PROSPECTUS SUPPLEMENT
TO
PROSPECTUS DATED JUNE 21, 1999
KEY LOGO
KEY ENERGY SERVICES, INC.
Offer to Exchange
8 3/8% Senior Notes Due 2008, Series B
for all outstanding
8 3/8% Senior Notes Due 2008, Series A
THE SERIES B NOTES
o The Series B notes will be freely tradeable and will have virtually
identical terms to the old notes, except for certain transfer
restrictions, registration rights and liquidated damages provisions
relating to the old notes.
MATERIAL TERMS OF THE EXCHANGE OFFER
o The exchange offer will expire at 5:00 p.m., New York City time, on August
31, 2001, unless extended.
o Not subject to any condition other than that the exchange offer will not
violate applicable law or any applicable interpretation of the staff of
the SEC.
o We will exchange all old notes that are validly tendered and not validly
withdrawn for an equal principal amount of Series B notes.
o You may withdraw tenders of old notes any time before the expiration of
the exchange offer.
o The exchange of notes in the exchange offer
will not be a taxable event for U.S. federal
income tax purposes.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THE PROSPECTUS
DATED JUNE 21, 1999 AND PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE SERIES B
NOTES TO BE ISSUED IN THE EXCHANGE OFFER OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
ILLEGAL.
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The date of this prospectus supplement is August 2, 2001.
This prospectus supplement is part of a registration statement we have
filed with the SEC. We are submitting this prospectus supplement and the
accompanying prospectus to holders of old notes so that they can consider
exchanging the old notes for Series B notes. We refer to this prospectus
supplement together with the accompanying prospectus as the prospectus. You
should rely only on the information contained in this prospectus or the
documents we incorporate by reference. We have not authorized anyone to provide
you with additional or different information. If anyone provides you with
additional or different information, you should not rely on it. We are not
making an offer to exchange and issue the Series B notes in any jurisdiction
where the offer or exchange is not permitted. You should assume that the
information contained in this prospectus is accurate only as of the date on the
front cover of this prospectus and that any information we have incorporated by
reference is accurate only as of the date of the document incorporated by
reference.
TABLE OF CONTENTS
Summary....................................................................S-3
Risk Factors...............................................................S-8
Use of Proceeds...........................................................S-13
Ratio of Earnings to Fixed Charges........................................S-13
The Exchange Offer........................................................S-14
Description of Notes......................................................S-20
Certain U.S. Federal Income Tax Considerations ...........................S-56
Plan of Distribution......................................................S-56
Legal Matters.............................................................S-57
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS, BUT
DOES NOT CONTAIN ALL INFORMATION THAT IS IMPORTANT TO YOU. THIS PROSPECTUS
INCLUDES SPECIFIC TERMS OF THE EXCHANGE OFFER AND A DESCRIPTION OF OUR BUSINESS.
WE ENCOURAGE YOU TO READ THIS PROSPECTUS AND THE MATERIALS REFERRED TO UNDER THE
CAPTION "WHERE YOU CAN FIND MORE INFORMATION."
THE EXCHANGE OFFER
On March 6, 2001, we completed the private offering of $175.0 million
aggregate principal amount of 8 3/8% Senior Notes due 2008, Series A.
We entered into a registration rights agreement with the initial
purchasers in which we agreed to deliver to you this prospectus and to
complete the exchange offer on or before September 2, 2001 or the next
business day. In the exchange offer, you are entitled to exchange old notes
you hold for Series B notes with substantially identical terms. You should
read the discussion under the headings "Summary of Terms of Series B Notes"
and "Description of Notes" for further information regarding the Series B
notes. After the exchange offer is complete, you will no longer be entitled
to any exchange or registration rights with respect to any old notes.
We have summarized the terms of the exchange offer below. You should read
the discussion under the headings "Summary of the Exchange Offer" and "The
Exchange Offer" for further information about the exchange offer and resale of
Series B notes.
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer. We are offering to issue Series B notes that
have been registered under the Securities Act of 1933 in
exchange for a like principal amount of old notes. To be
exchanged, an old note must be properly tendered and
accepted. All old notes that are validly tendered and not
validly withdrawn will be exchanged. Old notes may only be
tendered in $1,000 increments.
As of this date, there is $175.0 million principal amount of
old notes outstanding.
We will issue Series B notes promptly after the expiration
of the exchange offer.
Expiration Date.... The exchange offer will expire at 5:00 p.m., New York City
time, August 31, 2001, unless we decide to extend the
expiration date.
Conditions to the
Exchange Offer..... We will not be required to accept old notes for exchange if
the exchange offer will violate applicable law or any
applicable interpretation of the staff of the SEC.
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Procedures for
Tendering.......... Old Notes The old notes were issued in global certificate
form to The Depository Trust Company. Interests in the old
notes, which are held by direct or indirect participants in
DTC through book-entry interests, are shown on, and
transfers of the old notes can be made only through, records
maintained in book-entry form by DTC.
If you are a participant in DTC and you wish to participate
in the exchange offer, you must do so through DTC's
automated tender offer program.
If you tender under this program, you also must cause DTC to
notify the exchange agent before the expiration date that
DTC has obtained from you an electronic acknowledgment that
you received and agreed to be bound by the letter of
transmittal that accompanies this prospectus.
If you are not a participant in DTC and you wish to tender
your old notes pursuant to the exchange offer, you should
promptly contact the broker, dealer, commercial bank, trust
company or other nominee through whom you hold a beneficial
interest in the old notes and instruct such person to tender
on your behalf.
Guaranteed Delivery
Procedures......... You must tender your old notes according to the guaranteed
delivery procedures described in "The Exchange
Offer-Guaranteed Delivery Procedures" if any of the
following apply:
o you wish to tender your old notes but they are not
immediately available;
o you cannot deliver your old notes, the letter of
transmittal or any other required documents to the
exchange agent prior to the expiration date; or
o you cannot comply with the applicable procedures under
DTC's automated tender offer program prior to the
expiration date.
Withdrawal Rights.. You may withdraw the tender of your old notes at any time
prior to 5:00 p.m., New York City time, on August 31, 2001.
Certain U.S. Federal
Income Tax
Considerations..... The exchange of old notes for Series B notes will not be a
taxable event for United States federal income tax purposes.
You will not recognize any taxable gain or loss or any
interest income as a result of the exchange.
Exchange Agent..... The Chase Manhattan Bank is serving as exchange agent for
the exchange offer.
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Resales............ We believe that you may resell the Series B notes issued in
the exchange offer without restrictions under the Securities
Act of 1933 provided that:
o you are acquiring the Series B notes in the ordinary
course of business;
o you are not participating, do not intend to participate,
and have no arrangement or understanding with any person
to participate, in the distribution of Series B notes
issued to you; and
o you are not one of our affiliates.
If our belief is inaccurate and you transfer any Series B
note without delivering a prospectus meeting the
requirements of the Securities Act of 1933 or without an
exemption from such requirements, you may incur liability
under the Securities Act of 1933. We do not assume or
indemnify you against any such liability.
Each broker-dealer that is issued Series B notes in the
exchange offer for its own account in exchange for old notes
that were acquired by that broker-dealer as a result of
market-making or other trading activities must acknowledge
that it will deliver a prospectus meeting the requirements
of the Securities Act of 1933 in connection with any resale
of the Series B notes issued in the exchange offer. A
broker-dealer may use this prospectus as supplemented for an
offer to resell, resale or other retransfer of the Series B
notes so issued.
SUMMARY OF TERMS OF SERIES B NOTES
The Series B notes to be issued in the exchange offer will be freely
tradeable and otherwise substantially identical to the old notes. The Series B
notes will evidence the same debt as the old notes. The old notes are, and the
Series B notes will be, governed by the same indenture.
Aggregate Principal Amount $175.0 million.
Interest Rate . . . . . . .8 3/8%.per.year.
Maturity.................. March 1, 2008.
Interest Payment Dates ... Interest will be payable
semi-annually on September 1 and March 1 of each
year.
Guarantees................ The Series B notes are guaranteed by certain of our
subsidiaries. If we cannot make payments on the
Series B notes when they are due, the guarantors are
obligated to make them instead.
Optional Redemption....... At any time on or after March 1, 2005, we may redeem
all or part of the notes. Before March 1, 2004, we
may redeem up to 35% of the aggregate principal
amount of the notes issued under the indenture at the
redemption price of 108.375% of the principal amount,
plus accrued and unpaid interest and liquidated
damages to the redemption date, with the net cash
proceeds of one or more equity offerings, provided at
least 65% of the aggregate principal amount of the
notes issued remain outstanding after each
redemption.
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Ranking................... The Series B notes will:
o be unsecured indebtedness;
o rank equally with our existing and future senior
unsecured indebtedness; and
o be effectively subordinated to certain of our
secured indebtedness to the extent of such
security interests.
Certain Covenants......... The indenture under which the old notes have been and
the Series B notes are being issued contains certain
covenants for your benefit which, among other things
and subject to certain exceptions, restrict our
ability to:
o sell assets;
o make restricted payments;
o incur additional indebtedness;
o issue or sell preferred stock of restricted
subsidiaries;
o create or incur liens;
o place restrictions on distributions and other
payments from restricted subsidiaries;
o merge or consolidate with or transfer substantial
assets to another entity;
o engage in transactions with related persons;
o engage in sale and leaseback transactions; or
o engage in any business other than permitted
businesses.
These covenants are subject to exceptions and some of
the covenants may be suspended before the notes
mature if the notes attain an investment grade rating
in the future and no event of default exists under
the indenture.
Change of Control......... If a change of control occurs, each holder of Series
B notes will have the right to require us to purchase
all or a portion of its notes at 101% of the
principal amount on the date of purchase, plus
accrued and unpaid interest.
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Form of Series B Notes.... The Series B notes will be issued in global
certificate form to DTC. You will not receive Series
B notes in certificated form unless one of the events
set forth under the heading "Description of
Notes -- Book- Entry; Delivery and Form" has
occurred. Instead, beneficial interests in the
Series B notes will be shown on, and transfers of
these notes will be effected only through, records
maintained in book-entry form by DTC.
There is no existing market for the Series B notes.
We cannot provide any assurance about:
o the liquidity of any markets that may develop for
the Series B notes;
o your ability to sell the Series B notes; and
o the prices at which you will be able to sell the
Series B notes.
Future trading prices of the Series B notes will
depend on many factors, including:
o prevailing interest rates;
o our operating results;
o the ratings of the Series B notes; and
o the market for similar securities.
The initial purchasers of the Series B notes have
advised us that they currently intend to make a
market in the Series B notes we issue in the exchange
offer. Those initial purchasers do not, however, have
any obligation to do so, and they may discontinue any
market-making activities at any time without any
notice. In addition, we do not intend to apply for
listing of the Series B notes on any securities
exchange or for quotation of the Series B notes in
any automated dealer quotation system.
Our principal offices are located at Two Tower Center, 20th Floor, East
Brunswick, New Jersey 08816 and our telephone number is (732) 247-4822.
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RISK FACTORS
AN INVESTMENT IN OUR DEBT SECURITIES IS SUBJECT TO A NUMBER OF RISKS. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THAT INVESTMENT
AND YOUR DECISION WHETHER TO EXCHANGE OLD NOTES FOR SERIES B NOTES.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS IS DEPENDENT ON CONDITIONS IN THE OIL AND GAS INDUSTRY, ESPECIALLY
THE PRODUCTION EXPENDITURES OF OIL AND GAS COMPANIES.
The demand for our services is primarily influenced by current and
anticipated oil and natural gas prices. Weakness in oil and natural gas prices
may cause lower day rates and lower use of available well service equipment. In
addition when oil and natural gas prices are weak, fewer wells are drilled,
resulting in less drilling and less maintenance work for us. Additional factors
that effect demand for our services include:
o the level of development, exploration and production activity of,
and corresponding spending by, oil and natural gas companies;
o oil and natural gas production costs;
o government regulation; and
o conditions in the worldwide oil and natural gas industry.
Periods of diminished or weakened demand for our services have occurred in
the past and may occur in the future. In light of these and other factors
relating to the oil and natural gas industry, our historical operating results
may not be indicative of future performance. In addition, reductions in oil and
natural gas prices can result in a reduction in the trading prices and value of
our securities, even if the reduction in oil and natural gas prices does not
affect our business generally.
WE HAVE PURSUED, AND MAY CONTINUE TO PURSUE, STRATEGIC ACQUISITIONS. OUR
BUSINESS MAY BE ADVERSELY AFFECTED IF WE CANNOT EFFECTIVELY INTEGRATE ACQUIRED
OPERATIONS.
A component of our strategy includes acquiring complementary businesses.
Acquisitions, including recent acquisitions and any acquisitions we make in the
future, involve a number of risks and challenges including:
o our ability to integrate acquired operations;
o potential loss of key employees and customers of the acquired
companies; and
o an increase in our expenses and working capital requirements.
Any of these factors could adversely affect our ability to achieve
anticipated levels of cash flows from our recent or future acquisitions or
realize other anticipated benefits. Furthermore, competition from other
potential buyers could reduce our acquisition opportunities or cause us to pay a
higher price than we otherwise might pay.
OUR BUSINESS INVOLVES CERTAIN OPERATING RISKS, AND OUR INSURANCE MAY NOT BE
ADEQUATE TO COVER ALL LOSSES OR LIABILITIES WE MIGHT INCUR IN OUR OPERATIONS.
Our operations are subject to many hazards and risks, including the
following:
o blow-outs;
o reservoir damage;
o loss of well control;
S-8
o cratering;
o fires;
o damage to the environment; and
o liabilities from accident or damage by our fleet of trucks.
If these hazards occur they could result in suspensions of operations,
damage to or destruction of our equipment and the property of others and injury
or death to personnel. We maintain insurance at levels that are customary in our
industry to protect against these liabilities; however, our insurance may not be
adequate to cover all losses or liabilities that we might incur in our
operations. There can be no assurance that our insurance will adequately protect
us against liability from all of the hazards of our business. Moreover, we also
are subject to the risk that we may not be able to maintain or obtain insurance
of the type and amount we desire at reasonable rates. If we were to incur a
significant liability for which we were not fully insured, it could have a
material adverse effect on our financial position and results of operations.
WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REGULATIONS THAT
EXPOSE US TO POTENTIAL LIABILITY.
Our operations are regulated under a number of foreign, federal, state and
local laws that govern, among other things, the handling, storage and disposal
of waste materials, some of which are classified as hazardous substances, and
the discharge of hazardous materials into the environment. Our operations are
subject to stringent regulations relating to protection of the environment and
waste handling. In addition to liability for our own noncompliance, these
regulations may expose us to liability for noncompliance of other parties,
without regard to whether we were negligent. Sanctions for noncompliance with
applicable environmental laws and regulations may include administrative, civil
and criminal penalties, revocation of permits and corrective action orders.
Furthermore, we may be liable for costs for environmental clean-up at currently
or previously owned or operated properties or off-site locations where we sent,
disposed of, or arranged for disposal of hazardous materials. Compliance with
existing laws or regulations, the adoption of new laws or regulations or the
more vigorous enforcement of environmental laws or regulations could have a
material adverse effect on our operations by increasing our expenses and
limiting our future business opportunities.
RISKS RELATING TO THE NOTES
WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT CASH FLOW TO MEET OUR DEBT SERVICE
OBLIGATIONS.
Our ability to make payments on and to refinance our indebtedness,
including the notes, and to fund planned capital expenditures will depend on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
We cannot assure you that we will generate sufficient cash flow from
operations, that currently anticipated operating improvements will be realized
or that future borrowings will be available to us under our senior credit
facility in an amount sufficient to enable us to pay our indebtedness, including
the notes, or to fund our other liquidity needs. We may need to refinance all or
a portion of our indebtedness, including the notes, on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness,
including our senior credit facility and the notes, on commercially reasonable
terms or at all.
WE ARE A HOLDING COMPANY AND CONDUCT A SUBSTANTIAL PORTION OF OUR OPERATIONS
THROUGH OUR SUBSIDIARIES, WHICH MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE
NOTES.
We conduct a substantial portion of our operations through our
subsidiaries. As a result, our cash flow and our ability to service our debt,
including the notes, is dependent upon the earnings of our subsidiaries. In
addition, we are dependent on the distribution of earnings, loans or other
payments from our subsidiaries to us. Any payment of dividends, distributions,
loans or other payments from our subsidiaries to us could be subject to
statutory or contractual restrictions. Payments to us by our subsidiaries also
will be contingent upon the profitability of our subsidiaries. If we are unable
to obtain funds from our subsidiaries we may not be able to pay interest or
principal
S-9
on the notes when due, or to redeem the notes upon a change of control, and we
cannot assure you that we will be able to obtain the necessary funds from other
sources.
