Offer Amount of Notes and Pari Passu Notes or
portions of Notes and Pari Passu Notes so validly tendered and not properly
withdrawn pursuant to the Asset Disposition Offer, or if less than the Asset
Disposition Offer Amount has been validly tendered and not properly withdrawn,
all Notes and Pari Passu Notes so validly tendered and not properly withdrawn,
in each case in integral multiples of $1,000. The Company will deliver to the
Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the terms of this
covenant and, in addition, the Company will deliver all certificates and notes
required, if any, by the agreements governing the Pari Passu Notes. The
Company or the Paying Agent, as the case may be, will promptly (but in any
case not later than five Business Days after the termination of the Asset
Disposition Offer Period) mail or deliver to each tendering holder of Notes or
holder or lender of Pari Passu Notes, as the case may be, an amount equal to
the purchase price of the Notes or Pari Passu Notes so validly tendered and
not properly withdrawn by such holder or lender, as the case may be, and
accepted by the Company for purchase, and the Company will promptly issue a
new Note, and the Trustee, upon delivery of an Officers' Certificate from the
Company, will authenticate and mail or deliver such new Note to such holder,
in a principal amount equal to any unpurchased portion of the Note
surrendered; provided that each such new Note will be in a principal amount of
$1,000 or an integral multiple of $1,000. In addition, the Company will take
any and all other actions required by the agreements governing the Pari Passu
Notes. Any Note not so accepted will be promptly mailed or delivered by the
Company to the holder thereof. The Company will publicly announce the results
of the Asset Disposition Offer on the Asset Disposition Purchase Date.
54
For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Indebtedness (other than
Subordinated Obligations or Disqualified Stock) of the Company or Indebtedness
of a Wholly-Owned Subsidiary (other than Guarantor Subordinated Obligations or
Disqualified Stock of any Wholly-Owned Subsidiary that is a Subsidiary
Guarantor) and the release of the Company or such Restricted Subsidiary from
all liability on such Indebtedness in connection with such Asset Disposition
(in which case the Company will, without further action, be deemed to have
applied such deemed cash to Indebtedness in accordance with clause (3)(a)
above); and
(2) securities, notes or other obligations received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash.
The Company will not, and will not permit any Restricted Subsidiary to, engage
in any Asset Swaps, unless:
(1) at the time of entering into such Asset Swap and immediately after
giving effect to such Asset Swap, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof;
(2) in the event such Asset Swap involves the transfer by the Company or
any Restricted Subsidiary of assets having an aggregate fair market value, as
determined by the Board of Directors of the Company in good faith, in excess
of $5.0 million, the terms of such Asset Swap have been approved by a majority
of the members of the Board of Directors of the Company; and
(3) in the event such Asset Swap involves the transfer by the Company or
any Restricted Subsidiary of assets having an aggregate fair market value, as
determined by the Board of Directors of the Company in good faith, in excess
of $15.0 million, the Company has received a written opinion from an
independent investment banking firm of nationally recognized standing that
such Asset Swap is fair to the Company or such Restricted Subsidiary, as the
case may be, from a financial point of view. The Company will comply, to the
extent applicable, with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with the repurchase
of Notes pursuant to the Indenture. To the extent that the provisions of any
securities laws or regulations conflict with provisions of this covenant, the
Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the Indenture by
virtue of any conflict.
55
Limitation on Affiliate Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or conduct any transaction (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction")
unless:
(1) the terms of such Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained in a comparable transaction at the time of such transaction
in arm's-length dealings with a Person who is not such an Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate
consideration in excess of $5.0 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the members of such Board having no personal
stake in such transaction, if any (and such majority or majorities, as the
case may be, determines that such Affiliate Transaction satisfies the criteria
in clause (1) above); and
(3) in the event such Affiliate Transaction involves an aggregate
consideration in excess of $15.0 million, the Company has received a written
opinion from an independent investment banking, accounting or appraisal firm
of nationally recognized standing that such Affiliate Transaction is not
materially less favorable 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.
The preceding paragraph will not apply to:
(1) any Restricted Payment (other than a Restricted Investment) permitted
to be made pursuant to the covenant described under " Limitation on Restricted
Payments;"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
agreements and other compensation arrangements, options to purchase Capital
Stock of the Company, restricted stock plans, long-term incentive plans, stock
appreciation rights plans, participation plans or similar employee benefits
plans and/or indemnity provided on behalf of officers and employees approved
by the Board of Directors;
(3) loans or advances to employees, officers or directors in the ordinary
course of business of the Company or any of its Restricted Subsidiaries but in
any event not to exceed $1.0 million in the aggregate outstanding at any one
time with respect to all loans or advances made since the Issue Date;
provided, however, that the Company and its Subsidiaries will comply in all
material respects with all applicable provisions of the Sarbanes-Oxley Act of
2002 and the rules and regulations promulgated in connection therewith in
connection with such loans or advances;
(4) any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries and Guarantees issued by the Company or a
Restricted Subsidiary for the benefit of the Company or a Restricted
Subsidiary, as the case may be, in accordance with "--Limitations on
Indebtedness;"
(5) the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, directors of the Company or any Restricted Subsidiary;
56
(6) the performance of obligations of the Company or any of its
Restricted Subsidiaries under the terms of any agreement to which the Company
or any of its Restricted Subsidiaries is a party as of or on the Issue Date
and identified on a schedule to the Indenture on the Issue Date, as these
agreements may be amended, modified, supplemented, extended or renewed from
time to time; provided, however, that any future amendment, modification,
supplement, extension or renewal entered into after the Issue Date will be
permitted to the extent that its terms are not more disadvantageous to the
holders of the Notes than the terms of the agreements in effect on the Issue
Date; and
(7) the provision of drilling services by Big Dog or a successor entity
to the Company or any of its Restricted Subsidiaries so long as the terms of
such Affiliate Transaction are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be obtained
in a comparable transaction at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate.
Limitation on sale of Capital Stock of Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
transfer, convey, sell, lease or otherwise dispose of any Voting Stock of any
Restricted Subsidiary or to issue any of the Voting Stock of a Restricted
Subsidiary (other than, if necessary, shares of its Voting Stock constituting
directors' qualifying shares) to any Person except:
(1) to the Company or a Wholly-Owned Restricted Subsidiary; or
(2) in compliance with the covenant described under " Limitation on sales
of assets and Subsidiary stock" and immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would continue to be a Restricted
Subsidiary.
Notwithstanding the preceding paragraph, the Company or any Restricted
Subsidiary may sell all the Voting Stock of a Restricted Subsidiary as long as
the Company complies with the terms of the covenant described under
"Limitation on sales of assets and Subsidiary stock."
SEC reports
Notwithstanding that the Company may not continue to be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Company will file with the SEC, and
make available to the Trustee and the registered holders of the Notes, the
annual reports and the information, documents and other reports (or copies of
such portions of any of the foregoing as the SEC may by rules and regulations
prescribe) that are specified in Sections 13 and 15(d) of the Exchange Act
within the time periods specified therein. In the event that the Company is
not permitted to file such reports, documents and information with the SEC
pursuant to the Exchange Act, the Company will nevertheless make available
such Exchange Act information to the Trustee and the holders of the Notes as
if the Company were subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act within the time periods specified therein. If the
Company has designated any of its Subsidiaries as Unrestricted Subsidiaries,
then the quarterly and annual financial information required by the preceding
paragraph shall include a reasonably detailed presentation, either on the face
of the financial statements or in the footnotes to the financial statements
and in Management's Discussion and Analysis of Results of Operations and
Financial Condition, of the financial condition and results of operations of
the Company and its Restricted Subsidiaries.
57
Merger and consolidation
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the laws of the
United States of America, any State of the United States or the District of
Columbia and the Successor Company (if not the Company) will expressly assume,
by supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as having
been Incurred by the Successor Company or such Subsidiary at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of Indebtedness
pursuant to the first paragraph of the "Limitation on Indebtedness" covenant;
(4) each Subsidiary Guarantor (unless it is the other party to the
transactions above, in which case clause (1) shall apply) shall have by
supplemental indenture confirmed that its Subsidiary Guarantee shall apply to
such Person's obligations in respect of the Indenture and the Notes and its
obligations under the Registration Rights Agreement shall continue to be in
effect; and
(5) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties
and assets of one or more Subsidiaries of the Company, which properties and
assets, if held by the Company instead of such Subsidiaries, would constitute
all or substantially all of the properties and assets of the Company on a
consolidated basis, shall be deemed to be the transfer of all or substantially
all of the properties and assets of the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in
the case of a lease of all or substantially all its assets, the predecessor
Company will not be released from the obligation to pay the principal of and
interest on the Notes.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve
"all or substantially all" of the property or assets of a Person.
Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (y) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction to realize tax benefits; provided that, in the case of a
Restricted Subsidiary that merges into the Company, the Company will not be
required to comply with the preceding clause (5).
58
In addition, the Company will not permit any Subsidiary Guarantor to
consolidate with or merge with or into any Person (other than another
Subsidiary Guarantor) and will not permit the conveyance transfer or lease of
substantially all of the assets of any Subsidiary Guarantor unless:
(1) (a) the resulting, surviving or transferee Person will be a
corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State of the
United States or the District of Columbia and such Person (if not such
Subsidiary Guarantor) will expressly assume, by supplemental indenture,
executed and delivered to the Trustee, all the obligations of such Subsidiary
Guarantor under its Subsidiary Guarantee; (b) immediately after giving effect
to such transaction (and treating any Indebtedness that becomes an obligation
of the resulting, surviving or transferee Person or any Restricted Subsidiary
as a result of such transaction as having been Incurred by such Person or such
Restricted Subsidiary at the time of such transaction), no Default of Event of
Default shall have occurred and be continuing; and (c) the Company will have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture; or
(2) the transaction is made in compliance with the provisions described
under "Subsidiary Guarantees;" "Certain Covenants Limitation on sales of
assets and Subsidiary stock" and "Certain Covenants Limitation on sale of
capital stock of Restricted Subsidiaries".