WE COULD INCUR A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD MATERIALLY ADVERSELY
AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS PROSPECTS AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We had approximately $534.2 million of indebtedness outstanding on March
31, 2001, including the notes. However, we will be permitted under our senior
credit facility and the indenture governing the notes to incur additional debt,
subject to certain limitations. If we incur additional debt, our increased
leverage could, for example:
o make it more difficult for us to satisfy our obligations under the
notes or other indebtedness and, if we fail to comply, such failure
could result in an event of default on the notes or such other
indebtedness;
o require us to dedicate a substantial portion of cash flow from
operations to required payments on indebtedness, thereby reducing
the availability of cash flow from working capital, capital
expenditures and other general business activities;
o limit our ability to obtain additional financing in the future for
working capital, capital expenditures and other general business
activities;
o limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
o detract from our ability to successfully withstand a downturn in our
business or the economy generally; and
o place us at a competitive disadvantage against less leveraged
competitors.
OUR DEBT INSTRUMENTS IMPOSE RESTRICTIONS ON US THAT MAY AFFECT OUR ABILITY TO
SUCCESSFULLY OPERATE OUR BUSINESS.
Our senior credit facility and the terms of the indenture restrict us
from taking various actions, such as:
o incurring additional indebtedness;
o paying dividends;
o repurchasing junior indebtedness;
o making investments;
o entering into transactions with affiliates;
o merging or consolidating with other entities; and
o selling all or substantially all of our assets.
In addition, our senior credit facility requires us to maintain certain
financial ratios and satisfy certain financial condition tests, several of which
become more restrictive over time and may require us to take action to reduce
our debt or take some other action in order to comply with them. These
restrictions also could limit our ability to obtain future financings, make
needed capital expenditures, withstand a future downturn in our business or the
economy in general, or otherwise conduct necessary business activities. We also
may be prevented from taking advantage of business opportunities that arise
because of the limitations imposed on us by the restrictive covenants under our
senior credit facility and the indenture. A breach of any of these provisions
will likely result in a default under the indenture governing the notes and
under our senior credit facility that would allow those lenders to declare that
indebtedness immediately due and payable. If we were unable to pay those amounts
because we do not have
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sufficient cash on hand or are unable to obtain alternative financing on
acceptable terms, the lenders could initiate a bankruptcy or liquidation
proceeding or proceed against any assets that serve as collateral to secure that
indebtedness. Our assets may not be sufficient to repay that amount and the
amounts due under the notes in full.
IN THE EVENT OF OUR BANKRUPTCY OR LIQUIDATION, HOLDERS OF THE NOTES WILL BE PAID
FROM ANY ASSETS REMAINING AFTER PAYMENTS TO ANY HOLDERS OF SECURED DEBT AND DEBT
OF OUR NON-GUARANTOR SUBSIDIARIES.
The notes are general unsecured senior obligations of us and our
subsidiary guarantors, and are effectively subordinated to any secured debt
that we may have in the future to the extent of the value of the assets
securing that debt. As of March 31, 2001, our total secured indebtedness was
approximately $41.8 million. The indenture permits us to incur additional
secured indebtedness provided certain conditions are met. In addition, not
all of our subsidiaries guarantee the notes, which are effectively
subordinated to the liabilities of any of these non-guarantor subsidiaries.
Specifically, not all of our foreign subsidiaries guarantee the notes.
If we are declared bankrupt or insolvent, or are liquidated, the holders
of our secured debt and any debt of our non-guarantor subsidiaries will be
entitled to be paid from our assets before any payment may be made with respect
to the notes. If any of the foregoing events occur, we cannot assure you that we
will have sufficient assets to pay amounts due on our secured debt, the debt of
our non-guarantor subsidiaries and the notes. As a result, holders of the notes
may receive less, ratably, than the holders of secured debt of our non-guarantor
subsidiaries in the event of our bankruptcy or liquidation.
WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL.
If a change of control, as defined in the indenture, occurs we will be
required to make an offer to purchase all the notes at a premium, plus any
accrued interest to the date of purchase. In such a situation, we cannot assure
you that we will have enough funds to pay for all of the notes that are tendered
under the offer to purchase. If a significant amount of notes are tendered, we
will almost certainly have to obtain financing to pay for the tendered notes;
however, we cannot be sure we will be able to obtain such financing on
acceptable terms, if at all. A change of control also may result in an event of
default under our senior credit facility and agreements governing our future
indebtedness and may result in the acceleration of that indebtedness, in which
case we will be required to repay that indebtedness at the time of acceleration
rather than at scheduled maturity. If that indebtedness is secured debt, we will
be required to repay that debt to the extent of the value of the assets securing
the debt before repurchasing the notes.
THE SUBSIDIARY GUARANTEES COULD BE DEEMED FRAUDULENT CONVEYANCES UNDER CERTAIN
CIRCUMSTANCES, AND A COURT MAY TRY TO SUBORDINATE OR VOID THE SUBSIDIARY
GUARANTEES.
Under the federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
o received less than reasonably equivalent value or fair consideration
for the incurrence of such guarantee; and
o was insolvent or rendered insolvent by reason of such
incurrence; or
o was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or
o intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor. The measures of insolvency for
purposes of these fraudulent transfer laws will vary depending upon the law
applied in any proceeding to
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determine whether a fraudulent transfer has occurred. Generally, however, a
guarantor would be considered insolvent if:
o the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets;
o the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability,
including contingent liabilities, on its existing debts, as they
become absolute and mature; or
o it could not pay its debts as they become due.
THERE IS A LIMITED MARKET FOR OLD NOTES AND NO ASSURANCE THAT A PUBLIC MARKET
FOR SERIES B NOTES WILL DEVELOP.
The old notes are eligible for trading in the PORTAL market of the NASD.
This market is open only to institutional investors eligible to purchase
securities in offerings made under the exemption from registration provided by
Rule 144A under the Securities Act of 1933. To the extent that old notes are
exchanged in the exchange offer, the existing limited market for old notes will
become further constricted, with a probable decrease in the liquidity of the old
notes.
The Series B notes constitute a new issue of securities with no
established public trading market. We do not intend to list the Series B notes
on any national securities exchange or for quotation in any automated dealer
quotation system. The initial purchasers of the old notes advised us that they
intend to make a public market in the Series B notes. However, they are not
obligated to do so and any market-making activities with respect to the Series B
notes can be discontinued at any time without notice. Historically, the market
for noninvestment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the notes. We
cannot assure you that the market, if any, for the notes will be free from
similar disruptions. Any disruptions in the market may adversely affect the
prices at which you may sell your notes. In addition, after their initial
issuance, the notes may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar notes, our
performance and other factors. Accordingly, no assurance can be given that an
active public market will develop for the Series B notes or as to the liquidity
of, or the trading market for, the Series B notes.
UNEXCHANGED OLD NOTES WILL REMAIN RESTRICTED.
Old notes that are not tendered in the exchange offer will continue to be
subject to the existing restrictions upon their transfer. We will have no
obligation to provide for the registration under the Securities Act of 1933 of
unexchanged old notes.
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USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of Series B notes
offered hereby. In consideration for issuing the Series B notes, we will receive
in exchange a like principal amount of old notes, the terms of which are
virtually identical to the Series B notes. The old notes surrendered in exchange
for the Series B notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Series B notes will not result in any change in our
capitalization.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of our earnings to our fixed
charges for each of the periods indicated:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
NINE MONTHS ENDED
1996 1997 1998 1999 2000 MARCH 31, 2001
------- -------- -------- --------- --------- ----------------------
2.62 2.52 2.61 1.39 2.33 2.24
For these ratios, earnings consist of income from continuing operations
before income taxes and fixed charges. Fixed charges consist of interest
expenses, amortization of debt issuance expenses and the portions of rentals and
lease obligations representative of the interest factor.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The old notes were sold on March 6, 2001, to the initial purchasers and
were subsequently resold to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933. We are offering to exchange the Series
B notes for the old notes to satisfy our contractual obligations under the
registration rights agreement we executed in connection with the offering of
the old notes.
After consummation of the exchange offer, holders of old notes who do not
tender will not have any further registration rights under the registration
rights agreement. Any unexchanged old notes will continue to be subject to
certain restrictions on transfer. The old notes are currently eligible for sale
pursuant to Rule 144A through the PORTAL System of the NASD. We anticipate that
most holders of old notes will elect to exchange them for Series B notes since
resales of Series B notes will not be restricted under the Securities Act of
1933. We anticipate that the liquidity of the market for any old notes remaining
after the consummation of the exchange offer will be substantially reduced.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn before the expiration date. We will issue $1,000
principal amount of Series B notes in exchange for each $1,000 principal amount
of old notes accepted in the exchange offer. Holders may tender some or all of
their old notes pursuant to the exchange offer. However, you may tender old
notes only in integral multiples of $1,000.
The form and terms of the Series B notes are the same as the form and
terms of the old notes except that:
o the Series B notes have been registered under the Securities Act of
1933 and hence will not bear legends restricting their transfer; and
o the holders of the Series B notes will not be entitled to certain
rights under the registration rights agreement, and the rights
presently applicable to old notes will terminate upon consummation
of the exchange offer.
The Series B notes will evidence the same debt as the old notes and will
be entitled to the benefits of the indenture.
Holders of old notes do not have any appraisal or dissenter's rights in
connection with the exchange offer. We are conducting the exchange offer in
accordance with the applicable requirements of the Securities Exchange Act of
1934 and the rules and regulations of the SEC thereunder, including Rule 14e-1.
We will be deemed to have accepted validly tendered old notes when, as and
if we give oral or written notice thereof to the exchange agent. The exchange
agent will act as agent for the tendering holders for the purpose of receiving
the Series B notes from us.
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees, or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than transfer taxes in certain
circumstances, in connection with the exchange offer.
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on August
31, 2001, unless we, in our sole discretion, extend the exchange offer, in which
case the expiration date will be the latest date and time to which the exchange
offer is extended.
We will notify the exchange agent of any extension of the exchange offer
by oral or written notice, followed by a public announcement no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled expiration date.
We reserve the right, in our sole discretion, to:
o delay accepting any old notes;
o extend the exchange offer;
o terminate the exchange offer if any of the conditions set forth
under "-- Conditions to the Exchange Offer" shall not have been
satisfied, by giving oral or written notice of such delay, extension
or termination to the exchange agent; or
o amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by a public announcement thereof. If the
exchange offer is amended in a manner we determine constitutes a material
change, we will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and, depending
upon the significance of the amendment and the manner of disclosure to the
registered holders, we will extend the exchange offer for a period of five to
ten business days if the exchange offer would otherwise expire during such
period.
Without limiting the manner in which we may choose to make public
announcement of any delay, extension, amendment or termination of the exchange
offer, we shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
PROCEDURES FOR TENDERING OLD NOTES
To tender in the exchange offer, a holder must either (1) comply with the
procedures for physical tender or (2) comply with the automated tender offer
program procedures of The Depository Trust Company, or "DTC", described below.
To complete a physical tender, a holder must:
o complete, sign and date the letter of transmittal or a facsimile of
the letter of transmittal;
o have the signature on the letter of transmittal guaranteed if the
letter of transmittal so requires;
o mail or deliver the letter of transmittal or facsimile to the
exchange agent prior to the expiration date; and
o deliver the old notes to the exchange agent prior to the expiration
date or comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address prior to the expiration date.
To complete a tender through DTC's automated tender offer program, the
exchange agent must receive, prior to the expiration date, a timely confirmation
of book-entry transfer of such old notes into the exchange agent's
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account at DTC according to the procedure for book-entry transfer described
below or a properly transmitted agent's message.
The tender by a holder that is not withdrawn prior to the expiration date
and our acceptance of that tender will constitute an agreement between the
holder and us in accordance with the terms and subject to the conditions
described in this prospectus supplement and prospectus and in the letter of
transmittal.
THE METHOD OF DELIVERY OF COMMUNICATIONS AND ANY REQUIRED DOCUMENTS IS AT
THE ELECTION AND RISK OF THE TENDERING HOLDER, AND WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. DELIVERY OF DOCUMENTS TO
DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT. IT IS SUGGESTED THAT COMMUNICATIONS AND ANY REQUIRED DOCUMENTS
BE DELIVERED SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT RECEIPT BY
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. PERSONS WHO HOLD OLD NOTES
THROUGH A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY, OR NOMINEE AND WHO
WISH TO TENDER THEIR OLD NOTES SHOULD INSTRUCT THAT INSTITUTION TO TENDER.
If you beneficially own old notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender those notes, you should contact the registered holder as soon as possible
and instruct the registered holder to tender on your behalf. If you are a
beneficial owner and wish to tender on your own behalf, you must, prior to
completing and executing the letter of transmittal and delivering your old
notes, either:
o make appropriate arrangements to register ownership of the old notes
in your name; or
o obtain a properly completed bond power from the registered holder of
your old notes.
The transfer of registered ownership may take considerable time and may
not be completed prior to the expiration date.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender. Accordingly, participants in the program may, instead of
physically completing and signing the letter of transmittal and delivering it to
the exchange agent, transmit their acceptance of the exchange offer
electronically. They may do so by causing DTC to transfer the old notes to the
exchange agent in accordance with its procedures for transfer. DTC will then
send an agent's message to the exchange agent.
An agent's message is a message transmitted by DTC to and received by the
exchange agent and forming part of the book-entry confirmation, stating that:
o DTC has received an express acknowledgment from a participant in
DTC's automated tender offer program that is tendering old notes
that are the subject of such book-entry confirmation;
o the participant has received and agrees to be bound by the terms of
the letter of transmittal or, in the case of an agent's message
relating to guaranteed delivery, the participant has received and
agrees to be bound by the applicable notice of guaranteed delivery;
and
o we may enforce the agreement against such participant.
A tender will be deemed to have been received as of the date the exchange
agent either receives a letter of transmittal accompanied by old notes,
book-entry confirmation from DTC and any other documents required by the letter
of transmittal from the holder or receives a notice of guaranteed delivery or
letter, telegram, or facsimile transmission from an eligible institution. An
eligible institution is a member of or a participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange Medallion Signature
Program, the Stock Exchange Medallion Program or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934.
All questions as to the validity, form, eligibility, acceptance, and
withdrawal of tendered old notes will be determined by us, in our sole
discretion, which determination will be final and binding. We reserve the
absolute
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right to reject any or all tenders not in proper form or the acceptance for
exchange of which may, in the opinion of our counsel, be unlawful. We also
reserve 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. 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, any defects or irregularities must be cured within such time as we shall
determine. Although we intend to notify holders of defects or irregularities,
neither we, the exchange agent, nor any other person shall be under any duty to
give notification of any defects or irregularities or incur any liability for
failure to give notification. Tenders will be deemed not to have been made until
any defects or irregularities have been cured or waived.
In all cases, issuance of Series B notes for old notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of a letter of transmittal accompanied by old
notes or a book-entry confirmation and all other required documents. If any
tendered old notes are not accepted for any reason set forth in the terms and
conditions of the exchange offer, such non-exchanged old notes will be credited
to an account maintained with DTC as promptly as practicable after the
expiration or termination of the exchange offer.
Each broker-dealer that receives Series B notes for its own account in
exchange for old notes, if the 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 Series B notes.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your old notes and cannot complete the procedures
for book-entry transfer before the expiration date, you may tender if:
o the tender is made through an eligible institution;
o before the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice
of guaranteed delivery setting forth the name and address of the
holder, stating that the tender is being made thereby and
guaranteeing that, within five business days after the expiration
date, a book-entry confirmation and any other documents required by
the letter of transmittal, will be received by the exchange agent;
and
o the book-entry confirmation and all other documents required by the
letter of transmittal are received by the exchange agent within five
business days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be sent
to holders who wish to tender their old notes according to the above guaranteed
delivery procedures.
WITHDRAWAL RIGHTS
You may withdraw tenders of old notes at any time before 5:00 p.m., New
York City time, on the expiration date. To withdraw a tender of old notes, a
written notice of withdrawal 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. Any such notice of withdrawal must specify the name of the
person having tendered the old notes to be withdrawn, identify the principal
amount of old notes to be withdrawn and the name and number of the account at
DTC to be credited. All questions as to the validity, form and eligibility of
such notices will be determined by us, whose determination shall be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for purposes of the exchange offer and no Series B notes
will be issued with respect thereto. Any old notes which have been tendered but
that are not accepted for exchange will be credited to the holder's account at
DTC through which such old notes were tendered without cost to such holder as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
We are not required to accept for exchange or to exchange Series B notes
for any old notes, and may terminate or amend the exchange offer as provided
herein before the acceptance of old notes, if:
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o any law, statute, rule, regulation or interpretation by the staff of
the SEC is proposed, adopted or enacted, which, in our reasonable
judgment, might materially impair our ability to proceed with the
exchange offer or materially impair the contemplated benefits of the
exchange offer us; or
o any governmental approval has not been obtained, which approval we
shall, in our reasonable judgment, deem necessary for the
consummation of the exchange offer.
If we determine in our reasonable judgment that either of the conditions
is not satisfied, we may:
o refuse to accept any old notes and credit all tendered notes to the
tendering holders;
o extend the exchange offer and retain all old notes tendered before
the expiration date, subject to the continuing rights of holders to
withdraw; or
o waive either unsatisfied condition and accept all properly tendered
old notes which have not been withdrawn.