Future Subsidiary Guarantors
After the Issue Date, the Company will cause each Restricted Subsidiary other
than a Foreign Subsidiary created or acquired by the Company or one or more of
its Restricted Subsidiaries to execute and deliver to the Trustee a Subsidiary
Guarantee pursuant to which such Subsidiary Guarantor will unconditionally
Guarantee, on a joint and several basis, the full and prompt payment of the
principal of, premium, if any, and interest on the Notes on a senior basis.
Limitation on lines of business
The Company will not, and will not permit any Restricted Subsidiary to, engage
in any business other than the Oil and Gas Business.
Payments for consent
Neither the Company nor any of its Restricted Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fees or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or is paid to all holders of the Notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or amendment.
59
Events of default
Each of the following is an Event of Default:
(1) default in any payment of interest or additional interest (as
required by the Registration Rights Agreement) on any Note when due, continued
for 30 days;
(2) default in the payment of principal of or premium, if any, on any
Note when due at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise;
(3) failure by the Company or any Subsidiary Guarantor to comply with its
obligations under "Certain covenants Merger and consolidation;"
(4) failure by the Company to comply for 30 days after notice with any of
its obligations under the provisions described under "Change of Control" above
or under the covenants described under "Certain covenants" above (in each
case, other than a failure to purchase Notes which will constitute an Event of
Default under clause (2) above and other than a failure to comply with
"Certain covenants Merger and consolidation" which is covered by clause (3));
(5) failure by the Company to comply for 60 days after notice with its
other agreements contained in the Indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries), other than Indebtedness owed to the Company or a Restricted
Subsidiary, whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness ("payment default"); or
(b) results in the acceleration of such Indebtedness prior to its
maturity (the "cross acceleration provision");
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 $10.0 million or more;
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary or group of Restricted Subsidiaries that,
taken together (as of the latest audited consolidated financial statements for
the Company and its Restricted Subsidiaries), would constitute a Significant
Subsidiary (the "bankruptcy provisions");
(8) failure by the Company or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for the Company and its Restricted
Subsidiaries), would constitute a Significant Subsidiary to pay final
judgments aggregating in excess of $10.0 million (net of any amounts that a
reputable and creditworthy insurance company has acknowledged liability for in
writing), which judgments are not paid, discharged or stayed for a period of
60 days (the "judgment default provision"); or
60
(9) any Subsidiary Guarantee of a Significant Subsidiary or group of
Restricted Subsidiaries that taken together as of the latest audited
consolidated financial statements for the Company and its Restricted
Subsidiaries would constitute a Significant Subsidiary ceases to be in full
force and effect (except as contemplated by the terms of the Indenture) or is
declared null and void in a judicial proceeding or any Subsidiary Guarantor
that is a Significant Subsidiary or group of Subsidiary Guarantors that taken
together as of the latest audited consolidated financial statements of the
Company and its Restricted Subsidiaries would constitute a Significant
Subsidiary denies or disaffirms its obligations under the Indenture or its
Subsidiary Guarantee.
However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify the Company and, in the case
of a notice given by the holders, the Trustee of the default and the Company
does not cure such default within the time specified in clauses (4) and (5) of
this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause (7)
above) occurs and is continuing, the Trustee by notice to the Company, or the
holders of at least 25% in principal amount of the outstanding Notes by notice
to the Company and the Trustee, may, and the Trustee at the request of such
holders shall, declare the principal of, premium, if any, and accrued and
unpaid interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal, premium and accrued and unpaid interest will be
due and payable immediately. In the event of a declaration of acceleration of
the Notes because an Event of Default described in clause (6) under "Events of
Default" has occurred and is continuing, the declaration of acceleration of
the Notes shall be automatically annulled if the event of default or payment
default triggering such Event of Default pursuant to clause (6) shall be
remedied or cured by the Company or a Restricted Subsidiary or waived by the
holders of the relevant Indebtedness within 20 days after the declaration of
acceleration with respect thereto and if (1) the annulment of the acceleration
of the Notes would not conflict with any judgment or decree of a court of
competent jurisdiction and (2) all existing Events of Default, except
nonpayment of principal, premium or interest on the Notes that became due
solely because of the acceleration of the Notes, have been cured or waived. If
an Event of Default described in clause (7) above occurs and is continuing,
the principal of, premium, if any, and accrued and unpaid interest on all the
Notes will become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any holders. The holders of a
majority in principal amount of the outstanding Notes may waive all past
defaults (except with respect to nonpayment of principal, premium or interest)
and rescind any such acceleration with respect to the Notes and its
consequences if (1) rescission would not conflict with any judgment or decree
of a court of competent jurisdiction and (2) all existing Events of Default,
other than the nonpayment of the principal of, premium, if any, and interest
on the Notes that have become due solely by such declaration of acceleration,
have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders unless such
holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
61
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding
Notes have not waived such Event of Default or otherwise given the Trustee a
direction that, in the opinion of the Trustee, is inconsistent with such
request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
of exercising any trust or power conferred on the Trustee. The Indenture
provides that in the event an Event of Default has occurred and is continuing,
the Trustee will be required in the exercise of its powers to use the degree
of care that a prudent person would use in the conduct of its own affairs. The
Trustee, however, may refuse to follow any direction that conflicts with law
or the Indenture or that the Trustee determines is unduly prejudicial to the
rights of any other holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is known
to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium, if any, or interest on any Note, the Trustee may
withhold notice if and so long as a committee of trust officers of the Trustee
in good faith determines that withholding notice is in the interests of the
holders. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Trustee, within
30 days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Company is
taking or proposing to take in respect thereof.
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture or was required to repurchase
the Notes, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
Amendments and waivers
Subject to certain exceptions, the Indenture and the Notes may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding (including without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for,
Notes) and, subject to certain exceptions, any past default or compliance with
any provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or
exchange offer for, Notes). However, without the consent of each holder of an
outstanding Note affected, no amendment may, among other things:
62
(1) reduce the amount of Notes whose holders must consent to an
amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the premium payable upon the redemption or repurchase of any
Note as described above under "Optional redemption," "Change of Control," or
"Certain Covenants Limitation on sales of assets and Subsidiary stock," or
change the time at which any Note may be redeemed or repurchased as described
above under "Optional redemption," or make any change to the provisions
relating to a Change of Control Offer in respect of a Change of Control that
has occurred or make any change to the provisions relating an Asset
Disposition Offer that has been made, in each case whether through an
amendment or waiver of provisions in the covenants, definitions or otherwise;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder to receive payment of, premium, if
any, principal of and interest on such holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions; or
(8) modify the Subsidiary Guarantees in any manner adverse to the holders
of the Notes. Notwithstanding the foregoing, without the consent of any
holder, the Company, the Guarantors and the Trustee may amend the Indenture
and the Notes to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation of the
obligations of the Company or any Subsidiary Guarantor under the Indenture;
(3) provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f) (2) (B) of
the Code);
(4) add Guarantees with respect to the Notes or release a Subsidiary
Guarantor upon its designation as an Unrestricted Subsidiary; provided,
however, that the designation is in accord with the applicable provisions of
the Indenture;
(5) secure the Notes;
63
(6) add to the covenants of the Company for the benefit of the
holders or surrender any right or power conferred upon the Company;
(7) make any change that does not adversely affect the rights of any
holder;
(8) comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act; or
(9) provide for the issuance of exchange securities which shall have
terms substantially identical in all respects to the Notes (except that the
transfer restrictions contained in the Notes shall be modified or eliminated
as appropriate) and which shall be treated, together with any outstanding
Notes, as a single class of securities.
The consent of the holders is not necessary under the Indenture to approve the
particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. A consent to any amendment
or waiver under the Indenture by any holder of Notes given in connection with
a tender of such holder's Notes will not be rendered invalid by such tender.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect in
the notice will not impair or affect the validity of the amendment.
Defeasance
The Company at any time may terminate all its obligations under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen
Notes and to maintain a registrar and paying agent in respect of the Notes. If
the Company exercises its legal defeasance option, the Subsidiary Guarantees
in effect at such time will terminate.
The Company at any time may terminate its obligations under covenants
described under "Certain covenants" (other than "Merger and consolidation"),
the operation of the crossdefault upon a payment default, cross acceleration
provisions, the bankruptcy provisions with respect to Significant
Subsidiaries, the judgment default provision and the Subsidiary Guarantee
provision described under "Events of default" above and the limitations
contained in clause (3) under "Certain covenants Merger and consolidation"
above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If the Company exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect to the Notes. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (4), (5), (6), (7) (with
respect only to Significant Subsidiaries), (8) or (9) under "Events of
default" above or because of the failure of the Company to comply with clause
(3) under "Certain covenants Merger and consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel (subject to customary exceptions and exclusions) to the
effect that holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and defeasance and
will be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred. In the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service
or other change in applicable federal income tax law.
64
No personal liability of directors, officers, employees and stockholders
No director, officer, employee, incorporator or stockholder of the Company or
any Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Company or any Subsidiary Guarantor under the Notes, the
Indenture or the Subsidiary Guarantees or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the SEC that such a waiver is against public policy.
Concerning the trustee
U.S. Bank National Association is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
Governing law
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York.
Certain definitions
"Acquired Indebtedness" means Indebtedness (i) of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
or (ii) assumed in connection with the acquisition of assets from such Person,
in each case whether or not Incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition. Acquired Indebtedness shall be deemed to have been
Incurred, with respect to clause (i) of the preceding sentence, on the date
such Person becomes a Restricted Subsidiary and, with respect to clause (ii)
of the preceding sentence, on the date of consummation of such acquisition of
assets.