If such waiver constitutes a material change to the exchange offer, we
will promptly distribute a prospectus supplement to all holders, and, depending
upon the significance of the waiver, we will extend the exchange offer for a
period of five to ten business days if it would otherwise expire during that
period.
EXCHANGE AGENT
The Chase Manhattan Bank will act as exchange agent for the exchange
offer.
Questions and requests for assistance and requests for additional copies
of this prospectus, the letter of transmittal or a notice of guaranteed delivery
should be directed to the exchange agent, as follows:
BY HAND/OVERNIGHT DELIVERY: BY REGISTERED OR CERTIFIED MAIL: BY FACSIMILE:
The Chase Manhattan Bank The Chase Manhattan Bank (214) 468-6494
9th Floor 9th Floor (For Eligible Institutes Only)
2001 Bryan Street 2001 Bryan Street
Dallas, Texas 75201 Dallas, Texas 75201 CONFIRM BY TELEPHONE:
(214) 468-6464
Attn: Registered Bond Attn: Registered Bond
Processing Department Processing Department
FEES AND EXPENSES
We will bear the expenses of the exchange offer. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telephone, facsimile or in person by our officers and regular
employees.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers or other persons for soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses and pay other expenses of the exchange offer.
We will pay all transfer taxes, if any, applicable to the exchange of the
old notes pursuant to the exchange offer. If, however, a transfer tax is imposed
for any reason other than the exchange of the old notes, then the amount of any
such transfer taxes will be payable by the tendering holder.
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ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized in connection
with the exchange offer. The expenses of the exchange offer will be amortized
over the term of the Series B notes.
RESALE OF SERIES B NOTES
Based on an interpretation by the staff of the SEC set forth in the
Shearman & Sterling, SEC No-Action Letter (available July 2, 1993), the Morgan,
Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991), the
Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13,
1989) and similar letters, we believe that the Series B notes may be offered for
resale, resold and otherwise transferred by any person other than a restricted
holder, without compliance with the registration and prospectus delivery
requirements of the Securities Act of 1933 if:
o the Series B notes are acquired by the holder in the ordinary course
of business;
o the holder is not engaged in and does not intend to engage in a
distribution of the Series B notes; and
o the holder does not have any arrangement or understanding with any
other person to participate in a distribution of Series B notes.
A restricted holder is an affiliate of Key or a broker-dealer that
receives Series B notes for its own account in the exchange offer, where the old
notes tendered were not acquired as a result of market-making or other trading
activities. Any person who is either a restricted holder or who acquires Series
B notes in the exchange offer to participate in a distribution not permitted by
the SEC's staff interpretation:
o cannot rely upon any of the No-Action Letters described above; and
o absent an exemption from registration, must comply with the
registration requirements of the Securities Act of 1933 in
connection with any secondary resale transaction.
Failure to comply with any of the conditions described above may result in
a holder incurring liabilities under the Securities Act of 1933 for which such
holder is not indemnified by us. Each broker or dealer that receives Series B
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 or other
activities, must acknowledge that it will deliver a prospectus in connection
with any sale of such Series B 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 Series B notes received in exchange for old notes if acquired as
a result of market-making activities or other trading activities. We will make
this prospectus, as supplemented, available to any broker-dealer for use in
connection with any such resale. The exchange offer is not being made to, nor
will we accept surrenders for exchange from, holders of old notes in any
jurisdiction in which this exchange offer would not be in compliance with the
securities or Blue Sky laws of such jurisdiction.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this exchange offer, we will have fulfilled
our obligations under the registration rights agreement, and holders of old
notes who do not tender them will not have any further registration rights under
the registration rights agreement or otherwise. The old notes that are not
exchanged in the exchange offer will remain restricted securities. In general,
you may not offer or sell the old notes unless either they are registered under
the Securities Act of 1933 or the offer or sale is exempt from or not subject to
registration under the Securities Act of 1933 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 of 1933.
OTHER
Participation in the exchange offer is voluntary and holders should
carefully consider whether to accept. You are urged to consult your financial
and tax advisors in making your decision on what action to take.
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In the future we may 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.
DESCRIPTION OF NOTES
We will issue the Series B notes, and we issued the old notes, under the
Indenture dated March 6, 2001 between us and The Chase Manhattan Bank, as
trustee. The old notes and the Series B notes have virtually identical terms and
will constitute a single series of debt securities under the Indenture. If the
exchange offer is consummated, holders of any remaining old notes will vote
together with holders of Series B notes for all relevant purposes under the
Indenture.
The following description is a summary of material provisions of the
Indenture and the terms of the Series B notes. The terms of the Series B notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939. Accordingly, the following
discussion is qualified in its entirety by reference to the provisions of the
Indenture and the Series B notes.
In this summary description of the Series B notes, all references to "we,"
"us" or "company" are to Key Energy Services, Inc., excluding its subsidiaries,
unless the context clearly indicates otherwise. We have used in this summary
description capitalized terms that we have defined below under "--Glossary."
GENERAL
THE SERIES B NOTES. The Series B notes:
o are our general obligations;
o are not secured by any collateral;
o are PARI PASSU in right of payment to all existing and future
unsecured senior indebtedness of Key;
o are senior in right of payment to our existing subordinated
indebtedness and any future indebtedness of which by its terms, is
subordinated to the notes; and
o are unconditionally guaranteed by the guarantors.
THE GUARANTEES. The Series B notes are jointly and severally guaranteed by
some of our subsidiaries. Future subsidiaries will not be required to guarantee
the notes except as required by the covenants described below under "--Certain
Covenants--Limitation on Issuances of Guarantees of Indebtedness; Additional
Guarantors." The following subsidiaries are guarantors of the notes:
Yale E. Key, Inc. Jeter Service Co.
Key Energy Drilling, Inc. Jeter Well Service, Inc.
WellTech Eastern, Inc. Jeter Transportation, Inc.
Odessa Exploration Incorporated Industrial Oilfield Supply, Inc.
Kalkaska Oilfield Services, Inc. Brooks Well Servicing, Inc.
Well-Co Oil Service, Inc. Updike Brothers, Inc.
Patrick Well Service, Inc. J.W. Gibson Well Service Company
Ram Oil Well Service, Inc. Key Energy Services-- South Texas, Inc.
Rowland Trucking Co., Inc. Key Energy Services-- California, Inc.
Landmark Fishing & Rental, Inc. Watson Oilfield Service & Supply, Inc.
Dunbar Well Service, Inc. WellTech Mid-Continent, Inc.
Frontier Well Service, Inc. Dawson Production Management, Inc.
Key Rocky Mountain, Inc. Dawson Production Taylor, Inc.
Key Four Corners, Inc. Dawson Production Acquisition Corp.
Dawson Production Partners, L.P.
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The guarantees on these notes:
o are general obligations of each Guarantor;
o are not secured by any collateral;
o are PARI PASSU in right of payment to all existing and future
unsecured senior indebtedness of each guarantor; and
o are senior in right of payment to each guarantor's existing
subordinated indebtedness, and any future indebtedness of any
guarantor which, by its terms, is subordinated to the guarantees.
Presently, all of our subsidiaries are Restricted Subsidiaries and are
subject to the restrictive covenants in the Indenture. However, under certain
circumstances we will be permitted to designate certain of our subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to most
of the restrictive covenants in the Indenture. Unrestricted Subsidiaries and
certain Restricted Subsidiaries are not guarantors of the notes. None of (1) our
foreign subsidiaries and (2) the following subsidiaries are Guarantors of the
Series B notes:
Production Systems, Inc. KEG Ama Heights, Inc.
Pyramid Land Corporation KEG Canal Properties, Inc.
WellTech, Inc. (California) KEG Orleans Place, Inc.
WellTech Oilfield Services Limited KEG Pearl Acres, Inc.
WellTech (Overseas) Limited KEG Villa Ashley, Inc.
PRINCIPAL, MATURITY AND INTEREST
The Series B notes will mature on March 1, 2008. Interest on the Series B
notes will accrue at the rate of 8 3/8% per year. Interest will be payable
semi-annually on September 1 and March 1 of each year, to the persons in whose
name the Series B notes are registered at the close of business immediately
preceding August 15 and February 15. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
SUBSIDIARY GUARANTEES
A Guarantor may not consolidate with or merge with or into another Person,
unless either:
o the surviving entity assumes all of such Guarantor's obligations by
executing a supplemental Indenture satisfactory to the trustee and
immediately after the transaction no default or event of default
exists; or
o the subsidiary guarantee is released.
A Subsidiary Guarantee will be released:
o in connection with any merger, consolidation or sale of all of the
capital stock of a Guarantor, if immediately after giving effect to
the transaction no default or event of default has occurred and is
continuing; or
o if we designate a Restricted Subsidiary that is a guarantor as an
Unrestricted Subsidiary pursuant to applicable provisions of the
Indenture.
OPTIONAL REDEMPTION
At any time on or before March 6, 2004, we may on any one or more
occasions redeem up to 35% of the aggregate principal amount of the notes from
the net cash proceeds of an Equity Offering, at a redemption price of 108.375%
of the principal amount thereof, together with accrued and unpaid
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interest to the date of redemption; PROVIDED that at least $113.8 million of the
principal amount of the notes remains outstanding immediately after such
redemption and that such redemption occurs within 90 days following the closing
of such Equity Offering.
If less than all of the notes are to be redeemed, the particular notes
will be selected:
o if the notes are not listed, on a PRO RATA basis or by lot or any
other method the trustee deems fair and appropriate; or
o if the notes are listed, in compliance with the requirements of the
principal exchange on which the notes are listed.
The Series B notes will be redeemable at our option, in whole or in part,
at any time on or after March 1, 2005, upon not less than 30 nor more than 60
days notice, at the redemption prices set forth below, plus accrued and unpaid
interest to the date of redemption if redeemed during the 12-month period
beginning on March 1 of the years indicated below:
PERCENT OF
YEAR PRINCIPAL AMOUNT
------- ------------------
2005..................... 104.188%
2006..................... 102.094%
2007 and thereafter...... 100.000%
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
As described below, if a Change of Control occurs, each holder will have
the right to require us to repurchase all or any part of that holder's Series B
notes pursuant to the Change of Control Offer. In the Change of Control Offer,
we will offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of Series B notes repurchased plus accrued and unpaid interest
thereon, if any, to the date of purchase. Within ten business days following any
Change of Control, we will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Series B notes on the Change of Control Payment Date specified in
such notice, pursuant to the procedures required by the Indenture and described
in such notice. We will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934 and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Series B notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the Change of Control provisions of the Indenture, we will comply with the
applicable securities laws and regulations and will not be deemed to have
breached our obligations under the Change of Control provisions of the Indenture
by virtue of such conflict.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all Series B notes or portions thereof
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment for all Series B notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the trustee the Series B
notes so accepted together with an officers' certificate stating the
aggregate principal amount of Series B notes or portions thereof being
purchased.
The Paying Agent will promptly mail to each holder of Series B notes so
tendered the Change of Control Payment for such Series B notes, and the trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each holder a new Series B note equal in principal amount to
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any unpurchased portion of the Series B notes surrendered, if any; PROVIDED that
each such new Series B note will be in a principal amount of $1,000 or an
integral multiple thereof.
We will publicly announce the results of the Change of Control Offer on,
or as soon as practicable after, the Change of Control Payment Date.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will apply regardless of 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 of the Series B notes to require us to repurchase or redeem
the Series B notes in the event of a takeover, recapitalization or similar
transaction.
Our outstanding Credit Facility currently restricts our ability to
purchase the Series B notes, and also provides that certain Change of Control
events with respect to the Company would constitute a default under the Credit
Facility. Any future credit agreements or other agreements relating to that
Credit Facility to which we become a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when we are
prohibited from purchasing Series B notes, we could seek the consent of our
senior lenders to the purchase of the Series B notes or could attempt to
refinance the borrowings that contain such prohibition. If we do not obtain such
a consent or refinance such borrowings, our failure to purchase tendered Series
B notes would constitute an Event of Default under the Indenture which would, in
turn, constitute a default under such Credit Facility.
We 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 us and purchases all
Series B notes validly tendered and not withdrawn under such Change of Control
Offer.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the company and its Subsidiaries taken as a whole.
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, the ability of a holder of Series B notes to
require us to repurchase such Series B notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) we (or the Restricted Subsidiary, as the case may be) receive
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) if the net Proceeds received with respect to any Asset Sale
exceed $15.0 million, such fair market value is determined by our Board of
Directors and evidenced by a resolution of the Board of Directors set
forth in an officers' certificate delivered to the trustee; and
(3) except with respect to a disposition of the Exploration and
Production Assets of Odessa (including by way of the sale of the Capital
Stock of Odessa) or the assets of the operations conducted by us or our
Subsidiaries in Argentina and related assets (including by way of the sale
of the Capital Stock of the Subsidiary or Subsidiaries conducting such
operations), at least 75% of the consideration therefor received by us or
such Restricted Subsidiary is in the form of cash. For purposes of this
provision, each of the following shall be deemed to be cash:
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(a) any liabilities of the company or any Restricted
Subsidiary (other than liabilities that are by their terms
subordinated to the Series B notes or any Subsidiary Guarantee) that
are assumed by the transferee of any such assets;
(b) any securities, notes or other obligations received by us
or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted
by us or such Restricted Subsidiary into cash (to the extent of the
cash received in that conversion);
(c) any assets received in exchange for assets in a
"like-kind" exchange or an exchange of assets of the company or any
Restricted Subsidiary for other assets which are useful in the
business of the company and the Restricted Subsidiaries (whether
such assets are of "like-kind"); and
(d) any Designated Noncash Consideration (which shall not at
any time exceed, in the aggregate, $30.0 million outstanding).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
we may apply such Net Proceeds at our option:
(1) to reduce permanently Indebtedness under a Credit Facility and
to correspondingly reduce commitments if such Indebtedness constitutes
revolving credit borrowings or to repay permanently any other Indebtedness
(other than Indebtedness that by its terms is subordinated to the Series B
notes or any Subsidiary Guarantees);
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Person engaged in a Permitted
Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a
Permitted Business.
Pending the final application of any such Net Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the second preceding paragraph will constitute Excess Proceeds. When
the aggregate amount of Excess Proceeds exceeds $10.0 million, we will make an
Asset Sale Offer to all holders of Series B notes and all holders of other
Indebtedness that is PARI PASSU with the Series B notes containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase the maximum principal
amount of Series B notes and such other PARI PASSU Indebtedness that may be
purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer
will be equal to 100% of principal amount plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase, and will be payable in
cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer,
we may use such Excess Proceeds for any purpose not otherwise prohibited by the
Indenture. If the aggregate principal amount of Series B notes and such other
PARI PASSU Indebtedness tendered into such Asset Sale Offer exceeds the amount
of Excess Proceeds, the trustee shall select the Series B notes and such other
PARI PASSU Indebtedness to be purchased on a pro rata basis. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
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SELECTION AND NOTICE
If less than all of the Series B notes are to be redeemed at any time, the
trustee will select Series B notes for redemption as follows:
(1) if the Series B notes are listed, in compliance with the
requirements of the principal national securities exchange on which the
Series B notes are listed; or
(2) if the Series B notes are not so listed, on a pro rata basis, by
lot or by such method as the trustee shall deem fair and appropriate.
Series B notes of $1,000 or less shall not be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30, but not more than
60, days before the redemption date to each holder of Series B notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
If any Series B note is to be redeemed in part only, the notice of
redemption that relates to that Series B note shall state the portion of the
principal amount thereof to be redeemed. A new Series B note in principal amount
equal to the unredeemed portion of the original Series B note will be issued in
the name of the holder thereof upon cancellation of the original Series B note.
Series B notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Series B notes or portions of them called for redemption.