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to
be used by the Company or a Restricted Subsidiary in the Oil and Gas Business;
(2) capital expenditures by the Company or a Restricted Subsidiary in the
Oil and Gas Business;
(3) the Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary; or
(4) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary;
65
provided, however, that, in the case of clauses (3) and (4), such Restricted
Subsidiary is primarily engaged in the Oil and Gas Business. "Adjusted
Consolidated Net Tangible Assets" means (without duplication), as of the date
of determination, the remainder of:
(a) the sum of:
(i) discounted future net revenues from proved oil and gas reserves
of the Company and its Restricted Subsidiaries calculated in accordance with
SEC guidelines before any provincial, territorial, state, federal or foreign
income taxes, as estimated by the Company in a reserve report prepared as of
the end of the Company's most recently completed fiscal year for which audited
financial statements are available, as increased by, as of the date of
determination, the estimated discounted future net revenues from
(A) estimated proved oil and gas reserves acquired since such
year end, which reserves were not reflected in such year end reserve report,
and
(B) estimated oil and gas reserves attributable to upward
revisions of estimates of proved oil and gas reserves since such year end due
to exploration, development or exploitation activities, in each case
calculated in accordance with SEC guidelines (utilizing the prices for the
fiscal quarter ending prior to the date of determination), and decreased by,
as of the date of determination, the estimated discounted future net revenues
from
(C) estimated proved oil and gas reserves produced or disposed
of since such year end, and
(D) estimated oil and gas reserves attributable to downward
revisions of estimates of proved oil and gas reserves since such year end due
to changes in geological conditions or other factors which would, in
accordance with standard industry practice, cause such revisions, in each case
calculated on a pre-tax basis and substantially in accordance with SEC
guidelines (utilizing the prices for the fiscal quarter ending prior to the
date of determination), in each case as estimated by the Company's petroleum
engineers or any independent petroleum engineers engaged by the Company for
that purpose;
(ii) the capitalized costs that are attributable to oil and gas
properties of the Company and its Restricted Subsidiaries to which no proved
oil and gas reserves are attributable, based on the Company's books and
records as of a date no earlier than the date of the Company's latest
available annual or quarterly financial statements;
(iii) the Net Working Capital on a date no earlier than the date of
the Company's latest annual or quarterly financial statements; and
(iv) the greater of
(A) the net book value of other tangible assets of the Company
and its Restricted Subsidiaries, as of a date no earlier than the date of the
Company's latest annual or quarterly financial statement, and
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(B) the appraised value, as estimated by independent
appraisers, of other tangible assets of the Company and its Restricted
Subsidiaries, as of a date no earlier than the date of the Company's latest
audited financial statements; minus
(b) the sum of:
(i) Minority Interests;
(ii) any net gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest audited financial
statements;
(iii) to the extent included in (a)(i) above, the discounted future
net revenues, calculated in accordance with SEC guidelines (utilizing the
prices utilized in the Company's year end reserve report), attributable to
reserves which are required to be delivered to third parties to fully satisfy
the obligations of the Company and its Restricted Subsidiaries with respect to
Volumetric Production Payments (determined, if applicable, using the schedules
specified with respect thereto); and
(iv) the discounted future net revenues, calculated in accordance
with SEC guidelines, attributable to reserves subject to Dollar-Denominated
Production Payments which, based on the estimates of production and price
assumptions included in determining the discounted future net revenues
specified in (a)(i) above, would be necessary to fully satisfy the payment
obligations of the Company and its Subsidiaries with respect to
Dollar-Denominated Production Payments (determined, if applicable, using the
schedules specified with respect thereto).
If the Company changes its method of accounting from the successful efforts
method of accounting to the full cost or a similar method, "Adjusted
Consolidated Net Tangible Assets" will continue to be calculated as if the
Company were still using the successful efforts method of accounting.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing; provided that beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control.
"Asset Disposition" means any direct or indirect sale, lease (other than an
operating lease entered into in the ordinary course of the Oil and Gas
Business), transfer, issuance or other disposition, or a series of related
sales, leases, transfers, issuances or dispositions that are part of a common
plan, of shares of Capital Stock of a Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the
purposes of this definition as a "disposition") by the Company or any of its
Restricted Subsidiaries, including any disposition by means of a merger,
consolidation or similar transaction.
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Notwithstanding the preceding, the following items shall not be deemed to be
Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly-Owned Subsidiary;
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of Hydrocarbons or mineral products inventory in the
ordinary course of the Oil and Gas Business;
(4) a disposition of obsolete or worn out equipment or equipment that is
no longer useful in the conduct of the business of the Company and its
Restricted Subsidiaries and that is disposed of in each case in the ordinary
course of business;
(5) transactions permitted under "Certain covenants Merger and
consolidation";
(6) an issuance of Capital Stock by a Restricted Subsidiary to the
Company or to a Wholly-Owned Subsidiary;
(7) for purposes of "Certain Covenants Limitation on sales of assets and
Subsidiary stock" only, the making of a Permitted Investment or a disposition
subject to "Certain covenants Limitation on Restricted Payments";
(8) an Asset Swap effected in compliance with "Certain covenants
Limitation on sales of assets and Subsidiary stock";
(9) dispositions of assets with an aggregate fair market value since the
Issue Date of less than $1.0 million;
(10) dispositions in connection with Permitted Liens;
(11) dispositions of receivables in connection with the compromise,
settlement or collection thereof in the ordinary course of business or in
bankruptcy or similar proceedings and exclusive of factoring or similar
arrangements;
(12) the licensing or sublicensing of intellectual property or other
general intangibles and licenses, leases or subleases of other property in the
ordinary course of business which do not materially interfere with the
business of the Company and its Restricted Subsidiaries;
(13) foreclosure on assets;
(14) any Production Payments and Reserve Sales, provided that any such
Production Payments and Reserve Sales, other than incentive compensation
programs on terms that are reasonably customary in the Oil and Gas Business
for geologists, geophysicists and other providers of technical services to the
Company or a Restricted Subsidiary, shall have been created, Incurred, issued,
assumed or Guaranteed in connection with the financing of, and within 60 days
after the acquisition of, the property that is subject thereto; and
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(15) the exchange by the Company of its membership interests in Big Dog
or Shark for a similar proportion of the capital stock of a successor
corporation to Big Dog or Shark, as the case may be, in any recapitalization
transaction.
"Asset Swap" means concurrent purchase and sale or exchange of Oil and Gas
Properties between the Company or any of its Restricted Subsidiaries and
another Person; provided that any cash received must be applied in accordance
with "Certain covenants Limitation on sales of assets and Subsidiary stock."
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value (discounted at the interest
rate borne by the Notes, compounded semi-annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (2) the sum of all such payments.
"Big Dog" means Big Dog Drilling Co., LLC, a Nevada limited liability company.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Business Day" means each day that is not a Saturday, Sunday or other day on
which banking institutions in New York, New York are authorized or required by
law to close.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation will be the capitalized amount of such obligation at the
time any determination thereof is to be made as determined in accordance with
GAAP, and the Stated Maturity thereof will be the date of the last payment of
rent or any other amount due under such lease prior to the first date such
lease may be terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States Government or any agency or instrumentality of the United States
(provided that the full faith and credit of the United States is pledged in
support thereof), having maturities of not more than one year from the date of
acquisition;
(2) marketable general 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
(provided that the full faith and credit of the United States is pledged in
support thereof) and, at the time of acquisition, having a credit rating of
"A" or better from either Standard & Poor's Ratings Services or Moody's
Investors Service, Inc.;
69
(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of not more
than one year from the date of acquisition thereof issued by any commercial
bank the long-term debt of which is rated at the time of acquisition thereof
at least "A" or the equivalent thereof by Standard & Poor's Ratings Services,
or "A" or the equivalent thereof by Moody's Investors Service, Inc., and
having combined capital and surplus in excess of $500.0 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and (3)
entered into with any bank meeting the qualifications specified in clause (3)
above;
(5) commercial paper rated at the time of acquisition thereof at least
"A-2" or the equivalent thereof by Standard & Poor's Ratings Services or "P-2"
or the equivalent thereof by Moody's Investors Service, Inc., or carrying an
equivalent rating by a nationally recognized rating agency, if both of the two
named rating agencies cease publishing ratings of investments, and in any case
maturing within one year after the date of acquisition thereof; and
(6) interests in any investment company or money market fund which
invests 95% or more of its assets in instruments of the type specified in
clauses (1) through (5) above.
"Change of Control" means:
(1) (A) any "person" or "group" of related persons (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that such person or group shall be deemed to have "beneficial
ownership" of all shares that any such person or group has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total voting
power of the Voting Stock of the Company (or its successor by merger,
consolidation or purchase of all or substantially all of its assets) (for the
purposes of this clause, such person or group shall be deemed to beneficially
own any Voting Stock of the Company held by a parent entity, if such person or
group "beneficially owns" (as defined above), directly or indirectly, more
than 50% of the voting power of the Voting Stock of such parent entity); or
(2) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(3) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is used
in Sections 13(d) and 14(d) of the Exchange Act); or
(4) the adoption by the stockholders of the Company of a plan or proposal
for the liquidation or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
70
"Commodity Agreements" means, in respect of any Person, any forward contract,
commodity swap agreement, commodity option agreement or other similar
agreement or arrangement in respect of Hydrocarbons used, produced, processed
or sold by such Person that are customary in the Oil and Gas Business and
designed to protect such Person against fluctuation in Hydrocarbon prices.
"Common Stock" means with respect to any Person, any and all shares, interest
or other participations in, and other equivalents (however designated and
whether voting or nonvoting) of such Person's common stock whether or not
outstanding on the Issue Date, and includes, without limitation, all series
and classes of such common stock.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDAX of such Person for the period of the most recent four consecutive
fiscal quarters ending prior to the date of such determination for which
financial statements are in existence to (y) Consolidated Interest Expense for
such four fiscal quarters, provided, however, that:
(1) if the Company or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period
that remains outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, Consolidated EBITDAX and Consolidated Interest
Expense for such period will be calculated after giving effect on a pro forma
basis to such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period (except that in making such computation, the amount
of Indebtedness under any revolving credit facility outstanding on the date of
such calculation will be deemed to be (i) the average daily balance of such
Indebtedness during such four fiscal quarters or such shorter period for which
such facility was outstanding or (ii) if such facility was created after the
end of such four fiscal quarters, the average daily balance of such
Indebtedness during the period from the date of creation of such facility to
the date of such calculation) and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such discharge had occurred on the first day of
such period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer outstanding
on such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness
(in each case other than Indebtedness Incurred under any revolving credit
facility unless such Indebtedness has been permanently repaid and the related
commitment terminated), Consolidated EBITDAX and Consolidated Interest Expense
for such period will be calculated after giving effect on a pro forma basis to
such discharge of such Indebtedness, including with the proceeds of such new
Indebtedness, as if such discharge had occurred on the first day of such
period;
(2) if since the beginning of such period the Company or any Restricted
Subsidiary will have made any Asset Disposition or disposed of any company,
division, operating unit, segment, business, group of related assets or line
of business or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is such an Asset Disposition:
(a) the Consolidated EBITDAX for such period will be reduced by an
amount equal to the Consolidated EBITDAX (if positive) directly attributable
to the assets which are the subject of such Asset Disposition for such period
or increased by an amount equal to the Consolidated EBITDAX (if negative)
directly attributable thereto for such period; and
71
(b) Consolidated Interest Expense for such period will be reduced by
an amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
the Company and its continuing Restricted Subsidiaries are no longer liable
for such Indebtedness after such sale);
(3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary or
is merged with or into the Company) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially all
of a company, division, operating unit, segment, business, group of related
assets or line of business, Consolidated EBITDAX and Consolidated Interest
Expense for such period will be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such Investment
or acquisition had occurred on the first day of such period; and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) will have Incurred
any Indebtedness or discharged any Indebtedness, made any Asset Disposition or
any Investment or acquisition of assets that would have required an adjustment
pursuant to clause (2) or (3) above if made by the Company or a Restricted
Subsidiary during such period, Consolidated EBITDAX andConsolidated Interest
Expense for such period will be calculated after giving pro forma effect
thereto as if such Asset Disposition or Investment or acquisition of assets
had occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
any calculation under this definition, the pro forma calculations will be
determined in good faith by a responsible financial or accounting officer of
the Company (including pro forma expense and cost reductions calculated on a
basis consistent with Regulation S-X under the Securities Act). If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness will be calculated as if the
rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account any Interest Rate Agreement applicable
to such Indebtedness if such Interest Rate Agreement has a remaining term in
excess of 12 months). If any Indebtedness that is being given pro forma effect
bears an interest rate at the option of the Company, the interest rate shall
be calculated by applying such optional rate chosen by the Company.
"Consolidated EBITDAX" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) Consolidated Income Taxes;
(3) consolidated depreciation expense;
72
(4) consolidated amortization expense or impairment charges recorded in
connection with the application of Statement of Financial Accounting Standard
No. 142 "Goodwill and Other Intangibles";
(5) other non-cash charges reducing Consolidated Net Income (excluding
any such on-cash charge to the extent it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash
expense that was paid in a prior period not included in the calculation); and
(6) exploration expenses, if applicable; and
less, to the extent included in calculating such Consolidated Net Income and
in excess of any costs or expenses attributable thereto that were deducted in
calculating such Consolidated Net Income, the sum of (x) the amount of
deferred revenues that are amortized during such period and are attributable
to reserves that are subject to Volumetric Production Payments, and (y)
amounts recorded in accordance with GAAP as repayments of principal and
interest pursuant to Dollar-Denominated Production Payments.
Notwithstanding the preceding sentence, clauses (2) through (6) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated
Net Income to compute Consolidated EBITDAX of such Person only to the extent
(and in the same proportion) that the net income (loss) of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and, to the extent the amounts set forth in clauses (2) through (6) are
in excess of those necessary to offset a net loss of such Restricted
Subsidiary or if such Restricted Subsidiary has net income for such period
included in Consolidated Net Income, only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any period,
taxes imposed upon such Person or other payments required to be made by such
Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, whether
paid or accrued, plus, to the extent not included in such interest expense:
(1) interest expense attributable to Capitalized Lease Obligations and
the interest portion of rent expense associated with Attributable Indebtedness
in respect of the relevant lease giving rise thereto, determined as if such
lease were a capitalized lease in accordance with GAAP and the interest
component of any deferred payment obligations;
(2) amortization of debt discount and debt issuance cost (provided that
any amortization of bond premium will be credited to reduce Consolidated
Interest Expense unless, pursuant to GAAP, such amortization of bond premium
has otherwise reduced Consolidated Interest Expense);
(3) non-cash interest expense;
73
(4) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(5) the interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by
a Lien on assets of such Person or one of its Restricted Subsidiaries;
(6) costs associated with Hedging Obligations (including amortization of
fees) provided, however, that if Hedging Obligations result in net benefits
rather than costs, such benefits shall be credited to reduce Consolidated
Interest Expense unless, pursuant to GAAP, such net benefits are otherwise
reflected in Consolidated Net Income;
(7) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(8) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any series of
Disqualified Stock of such Person or on Preferred Stock of its Restricted
Subsidiaries payable to a party other than the Company or a Wholly-Owned
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP;
(9) Receivables Fees; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust;
For the purpose of calculating the Consolidated Coverage Ratio in connection
with the Incurrence of any Indebtedness described in the final paragraph of
the definition of "Indebtedness", the calculation of Consolidated Interest
Expense shall include all interest expense (including any amounts described in
clauses (1) through (10) above) relating to any Indebtedness of the Company or
any Restricted Subsidiary described in the final paragraph of the definition
of "Indebtedness".
For purposes of the foregoing, total interest expense will be determined (i)
after giving effect to any net payments made or received by the Company and
its Subsidiaries with respect to Interest Rate Agreements and (ii) exclusive
of amounts classified as other comprehensive income on the balance sheet of
the Company. Notwithstanding anything to the contrary contained herein,
commissions, discounts, yield and other fees and charges Incurred in
connection with any transaction pursuant to which the Company or its
Restricted Subsidiaries may sell, convey or otherwise transfer or grant a
security interest in any accounts receivable or related assets shall be
included in Consolidated Interest Expense.
"Consolidated Net Income" means, for any period, the net income (loss) of the
Company and its consolidated Restricted Subsidiaries determined in accordance
with GAAP; provided, however, that there will not be included in such
Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that:
74
(a) subject to the limitations contained in clauses (3), (4) and (5)
below, the Company's equity in the net income of any such Person for such
period will be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period to the
Company or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution to a Restricted
Subsidiary, to the limitations contained in clause (2) below); and
(b) the Company's equity in a net loss of any such Person (other than
an Unrestricted Subsidiary) for such period will be included in determining
such Consolidated Net Income to the extent such loss has been funded with cash
from the Company or a Restricted Subsidiary;
(2) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that:
(a) subject to the limitations contained in clauses (3), (4) and (5)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net Income up
to the aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend (subject, in the case of a dividend to another
Restricted Subsidiary, to the limitation contained in this clause); and
(b) the Company's equity in a net loss of any such Restricted
Subsidiary for such period will be included in determining such Consolidated
Net Income;
(3) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated Restricted
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (loss) realized upon the sale or other disposition of any Capital Stock
of any Person;
(4) any extraordinary gain or loss;
(5) the cumulative effect of a change in accounting principles;
(6) any asset impairment writedowns on Oil and Gas Properties under GAAP
or SEC guidelines; and
(7) any unrealized non-cash gains or losses on charges in respect of
Hedging Obligations (including those resulting from the application of SFAS
133).
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who: (1) was a member of such Board of
Directors on the date of the Indenture; or (2) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means, with respect to the Company or any Subsidiary
Guarantor, one or more debt facilities (including, without limitation, the
Senior Secured Credit Agreement) or commercial paper facilities with banks or
other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time (and whether or not with the original administrative
agent and lenders or another administrative agent or agents or other lenders
and whether provided under the original Senior Secured Credit Agreement or any
other credit or other agreement or indenture).
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement, futures contract, option contract or other
similar agreement as to which such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or both
would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person 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:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock which is convertible or exchangeable solely at the
option of the Company or a Restricted Subsidiary); or
(3) is redeemable at the option of the holder of the Capital Stock in
whole or in part,
in each case on or prior to the date that is 91 days after the earlier of the
date (a) of the Stated Maturity of the Notes or (b) on which there are no
Notes outstanding; provided that only the portion of Capital Stock which so
matures or is mandatorily redeemable, is so convertible or exchangeable or is
so redeemable at the option of the holder thereof prior to such date will be
deemed to be Disqualified Stock; provided, further, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof
have the right to require the Company to repurchase such Capital Stock upon
the occurrence of a change of control or asset sale (each defined in a
substantially identical manner to the corresponding definitions in the
Indenture) shall not constitute Disqualified Stock if the terms of such
Capital Stock (and all such securities into which it is convertible or for
which it is ratable or exchangeable) provide that the Company may not
repurchase or redeem any such Capital Stock (and all such securities into
which it is convertible or for which it is ratable or exchangeable) pursuant
to such provision prior to compliance by the Company with the provisions of
the Indenture described under the captions "Change of control" and "Certain
covenants Limitation on sales of assets and Subsidiary stock" and such
repurchase or redemption complies with "Certain covenants Restricted
Payments."
"Dollar-Denominated Production Payments" means production payment obligations
recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Offering" means (i) a public offering for cash by the Company of its
Common Stock, or options, warrants or rights with respect to its Common Stock
made pursuant to a registration statement that has been declared effective by
the SEC, other than public offerings with respect to the Company's Common
Stock, or options, warrants or rights, registered on Form S-4 or S-8 (ii) a
private offering to institutional investors for cash by the Company of its
Common Stock, or options, warrants or rights with respect to its Common Stock.
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"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee
of such Indebtedness of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the
term "Guarantee" will not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding
on the Issue Date or thereafter Incurred) which is expressly subordinate in
right of payment to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement, Currency Agreement or Commodity
Agreement.
"holder" means a Person in whose name a Note is registered on the Registrar's
books.
"Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons
and all constituents, elements or compounds thereof and products refined or
processed therefrom.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) will be deemed to
be Incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary; and the terms "Incurred" and "Incurrence" have meanings
correlative to the foregoing.