SUSPENDED COVENANTS
During any period of time that the Series B notes have an Investment Grade
Rating from either of the Rating Agencies and no Default has occurred and is
continuing under the Indenture, we and our Restricted Subsidiaries will not be
subject to the provisions of the Indenture described above under "--Repurchase
at the Option of Holders--Asset Sales," and described below under the following
headings under "--Certain Covenants":
o "--Restricted Payments;"
o "--Incurrence of Indebtedness and Issuance of Preferred Stock;"
o "--Sale and Leaseback Transactions" (to the extent set forth in that
covenant);
o "--Dividend and Other Payment Restrictions Affecting Subsidiaries;"
o "--Merger, Consolidation or Sale of Assets" (to the extent set forth
in that covenant);
o "--Transactions with Affiliates'"
o "--Business Activities;" and
o "--No Amendment of Subordination Provisions"
(collectively, the "SUSPENDED COVENANTS"); PROVIDED, HOWEVER, such covenants
shall not be suspended if the Investment Grade Rating was obtained directly or
indirectly by our merger, consolidation or otherwise with a company that had an
Investment Grade Rating from either of the Rating Agencies and at such time we
did not have an Investment Grade Rating from either of the Rating Agencies; and
PROVIDED FURTHER, that the provisions of the Indenture described above under
"--Repurchase at the Option of Holders--Change of Control," and described below
under the following headings under "--Certain Covenants":
o "--Limitations on Issuances of Guarantees of Indebtedness;
Additional Guarantors;"
o "--Liens;"
o "--Designation of Restricted and Unrestricted Subsidiaries;"
o "--Payments for Consent;" and
o "--Reports"
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will not be so suspended; and PROVIDED FURTHER, that if we and our Restricted
Subsidiaries are not subject to the Suspended Covenants for any period of time
as a result of the preceding sentence and, subsequently, the Rating Agency or
Rating Agencies which had given the Series B notes an Investment Grade Rating
withdraws its or their ratings or downgrades the ratings assigned to the Series
B notes below the Investment Grade Ratings so that the Series B notes do not
have an Investment Grade Rating from either Rating Agency, or a Default (other
than with respect to the Suspended Covenants) occurs and is continuing, we and
our Restricted Subsidiaries will thereafter again be subject to the Suspended
Covenants, subject to the terms, conditions and obligations set forth in the
Indenture (each such date of reinstatement being the "Reinstatement Date"),
including those set forth in the preceding sentence. Compliance with the
Suspended Covenant with respect to Restricted Payments made after the
Reinstatement Date will be calculated in accordance with the terms of the
covenant described under "--Certain Covenants--Restricted Payments" as though
such covenant had been in effect during the entire period of time from which the
Series B notes are issued. As a result, during any period in which we and our
Restricted Subsidiaries are not subject to the Suspended Covenants, the Series B
notes will be entitled to substantially reduced covenant protection.
CERTAIN COVENANTS
The Indenture contains, among others, the covenants described below.
RESTRICTED PAYMENTS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our or any of our Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving us or any of our Restricted
Subsidiaries) or to the direct or indirect holders of our or any of our
Restricted Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the company or to us or to our Restricted
Subsidiaries);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving us) any Equity Interests of the Company or any of
our direct or indirect parents or any of our Restricted Subsidiaries
(other than any such Equity Interests owned by us or any of our Restricted
Subsidiaries);
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Series B notes or the Subsidiary Guarantees, except a
payment of interest, principal, premium or liquidated damages at the
Stated Maturity of such Indebtedness or in accordance with the mandatory
provisions of such Indebtedness without giving effect to any amendment of
such Indebtedness (other than an amendment approved by the holders so
affected as provided below under "--No Amendment of Subordination
Provisions") after the date of the Indenture with respect to any such
Indebtedness issued prior to the date of the Indenture (provided that the
other requirements of the Indenture, with respect to the events giving
rise to such mandatory provisions are first complied with); or
(4) make any Restricted Investment (all such payments and other
actions set forth in clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence of such Restricted Payment; and
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(2) with respect to all Restricted Payments other than regular
dividends on Qualified Preferred Stock, we would, at the time of such
Restricted Payment and after giving pro forma effect to such Restricted
Payment as if such Restricted Payment had been made at the beginning of
the applicable four-quarter period, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by us and our Restricted Subsidiaries
after April 1, 1999 (excluding Restricted Payments permitted by clauses
(2), (3) and (4) of the next paragraph), is less than the sum, without
duplication, of:
(a) 50% of our Consolidated Net Income for the period (taken
as one accounting period) from April 1, 1999 to the end of our most
recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or,
if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus
(b) 100% of the aggregate net cash proceeds received by us
since April 1, 1999 as a contribution to our common equity capital
or from the issue or sale of our Equity Interests (other than
Disqualified Stock) or from the issue or sale of our convertible or
exchangeable Disqualified Stock or our convertible or exchangeable
debt securities that have been converted into or exchanged for such
Equity Interests (other than Equity Interests (or Disqualified Stock
or debt securities) sold to one of our Subsidiaries), plus
(c) to the extent that any Restricted Investment that was made
after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (i) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (ii) the initial amount of such Restricted
Investment, plus
(d) to the extent not otherwise included in Consolidated Net
Income or otherwise increasing amounts available for Restricted
Payments or Permitted Investments, 50% of all dividends,
distributions or interest payments in respect of Restricted
Investments.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any of our Indebtedness or any Indebtedness of any
Guarantor that is subordinated to the Series B notes or of any of our
Equity Interests or any Equity Interests of any of our Restricted
Subsidiaries in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to one of our Subsidiaries) of,
our Equity Interests (other than Disqualified Stock); PROVIDED that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
our Indebtedness or any Indebtedness of any Guarantor that is subordinated
to the Series B notes with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
S-27
(4) the declaration or payment of any dividend or other distribution
by a Restricted Subsidiary to the holders of its common Equity Interests
on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the company or any Restricted
Subsidiary held by any member (or any of our Subsidiaries') management
pursuant to any management equity subscription agreement or stock option
agreement; PROVIDED that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $2.0 million in any twelve-month period;
(6) in connection with an acquisition by us or any of our Restricted
Subsidiaries, the return to us or our Restricted Subsidiaries of Equity
Interests of us or our Restricted Subsidiary constituting a portion of the
purchase consideration in settlement of indemnification claims;
(7) the purchase by us of fractional shares arising out of stock
dividends, splits or combinations or business combinations;
(8) the acquisition in open-market purchases of our common Equity
Interests for matching contributions to our employee stock purchase and
deferred compensation plans in the ordinary course of business and
consistent with past practices;
(9) the redemption, repurchase, retirement, defeasance or other
acquisition of the 1997 Convertible Subordinated Notes; PROVIDED that at
least 90% of such 1997 Convertible Subordinated Notes have been converted;
and
(10) Restricted Payments not to exceed $20.0 million under this
clause (10);
PROVIDED that in the case of clauses (2), (3), (5), (8) and (10) no Default or
Event of Default should have occurred and be continuing immediately after such
transaction.
The amount of all Restricted Payments (other than Restricted Payments made
in cash) shall be the fair market value on the date of the Restricted Payment of
the asset(s) or securities proposed to be transferred or issued by us or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be valued
by this covenant shall be determined by the board of directors whose resolution
with respect thereto shall be delivered to the trustee. The board of directors'
determination must be based upon an opinion or apprisal issued by an accounting,
appraisal or investment banking firm of national standing if the fair market
value exceeds $10.0 million. Not later than the date of making any Restricted
Payment, we 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 this "Restricted Payments" covenant were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and we will
not issue any Disqualified Stock and will not permit any of our Restricted
Subsidiaries to issue any shares of preferred stock or Disqualified Stock;
PROVIDED, HOWEVER, that we may and any Guarantor may incur Indebtedness
(including Acquired Debt) or issue Disqualified Stock, if:
(1) the Fixed Charge Coverage Ratio for our most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such Disqualified Stock is issued would have been at least
2.25 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional
Indebtedness had been
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incurred, or the Disqualified Stock had been issued, as the case may be,
at the beginning of such four-quarter period; and
(2) no Default or Event of Default has occurred and is continuing.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) The incurrence by us of additional Indebtedness under Credit
Facilities; PROVIDED that the aggregate principal amount of all of our
Indebtedness and all Indebtedness of our Restricted Subsidiaries
outstanding at any time under all Credit Facilities incurred under this
clause (1) after giving effect to such incurrence does not exceed an
amount equal to $250.0 million;
(2) the incurrence by us and our Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by us of Indebtedness represented by the Series B
notes originally issued on the date of the Indenture, the Guarantees and
the Indenture;
(4) the incurrence by us or any of our Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in our business or the
business of such Subsidiary in an aggregate principal amount not to exceed
$50.0 million at any time outstanding;
(5) the incurrence of Indebtedness solely in respect of bankers'
acceptances, letters of credit, surety or performance bonds (to the extent
that such incurrence does not result in the incurrence of any obligation
for the payment of borrowed money of others), all in the ordinary course
of business;
(6) the incurrence by us or any of our Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred under the first paragraph of this covenant or clauses (2) or (3)
of this paragraph;
(7) the incurrence by us or any of our Restricted Subsidiaries of
intercompany Indebtedness between or among us and any of our Restricted
Subsidiaries; PROVIDED, HOWEVER, that (i) any subsequent issuance or
transfer of Equity Interests or other event that results in any such
Indebtedness being held by a Person other than us or a Restricted
Subsidiary thereof and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the company or a Restricted
Subsidiary thereof shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by us or such Restricted Subsidiary, as
the case may be, that was not permitted by this clause (7);
(8) the incurrence by us or any of our Restricted Subsidiaries of
Hedging Obligations;
(9) the guarantee by us or any of the Guarantors of our Indebtedness
or the Indebtedness of a Restricted Subsidiary that was permitted to be
incurred by another provision of this covenant;
(10) the incurrence by us or any of our Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or
S-29
replace any Indebtedness incurred pursuant to this clause (10), not to
exceed $100.0 million outstanding at any time;
(11) the incurrence by our Unrestricted Subsidiaries of Non-Recourse
Debt; PROVIDED, HOWEVER, that if any such Indebtedness ceases to be
Non-Recourse Debt, such event shall be deemed to constitute an incurrence
of Indebtedness by a Restricted Subsidiary that was not permitted by this
clause (11); and
(12) the accrual of interest, accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class
of Disqualified Stock; provided, in each such case, that the amount
thereof is included in our Fixed Charges as accrued.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness (including Acquired Debt) meets the criteria of
more than one of the categories of Permitted Debt described in clauses (1)
through (12) above, or is entitled to be incurred pursuant to the first
paragraph of this covenant, we, in our sole discretion, will be permitted to
classify (or later classify or reclassify), in whole or in part, such item of
Indebtedness in any manner that complies with this covenant.
LIENS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind securing Indebtedness, Attributable Debt or trade payables on any asset now
owned or hereafter acquired, except (1) Permitted Liens or (2) if the
Obligations under the Series B notes (or a Guarantee of the Series B notes) and
the Indenture are equally and ratably secured (or secured on a senior basis if
such other obligations are subordinated to the Obligations under the Series B
notes or the Guarantees of the Series B notes) with the other obligations so
secured until such time as such other obligations are no longer secured by such
Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital
Stock to us or any of our Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, its profits, or pay
any indebtedness owed to us or any of our Restricted Subsidiaries;
(2) make loans or advances to us or any of our Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to us or any of our
Restricted Subsidiaries.
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However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) any Credit Facilities and Existing Indebtedness as in effect on
the date of the Indenture and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, PROVIDED that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
are not materially more restrictive, taken as a whole, as determined in
the reasonable judgment of our board of directors, with respect to such
dividend and other payment restrictions than those contained in such
Credit Facilities or such Existing Indebtedness, as in effect on the date
of the Indenture;
(2) the Indenture, the Guarantees and the Series B notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a
Person acquired by us or any of our Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired; PROVIDED that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by such Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; PROVIDED that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are not materially more restrictive, taken as a
whole, as determined in the reasonable judgment of our board of directors,
than those contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "--Liens" that limit our right or the right of any of our
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
and
(12) restrictions imposed with respect to one of our Subsidiaries
imposed pursuant to a binding agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock
or assets of such Subsidiary; provided that such disposition will comply
with the covenant entitled "--Repurchase at the Option of Holders-Asset
Sales."
MERGER, CONSOLIDATION OR SALE OF ASSETS
We may not, directly or indirectly: (1) consolidate or merge with or into
another Person (whether or not we are the surviving corporation); or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of our
properties or assets, in one or more related transactions, to another Person,
unless:
(1) either: (a) we are the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than the
company) or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made is a corporation
S-31
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or
merger (if other than the company) or the Person to which such sale,
assignment, transfer, conveyance or other disposition shall have been made
assumes all of our obligations under the Series B notes and the Indenture
pursuant to agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of
Default exists; and
(4) we or the Person formed by or surviving any such consolidation
or merger (if other than the company) will, on the date of such
transaction after giving pro forma effect thereto and any related
financing transactions as if the same had occurred at the beginning of the
applicable four-quarter period, either (a) be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; or (b) have a Fixed Charge Coverage Ratio that is the
same or higher than the Fixed Charge Coverage Ratio of the company
immediately prior to such transactions; PROVIDED, HOWEVER, that this
clause (4) shall be suspended during any period in which we and our
Restricted Subsidiaries are not subject to the Suspended Covenants.
In addition, we may not, directly or indirectly, lease all or
substantially all of our properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among us and any of our Wholly Owned
Subsidiaries or any of the Guarantors.
TRANSACTIONS WITH AFFILIATES
We will not, and will not permit any of our Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to us or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by us or such
Restricted Subsidiary with an unrelated Person; and
(2) we deliver to the trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, a resolution of the board of directors set
forth in an officers' certificate certifying that such Affiliate
Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the board of directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to the
holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of
national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
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(1) any employment agreement or arrangements (including loan
arrangements and advances) with officers and employees entered into by us
or any of our Restricted Subsidiaries in the ordinary course of business;
(2) transactions between or among us and/or our Restricted
Subsidiaries;
(3) payment of reasonable directors fees and the provision of
customary indemnification arrangements to officers, directors and
employees of us or our Restricted Subsidiaries; and
(4) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments."
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if no Default or Event of Default would occur or be
continuing immediately after such designation and taking into effect the
designation. If a Restricted Subsidiary is designated as an Unrestricted
Subsidiary, all outstanding Investments owned by us and our Restricted
Subsidiaries in the Subsidiary so designated will be deemed to be an Investment
made as of the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of the covenant described above
under the caption "--Restricted Payments" or Permitted Investments, as
applicable. All such outstanding Investments will be valued at their fair market
value at the time of such designation. That designation will only be permitted
if such Restricted Payment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The board of directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default or
Event of Default as a result of such designation.
SALE AND LEASEBACK TRANSACTIONS
We will not, and will not permit any of our Restricted Subsidiaries to,
enter into any sale and leaseback transaction; provided that we or any of our
Restricted Subsidiaries that is a Guarantor may enter into a sale and leaseback
transaction if:
(1) we or that Guarantor, as applicable, could have (a) incurred
Indebtedness in an amount equal to the Attributable Debt relating to such
sale and leaseback transaction under the Fixed Charge Coverage Ratio test
in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b)
incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "--Liens"; PROVIDED, HOWEVER, that
clause (a) of this clause (1) shall be suspended during any period in
which we nd our Restricted Subsidiaries are not subject to the Suspended
Covenants;
(2) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, which (if in excess of $10
million) will be determined in good faith by the board of directors and
set forth in an officers' certificate delivered to the trustee, of the
property that is the subject of such sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and we apply the proceeds of such transaction in compliance
with, the covenant described above under the caption "Repurchase at the
Option of Holders-Asset Sales."
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS; ADDITIONAL GUARANTORS
We will not permit any of our Restricted Subsidiaries, directly or
indirectly, to guarantee or pledge any assets to secure the payment of any of
our Indebtedness under any Credit Facility unless
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such Restricted Subsidiary contemporaneously executes and delivers a
supplemental indenture providing for the Guarantee of the payment of the Series
B notes by such Restricted Subsidiary in the form provided in the Indenture.
Notwithstanding the preceding paragraph, any Subsidiary Guarantee of the
Series B notes will provide by its terms that it will be automatically and
unconditionally released and discharged under the circumstances described above
under the caption "--Subsidiary Guarantees." The form of the Subsidiary
Guarantee will be attached as an exhibit to the Indenture.
BUSINESS ACTIVITIES
We will not, and will not permit any Restricted Subsidiary to, engage in
any business other than Permitted Businesses.
PAYMENTS FOR CONSENT
We will not, and will not permit any of our Subsidiaries to, directly or
indirectly, pay or cause to be paid any consideration to or for the benefit of
any holder of Series B notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the Series B
notes unless such consideration is offered to be paid and is paid to all holders
of the Series B 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.
NO AMENDMENT OF SUBORDINATION PROVISIONS
Without the consent of each holder of Series B notes so affected, we will
not amend, modify or alter the Subordinated Convertible Note Indenture or the
Senior Subordinated Note Indenture in any way that will (i) increase the
principal of, advance the final maturity date of or shorten the Weighted Average
Life to Maturity of any Subordinated Convertible Notes or Senior Subordinated
Notes or (ii) alter the redemption provisions or the price or terms at which we
are required to offer to purchase such Convertible Subordinated Notes or Senior
Subordinated Notes in any manner adverse to such holder.
REPORTS
Whether or not required by the SEC, so long as any Series B notes are
outstanding, we will furnish to the holders of Series B notes, within the time
periods specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K
if we were required to file such Forms, including a Management's
Discussion and Analysis of Financial Condition and Results of Operations
and, with respect to the annual information only, a report on the annual
financial statements by our independent public accountants; and
(2) all current reports that would be required to be filed with the
SEC on Form 8-K if we were required to file such reports.
If we have designated any of our 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 thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of us and our
Restricted Subsidiaries separate from the financial condition and results of
operations of our Unrestricted Subsidiaries.
In addition, whether or not required by the SEC, we will file a copy of
all of the information and reports referred to in clauses (1) and (2) above with
the SEC for public availability within the time
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periods specified in the SEC's rules and regulations (unless the SEC will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Series B notes;
(2) default in payment when due of the principal of or premium, if
any, on the Series B notes, (including in connection with an offer to
purchase);
(3) failure by us or any of our Subsidiaries to comply with the
provisions described under the captions "--Certain Covenants-Merger,
Consolidation or Sale of Assets" and "--Repurchase at the Option of the
Holders-Asset Sales" and such failure shall have continued for 15 days
after notice from us or any holder of the Series B notes; and failure by
us or any of our Subsidiaries to comply with the provisions under the
captions "--Restricted Payments" or "--Incurrence of Indebtedness and
Issuance of Preferred Stock," and such failure shall have continued for 30
days after notice from us or any holder of the Series B notes;
(4) failure by us or any of our Restricted Subsidiaries to comply
with any of the other agreements in the Indenture and such failure has
continued for 60 days after notice to us by the trustee or the holders of
at least 25% in aggregate principal amount of the Series B notes then
outstanding;
(5) 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 us or any of our Restricted
Subsidiaries (or the payment of which is guaranteed by us or any of our
Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, if that default:
(a) is caused by a failure to pay principal of or premium, if
any, or interest on such Indebtedness prior to the expiration of the
grace period provided in such mortgage, indenture or instrument (a
"Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to
its express maturity;
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $15.0 million or more;
(6) failure by us or any of our Restricted Subsidiaries that are
Significant Subsidiaries or that would be a Significant Subsidiary if
taken together to pay final judgments aggregating in excess of $15.0
million, which judgments are not paid, discharged or stayed for a period
of 60 days;
(7) except as permitted by the Indenture:
o any Subsidiary Guarantee is or becomes unenforceable or
invalid; or
o any Subsidiary Guarantee ceases for any reason to be in
full force and effect; or
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o any Guarantor, or any Person acting on behalf of any
Guarantor, denies or disaffirms its obligations under its
Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to us or
any of our Restricted Subsidiaries that are Significant Subsidiaries or
that would be a Significant Subsidiary if taken together.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to us, any Restricted Subsidiary that is
a Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Series B
notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding Series B
notes may declare all the Series B notes to be due and payable immediately.
Holders of the Series B notes may not enforce the Indenture or the Series
B notes except as provided in the Indenture. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding Series B notes
may direct the trustee in its exercise of any trust or power. The trustee may
withhold from holders of the Series B notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
The holders of a majority in aggregate principal amount of the Series B
notes then outstanding by notice to the trustee may on behalf of the holders of
all of the Series B notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Series B notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by us or on our behalf with the intention
of avoiding payment of the premium that we would have had to pay if we then had
elected to redeem the Series B notes pursuant to the optional redemption
provisions of the Indenture, an equivalent premium shall also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the Series B notes. If an Event of Default occurs prior to March 1, 2005, by
reason of any willful action (or inaction) taken (or not taken) by us or on our
behalf with the intention of avoiding the prohibition on redemption of the
Series B notes prior to March 1, 2005, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Series B notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the Indenture. Upon becoming aware of any Default or Event of
Default, we are required to deliver to the trustee a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the company
or any Guarantor, as such, shall have any liability for any of our obligations
or obligations of the Guarantors under the Series B notes, the Indenture, the
Subsidiary Guarantees, or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of Series B notes by
accepting a note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Series B notes. The waiver may
not be effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have all of our
obligations discharged with respect to the outstanding Series B notes and all
obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
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(1) the rights of holders of outstanding Series B notes to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on such Series B notes when such payments are
due from the trust referred to below;
(2) our obligations with respect to the Series B notes concerning
issuing temporary Series B notes, registration of Series B notes,
mutilated, destroyed, lost or stolen Series B notes and the maintenance of
an office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the
trustee, and our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, we may, at our option and at any time, elect to have our
obligations and the obligations of the Guarantors released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not constitute
a Default or Event of Default with respect to the Series B notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Series B notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the Series B notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest and Liquidated Damages, if any, on the outstanding
Series B notes on the stated maturity or on the applicable redemption
date, as the case may be, and we must specify whether the Series B notes
are being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, we shall have delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that either we have received from, or there has been published
by, the Internal Revenue Service a ruling or since
the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based
thereon, such opinion of counsel shall confirm that, the holders of the
outstanding Series B notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance
had not occurred;
(3) in the case of Covenant Defeasance, we shall have delivered to
the trustee an opinion of counsel reasonably acceptable to the Trustee
confirming that the holders of the outstanding Series B notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either:
o on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to
be applied to such deposit); or
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o insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which we or any of
our Restricted Subsidiaries is a party or by which we or any of our
Restricted Subsidiaries is bound;
(6) we must have delivered to the trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(7) we must deliver to the trustee an officers' certificate stating
that the deposit was not made by us with the intent of preferring the
holders of Series B notes over our other creditors with the intent of
defeating, hindering, delaying or defrauding our creditors or others; and
(8) we must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Without the consent of each holder affected, an amendment or waiver may
not (with respect to any Series B notes held by a non-consenting holder):
(1) reduce the principal amount of Series B notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Series B
notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any Note;
(4) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Series B notes (except a
rescission of acceleration of the Series B notes by the holders of at
least a majority in aggregate principal amount of the Series B notes and a
waiver of the payment default that resulted from such acceleration);
(5) make any Series B note payable in money other than that stated
in the Series B notes;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Series B notes to
receive payments of principal of or premium, if any, or interest on the
Series B notes;
(7) waive a redemption payment with respect to any Series B note
(other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver
provisions.
Notwithstanding the preceding, without the consent of any holder of Series
B notes, together with the trustee, we may amend or supplement the Indenture or
the Series B notes:
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(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Series B notes in addition to or
in place of certificated Series B notes;
(3) to provide for the assumption of our obligations to holders of
Series B notes in the case of a merger or consolidation or sale of all or
substantially all of our assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of Series B notes or that does not adversely
affect the legal rights under the Indenture of any such holder;
(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act;
or
(6) to add Guarantors of the Series B notes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged, and will cease to be of further effect
as to all Series B notes issued thereunder, when:
(1) either:
(a) all Series B notes that have been authenticated, except
lost, stolen or destroyed Series B notes that have been replaced or
paid and Series B notes for whose payment money has been deposited
in trust and thereafter repaid to us, have been delivered to the
trustee for cancellation; or
(b) all Series B notes that have not been delivered to the
trustee for cancellation have become due and payable by reason of
the mailing of a notice of redemption or otherwise or will become
due and payable within one year, and we have irrevocably deposited
or caused to be deposited with the trustee as trust funds in trust
solely for the benefit of the holders, cash in U.S. dollars,
non-callable Government Securities, or a combination of cash in U.S.
dollars and non-callable Government Securities, in such amounts as
will be sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire indebtedness on the Series
B notes not delivered to the trustee for cancellation for principal,
premium and Liquidated Damages, if any, and accrued interest to the
date of maturity or redemption;
(2) the deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which we or any
Guarantor is a party or by which we or any Guarantor is bound;
(3) we have paid or caused to be paid all sums payable by us under
the Indenture; and
(4) we have delivered irrevocable instructions to the trustee under
the Indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, we must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
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INFORMATION CONCERNING THE TRUSTEE
The Chase Manhattan Bank serves as trustee under the Indenture relating to
the Series B notes.
The Indenture contains limitations on the rights of the trustee
thereunder, should it become our creditor, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Indenture permits the trustee to
engage in other transactions; provided, however if it acquires any conflicting
interest it must eliminate such conflict, apply to the commission for permission
to continue, or resign.
GOVERNING LAW
The Indenture and the notes are governed by the laws of the State of New
York.
GLOSSARY
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with,
or in contemplation of, such other Person merging with or into, or
becoming a Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"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 purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; PROVIDED that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets
or rights, other than sales of inventory in the ordinary course of
business consistent with past practices and sales of accounts receivables
under a Credit Facility permitted to be incurred as Indebtedness; PROVIDED
that the sale, conveyance or other disposition of all or substantially all
of the assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above
under the caption "--Repurchase at the Option of Holders--Change of
Control" and/or the provisions described above under the caption
"--Certain Covenants--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of the Company's
Restricted Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries,
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
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(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $2.0 million;
or (b) results in net proceeds to the Company and its Restricted
Subsidiaries of less than $2.0 million;
(2) a transfer of assets between or among the Company and any
Restricted Subsidiary;
(3) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary; and
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "--Certain Covenants--Restricted Payments."
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"BOARD OF DIRECTORS" means:
(1) with respect to a corporation, the board of directors, or a duly
authorized committee thereof, of the corporation;
(2) with respect to a partnership, the Board of Directors of the
general partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
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"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(PROVIDED that the full faith and credit of the United States is pledged
in support thereof) having maturities of not more than twelve months from
the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of twelve months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding twelve months and overnight bank
deposits, in each case, with any domestic commercial bank having capital
and surplus in excess of $500 million and a Thompson Bank Watch Rating of
"B" or better;
(4) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(5) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, 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 Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or
dissolution of the Company;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the Voting Stock of the Company, measured
by voting power rather than number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(5) the Company consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where
the Voting Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person immediately after giving effect to such issuance.
For the purposes of this definition of "Change of Control", any transfer
of an equity interest of an entity that was formed for the purpose of acquiring
Voting Stock of the Company will be deemed to be a transfer of an equity
interest in the Company.
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"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period PLUS:
(1) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale, to the extent such losses were
deducted in computing such Consolidated Net Income; PLUS
(2) provision for taxes based on income or profits of such Person
and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; PLUS
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts
and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments, if any, pursuant to
Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; PLUS
(4) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses including
asset impairment charges pursuant to FASB 121 (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income; PLUS
(5) the one time charge (up to $5.0 million) realized in connection
with the repurchase of the unsatisfied portion of the $20.0 million
volumetric production payment granted by Odessa to Norwest Bank Texas,
N.A. effective March 1, 2000; MINUS
(6) non-cash items increasing such Consolidated Net Income for such
period, other than items that were accrued or otherwise recorded in the
ordinary course of business, in each case, on a consolidated basis and
determined in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any specified Person for
any periods the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; PROVIDED that:
(1) the Net Income of any Person that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions
paid in cash to the specified Person or a Guarantor;
(2) the Net Income of any Restricted Subsidiary that is not a
Guarantor shall be excluded to the extent that the declaration or payment
of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
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(4) the Net Income (and loss) of any Unrestricted Subsidiary shall
be excluded, whether or not distributed to the specified Person or one of
its Subsidiaries; and
(5) the cumulative effect of a change in accounting principles shall
be excluded.
"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 FACILITIES" means, with respect to the Company, one or more debt
facilities or commercial paper facilities, in each case 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.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of noncash
consideration received by the Company or one of its Subsidiaries in connection
with an Asset Sale that is designated as Designated Noncash Consideration
pursuant to an Officer's Certificate, setting forth the basis of such valuation,
executed by the chief financial officer of the Company, less the amount of cash
or Cash Equivalents received in connection with a sale of such Designated
Noncash Consideration.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature. Notwithstanding the preceding sentence, 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 an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any sale by the Company of any Equity Interest
(other than Disqualified Stock) of the Company for cash.
"EXISTING INDEBTEDNESS" means up to $357.0 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries in
existence on the date of the Indenture, until such amounts are repaid.
"EXPLORATION AND PRODUCTION ASSETS" means the oil and gas exploration and
production assets of Odessa held by Odessa as of the date of the Indenture, and
any such oil and gas assets received in exchange for oil and gas assets held by
Odessa as of the date of the Indenture.
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"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments, if any, pursuant to Hedging Obligations, but
excluding the amortization of fees paid (or one-time syndication fees
owed) prior to the date of the Indenture with respect to (i) any Credit
Facility that was in place prior to the date of the Indenture, (ii) the
Notes, (iii) the Subordinated Convertible Notes, and (iv) the Senior
Subordinated Notes; PLUS
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; PLUS
(3) any 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,
whether or not such Guarantee or Lien is called upon; PLUS
(4) the product of (a) all dividend payments, whether or not in
cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the Company, times
(b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory
tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person for
such period. In the event that the specified Person or any of its Restricted
Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than
revolving credit borrowings) or issues or redeems preferred stock subsequent to
the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any
of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during
the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving
effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
and
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(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the
extent that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"GUARANTORS" means each of the following until released as a Guarantor
under the Indenture:
(1) Yale E. Key, Inc., a Texas corporation; Key Energy Drilling,
Inc., a Delaware corporation; WellTech Eastern, Inc., a Delaware
corporation; Odessa Exploration Incorporated, a Delaware corporation;
Kalkaska Oilfield Services, Inc., a Michigan corporation; Well-Co Oil
Service, Inc., a Nevada corporation; Patrick Well Service, Inc., a Kansas
corporation; Ram Oil Well Service, Inc., a New Mexico corporation; Rowland
Trucking Co., Inc., a New Mexico corporation; Landmark Fishing & Rental,
Inc., an Oklahoma corporation; Dunbar Well Service, Inc., a Colorado
corporation; Frontier Well Service, Inc., a Wyoming corporation; Key Rocky
Mountain, Inc., a Delaware corporation; Key Four Corners, Inc., a Delaware
corporation; Jeter Service Co., an Oklahoma corporation; Jeter Well
Service, Inc., an Oklahoma corporation; Jeter Transportation, Inc., an
Oklahoma corporation; Industrial Oilfield Supply, Inc., an Oklahoma
corporation; Brooks Well Servicing, Inc., a Delaware corporation; Updike
Brothers, Inc., a Wyoming corporation; J.W. Gibson Well Service Company, a
Delaware corporation; Key Energy Services--South Texas, Inc., a Delaware
corporation; Key Energy Services--California, Inc., a Delaware
corporation; Watson Oilfield Service & Supply, Inc., a Delaware
corporation; WellTech Mid-Continent, Inc., a Delaware corporation; Dawson
Production Management, Inc., a Delaware corporation; Dawson Production
Taylor, Inc., a Delaware corporation; Dawson Production Acquisition Corp.,
a Delaware corporation; and Dawson Production Partners, L.P., a Delaware
limited partnership; and
(2) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture;
and their respective successors and assigns.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations
of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in commodity prices, interest rates or the value of
foreign currencies purchased or received by the Company the ordinary
course of business and not for the purposes of speculation.
"INDEBTEDNESS" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent, in respect of:
S-46
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or
trade payable;
(6) any Hedging Obligations; or
(7) obligations of special purpose entities formed to borrow money
that are secured or financed by accounts receivable of the Company or any
Restricted Subsidiary;
if and to the extent any of the preceding items (other than letters of credit,
Hedging Obligations and receivables financings) would appear as a liability upon
a balance sheet of the specified Person prepared in accordance with GAAP In
addition, the term "Indebtedness" includes all Indebtedness of others secured by
a Lien on any asset of the specified Person (whether or not such Indebtedness is
assumed by the specified Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount; and
(2) the principal amount thereof, in the case of any other
Indebtedness.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's or BBB- (or the equivalent) by S&P.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
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"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person and its Restricted Subsidiaries, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends, excluding,
however:
(1) any gain or loss together with any related provision for taxes
on such gain or loss realized in connection with: (a) any Asset Sale; or
(b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in each
case after taking into account any available tax credits or deductions and any
tax sharing arrangements and amounts required to be applied to the repayment of
Indebtedness, other than Indebtedness under a Credit Facility, secured by a Lien
on the asset or assets that were the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(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 (other than the Notes) of the Company
or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"ODESSA" means Odessa Exploration Incorporated, a Delaware corporation.
"PERMITTED BUSINESS" means any of the businesses engaged in by the Company
and its Subsidiaries on the date of the Indenture and all reasonable extensions
thereof and other businesses ancillary or related thereto or to the oil and gas
industry.
"PERMITTED INVESTMENTS" means:
(1) any Investment in the Company or in a Restricted Subsidiary of
the Company that is a Guarantor;
(2) any Investment in Cash Equivalents;
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(3) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the
Company; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the
Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales" or in connection with
the settlement or release of claims in an insolvency or similar proceeding
or a settlement in lieu of an insolvency or similar proceeding;
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) other Investments in any Subsidiary that is not a Guarantor
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in
value), which when taken together with all other Investments made pursuant
to this clause (6) not to exceed $30.0 million outstanding at any time
(without giving effect to any reduction for any writedown or writeoff of
such Investments); and
(7) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with
all other Investments made pursuant to this clause (7) since the date of
the Indenture, not to exceed $30.0 million outstanding at any time
(without giving effect to any reduction for any writedown or writeoff of
such Investments).