"Indebtedness" means, with respect to any Person on any date of determination
(without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
77
(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) the principal component of all obligations of such Person in respect
of letters of credit, bankers' acceptances or other similar instruments
(including reimbursement obligations with respect thereto except to the extent
such reimbursement obligation relates to a trade payable and such obligation
is satisfied within 30 days of Incurrence);
(4) the principal component of all obligations of such Person to pay the
deferred and unpaid purchase price of property (except trade payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto;
(5) Capitalized Lease Obligations and all Attributable Indebtedness of
such Person;
(6) the principal component or liquidation preference of all obligations
of such Person with respect to the redemption, repayment or other repurchase
of any Disqualified Stock or, with respect to any Subsidiary that is not a
Subsidiary Guarantor, any Preferred Stock (but excluding, in each case, any
accrued dividends);
(7) the principal component of all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided, however, that the amount of such
Indebtedness will be the lesser of (a) the fair market value of such asset at
such date of determination and (b) the amount of such Indebtedness of such
other Persons;
(8) the principal component of Indebtedness of other Persons to the
extent Guaranteed by such Person; and
(9) to the extent not otherwise included in this definition, net
obligations of such Person under Commodity Agreements, Currency Agreements and
Interest Rate Agreements (the amount of any such obligations to be equal at
any time to the termination value of such agreement or arrangement giving rise
to such obligation that would be payable by such Person at such time).
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date.
In addition, "Indebtedness" of any Person shall include Indebtedness described
in the preceding paragraph that would not appear as a liability on the balance
sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture");
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and
(3) there is recourse, by contract or operation of law, with respect to
the payment of such Indebtedness to property or assets of such Person or a
Restricted Subsidiary of such Person; and then such Indebtedness shall be
included in an amount not to exceed:
78
(a) the lesser of (i) the net assets of the General Partner and (ii)
the amount of such obligations to the extent that there is recourse, by
contract or operation of law, to the property or assets of such Person or a
Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a)
immediately above, the actual amount of such Indebtedness that is recourse to
such Person or a Restricted Subsidiary of such Person, if the Indebtedness is
evidenced by a writing and is for a determinable amount.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such Person
in other Persons (including Affiliates) in the form of any direct or indirect
advance, loan (other than advances or extensions of credit to customers in the
ordinary course of business) or other extensions of credit (including by way
of Guarantee or similar arrangement, but excluding any debt or extension of
credit represented by a bank deposit other than a time deposit) or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by, such Person and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that none of the following will be deemed to be an Investment:
(1) Hedging Obligations entered into in the ordinary course of business
and in compliance with the Indenture;
(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
(3) an acquisition of assets, Capital Stock or other securities by the
Company or a Subsidiary for consideration to the extent such consideration
consists of Common Stock of the Company.
For purposes of "Certain covenants Limitation on Restricted Payments,"
(1) "Investment" will include the portion (proportionate to the Company's
equity interest in a Restricted Subsidiary to be designated as an Unrestricted
Subsidiary) of the fair market value of the net assets of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company will be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary in an amount
(if positive) equal to (a) the Company's "Investment" in such Subsidiary at
the time of such redesignation less (b) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets (as conclusively determined by the Board of Directors of the
Company in good faith) of such Subsidiary at the time that such Subsidiary is
so re-designated a Restricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary will
be valued at its fair market value at the time of such transfer, in each case
as determined in good faith by the Board of Directors of the Company.
79
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Minority Interest" means the percentage interest represented by any shares of
any class of Capital Stock of a Restricted Subsidiary that are not owned by
the Company or a Restricted Subsidiary.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and net proceeds
from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to the properties or assets that
are the subject of such Asset Disposition or received in any other non-cash
form) therefrom, in each case net of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses Incurred, and all federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP (after taking into account any available tax credits or
deductions and any tax sharing agreements), as a consequence of such Asset
Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid
out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures or to holders of royalty or
similar interests as a result of such Asset Disposition; and
(4) the deduction of appropriate amounts to be provided by the seller as
a reserve, in accordance with GAAP, against any liabilities associated with
the assets disposed of in such Asset Disposition and retained by the Company
or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and other fees and charges
actually Incurred in connection with such issuance or sale and net of taxes
paid or payable as a result of such issuance or sale (after taking into
account any available tax credit or deductions and any tax sharing
arrangements).
"Net Working Capital" means (a) all current assets of the Company and its
Restricted Subsidiaries except current assets from commodity price risk
management activities arising in the ordinary course of the Oil and Gas
Business, less (b) all current liabilities of the Company and its Restricted
Subsidiaries, except current liabilities included in Indebtedness and any
current liabilities from commodity price risk management activities arising in
the ordinary course of the Oil and Gas Business, in each case as set forth in
the consolidated financial statements of the Company prepared in accordance
with GAAP.
"Non-Recourse Debt" means Indebtedness of a Person:
80
(1) as to which neither the Company nor any Restricted Subsidiary (a)
provides any Guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor or otherwise);
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare
a default under such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(3) the explicit terms of which provide there is no recourse against any
of the assets of the Company or its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer, any Vice President, the Treasurer or
the Secretary of the Company. Officer of any Subsidiary Guarantor has a
correlative meaning.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company. "Oil And Gas Business" means (a) the business of acquiring,
exploring, exploiting, developing, producing, operating and disposing of
interests in oil, gas, liquid natural gas and other hydrocarbon properties,
(b) the business of gathering, marketing, treating, processing, storage,
refining, selling and transporting of any production from such interests or
properties and products produced in association therewith, (c) any business or
activity relating to, arising from, or necessary, appropriate or incidental to
the activities described in the foregoing clauses (a) and (b) of this
definition.
"Oil and Gas Properties" means all properties, including equity or other
ownership interests therein, owned by such Person which contain "proved oil
and gas reserves" as defined in Rule 4-10 of Regulation S-X of the Securities
Act.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Pari Passu Indebtedness" means Indebtedness that ranks equally in right of
payment to the Notes.
"Permitted Business Investment" means any Investment made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business including investments or expenditures for actively
exploiting, exploring for, acquiring, developing, producing, processing,
gathering, marketing or transporting oil and gas through agreements,
transactions, interests or arrangements which permit one to share risks or
costs, comply with regulatory requirements regarding local ownership or
satisfy other objectives customarily achieved through the conduct of the Oil
and Gas Business jointly with third parties, including:
(1) ownership interests in oil and gas properties, liquid natural gas
facilities, processing facilities, gathering systems, pipelines or ancillary
real property interests;
81
(2) Investments in the form of or pursuant to operating agreements,
processing agreements, farm-in agreements, farm-out agreements, development
agreements, area of mutual interest agreements, unitization agreements,
pooling agreements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements (including
for limited liability companies) with third parties; and (3) direct or
indirect ownership interests in drilling rigs and related equipment,
including, without limitation, transportation equipment; provided, however
that a "Permitted Business Investment" shall only include Investments in
entities that are classified as pass-through entities for U.S. federal, state
and local and foreign income tax purposes.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) a Restricted Subsidiary or a Person which will, upon the making of
such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is the Oil and Gas Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is the Oil and Gas
Business;
(3) cash and Cash Equivalents;
(4) receivables owing to the Company or any Restricted Subsidiary created
or acquired in the ordinary course of the Oil and Gas Business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary; provided, however, that the Company and its Subsidiaries will
comply in all material respects with all applicable provisions of the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in
connection therewith in connection with such loans or advances;
(7) Capital Stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments or pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(8) Investments made as a result of the receipt of non-cash consideration
from an Asset Disposition that was made pursuant to and in compliance with
"Certain covenants Limitation on sales of assets and Subsidiary stock";
(9) Investments in existence on the Issue Date;
(10) Commodity Agreements, Currency Agreements, Interest Rate Agreements
and related Hedging Obligations, which transactions or obligations are
Incurred in compliance with "Certain covenants Limitation on indebtedness";
82
(11) Guarantees issued in accordance with "Certain covenants Limitations
on Indebtedness";
(12) any Asset Swap made in accordance with "Certain covenants Limitation
on sales of assets and Subsidiary stock";
(13) a successor corporation to Big Dog or Shark formed by any
recapitalization transaction in which the Company exchanges its membership
interests in Big Dog or Shark, as the case may be, for a similar proportion of
the capital stock of such successor corporation;
(14) Permitted Business Investments in an aggregate amount not to exceed
5% of Adjusted Consolidated Net Tangible Assets (with Adjusted Consolidated
Net Tangible Assets and the fair market value of such Investment being
measured at the time such Investment is made and without giving effect to
subsequent changes in value); and
(15) Investments by the Company or any of its Restricted Subsidiaries,
together with all other Investments pursuant to this clause (15), in an
aggregate amount at the time of such Investment not to exceed $10.0 million
outstanding at any one time (with the fair market value of such Investment
being measured at the time such Investment is made and without giving effect
to subsequent changes in value).