"PERMITTED LIENS" means:
(1) Liens securing Indebtedness (other than Indebtedness
subordinated to the Notes), Obligations under Credit Facilities and all
Guarantees thereof, in each case, that were permitted by the terms of the
Indenture to be incurred;
(2) Liens in favor of the Company or any Guarantor;
(3) Liens on property of a Person existing at the time such Person
is merged with or into or consolidated with the Company or any Subsidiary
of the Company; PROVIDED that such Liens were not incurred in
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company;
(4) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, PROVIDED that such Liens
were not incurred in contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second paragraph of the
covenant entitled "--Certain
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Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
covering only the assets acquired with such Indebtedness and the proceeds
thereof;
(7) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (10) of the second paragraph of the
covenant entitled "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock";
(8) Liens existing on the date of the Indenture;
(9) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
PROVIDED that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(10) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Liens arising in the ordinary
course of business;
(11) Liens consisting of pledges or deposits required in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other social security legislation;
(12) Liens on property of the Company or any Subsidiary securing (a)
the performance of bids, trade contacts (other than for borrowed money),
leases and statutory obligations, (b) surety bonds and (c) other
obligations of a like nature, including pledges or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security legislation, in
each case, incurred in the ordinary course of business;
(13) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, do not interfere with the ordinary conduct of the businesses of
the Company and its Subsidiaries taken as a whole;
(14) purchase money security interests on any property acquired by
the Company or any Subsidiary in the ordinary course of business, securing
Indebtedness incurred or assumed for the purpose of financing all or any
part of the cost of acquiring such property, PROVIDED that (a) any such
Lien attaches to such property concurrently with or within 180 days after
the acquisition thereof, (b) such Lien attached solely to the property so
acquired in such transaction and the proceeds thereof and (c) the
principal amount of the Indebtedness secured thereby does not exceed 100%
of the costs of such property;
(15) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's liens, rights of setoff or similar rights
and remedies as to deposit accounts or the funds maintained with a
creditor depository 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 Subsidiary to provide collateral to the
depository institution;
(16) extensions, renewals and replacements of Liens referred to in
clauses (1) through (15) above; PROVIDED that any such extension, renewal
or replacement Lien is limited to the property or assets covered by the
Lien extended, renewed or replaced and does not secure any Indebtedness in
principal amount (or accreted value) in excess of the principal amount (or
accreted value) in excess of that secured immediately prior to such
extension, renewal or replacement;
(17) Liens consisting of the rights of lessees with respect to
assets leased by the Company or any Subsidiary to such lessees; and
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(18) Liens incurred in the ordinary course of business of the
Company or any Subsidiary of the Company with respect to obligations that
do not exceed $10.0 million at any one time outstanding.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity
date not sooner than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company, by the
Restricted Subsidiary or Restricted Subsidiaries which are the obligor or
obligors on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded or by the Company and such Restricted
Subsidiary or Restricted Subsidiaries, as the case may be.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"QUALIFIED PREFERRED STOCK" means preferred stock of the Company, PROVIDED
that when first issued, the Company would, after giving pro forma effect to such
issuance, have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Certain
Covenants-- Incurrence of Indebtedness and Issuance of Preferred Stock."
"RATING AGENCY" means each of S&P and Moody's, or if S&P or Moody's or
both shall not make a rating on the notes publicly available, a nationally
recognized statistical rating agency or agencies, as the case may be, selected
by us (as certified by a resolution of our Board of Directors) which shall be
substituted for S&P or Moody's, or both, as the case may be.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of such Person
that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, Inc., or any successor to the
rating agency business thereof.
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"SENIOR SUBORDINATED NOTE INDENTURE" means that certain indenture, dated
January 22, 1999, between the Company and The Bank of New York, as trustee, as
amended or supplemented from time to time, relating to the Senior Subordinated
Notes.
"SENIOR SUBORDINATED NOTES" means the Company's 14% Senior Subordinated
Notes due 2009 issued pursuant to the Senior Subordinated Note Indenture.
"SIGNIFICANT SUBSIDIARY" means, at any time, any Subsidiary that, at such
time, would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect
on the date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness or as such scheduled maturity date may have been
deferred, and shall not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date originally scheduled
for the payment thereof.
"SUBORDINATED CONVERTIBLE NOTE INDENTURE" means that certain indenture,
dated as of September 25, 1997, between the Company and American Stock Transfer
& Trust Company, as trustee, as amended or supplemented from time to time,
relating to the Subordinated Convertible Notes.
"SUBORDINATED CONVERTIBLE NOTES" means the Company's 5% Senior
Subordinated Notes due 2004 issued pursuant to the Subordinated Convertible Note
Indenture.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which
more than 50% of the total 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 is at the time
owned or controlled, directly or indirectly, by such Person or one or more
of the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(3) 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 Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries; and
S-52
(5) has at least one director on its board of directors that is not
a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding 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 by a Restricted Subsidiary of the Company as of
such date and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "--Certain Covenants
--Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant. The Board of Directors of the Company may at any
time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
PROVIDED that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if: (1) such Indebtedness is permitted under the covenant described
under the caption "--Certain Covenants-- Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period and (2) no
Default or Event of Default would be in existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount
of each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
BOOK ENTRY; DELIVERY AND FORM
We will issue the Series B notes in the form of one permanent global
certificate in definitive, fully registered form. The global certificate will be
deposited with, or on behalf of, DTC and registered in the name of DTC or its
nominee.
Except as set forth below, the global certificate may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee.
DTC has advised us that:
o DTC is a limited-purpose trust company which was created to hold
securities for its participating organizations and to facilitate the
clearance and settlement of
S-53
transactions in such securities between participants through
electronic book-entry changes in accounts of its participants;
o participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations;
and
o access to the DTC's book-entry system is also available to other
entities, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a
participant.
Persons who are not participants may beneficially own securities held by
or on behalf of DTC only through the participants or the indirect participants.
The ownership interests in, and transfers of ownership interests in, each
security held by or on behalf of DTC are recorded on the records of the
participants and indirect participants.
DTC has also advised that pursuant to procedures established by it:
(1) upon the deposit by us of the Series B notes, DTC will credit
the accounts of participants with the principal amount of the Series B
notes equivalent to their interest in the old notes tendered for exchange;
and
(2) ownership of beneficial interests in the global certificate will
be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC, the participants and the indirect
participants.
The laws of some jurisdictions may require that certain persons take
physical delivery in definitive form of securities which they own. Accordingly,
the ability to transfer interests in the Series B notes represented by a global
certificate to those persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest
in Series B notes represented by a global certificate to pledge or transfer
those interests to persons or entities that do not participate in DTC's system,
or otherwise to take actions in respect of such interest, may be affected by the
lack of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of the global
certificate, DTC will be considered the sole owner or holder of the Series B
notes for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in the global certificate will not:
o be entitled to have Series B notes registered in their names, will
not receive or be entitled to receive physical delivery of Series B
notes in definitive form; and
o be considered the registered owners or holders of the Series B notes
for the purpose of receiving payments and for all other purposes,
including with respect to the giving of any direction, instruction
or approval to the trustee.
Neither we, the trustee, the paying agent, the note registrar nor any of
our agents will have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of
beneficial ownership interest in the Series B notes or for maintaining,
supervising or reviewing any of DTC's records or any participant's or
indirect participant's records relating to the beneficial ownership
interests in the Series B notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its participants or indirect participants.
S-54
We will make principal and interest payments on the Series B notes, either
directly or through a paying agent, to DTC as the registered owner of the global
certificate. Under the terms of the Indenture, we and the trustee will treat the
persons in whose names the notes are registered as the owners of such notes for
all purposes. Therefore, neither we, the trustee nor any paying agent has any
direct responsibility or liability for the payment of principal or interest on
the notes to beneficial owners. DTC has advised us and the trustee that its
present practice is, upon receipt of any payment of principal or interest to
credit immediately the accounts of the participants with payment in amounts
proportionate to their respective holdings in the global certificate as shown on
the records of DTC. Payments by participants and indirect participants to
beneficial owners will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in "street name" and will be the responsibility of
such participants or indirect participants.
As long as the Series B notes are represented by a global certificate,
DTC's nominee will be the holder of the Series B notes and therefore will be the
only entity that can exercise a right to repayment or repurchase of the notes.
DTC has advised us that it will take any action permitted to be taken by a
holder of Series B notes only at the direction of one or more participants to
whose account DTC has credited the interests in the Series B notes and only in
respect of such portion of the aggregate principal amount of the Series B notes
as to which such participant or participants has or have given such direction.
Notice by participants or indirect participants or by beneficial owners held
through such participants or indirect participants must be transmitted to DTC in
accordance with its procedures on a form required by DTC and provided to
participants. In order to ensure that DTC will timely take any such action, the
beneficial owner must instruct the broker or other participant. Different firms
have cut-off times for accepting instructions from their customers and,
accordingly, each beneficial owner should consult the broker or other
participant or indirect participant through which it holds its interest in order
to ascertain the cut-off time by which such an instruction must be given in
order for timely notice to be delivered to DTC. We will not be liable for any
delay in delivery of instructions to DTC.
We will issue Series B notes in definitive form in exchange for the global
certificate if:
(1) DTC (a) is at any time unwilling or unable to continue as
depository and a successor depository is not appointed by us within 90
days or (b) has ceased to be a clearing agency registered under the
Securities Exchange Act of 1934;
(2) we, at our option, notify the trustee in writing that we elect
to cause the issuance of certificated notes; or
(3) there has occurred and is continuing a Default or Event of
Default with respect to the Series B notes.
In such an instance, a beneficial owner will be entitled to have Series B
notes equal in principal amount to such beneficial interest issued in fully
registered certificated form. Series B notes so issued in definitive form will
be issued in denominations of $1,000 and integral multiples thereof and will be
issued in registered form only, without coupons.
Neither we nor the trustee will be liable for any delay by DTC or its
nominee in identifying the beneficial owners of Series B notes and we and the
trustee may conclusively rely on, and will be protected in relying on,
instructions from DTC or its nominee for all purposes.
S-55
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is addressed to persons who receive Series B
notes in this exchange offer based upon current provisions of the Internal
Revenue Code, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the IRS will
not take a contrary view, and no ruling from the IRS has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders. Certain holders of the Series B
notes (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who hold Series B
notes in connection with a hedging transaction, straddle, or conversion
transaction) may be subject to special rules not discussed below.
The issuance of the Series B notes to holders of the old notes pursuant to
the terms set forth in this prospectus will not constitute a taxable exchange
for federal income tax purposes. Consequently, no gain or loss will be
recognized by holders of the old notes upon receipt of the Series B notes.
Issuance of the Series B notes should be treated for federal income tax purposes
either (i) as merely a continuation of a single debt obligation as to which no
gain or loss is realized or (ii) as an exchange of debt securities on which no
gain or loss is recognized. In either event, for purposes of determining gain or
loss upon the subsequent sale or exchange of the Series B notes, a holder's
basis in the Series B notes will be the same as such holder's basis in the old
notes exchanged therefor. A holder's holding period for the Series B notes
should include the holder's holding period for the notes exchanged. Each
holder's taxation of a Series B note will be the same as for the old notes, and
the issue price, original issue discount, bond premium and market discount
inclusion and other tax characteristics of the Series B notes should be
identical to the issue price, original issue discount, bond premium and market
discount inclusion and other tax characteristics of the old notes exchanged
therefor.
PLAN OF DISTRIBUTION
Each broker-dealer that acquires Series B 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 Series B notes. This
prospectus, as supplemented, as it may be amended or further supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Series B 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
have agreed that we will make this prospectus, as supplemented, as amended or
further supplemented, available to any broker-dealer for use in connection with
any such resale.
We will not receive any proceeds from any sales of the Series B notes by
broker-dealers. Series B 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 Series B notes or a combination of such methods or
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 the purchaser 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 Series B notes. Any
broker-dealer that resells the Series B notes that were received by it for its
own account pursuant to the exchange offer may be deemed to be an underwriter
within the meaning of the Securities Act of 1933 and any profit on any such
resale of Series B notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act
of 1933. 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 of
1933.
For the period of time as such broker-dealers must comply with prospectus
delivery requirements of the Exchange Act in order to resell the Series B notes,
we will promptly send additional copies of this prospectus, as supplemented, and
any amendment or additional supplement to this prospectus to any broker-dealer
that requests such documents in the letter of transmittal. We have agreed to pay
certain expenses incident to the exchange offer, other than commission or
concessions of
S-56
any brokers or dealers, and will indemnify the holders of the old notes against
certain liabilities, including liabilities under the Securities Act of 1933.
By acceptance of this exchange offer, each broker-dealer that receives
Series B notes for its own account pursuant to the exchange offer agrees that,
upon receipt of notice from us of the happening of any event which makes any
statement in the prospectus, as supplemented, untrue in any material respect or
which requires the making of any changes in the prospectus in order to make the
statements therein not misleading (which notice we agree to deliver promptly to
such broker-dealer), such broker-dealer will suspend use of the prospectus until
we have amended or supplemented the prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemental prospectus to
such broker-dealer.
LEGAL MATTERS
Certain legal matters in connection with the validity of the Series B
notes offered hereby will be passed on for us by Porter & Hedges, L.L.P.,
Houston, Texas.
S-57
KEY ENERGY SERVICES INC.
EXCHANGE OFFER
------------------
PROSPECTUS
SUPPLEMENT
------------------
PROSPECTUS
[LOGO]
$375,000,000
KEY ENERGY SERVICES, INC.
Common Stock
Debt Securities
Preferred Stock
Warrants
-----------
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. This means:
- we may issue the common stock, debt securities, preferred stock and
warrants covered by this prospectus from time to time;
- we will issue the common stock, preferred stock, warrants and debt
securities to people from whom we acquire assets, businesses or
securities;
- we will provide a prospectus supplement each time we issue the securities;
- the prospectus supplement will provide specific information about the
terms of that offering and also may add, update or change information
contained in this prospectus.
Our common stock is listed and traded on the New York Stock Exchange under
the symbol "KEG."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 IN THIS PROSPECTUS.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
This prospectus is dated June 21, 1999
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED
ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN
OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
TABLE OF CONTENTS
SECTION PAGE
-------------------------------------------------------------------------------------------------------- -----------
Where You Can Find More Information..................................................................... 3
Key Energy Services, Inc................................................................................ 4
The Offering............................................................................................ 4
Ratio of Earnings to Fixed Charges...................................................................... 5
Forward-Looking Statements.............................................................................. 6
Risk Factors............................................................................................ 6
Acquisition Terms....................................................................................... 11
Selling Security Holders and Plan of Distribution....................................................... 12
Description of Debt Securities.......................................................................... 13
Description of Capital Stock............................................................................ 17
Description of Warrants................................................................................. 18
Legal Matters........................................................................................... 18
Experts................................................................................................. 19
2
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 (Reg. No.
333-67667) with respect to the securities we are offering. This prospectus does
not contain all the information contained in the registration statement,
including its exhibits and schedules. You should refer to the registration
statement, including the exhibits and schedules, for further information about
us and the securities we are offering. Statements we make in this prospectus
about certain contracts or other documents are not necessarily complete. When we
make such statements, we refer you to the copies of the contracts or documents
that are filed as exhibits to the registration statement, because those
statements are qualified in all respects by reference to those exhibits. The
registration statement, including exhibits and schedules, is on file at the
offices of the SEC and may be inspected without charge.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings, including the registration statement,
are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You also may read and copy any document we file at the SEC's
public reference rooms in Washington, D.C.; New York, New York; and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information about
the public reference rooms.
SEC rules allow us to include some of the information required to be in the
registration statement by incorporating that information by reference to
documents we file with them. That means we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus, and information that we file
later with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act until
we sell all of the securities covered by this prospectus:
- Annual Report on Form 10-K for the year ended June 30, 1998, as amended by
Annual Report on Form 10-K/A filed on October 28, 1998, and as further
amended by Annual Report on Form 10-K/A2 filed on March 31, 1999;
- Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, as
amended by Quarterly Report on Form 10-Q/A filed on March 31, 1999;
- Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, as
amended by Quarterly Report on Form 10-Q/A filed on March 31, 1999 and as
further amended by Quarterly Report on Form 10-Q/A filed on April 30,
1999;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, as
amended by Quarterly Report on Form 10-Q/A filed on June 7, 1999;
- Current Reports on Form 8-K, filed on September 28, 1998, Form 8-K/A filed
on October 28, 1998, Form 8-K/A2 filed on March 31, 1999, Form 8-K filed
on December 21, 1998 and Form 8-K filed on February 3, 1999, Form 8-K
filed on April 20, 1999, and Form 8-K filed on May 6, 1999;
- Our prospectus dated April 16, 1999 as filed with the SEC pursuant to Rule
424(b) on April 16, 1999, as supplemented by the prospectus supplement
dated May 4, 1999 filed with the SEC pursuant to Rule 424(b) on May 4,
1999;
- Proxy Statement on Schedule 14A, dated November 17, 1998; and
- The description of our common stock contained in Form 8-A dated March 27,
1998, including any amendments or reports that have been filed to update
the description.
You may request a copy of these filings, which we will provide to you at no
cost, by writing or telephoning us at the following address:
Key Energy Services, Inc.
Two Tower Center, 20th Floor
East Brunswick, New Jersey 08816
(732) 247-4822
3
KEY ENERGY SERVICES, INC.