"Permitted Liens" means, with respect to any Person:
(1) Liens securing Indebtedness and other obligations under, and related
Hedging Obligations and Liens on assets of Restricted Subsidiaries securing
Guarantees of Indebtedness and other obligations of the Company under, any
Credit Facility permitted to be Incurred under the Indenture under the
provisions described in clause (1) of the second paragraph under "Certain
covenants Limitation on Indebtedness");
(2) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person
is a party, or deposits as security for contested taxes or import or customs
duties or for the payment of rent, in each case Incurred in the ordinary
course of business;
(3) Liens imposed by law, including carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings if a reserve or other appropriate provisions,
if any, as shall be required by GAAP shall have been made in respect thereof;
(4) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in good
faith by appropriate proceedings; provided that appropriate reserves required
pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of issuers of surety or performance bonds or letters
of credit or bankers' acceptances issued pursuant to the request of and for
the account of such Person in the ordinary course of its business; provided,
however, that such letters of credit do not constitute Indebtedness;
(6) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning, building codes or other restrictions
(including, without limitation, minor defects or irregularities in title and
similar encumbrances) as to the use of real properties or Liens incidental to
the conduct of the business of such Person or to the ownership of its
properties which do not in the aggregate materially adversely affect the value
of said properties or materially impair their use in the operation of the
business of such Person;
83
(7) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured by a Lien
on the same property securing such Hedging Obligation;
(8) leases, licenses, subleases and sublicenses of assets (including,
without limitation, real property and intellectual property rights) which do
not materially interfere with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries;
(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may have
been duly initiated for the review of such judgment have not been finally
terminated or the period within which such proceedings may be initiated has
not expired;
(10) Liens for the purpose of securing the payment of all or a part of
the purchase price of, or Capitalized Lease Obligations, purchase money
obligations or other payments Incurred to finance the acquisition, improvement
or construction of, assets or property acquired or constructed in the ordinary
course of business; provided that;
(a) the aggregate principal amount of Indebtedness secured by such
Liens is otherwise permitted to be Incurred under the Indenture and does not
exceed the cost of the assets or property so acquired or constructed; and
(b) such Liens are created within 180 days of construction or
acquisition of such assets or property and do not encumber any other assets or
property of the Company or any Restricted Subsidiary other than such assets or
property and assets affixed or appurtenant thereto;
(11) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a depositary
institution; provided that:
(a) such deposit account is not a dedicated cash collateral account
and is not subject to restrictions against access by the Company in excess of
those set forth by regulations promulgated by the Federal Reserve Board; and
(b) such deposit account is not intended by the Company or any
Restricted Subsidiary to provide collateral to the depository institution;
(12) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by the Company and its
Restricted Subsidiaries in the ordinary course of business;
(13) Liens existing on the Issue Date;
(14) Liens on property or shares of stock of a Person at the time such
Person becomes a Restricted Subsidiary; provided, however, that such Liens are
not created, Incurred or assumed in connection with, or in contemplation of,
such other Person becoming a Restricted Subsidiary; provided further, however,
that any such Lien may not extend to any other property owned by the Company
or any Restricted Subsidiary;
84
(15) Liens on property at the time the Company or a Restricted Subsidiary
acquired the property, including any acquisition by means of a merger or
consolidation with or into the Company or any Restricted Subsidiary; provided,
however, that such Liens are not created, Incurred or assumed in connection
with, or in contemplation of, such acquisition; provided further, however,
that such Liens may not extend to any other property owned by the Company or
any Restricted Subsidiary;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Wholly-Owned Subsidiary;
(17) Liens securing the Notes, Subsidiary Guarantees and other
obligations arising under the Indenture;
(18) Liens securing Refinancing Indebtedness Incurred to refinance
Indebtedness that was previously so secured, provided that any such Lien is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which the original Lien
arose, could secure) the Indebtedness being refinanced or is in respect of
property or assets that is the security for a Permitted Lien hereunder;
(19) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(20) Liens in respect of Production Payments and Reserve Sales, which
Liens shall be limited to the property that is the subject of such Production
Payments and Reserve Sales;
(21) Liens arising under farm-out agreements, farm-in agreements,
division orders, contracts for the sale, purchase, exchange, transportation,
gathering or processing of Hydrocarbons, unitizations and pooling
designations, declarations, orders and agreements, development agreements,
operating agreements, production sales contracts, area of mutual interest
agreements, gas balancing or deferred production agreements, injection,
repressuring and recycling agreements, salt water or other disposal
agreements, seismic or geophysical permits or agreements, and other agreements
which are customary in the Oil and Gas Business; provided, however, in all
instances that such Liens are limited to the assets that are the subject of
the relevant agreement, program, order or contract;
(22) Liens on pipelines or pipeline facilities that arise by operation of
law; and
(23) Liens securing Indebtedness (other than Subordinated Obligations and
Guarantor Subordinated Obligations) in an aggregate principal amount
outstanding at any one time not to exceed $5.0 million.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
85
"Production Payments and Reserve Sales" means the grant or transfer by the
Company or a Restricted Subsidiary to any Person of a royalty, overriding
royalty, net profits interest, production payment (whether volumetric or
dollar denominated), partnership or other interest in oil and gas properties,
reserves or the right to receive all or a portion of the production or the
proceeds from the sale of production attributable to such properties where the
holder of such interest has recourse solely to such production or proceeds of
production, subject to the obligation of the grantor or transferor to operate
and maintain, or cause the subject interests to be operated and maintained, in
a reasonably prudent manner or other customary standard or subject to the
obligation of the grantor or transferor to indemnify for environmental, title
or other matters customary in the Oil and Gas Business, including any such
grants or transfers pursuant to incentive compensation programs on terms that
are reasonably customary in the Oil and Gas Business for geologists,
geophysicists or other providers of technical services to the Company or a
Restricted Subsidiary.
A "Public Market" exists at any time with respect to the Common Stock of the
Company if the Common Stock of the Company is then registered with the SEC
pursuant to Section 12(b) or 12(g) of Exchange Act and traded either on a
national securities exchange or in the National Association of Securities
Dealers Automated Quotation System.
"Receivables" means a right to receive payment arising from a sale or lease of
goods or the performance of services by a Person pursuant to an arrangement
with another Person pursuant to which such other Person is obligated to pay
for goods or services under terms that permit the purchase of such goods and
services on credit and shall include, in any event, any items of property that
would be classified as an "account," "chattel paper," "payment intangible" or
"instrument" under the Uniform Commercial Code as in effect in the State of
New York and any "supporting obligations" as so defined.
"Receivables Fees" means any fees or interest paid to purchasers or lenders
providing the financing in connection with a factoring agreement or other
similar agreement, including any such amounts paid by discounting the face
amount of Receivables or participations therein transferred in connection with
a factoring agreement or other similar arrangement, regardless of whether any
such transaction is structured as on-balance sheet or off-balance sheet or
through a Restricted Subsidiary or an Unrestricted Subsidiary.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, exchange, renew, repay or extend (including pursuant to
any defeasance or discharge mechanism) (collectively, "refinance,"
"refinances," and "refinanced" shall have a correlative meaning) any
Indebtedness existing on the date of the Indenture or Incurred in compliance
with the Indenture (including Indebtedness of the Company that refinances
Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted
Subsidiary that refinances Indebtedness of another Restricted Subsidiary)
including Indebtedness that refinances Refinancing Indebtedness, provided,
however, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the Notes, the Refinancing Indebtedness
has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness
being refinanced or (b) if the Stated Maturity of the Indebtedness being
refinanced is later than the Stated Maturity of the Notes, the Refinancing
Indebtedness has a Stated Maturity at least 91 days later than the Stated
Maturity of the Notes;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced;
86
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to or less than the sum of the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being refinanced (plus, without duplication,
any additional Indebtedness Incurred to pay interest or premiums required by
the instruments governing such existing Indebtedness and fees Incurred in
connection therewith); and
(4) if the Indebtedness being refinanced is subordinated in right of
payment to the Notes or the Subsidiary Guarantee, such Refinancing
Indebtedness is subordinated in right of payment to the Notes or the
Subsidiary Guarantee on terms at least as favorable to the holders as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Registration Rights Agreement" means that certain registration rights
agreement dated as of the date of the Indenture by and among the Company, the
Subsidiary Guarantors and the initial purchasers set forth therein.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the United States Securities and Exchange Commission.
"Senior Secured Credit Agreement" means the Credit Agreement dated as of
November 5, 2004 among the Company, Bank One, N.A., as Administrative Agent
and the lenders parties thereto from time to time, as the same may be amended,
supplemented or otherwise modified from time to time.
"Shark" means Shark Trucking Co., LLC, a Nevada limited liability company.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem
or repurchase any such principal prior to the date originally scheduled for
the payment thereof.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
87
"Subsidiary" of any Person means (a) any corporation, association or other
business entity (other than a partnership, joint venture, limited liability
company or similar entity) of which more than 50% of the total ordinary voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof (or Persons performing similar functions) or (b) any partnership,
joint venture limited liability company or similar entity of which more than
50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, is, in
the case of clauses (a) and (b), at the time owned or controlled, directly or
indirectly, by (1) such Person, (2) such Person and one or more Subsidiaries
of such Person or (3) one or more Subsidiaries of such Person. Unless
otherwise specified herein, each reference to a Subsidiary will refer to a
Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes and exchange notes issued in a registered exchange offer pursuant to the
Registration Rights Agreement by a Subsidiary Guarantor pursuant to the terms
of the Indenture and any 142 supplemental indenture thereto, and,
collectively, all such Guarantees. Each such Subsidiary Guarantee will be in
the form prescribed by the Indenture.
"Subsidiary Guarantor" means Piper Petroleum Company, Delta Exploration
Company, Inc., and Castle Texas Exploration Limited Partnership, and any
Restricted Subsidiary created or acquired by the Company after the Issue Date
(other than a Foreign Subsidiary).
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors of the
Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary or a Person
becoming a Subsidiary through merger or consolidation or Investment therein)
to be an Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold any Lien on
any property of, any other Subsidiary of the Company which is not a Subsidiary
of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary;
(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall,
at the date of designation, and will at all times thereafter, consist of
Non-Recourse Debt;
(3) such designation and the Investment of the Company in such Subsidiary
complies with "Certain covenants Limitation on Restricted Payments";
(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, a
substantial portion of the business of the Company and its Subsidiaries;
(5) such Subsidiary is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Capital Stock of such Person; or
88
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary,
such Subsidiary is not a party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary with terms
substantially less favorable to the Company than those that might have been
obtained from Persons who are not Affiliates of the Company.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board
of Directors of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet
the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be Incurred as of such
date.
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that immediately after
giving effect to such designation, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof and the
Company could Incur at least $1.00 of additional Indebtedness under the first
paragraph of the covenant described under "Certain covenants Limitation on
Indebtedness" on a pro forma basis taking into account such designation.
"U.S. Government Obligations" means securities that are (a) direct obligations
of the United States of America for the timely payment of which its full faith
and credit is pledged or (b) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States of America
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation of the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depositary receipt issued by a bank (as defined in Section 3(a)(2)
of the Securities Act), as custodian with respect to any such U.S. Government
Obligations or a specific payment of principal of or interest on any such U.S.
Government Obligations held by such custodian for the account of the holder of
such depositary receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligations or the specific
payment of principal of or interest on the U.S. Government Obligations
evidenced by such depositary receipt.
"Volumetric Production Payments" means production payment obligations recorded
as deferred revenue in accordance with GAAP, together with all undertakings
and obligations in connection therewith.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary, all of the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company or another Wholly-Owned Subsidiary.
89
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material federal income tax
considerations relevant to the exchange of new notes for old notes but does
not purport to be a complete analysis of all potential tax effects. This
discussion is based upon the provisions of the Internal Revenue Code of 1986,
as amended, applicable Treasury Regulations promulgated and proposed
thereunder, judicial authority and administrative interpretations, as of the
date hereof, all of which are subject to change, possibly with retroactive
effect or are subject to different interpretations. This discussion does not
address the tax considerations arising under the laws of any foreign, state,
local, or other jurisdiction.
We believe that the exchange of new notes for old notes should not be an
exchange or otherwise a taxable event to a holder for United States federal
income tax purposes. Accordingly, a holder should have the same adjusted issue
price, adjusted basis and holding period in the new notes as it had in the old
notes immediately before the exchange.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Securities and Exchange
Commission in no action letters issued to third parties, we believe that you
may transfer new notes issued in the exchange offer in exchange for the old
notes if:
* you acquire the new notes in the ordinary course of your
business; and
* you are not engaged in, and do not intend to engage in, and
have no arrangement or understanding with any person to
participate in, a distribution of the new notes.
You may not participate in the exchange offer if you are:
* our "affiliate" within the meaning of Rule 405 under the
Securities Act; or
* a broker-dealer that acquired old notes directly from us.
Each broker-dealer that receives new notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We and the subsidiary guarantors have agreed that,
starting on the expiration date of the exchange offer and ending on the close
of business 180 days after the date of such expiration date, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
If you wish to exchange new notes for your old notes in the exchange
offer, you will be required to make representations to us as described in
"Exchange Offer - Purpose and Effect of the Exchange Offer" and " - Procedures
for Tendering - Your representations to us" in this prospectus and in the
letter of transmittal. In addition, if you are a broker-dealer who receives
new notes for your own account in exchange for old notes that were acquired by
you as a result of market-making activities or other trading activities, you
will be required to acknowledge that you will deliver a prospectus in
connection with any resale by you of the new notes.
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We will not receive any proceeds from any resale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of new notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the expiration date of the exchange offer,
we and the subsidiary guarantors will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests such documents in the letter of transmittal. We
have agreed to pay all expenses incident to the exchange offer (including the
expenses of one counsel for the holders of the old notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the old notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the new notes offered in this exchange offer will be
passed upon for us by Krys Boyle, P.C., Denver, Colorado. Shareholders and
employees of Krys Boyle, P.C. own an aggregate of 3,600 shares of Delta common
stock that were purchased on the open market for cash at prevailing prices.
EXPERTS
The consolidated balance sheets of Delta Petroleum Corporation as of June
30, 2004 and 2003, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended June 30, 2004; the statement of oil and
gas revenue and direct lease operating expenses of the Alpine assets for the
fiscal years ended June 30, 2004, 2003 and 2002; and the statement of oil and
gas revenue and direct lease operating expenses of the Manti assets for the
fiscal years ended June 30, 2004, 2003 and 2002, incorporated herein by
reference have been incorporated herein in reliance upon the reports of KPMG
LLP, an independent registered public accounting firm, upon the authority of
said firm as experts in accounting and auditing.
The audit report covering the June 30, 2004 consolidated financial
statements of Delta Petroleum Corporation refers to the adoption of Statement
of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, as of July 1, 2002.
RESERVE ENGINEERS
Certain information incorporated by reference in this prospectus
regarding estimated quantities of oil and natural gas reserves associated with
our oil and gas properties, the future net revenues from those reserves and
their present value is based on estimates of the reserves and present values
prepared by or derived from estimates prepared by Ralph E. Davis Associates,
Inc. or Mannon Associates, independent reserve engineers. The reserve
information is incorporated by reference herein in reliance upon the authority
of said firms as experts with respect to such reports.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, with respect to the new notes
offered hereby. As permitted by the rules and regulations of the Securities
and Exchange Commission, this prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to us and the new notes offered hereby, reference is made to the
registration statement, including the exhibits and schedules filed therewith.
Statements contained in this prospectus concerning the provisions of any
contract, agreement or other document referred to herein or therein are not
necessarily complete, but contain a summary of the material terms of such
contracts, agreements or other documents. With respect to each contract,
agreement or other document filed as an exhibit to the registration statement,
reference is made to the exhibit for the complete contents of the exhibit, and
each statement concerning its provisions is qualified in its entirety by such
reference. We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. The
registration statement and our other filings with the Securities and Exchange
Commission may be read and copied at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials may also
be obtained by mail at prescribed rates from the Public Reference Room of the
Securities and Exchange Commission at that address. You may obtain information
on the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. Copies of such materials may also be
obtained from the web site that the Securities and Exchange Commission
maintains at www.sec.gov.
We maintain an internet web site at www.deltapetro.com. The information
on this site does not form a part of this prospectus. Our common stock is
listed and traded on the Nasdaq National Market System under the trading
symbol "DPTR."
Pursuant to the Indenture under which the new notes will be issued, we
have agreed that, whether or not we are required to do so by the rules and
regulations of the Securities and Exchange Commission, for so long as any of
the new notes remain outstanding, we will furnish to the holders of the new
notes copies of the annual reports and any other information, documents and
other reports which we would be required to file with the Securities and
Exchange Commission if we were subject to Section 13 or 15(d) of the
Securities Exchange Act of 1934. In addition, whether or not required by the
rules and regulations of the Securities and Exchange Commission, we will also
agree to file a copy of all such information and reports with the Securities
and Exchange Commission for public availability (unless the Securities and
Exchange Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. Any
request of this nature should be directed to our Corporate Secretary, Delta
Petroleum Corporation, 370 17th Street, Suite 4300, Denver, Colorado 80202
(telephone (303) 293-9133).
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INCORPORATION BY REFERENCE
In this prospectus, we have incorporated by reference certain information
we have filed, or will file, with the Securities and Exchange Commission. The
information incorporated by reference is an important part of this prospectus,
and information that we file later with the Securities and Exchange Commission
will automatically update and supersede this information. Any statement
contained in any 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 in or omitted from
this prospectus, or in any other subsequently filed document which 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.
We incorporate by reference the documents listed below and any further
filings made with the Securities and Exchange Commission under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until we terminate this exchange offer:
* Annual Report on Form 10-K for fiscal year ended June 30,
2004, filed on September 13, 2004, Exchange Act reporting
number 0-16203.
* Amendment No. 1 to Annual Report on Form 10-K for fiscal year
ended June 30, 2004, filed on Form 10-K/A on October 28, 2004,
Exchange Act reporting number 0-16203.
* Amendment No. 2 to Annual Report on Form 10-K for fiscal year
ended June 30, 2004, filed on Form 10-K/A on March 8, 2005,
Exchange Act reporting number 0-16203.
* Quarterly Report on Form 10-Q for the quarter ended September 30,
2004, filed on November 9, 2004, Exchange Act reporting number
0-16203.
* Quarterly Report on Form 10-Q for the quarter ended December
31, 2004, filed on February 9, 2005, Exchange Act reporting
number 0-16203.
* Quarterly Report on Form 10-Q for the quarter ended March 31,
2005, filed on May 10, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated August 9, 2004, filed on
August 10, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated June 29, 2004, filed on
July 6, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated June 17, 2005, filed on
June 22, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated May 5, 2005, filed on May 11,
2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K/A, dated January 21, 2005 filed on
April 6, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated March 23, 2005, filed on
March 29, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated March 15, 2005, filed on
March 21, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated March 9, 2005 filed on
March 15, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated March 3, 2005, filed on
March 4, 2005, Exchange Act reporting number 0-16203.
93
* Current Report on Form 8-K, dated February 28, 2005 (reporting
information under Items 8.01 and 9.01) filed on February 28,
2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated January 21, 2005, filed on
January 24, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated January 21, 2005, filed on
January 21, 2005, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated December 28, 2004, filed
on December 28, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated November 19, 2004, filed
on November 19, 2004, Exchange Act reporting number 0-16203.
* Definitive Proxy Materials on Schedule 14A, filed on
November 22, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated November 5, 2004, filed on
November 12, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated November 4, 2004, filed
on November 10, 2004, Exchange Act reporting number 0-16203,
except for information disclosed under Item 2.02.
* Current Report on Form 8-K, dated October 26, 2004, filed
on October 29, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated September 29, 2004, filed
on October 1, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated August 25, 2004, filed on
August 26, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated August 6, 2004, filed on
August 6, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K/A, dated June 29, 2004, filed
on September 13, 2004, Exchange Act reporting number 0-16203.
* Current Report on Form 8-K, dated June 29, 2004, filed on
July 8, 2004, Exchange Act reporting number 0-16203.
* The description of our common stock contained in our
Registration Statement on Form 10 filed September 9, 1987,
Exchange Act reporting number 0-16203.
In addition, all documents filed by us under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 before the termination of this
exchange offer shall be deemed to be incorporated by reference into this
prospectus from the respective dates of filing such documents.
We will provide without charge to any person to whom this prospectus is
delivered, on the written or oral request of such person, a copy of any or all
of the documents incorporated by reference (other than exhibits to such
documents unless the exhibits are specifically incorporated by reference in
the documents). You may request a copy of any document incorporated by
reference in this prospectus and any exhibit specifically incorporated by
reference in those documents, at no cost, by writing or telephoning us at the
following address or phone number:
Delta Petroleum Corporation
370 17th Street, Suite 4300
Denver, Colorado 80202
Attn: Kevin Nanke, Chief Financial Officer
(303) 293-9133
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ANNEX A
LETTER OF TRANSMITTAL
TO TENDER
OUTSTANDING 7% SENIOR SUBORDINATED NOTES DUE 2015
(ISSUED BY DELTA PETROLEUM CORPORATION ON MARCH 15, 2005)
PURSUANT TO THE EXCHANGE OFFER AND PROSPECTUS DATED AUGUST 26, 2005
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON SEPTEMBER 26, 2005 (THE "EXPIRATION DATE"), UNLESS THE
EXCHANGE OFFER IS EXTENDED BY THE COMPANY.