BUSINESS
We are the world's largest onshore oil and gas well service and workover
company based on the number of rigs we own and available industry data. We
provide a complete range of rig-based well maintenance, workover, completion,
recompletion, contract drilling and non-rig ancillary well services to major and
independent oil and gas companies. We believe that we have the most
comprehensive array of services of any participant in the market and have
differentiated ourself from our competitors by our position as a single-source
provider of multiple well-head based services and products across multiple
geographic regions. In addition to maintenance and workover services, we provide
services that include:
- the completion of newly drilled wells;
- the recompletion of existing wells (including horizontal recompletions);
- plugging and abandonment of wells at the ends of their useful lives;
- oilfield fluid and equipment transportation;
- oilfield fluid storage and disposal services;
- fishing and rental tools;
- wireline services;
- air drilling;
- hot oiling; and
- production testing services.
AREAS OF OPERATION. Our principal operating regions in the United States
include West Texas and Eastern New Mexico, the Gulf Coast, Oklahoma, Michigan,
the Appalachian Basin, the Rocky Mountains, the Ark La Tex region, the Four
Corners area and California. We also operate in Argentina and have limited
operations in Ontario, Canada.
OPERATING ASSETS. We estimate that our share of the domestic onshore well
service rig fleet is approximately 37% based on the number of rigs we own and
available industry data. Our operating assets consist of approximately 1,420
well service and workover rigs, 75 drilling rigs and 1,130 oil field trucks.
ACQUISITIONS. We have pursued an acquisition strategy designed to
consolidate a highly fragmented industry that is primarily comprised of small,
regional well service companies. Over the last three years, we have completed
over 50 acquisitions, for an aggregate consideration of approximately
$807 million.
-------------------
Our principal executive offices are located at Two Tower Center,
20th Floor, East Brunswick, New Jersey 08816 and our phone number is
(732) 247-4822.
THE OFFERING
This prospectus covers up to $375,000,000 of common stock, debt securities,
preferred stock and warrants that we plan to issue to the owners or controlling
persons of assets or businesses that we may acquire and holders of securities
that we may acquire in the future. This prospectus may also be used by those
people to resell the securities we issue to them.
4
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of our earnings to our fixed charges for each of the periods
indicated is as follows:
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
1994 1995 1996 1997 1998 MARCH 31, 1999
--------- --------- --------- --------- --------- -------------------
2.65 2.57 2.62 2.52 2.61 (0.18)
For these ratios, earnings consist of income from continuing operations
before income taxes and fixed charges. Fixed charges consist of interest
expenses, amortization of debt issuance expenses and the portions of rentals and
lease obligations representative of the interest factor.
5
FORWARD-LOOKING STATEMENTS
The statements made in this prospectus or in the documents we have
incorporated by reference that are not statements of historical fact are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate" or "believe," or similar terminology.
The forward-looking statements include discussions about business strategy
and expectations concerning market position, future operations, margins,
profitability, liquidity and capital resources, and statements concerning the
integration into our business of the operations we have acquired. Although we
believe that the expectations in such statements are reasonable, we cannot give
any assurance that those expectations will be correct.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
Our operations are subject to several uncertainties, risks and other
influences, many of which are outside our control and any of which could
materially affect our results of operations and ultimately prove the statements
we make to be inaccurate.
Important factors that could cause actual results to differ materially from
our expectations are discussed under the heading "Risk Factors" and elsewhere in
this prospectus.
RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN THIS
PROSPECTUS BEFORE DECIDING TO BUY OUR SECURITIES.
RECENT OPERATING LOSSES
We have experienced a significant decrease in the demand for our services
during the last three quarters that has resulted in operating losses. The
proceeds of our May 1999 public offering permitted us to reduce indebtedness and
has provided us with a cash reserve which, together with cash from operations,
should permit us to maintain operations for the balance of calendar 1999 and
through 2000. However, there must be a significant improvement in the demand for
our services for us to be able to generate cash from operations sufficient to
service our indebtedness or to return to profitability. No assurance can be
given when or if there will be any such improvement in demand for our services.
RISKS ASSOCIATED WITH OIL AND GAS INDUSTRY -- OUR BUSINESS IS DEPENDENT ON
CONDITIONS IN THE OIL AND GAS INDUSTRY, ESPECIALLY THE PRODUCTION EXPENDITURES
OF OIL AND GAS COMPANIES.
The demand for our services is directly influenced by current and
anticipated oil and gas prices, oil and gas production costs, and government
regulation and conditions in the worldwide oil and gas industry, and
particularly on the level of development, exploration and production activity
of, and corresponding spending by, oil and gas companies. Most of our operations
are in the United States where the demand for well servicing and related
services currently is depressed in many markets because of weak oil prices,
which recently were at a twelve-year low. Continued weakness in oil and gas
prices may cause lower day rates and lower utilization of available well service
equipment, which may influence the recoverability and carrying value of our
long-term assets and related goodwill balances, pursuant to the provisions of
SFAS 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." In addition, when oil prices are weak, fewer wells
are drilled,
6
resulting in less drilling and less maintenance work for us. Periods of
diminished or weakened demand may continue to occur. In light of these and other
factors relating to the oil and gas industry, our historical operating results
may not be indicative of future performance. In addition, reductions in oil
prices can result in a reduction in the trading prices of our securities, even
if the reduction in oil prices does not affect our business generally.
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR
CURRENT INDEBTEDNESS.
We have a significant amount of indebtedness. Our substantial indebtedness
could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital expenditures and
other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
credit facility, among other things, our ability to borrow additional
funds. Our failure to comply with these covenants could result in an event
of default which, if not cured or waived, could have a material adverse
effect on us.
ADDITIONAL BORROWINGS AVAILABLE -- DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND
OUR SUBSIDIARIES STILL MAY BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD
FURTHER INCREASE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. Our credit facility currently permits additional
borrowings of up to approximately $9.0 million. If new debt is added to our and
our subsidiaries' current debt levels, the related risks that we and they now
face could intensify.
ABILITY TO SERVICE DEBT -- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, and to
fund planned capital expenditures will depend on our ability to generate cash in
the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations to service our outstanding debt, that currently anticipated cost
savings and operating improvements will be realized or that future borrowings
will be available to us under our credit facility in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness,
including our credit facility, on commercially reasonable terms or at all.
7
RISKS ASSOCIATED WITH INTEGRATION OF ACQUISITIONS -- WE HAVE PURSUED, AND INTEND
TO CONTINUE TO PURSUE, ACQUISITIONS. OUR BUSINESS MAY BE ADVERSELY AFFECTED IT
WE CANNOT EFFECTIVELY INTEGRATE ACQUIRED OPERATIONS.
One of our business strategies has been to acquire operations and assets
that are complementary to our existing businesses. In the last twelve months,
our acquisitions have doubled the number of well service rigs we own. Our
revenues have grown from $44.7 million in fiscal 1995 to $645.6 million on a pro
forma basis in fiscal 1998, largely as a result of acquisitions. Acquiring
operations and assets involves financial, operational and legal risks. These
risks include the difficulty of assimilating operations, systems and personnel
of the acquired businesses and maintaining uniform standards, controls,
procedures and policies. Any future acquisitions would likely result in an
increase in expenses. In addition, competition from other potential buyers could
cause us to pay a higher price than we otherwise might have to pay and reduce
our acquisition opportunities. Moreover, our past success in making acquisitions
and in integrating acquired businesses does not necessarily mean we will be
successful in making acquisitions and integrating businesses in the future.
OPERATING RISKS; INSURANCE -- OUR BUSINESS COULD BE ADVERSELY AFFECTED BY
CERTAIN OPERATING RISKS, AND OUR INSURANCE MAY NOT BE ADEQUATE TO COVER ALL
LOSSES OR LIABILITIES WE MIGHT INCUR IN OUR OPERATIONS.
Our operations are subject to many hazards. These hazards include
explosions, blow-outs, reservoir damage, loss of well control, cratering, fires
and damage to the environment. In addition, we are subject to seasonal risks
caused by adverse weather conditions such as rain and flooding, high winds and
severe winter storms. Operations in northern regions are subject to limitations
on transporting equipment during the spring thaw. These hazards and risks could
cause the suspension of operations, damage to or destruction of our equipment
and the property of others and injury or death to field personnel. Like most
companies in our industry, we have experienced some of these incidents in our
operations. The frequency and severity of these incidents affect our operating
costs and our relationships with customers, employees and regulators. Any
significant increase in the frequency or severity of such incidents, or the
general level of compensation awards, could affect our ability to obtain
insurance and could have a material adverse effect on our business. We have
insurance, customary in the industry, to protect against these liabilities.
However, this insurance is capped at $50 million per incident and does not
provide coverage for all liabilities. Our insurance may not be adequate to cover
all losses or abilities that we might incur in our operations. To the extent our
liability for any particular loss or liability exceeds the $50 million cap, we
would incur costs for the excess. Moreover, we may not be able to maintain
insurance at adequate levels or at reasonable rates and particular types of
coverage may not be available in the future.
COMPETITION
We experience intense competition in our markets. Certain of our competitors
have greater financial and other resources than we do.
POTENTIAL LABOR SHORTAGE -- WE HISTORICALLY HAVE EXPERIENCED A HIGH EMPLOYEE
TURNOVER RATE. ANY DIFFICULTY WE EXPERIENCE REPLACING OR ADDING WORKERS COULD
ADVERSELY AFFECT OUR BUSINESS.
We historically have experienced an annual employee turnover rate of over
50%. The high turnover rate is caused by the nature of the work, which is
physically demanding and performed outdoors. As a result, workers may choose to
pursue employment in fields that offer a more desirable work environment at wage
rates that are competitive with ours. Although we currently are downsizing our
workforce, we cannot assure that at times of high demand we will be able to
recruit and train workers. Potential inability or lack of desire by workers to
commute to our facilities and job sites and competition for workers from other
industries are factors that could affect our ability to attract
8
workers. We believe that our wage rates are competitive with the wage rates of
our competitors and other potential employers. A significant increase in the
wages other employers pay could result in a reduction in our workforce,
increases in our wage rates, or both. Either of these events could diminish our
profitability and growth potential.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS -- WE MAY BECOME LIABLE FOR
PENALTIES UNDER A VARIETY OF ENVIRONMENTAL LAWS AND GOVERNMENT REGULATIONS EVEN
IF WE DO NOT CAUSE ANY ENVIRONMENTAL PROBLEMS. CERTAIN CHANGES IN ENVIRONMENTAL
LAWS AND GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are subject to foreign, federal, state and local laws and
regulations relating to protection of the environment, natural resources, health
and safety, waste management and transportation of waste and other materials
including hydrocarbons and chemicals. Our fluid services include injection
operations that pose certain risks of environmental liability. Although we
monitor the injection process, the possibility exists of leakage to surface or
subsurface soils or groundwater, which could result in cancellation of well
operations, fines and penalties, expenditures for remediation, and liability for
property damages and personal injuries. Sanctions for noncompliance with
applicable environmental laws and regulations also may include administrative,
civil and criminal penalties, revocation of permits and corrective action
orders. In addition, our operations may be subject to potential liability for
environmental clean up at currently or previously owned or operated properties
or off-site locations where we sent, disposed of, or arranged for disposal of
hazardous materials. A party can be liable for environmental damage without
regard to its negligence or fault. Therefore, we could incur liability based on
the conduct of others, or for acts that were lawful at the time we performed
them. Environmental laws have become more stringent over the years. The
modification or interpretation of existing laws or regulations, the adoption of
new laws or regulations or the more vigorous enforcement of environmental laws
or regulations could curtail exploratory or development drilling for oil and gas
and could limit well servicing opportunities.
FOREIGN INVESTMENTS -- OUR FOREIGN BUSINESS EXPOSES US TO RISKS RELATING TO
INCREASED REGULATION AND POLITICAL OR ECONOMIC INSTABILITY WITHIN CERTAIN
FOREIGN COUNTRIES.
We have investments and may make additional investments in Argentina and
Canada. We may make other investments outside the United States. Foreign
investments are subject to risks relating to the political, social and economic
structures of those countries. Risks may include fluctuations in currency
valuation, expropriation, confiscatory taxation and nationalization, currency
conversion restrictions, increased regulation and approval requirements and
governmental policies limiting returns to foreign investors. In fiscal 1998, our
foreign operations accounted for less than 10% of our revenues.
DEPENDENCE ON KEY PERSONNEL -- OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE LOSE
OUR EXECUTIVE OFFICERS.
We depend upon the performance of our executive officers. We have entered
into employment agreements with these executive officers that contain
non-compete provisions. Notwithstanding these agreements, we may not be able to
retain our executive officers and may not be able to enforce the non-compete
provisions in the employment agreements. We maintain key person life insurance
on the lives of certain of our offices, including our chief executive officer.
This insurance does not mean that the death or disability of one or more of them
would not adversely affect our operations.
YEAR 2000 ISSUE -- THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS IT
OUR SUPPLIERS AND CUSTOMERS DO NOT ADEQUATELY ADDRESS THEIR YEAR 2000 CONCERNS.
We currently are implementing a new integrated management information system
along with updated hardware that will replace most of our current systems. The
new management information
9
system will be year 2000 compliant for our systems as well as for those of our
past and future acquisitions. Implementation began in July 1998 and is scheduled
to be substantially completed by June 1999. Our new management information
systems do not cover our Argentine operations, but we have established a
separate system, which is year 2000 compliant, that will be implemented in late
1999.
We have not yet developed a plan to formally communicate with our
significant suppliers and customers to determine if those parties have
appropriate plans to remedy year 2000 issues when their systems interface with
our systems or otherwise have an impact on our operations. We do not anticipate
that this will have a material impact on our operations. However, there can be
no assurance that the systems of other companies on which we rely will be timely
converted, or that failure to successfully convert by another company, or
conversion that is incompatible with our systems, would not have an impact on
our operations. We currently do not have a contingency plan to cover any
unforeseen problems encountered that relate to the year 2000, but we intend to
produce one before the end of the current fiscal year.
The cost of the new management information system is not anticipated to have
a material impact on our business. Although we are not aware of any material
operational issues or costs associated with preparing our internal systems for
the year 2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems and
changes to address the year 2000 issues.
If we are unable to adequately address the year 2000 issue in a timely
manner, the worst case scenario would be that we could suffer significant
computer downtime, and billings, payments and collections would revert to manual
accounting records. In addition, the inability of our principal suppliers and
major customers to be year 2000 compliant could result in delays in product
deliveries from those suppliers and collection of accounts receivable.
SHARES ELIGIBLE FOR FUTURE SALE -- THE MARKET PRICE OF OUR COMMON STOCK COULD BE
ADVERSELY AFFECTED BY SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK IN THE PUBLIC
MARKET OR THE PERCEPTION THAT SUCH SALES COULD OCCUR.
As of June 7, 1999, we had 83,155,068 shares of common stock outstanding. As
of such date, approximately 16.2 million shares of common stock were issuable
upon the exercise of outstanding options, warrants and convertible securities.
The market price of the common stock could be adversely affected by sales of
substantial amounts of common stock in the public market or the perception that
such sales could occur.
VOLATILITY -- THE TRADING PRICE OF OUR SECURITIES COULD BE SUBJECT TO
SIGNIFICANT FLUCTUATIONS.
The trading price of our common stock has been volatile. Factors such as
announcements of fluctuations in our or our competitors' operating results and
market conditions for oil and gas related stocks in general could have a
significant impact on the future trading prices of our securities. In
particular, the trading price of the common stock of many oil and gas companies
has experienced extreme price and volume fluctuations, which have at times been
unrelated to the operating performance of such companies whose stocks were
affected. The trading prices of our securities could be subject to significant
fluctuations in response to variations in our prospects and operating results,
which may in turn be affected by weakness in oil prices, changes in interest
rates and other factors. In addition, our May 1999 public offering of 58,508,772
shares of our common stock resulted in an approximate 317% increase in the
number of shares of our common stock issued and outstanding. The historical
volume of trading and historical trading price of our common stock has been
based on a substantially lower number of outstanding shares of our common stock
than were outstanding after the offering. Therefore, our prior trading volume
and prior market price may not be indicative of our future trading volume and
market price. There can be no assurance that these factors will not have an
adverse effect on the trading prices of our securities.
10
ACQUISITION TERMS
This prospectus covers up to $375,000,000 of common stock, debt securities,
preferred stock and warrants that we may issue in connection with any asset
acquisition, stock acquisition, merger, consolidation or securities exchange
offer. Persons receiving securities in distributions pursuant to exchange
offers, mergers or consolidations may be required to complete and submit letters
of transmittal and other documentation customary in such transactions, all of
which will be described in the applicable prospectus supplement. We expect to
determine the terms of any acquisitions by direct negotiations with the persons
from whom the assets, businesses or securities are acquired. The securities
issued in each acquisition will be valued at prices reasonably related to market
prices, either when an agreement for the acquisition is entered into, or when we
deliver the securities
The specific terms of the particular securities to be issued will be set
forth in a prospectus supplement that will be delivered together with this
prospectus. In the case of common stock, a prospectus supplement would include
the number of shares to be issued. Terms set forth for the warrants would
include the number and terms of the warrants and the number of shares of common
stock issuable upon their exercise, including, the exercise price, the terms of
the offering, sale, duration and detachability of the warrants. In the case of
debt securities, the prospectus supplement would include, where applicable:
- aggregate principal amount;
- ranking as senior or subordinated debt securities;
- maturity;
- conversion terms;
- rate or rates (or method of determination);
- time or times for the payment of interest, if any;
- any exchangeability;
- any terms for optional or mandatory redemption or repurchase, or payment
of additional amounts or any sinking fund provisions;
- whether or not such debt securities are guaranteed by our subsidiaries;
and
- any other specific terms of such debt securities.