The Exchange Agent for the Exchange Offer is:
U.S. Bank National Association
60 Livingston Avenue
St. Paul, Minnesota 55107
Attention: Specialized Financing
IF YOU WISH TO EXCHANGE CURRENTLY OUTSTANDING 7% SENIOR SUBORDINATED NOTES DUE
2015 WHICH WERE ISSUED BY THE COMPANY ON MARCH 15, 2005 (THE "OLD NOTES") FOR
AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF NEW 7% SENIOR SUBORDINATED NOTES DUE
2015 PURSUANT TO THE EXCHANGE OFFER, YOU MUST VALIDLY TENDER (AND NOT
WITHDRAW) OLD NOTES TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE BY CAUSING AN AGENT'S MESSAGE TO BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO SUCH TIME.
The undersigned hereby acknowledges receipt and review of the Prospectus,
dated August 26, 2005 (the "Prospectus"), of Delta Petroleum Corporation, a
Colorado corporation (the "Company"), and this Letter of Transmittal (the
"Letter of Transmittal"), which together describe the Company's offer to
exchange (the "Exchange Offer") its 7% Senior Subordinated Notes due 2015 (the
"New Notes") the offer and sale of which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of its outstanding 7% Senior Subordinated Notes due 2015
which were issued on March 15, 2005 (the "Old Notes"). Capitalized terms used
but not defined herein have the respective meaning given to them in this
Prospectus. The Company reserves the right, at any time or from time to time,
to extend the Exchange Offer at its discretion, in which event the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. The Company shall notify the Exchange Agent and each registered
holder of the Old Notes of any extension by oral or written notice prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter of Transmittal is to be used by holders of the Old Notes. Tender
of Old Notes is to be made according to the Automated Tender Offer Program
("ATOP") of the Depository Trust Company ("DTC") pursuant to the procedures
set forth in the Prospectus under the caption "The Exchange Offer - Procedures
for Tendering. - DTC participants that are accepting the Exchange Offer must
transmit their acceptance to DTC, which will verify the acceptance and execute
a book-entry delivery to the Exchange Agent's DTC account. DTC will then send
a computer generated message known as an "agent's message" to the exchange
agent for its acceptance. For you to validly tender your Old notes in the
Exchange Offer, the Exchange Agent must receive prior to the Expiration Date,
an agent's message under the ATOP procedures that confirms that:
1
* DTC has received your instructions to tender your Old Notes; and
* You agree to be bound by the terms of this Letter of Transmittal
BY USING THE ATOP PROCEDURES TO TENDER OLD NOTES, YOU WILL NOT BE REQUIRED TO
DELIVER THIS LETTER OF TRANSMITTAL TO THE EXCHANGE AGENT. HOWEVER, YOU WILL BE
BOUND BY ITS TERMS, AND YOU WILL BE DEEMED TO HAVE MADE THE ACKNOWLEDGMENTS
AND THE REPRESENTATIONS AND WARRANTIES IT CONTAINS, JUST AS IF YOU HAD SIGNED
IT.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
1. By tendering Old Notes in the Exchange Offer, you acknowledge receipt
of the Prospectus and this Letter of Transmittal.
2. By tendering Old Notes in the Exchange Offer, you represent and
warrant that you have full authority to tender the Old Notes described above
and will, upon request, execute and deliver any additional documents deemed by
the Company to be necessary or desirable to complete the tender of Old Notes.
3. The tender of the Old Notes pursuant to all of the procedures set
forth in the Prospectus will constitute an agreement between you and the
Company as to the terms and conditions set forth in the Prospectus.
4. The Exchange Offer is being made in reliance upon interpretations
contained in no-action letters issued to third parties by the staff of the
Securities and Exchange Commission (the "SEC"), including Exxon Capital
Holdings Corp., SEC No-Action Letter (available April 13, 1989), Morgan
Stanley & Co., Inc., SEC No-Action Letter (available June 5, 1991) and
Shearman & Sterling, SEC No-Action Letter (available July 2, 1993), that the
New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by holders thereof
(other than a broker-dealer who purchased Old Notes exchanged for such New
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act of 1933, as amended (the
"Securities Act")) and any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act (without compliance
with the registration and prospectus delivery provisions of the Securities
Act), provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders are not participating in, and have no
arrangement with any person to participate in, the distribution of such New
Notes.
5. By tendering Old Notes in the Exchange Offer, you represent and
warrant that:
a. the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of your business, whether or not you are
the holder;
b. neither you nor any such other person is engaging in or intends
to engage in a distribution of such New Notes;
c. neither you nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes; and
2
d. neither the holder nor any such other person is an "affiliate,"
as such term is defined under Rule 405 promulgated under the Securities Act,
of the Company.
6. You may, if you are unable to make all of the representations and
warranties contained in Item 5 above and as otherwise permitted in the
Registration Rights Agreement (as defined below), elect to have your Old Notes
registered in the shelf registration statement described in the Registration
Rights Agreement, dated as of June 22, 2004 (the "Registration Rights
Agreement"), by and among the Company, the Subsidiary Guarantors (as defined
therein) and the Initial Purchasers (as defined therein). Such election may be
made only by notifying the Company in writing at 370 17th Street Suite 4300,
Denver, Colorado 80202 Attention: Corporate Secretary. By making such
election, you agree, as a holder of Old Notes participating in a shelf
registration, to indemnify and hold harmless the Company, each of the
directors of the Company, each of the officers of the Company who signs such
shelf registration statement, each person who controls the Company within the
meaning of either the Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and each other holder of Old Notes, from and
against any and all losses, claims, damages or liabilities caused by any
untrue statement or alleged untrue statement of a material fact contained in
any shelf registration statement or prospectus, or in any supplement thereto
or amendment thereof, or caused by the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; but only with respect to information relating to the
undersigned furnished in writing by or on behalf of the undersigned expressly
for use in a shelf registration statement, a prospectus or any amendments or
supplements thereto. Any such indemnification shall be governed by the terms
and subject to the conditions set forth in the Registration Rights Agreement,
including, without limitation, the provisions regarding notice, retention of
counsel, contribution and payment of expenses set forth therein. The above
summary of the indemnification provision of the Registration Rights Agreement
is not intended to be exhaustive and is qualified in its entirety by the
Registration Rights Agreement.
7. If you are a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, you acknowledge, by
tendering Old Notes in the Exchange Offer, that you will deliver a prospectus
in connection with any resale of such New Notes; however, by so acknowledging
and by delivering a prospectus, you will not be deemed to admit that you are
an "underwriter" within the meaning of the Securities Act. If you are a
broker-dealer and Old Notes held for your own account were not acquired as a
result of market-making or other trading activities, such Old Notes cannot be
exchanged pursuant to the Exchange Offer.
8. Any of your obligations hereunder shall be binding upon your
successors, assigns, executors, administrators, trustees in bankruptcy and
legal and personal representatives of the undersigned.
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Book-Entry confirmations.
Any confirmation of a book-entry transfer to the Exchange Agent's account
at DTC of Old Notes tendered by book-entry transfer (a "Book-Entry
Confirmation"), as well as an agent's message, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein prior to 5:00 P.M., New York City time, on the
Expiration Date.
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2. Partial Tenders.
Tenders of Old Notes will be accepted only in integral multiples of
$1,000. The entire principal amount of Old Notes delivered to the exchange
agent will be deemed to have been tendered unless otherwise communicated to
the exchange agent. If the entire principal amount of all Old Notes is not
tendered, then Old Notes for the principal amount of Old Notes not tendered
and notes issued in exchange for any Old Notes accepted will be delivered to
the holder via the facilities of DTC promptly after the Old Notes are accepted
for exchange.
3. Validity of Tenders.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined
by the Company, in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any or all tenders
not in proper form or the acceptance for exchange of which may, in the opinion
of counsel for the Company, be unlawful. The Company also reserves the
absolute right to waive any of the conditions of the Exchange Offer or any
defect or irregularity in the tender of any Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions on this Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes must be cured within such time as the Company shall
determine. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Company, the
Exchange Agent, nor any other person shall be under any duty to give such
notification of any defects or irregularities in tenders or incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
holders via the facilities of DTC, as soon as practicable following the
Expiration Date.
4. Waiver of Conditions.
The Company reserves the absolute right to waive, in whole or part, up to
the expiration of the exchange offer any of the conditions of the Exchange
Offer set forth in the Prospectus or in this Letter of Transmittal.
5. No Conditional Tender.
No alternative, conditional, irregular or contingent tender of Old Notes
will be accepted.
6. Request for Assistance or Additional Copies.
Requests for assistance or for additional copies of the Prospectus or
this Letter of Transmittal may be directed to the Exchange Agent at the
address or telephone number set forth on the cover page of this Letter of
Transmittal. Holders may also contact their broker, dealer, commercial bank,
trust company or other nominee for assistance concerning the Exchange Offer.
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7. Withdrawal.
Tenders may be withdrawn only pursuant to the limited withdrawal rights
set forth in the Prospectus under the caption "Exchange Offer - Withdrawal of
Tenders."
8. No Guarantee of Late Delivery.
There is no procedure for guarantee of late delivery in the Exchange
Offer. IMPORTANT: BY USING THE ATOP PROCEDURES TO TENDER OLD NOTES, YOU WILL
NOT BE REQUIRED TO DELIVER THIS LETTER OF TRANSMITTAL TO THE EXCHANGE AGENT.
HOWEVER, YOU WILL BE BOUND BY ITS TERMS, AND YOU WILL BE DEEMED TO HAVE MADE
THE ACKNOWLEDGEMENTS AND THE REPRESENTATIONS AND WARRANTIES IT CONTAINS, JUST
AS IF YOU HAD SIGNED IT.
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[Back Cover Page]
DELTA PETROLEUM CORPORATION
[Logo]
Offer to Exchange up to
$150,000,000 7% Senior Subordinated Notes due 2015
issued by Delta Petroleum Corporation on March 15, 2005
For
$150,000,000 7% Senior Subordinated Notes due 2015,
the offer and exchange of which have been registered
under the Securities Act of 1933
August 26, 2005