In the case of Preferred stock, the information that will be set forth in a
prospectus supple will include:
- specific designation;
- number of shares;
- liquidation value;
- dividend rights;
- liquidation and redemption rights;
- voting rights;
- other rights, including conversion or exchange rights, if any, and
- any other specific terms.
We will not pay any underwriting discounts or commissions, but we may pay
finder's fees in connection with certain acquisitions. The SEC may consider any
person who receives these fees to be
11
an "underwriter," in which case any profit on the resale of the securities
purchased by them could be deemed to be underwriting commissions or discounts
under the Securities Act.
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION
In general, the persons to whom we issue securities under this prospectus
will be able to resell those securities in the public markets without further
registration and without being required to deliver a prospectus. However,
certain persons who receive large blocks of our securities may want to resell
those securities in distributions that would require the delivery of a
prospectus. This prospectus may be used for those resales. However, no person
who receives the securities covered by this prospectus will be authorized to use
this prospectus for an offer of such securities without first obtaining our
consent. We may limit our consent to a specified time period and subject our
consent to certain limitations and conditions, which may vary by agreement. We
will provide the information identifying any people reselling securities
acquired under this prospectus and will disclose information about them and the
securities they are reselling in a supplement to this prospectus as may then be
required by the Securities Act and the rules of the SEC.
We will not receive any of the proceeds from the resale of the securities by
selling security holders. The selling security holders may resell all or a
portion of the securities beneficially owned by them on any exchange or market
on which the purchased securities are listed or quoted, on terms to be
determined at the times of such sales. The selling security holders also may
make private sales directly or through a broker. Alternatively, any of the
selling security holders may offer securities purchased under this prospectus
through underwriters, dealers or agents, who may receive compensation in the
form of underwriting discounts, commissions or concessions from the selling
security holders.
The specific amount of the securities being offered or sold, the names of
the selling security holders, the purchase prices and public offering prices,
the name of any agent, dealer or underwriter, and any applicable commissions or
discounts with respect to a particular offer or sale will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement.
To comply with state securities laws, the securities covered by this
prospectus will be sold in certain jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the securities may
not be sold at all unless they have been offered or qualified qualified for sale
in those states or an exemption from the registration or qualification
requirement is available.
The selling security holders and any brokers, dealers, agents or
underwriters that participate with the selling security holders in the
distribution of the securities offered hereby may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions or discounts
received by them and any profit on the resale of the securities sold under this
prospectus and purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We and the selling security holders may agree to indemnify each other
against certain liabilities arising under the Securities Act. We may pay all
expenses related to the offer and sale of the securities they sell under this
prospectus, other than selling commissions and fees.
Any debt securities, preferred stock or warrants may, but are not expected
to be, listed on any securities exchange.
12
DESCRIPTION OF DEBT SECURITIES
The debt securities will be:
- our direct unsecured or secured general obligations;
- either senior debt securities or subordinated debt securities; and
- issued under one or more separate indentures.
Senior debt securities will be issued under a senior indenture and
subordinated debt securities will be issued under a subordinated indenture.
Senior debt securities and subordinated debt securities may be guaranteed by
certain of our subsidiaries. The debt securities issued may be convertible into
shares of our common stock.
We have summarized selected provisions of the indentures below. The summary
is not complete. The forms of the indentures have been filed as exhibits to the
registration statement, and you should read the indentures for provisions that
may be important to you. In the summary, we have included references to section
numbers of the indentures so that you can easily locate those provisions.
Capitalized terms used in this summary have the meanings used in the indentures.
GENERAL
- The Indentures do not limit the aggregate principal amount of debt
securities that can be issued thereunder. (Section 301)
- Debt securities may be issued in one or more series, each in an aggregate
principal amount authorized by the Company before issuance, and may be in
any currency or currency unit that we may designate. (Section 301)
- Debt securities of a series may be issued in registered or global form.
(Sections 201 and 203)
- The Indentures do not limit the amount of other unsecured indebtedness or
securities that we can issue.
- The senior debt securities will rank equally with all of our other senior
debt.
- The subordinated debt securities will have a junior position to all of our
senior debt. (Section 1301)
We are a holding company that conducts all operations through our
subsidiaries. Holders of debt securities generally will have a junior position
to claims of creditors of our subsidiaries including trade creditors, debt
holders, secured creditors, taxing authorities, guaranty holders and any
preferred stockholders. At December 31, 1998, we did not have any outstanding
preferred stock and we and our subsidiaries had $849.4 million of outstanding
debt.
A prospectus supplement and a supplemental indenture relating to any series
of debt securities being offered will include specific terms relating to the
offering. These terms will include some or all of the following:
- the title and type of debt securities being offered;
- the total principal amount of debt securities being offered;
- the dates on which the principal of, and premium, if any, on the offered
debt securities is payable;
- the interest rate;
- the date from which interest will accrue;
13
- the interest payment dates;
- any optional redemption periods;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- whether the debt securities, will be convertible into shares of common
stock or exchangeable for other of our securities, and if so, the terms of
conversion or exchange;
- events causing acceleration of maturity;
- any provisions granting special rights to holders when the specified event
occurs;
- any changes to or additional events of default or covenants;
- any special tax implications of the debt securities; and
- any other terms of the debt securities. (Section 301)
GUARANTEES
- Debt securities may be guaranteed by some, but not all, of our
subsidiaries.
- The subsidiaries that will guarantee any guaranteed debt securities are
identified in the senior indenture and subordinated indenture relating
thereto, each of which is an exhibit to this registration statement.
- The guarantees will be general obligations of each guarantor.
- The guarantors will jointly and severally guarantee any of our guaranteed
debt securities.
- Not all of our subsidiaries will be required to guarantee any guaranteed
debt securities. In the event of a bankruptcy, liquidation or
reorganization of any of the non-guarantor subsidiaries, the non-guarantor
subsidiaries will pay the holders of their debt and their trade creditors
before they will be able to distribute any of their assets to us. Although
not all of our subsidiaries will guarantee any guaranteed debt securities,
the guarantor subsidiaries generated over 90% of our consolidated revenues
in the 12-month period ended December 31, 1998.
- The obligations of each guarantor under any subsidiary guarantee will be
limited as necessary to prevent that subsidiary guarantee from
constituting a fraudulent conveyance under applicable law.
- A subsidiary guarantor may not consolidate with or merge into another
company unless the surviving company assumes all of the obligations of
that guarantor subsidiary pursuant to a supplemental indenture
satisfactory to the trustee, and only if immediately after giving effect
to the transaction, no default or event of default would exist.
DENOMINATIONS
The debt securities will be issued in registered form in denominations of
$1,000 each or multiples thereof. (Section 302)
SUBORDINATION
Under the subordinated indenture, payment of the principal, interest and any
premium on the subordinated debt securities generally will be subordinated and
junior in right of payment to the prior
14
payment in full of all senior debt. The subordinated indenture provides that no
payment of principal, interest and or premium on the subordinated debt
securities may be made in the event:
- of any insolvency, bankruptcy or similar proceeding involving us or our
property; or
- we fall to pay the principal, interest, any premium or any other amounts
on any senior debt when due. (Sections 1301 and 1303)
The subordinated indenture will not limit the amount of senior debt that we
may incur.
Senior debt is defined to include all notes or other, unsecured evidences of
indebtedness including out guarantees for money we borrowed, not expressed to be
subordinate or junior in right of payment to any of our other indebtedness.
(Section 101)
EVENTS OF DEFAULT
The following are Events of Default under each Indenture:
- failure to pay principal or any premium on any debt security when due;
- failure to pay any interest on any debt security when due, continued for
30 days;
- failure to deposit any mandatory sinking fund payment when due, continued
for 30 days;
- failure to perform any other covenant in the Indenture that continues for
90 days after written notice;
- certain events of bankruptcy, insolvency or reorganization; and
- any other Event of Default as may be specified with respect to debt
securities of such series. (Section 501)
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities. The Trustee may withhold notice to the holders of debt securities of
any default (except in the payment of principal or interest) if the Trustee
considers the withholding of notice to be in the best interest of the holders.
(Section 602)
ACCELERATION OF DEBT UPON AN EVENT OF DEFAULT
If an Event of Default occurs:
- either the Trustee or the holders of at least 25% in principal amount of
the outstanding debt securities may declare the principal amount of all
the debt securities of the applicable series to be due and payable
immediately. (Section 502)
- If this happens, subject to certain conditions, the holders of a majority
in principal amount of the outstanding debt securities of such series can
void the declaration. These conditions include the requirement that we
have paid or deposited deposited with the Trustee a sum sufficient to pay
all overdue principal and interest payments on the series of debt
securities subject to the default. (Section 502)
If an Event of Default occurs due to certain events of bankruptcy,
insolvency or reorganization, the principal amount of the outstanding debt
securities of all series will become immediately due and payable without any
declaration or other act on the part of either Trustee or any holder.
(Section 502)
Depending on the terms of our indebtedness, an Event of Default under an
Indenture may cause a cross default on such other indebtedness.
15
DUTIES OF TRUSTEE
Other than its duties in the case of default, the Trustee is not obligated
to exercise any of its rights or powers under any Indenture at the request,
order or direction of any holders unless the holders offer the Trustee
reasonable indemnity. (Section 603)
If the holders provide reasonable indemnification, the holders of a majority
of principal amount of any series of debt securities may direct the time, method
and place of conducting any proceeding or any remedy available to the Trustee,
or exercising any power conferred upon the Trustee for any series of debt
securities. (Section 512)
COVENANTS
Under the Indentures, we will:
- pay the principal, interest and any premium on the debt securities when
due;
- maintain a place of payment;
- deliver a report to the Trustee at the end of each fiscal year reviewing
our obligations under the Indentures; and
- deposit sufficient funds with any payment agent on or before the due date
for any principal, interest or any premium. (Sections 1001, 1002, 1003 and
1005)
MODIFICATION OF INDENTURES
Under each Indenture, all rights and obligations of the holders may be
modified with the consent of the holders of a majority in aggregate principal
amount of the outstanding debt securities of each series effected by the
modification. No modification of the principal or interest payment terms and no
modification reducing the percentage required for modifications is effective
against any holder without its consent. (Sections 901 and 902)
CONSOLIDATION, MERGER AND SALE OF ASSETS
Each Indenture generally permits a consolidation or merger between us and
another company. They also permit the sale by us of all or substantially all of
our property and assets. If this happens, the remaining or acquiring company
will assume all of our responsibilities and liabilities under the Indentures,
including the payment of all amounts due on the debt securities and performance
of the covenants in the Indentures. (Sections 801 and 802)
We will only consolidate or merge with or into any other company or sell all
or substantially all of our assets according to the terms and conditions of the
Indentures. The remaining or acquiring company will be substituted for us in the
Indentures with the same effect as if it had been an original party to the
Indenture. Thereafter, the successor company may exercise our rights and powers
under any Indenture, in our name or in its own name. Any act or proceeding
required or permitted to be done by our board of directors or any of our
officers may be done by the board or officers of the successor company. If we
sell all or substantially all of our assets, we shall be released from all our
liabilities and obligations under any Indenture and under the debt securities.
(Sections 801 and 802)
DISCHARGE AND DEFEASANCE
We and the subsidiary guarantors, if any, will be discharged from our
obligations under the debt securities of any series if we deposit with the
Trustee enough cash or government securities to pay the principal, interest, any
premium and any other sums due to the stated maturity date or redemption
16
date of the debt securities of the series. If this happens, the holders of the
debt securities of the series will not be entitled to the benefits of the
Indenture except for registration, transfer and exchange of debt securities and
replacement of lost, stolen or mutilated debt securities. (Section 401)
Under federal income tax law as of the date of this prospectus, a discharge
may be treated as an exchange of the related debt securities. Each holder might
be required to recognize gain or loss equal to the difference between the
holder's cost or other tax basis for the debt securities and the value of the
holder's interest in the trust. Holders might be required to include as income a
different amount than would be includable without the discharge. Prospective
investors are urged to consult their own tax advisers as to the consequences of
a discharge, including the applicability and effect of tax laws other than the
federal income tax law.
PAYMENT AND PAYING AGENTS
Principal, interest and premium on fully registered securities will be paid
at designated places. Payment will be made by check mailed to the person in
whose name the debt securities are registered on the day specified in the
Indentures or any prospectus supplement. Payments in other forms will be paid at
a place designated by us and specified in a prospectus supplement.
(Section 307)
Fully registered securities may be transferred or exchanged at the corporate
trust office of the Trustee or at any other office or agency maintained by us
for such purposes without the payment of any service charge except for any tax
or governmental charge. (Section 1002)
GLOBAL SECURITIES
The debt securities of a series may be issued in the form of one or more
global certificates that will be deposited with a depositary identified in a
prospectus supplement. Unless otherwise stated in any prospectus supplement, The
Depository Trust Company, New York, New York ("DTC") will act as depositary.
Beneficial interests in global certificates will be shown on, and transfers of
global certificates will be effected only through, records maintained by DTC and
its participants.
DESCRIPTION OF CAPITAL STOCK
As of March 1, 1999, our authorized capital stock was 100,000,000 shares,
which may be issued as either shares of preferred stock or common stock. As of
June 7, 1999, we had 83,155,068 shares of common stock outstanding and no shares
of preferred stock outstanding.
COMMON STOCK
LISTING. Our common stock is listed on the New York Stock Exchange under
the symbol "KEG."
DIVIDENDS. Common stockholders may receive dividends when declared by the
board of directors. Dividends may be paid in cash, stock or another form.
However, certain of our existing debt agreements contain covenants that
currently restrict us from paying dividends. Additionally, in certain cases,
common stockholders may not receive dividends until we have satisfied our
obligations to any preferred stockholders.
FULLY PAID. All outstanding shares of common stock are fully paid and
non-assessable. Any additional common stock we issue will also be fully paid and
non-assessable.
17
VOTING RIGHTS. Each share of common stock is entitled to one vote in the
election of directors and other matters. Common stockholders are not entitled to
preemptive or cumulative voting rights. We also are authorized to issue
non-voting common stock under our charter.
OTHER RIGHTS. We will notify common stockholders of any stockholders'
meetings according to applicable law. If we liquidate, dissolve or wind-up our
business, either voluntarily or not, common stockholders will share equally in
the assets remaining after we pay our creditors and preferred stockholders.
TRANSFER AGENT AND REGISTRAR. Our transfer agent and registrar is American
Stock Transfer & Trust Company, New York. New York.
PREFERRED STOCK
The following description of the terms of the preferred stock sets forth
certain general terms and provisions of the preferred stock we may offer. If we
offer preferred stock, the specific designations and rights will be described in
a prospectus supplement and a description will be filed with the SEC.
Our board of directors can, without approval of our stockholders, issue one
or more series of preferred stock. The board can also determine the number of
shares of each series and the rights, preferences and limitations of each series
including the dividend rights, voting rights, conversion rights, redemption
rights and any liquidation preferences of any series of preferred stock, the
number of shares constituting each series and the terms and conditions of issue.
In some cases, the issuance of preferred stock could delay a change in control
of the Company and make it harder to remove present management. Under certain
circumstances, preferred stock could also restrict dividend payments to holders
of our common stock.
The transfer agent, registrar, and dividend disbursement agent for a series
of preferred stock will be named in a prospectus supplement. The registrar for
shares of preferred stock will send notices to stockholders of any meetings at
which holders of the preferred stock have the right to elect directors or to
vote on any other matter.
DESCRIPTION OF WARRANTS
We may issue warrants, including warrants to purchase debt securities,
preferred stock, common stock or other securities. We may issue warrants
independently or together with other securities that may be attached to or
separate from the warrants. The terms of warrants will be set forth in a
prospectus supplement which will describe, among other things, the designation
of the warrants, the securities into which the warrants are exercisable, the
exercise price, the aggregate number of warrants to be issued, the principal
amount of securities purchasable upon exercise of each warrant, the price or
prices at which each warrant will be issued, the procedures for exercising the
warrants, the date upon which the exercise of warrants will commence, and the
expiration date, and any other material terms of the warrants.
LEGAL MATTERS
Certain legal matters relating to the validity of the common stock, debt
securities, preferred stock and warrants will be passed upon by Porter & Hedges,
L.L.P., Houston, Texas.
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EXPERTS
The consolidated financial statements of the Company and subsidiaries as of
June 30, 1998 and 1997, and for each of the years in the three-year period ended
June 30, 1998, have been incorporated by reference in this prospectus In
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements of Dawson Production Services, Inc.
and subsidiaries as of March 31, 1998 and 1997, and for each of the years in the
three-year period ended March 31, 1998, have been incorporated by reference in
this prospectus in reliance upon the report of KPMG LLP, independent certified
public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
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