Filed Pursuant to Rule 424(b)(5)
Registration No. 333-67665
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 16, 1999)
$100,000,000
[LOGO]
KEY ENERGY SERVICES, INC.
8 3/8% SENIOR NOTES
DUE 2008
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This is an offering by Key Energy Services, Inc. of $100,000,000 of its 8 3/8%
Senior Notes due 2008. Interest on the notes is payable on September 1 and
March 1 of each year, beginning September 1, 2002. The notes will mature on
March 1, 2008.
We and the subsidiary guarantors have $175,000,000 principal amount of our
existing 8 3/8% Senior Notes due 2008 issued and outstanding that have
substantially identical terms to the notes offered by this prospectus
supplement. We and the subsidiary guarantors have agreed to make an offer to
exchange the existing 8 3/8% Senior Notes for additional notes of the same
series as the notes offered by this prospectus supplement.
We may redeem all or part of the notes on or after March 1, 2005. Before
March 1, 2004, we may redeem up to 35% of the aggregate principal amount of the
notes, including any notes issued in exchange for our existing 8 3/8% Senior
Notes from the proceeds of certain equity offerings. Redemption prices are set
forth under "Description of Notes--Optional Redemption." For a discussion of the
tax consequences of this offering, see "Certain United States Federal Income Tax
Considerations."
The notes will be our senior unsecured obligations, and will be guaranteed by
most, but not all, of our subsidiaries on a senior unsecured basis. The notes
and guarantees will rank senior to our existing and future subordinated
indebtedness and equally with any of our existing and future unsecured senior
indebtedness, including our existing 8 3/8% Senior Notes. The notes will be
effectively subordinated to any of our and the subsidiary guarantors' secured
indebtedness to the extent of the value of the security for that indebtedness.
In addition, the notes will be effectively subordinated to any indebtedness of
our non-guarantor subsidiaries.
INVESTING IN THE NOTES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE S-7.
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PER NOTE TOTAL
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Public Offering Price....................................... 101.5000% $101,500,000
Underwriting Discount....................................... 1.5000% $ 1,500,000
Proceeds to Key............................................. 100.00% $100,000,000
Interest on the notes will accrue from March 1, 2002.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We expect to deliver the notes on or about March 1, 2002, subject to conditions.
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LEHMAN BROTHERS BEAR, STEARNS & CO. INC.
SOLE BOOK-RUNNING MANAGER JOINT LEAD-MANAGER
FIRST ALBANY CORPORATION
FEBRUARY 22, 2002
This document is in two parts. The first part is this prospectus supplement,
which describes the terms of this offering of the notes. The second part is the
accompanying prospectus, which gives more general information, some of which may
not apply to the notes.
You should rely only on the information contained in this prospectus
supplement and the accompanying prospectus or incorporated by reference in these
documents. No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained or incorporated by reference
in this prospectus supplement or the accompanying prospectus. If anyone provides
you with different, inconsistent or unauthorized information or representations,
you must not rely on them. This prospectus supplement and the accompanying
prospectus are an offer to sell only the notes offered by these documents, but
only under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus supplement is current only as of its
date.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-3
The Offering................................................ S-5
Risk Factors................................................ S-7
Ratio of Earnings to Fixed Charges.......................... S-12
Use of Proceeds............................................. S-12
Capitalization.............................................. S-13
Description of Notes........................................ S-14
Certain United States Federal Income Tax Considerations..... S-52
Underwriting................................................ S-57
Legal Matters............................................... S-58
Experts..................................................... S-58
PROSPECTUS
Where You Can Find More Information......................... 3
Key Energy Services, Inc.................................... 4
Ratio of Earnings to Fixed Charges.......................... 6
Forward-looking Statements.................................. 7
Risk Factors................................................ 7
Use of Proceeds............................................. 11
Plan of Distribution........................................ 12
Description of Debt Securities.............................. 14
Description of Capital Stock................................ 19
Description of Warrants..................................... 20
Legal Matters............................................... 20
Experts..................................................... 20
S-2
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. THIS
SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU
SHOULD CAREFULLY READ THIS ENTIRE PROSPECTUS SUPPLEMENT, THE ACCOMPANYING
PROSPECTUS, THE DOCUMENTS INCORPORATED BY REFERENCE AND THE OTHER DOCUMENTS TO
WHICH WE REFER FOR A MORE COMPLETE UNDERSTANDING OF THIS OFFERING.
KEY ENERGY SERVICES, INC.
Based on available industry data, we are the largest onshore, rig-based well
servicing contractor in the world. We provide a complete range of well services
to major oil companies and independent oil and natural gas production companies,
including:
- rig-based well maintenance, workover, completion, and recompletion
services (including horizontal recompletions);
- oilfield trucking services; and
- ancillary oilfield services.
We conduct well servicing operations onshore internationally in Argentina
and Ontario, Canada and in the following regions of the continental United
States:
- Gulf Coast (including South Texas, Central Gulf Coast of Texas and South
Louisiana);
- Permian Basin of West Texas and Eastern New Mexico;
- Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins and the
ArkLaTex region);
- Four Corners (including the San Juan, Piceance, Uinta, and Paradox
Basins);
- Eastern (including the Appalachian, Michigan and Illinois Basins);
- Rocky Mountains (including the Denver-Julesberg, Powder River, Wind River,
Green River and Williston Basins); and
- California (the San Joaquin Basin).
We are also a leading onshore drilling contractor and conduct land drilling
operations in a number of major domestic producing basins, as well as in
Argentina and in Ontario, Canada. In addition to our other businesses, we also
produce and develop oil and natural gas reserves in the Permian Basin region and
Texas Panhandle.
We have built our leadership position in part through the acquisition of
small, regional well service companies. We have also implemented a strategy,
which has also contributed to our position within the industry, to:
- improve our balance sheet and reduce our level of debt;
- build strong customer relationships by offering a broad range of equipment
and services that will meet most of our customer's needs at the wellsite;
- maximize utilization of our rig fleet by actively refurbishing our rigs
and related equipment; and
- train and professionally develop our employees, with an emphasis on
safety.
RECENT DEVELOPMENTS
Most of our foreign revenues are derived from our operations in Argentina.
For fiscal 2001, revenues from operations in Argentina were $48.5 million, which
accounted for 5.6% of our total
S-3
revenues for such period. For fiscal 2001, net income from operations in
Argentina was $4.5 million. For the six months ended December 31, 2001, revenues
from operations in Argentina were $21.3 million, which accounted for 4.6% of our
total revenue for such period. We incurred a net loss of $1.3 million from our
operations in Argentina for the same six-month period. Recently, Argentina has
been negatively affected by volatile economic and political conditions. In
December 2001, the Argentine government announced that it would restrict bank
account withdrawals and would not service its public sector debt. In addition,
in January 2002, the Argentine government abandoned its decade-old fixed
peso-dollar exchange rate and created a dual exchange rate system. As a result
of this abandonment of the fixed peso-dollar exchange rate system, at
December 31, 2001, we recorded a $1.8 million foreign currency transaction loss
on our dollar-denominated accounts receivable and reduced our stockholders'
equity by an additional $24.2 million due to foreign currency translation
related to our net investment in our Argentine subsidiary. The Argentine
government has also recently announced its intent to impose a 20% tax on oil
exports effective March 1, 2002 or other taxes on production that would produce
comparable tax revenues.
We believe that all of these events will negatively affect oil production in
Argentina, and accordingly will have a negative effect on demand for our
services. The economic conditions in Argentina continue to be unstable and
further devaluation of the Argentine peso may occur. We continue to evaluate the
structure of our operations in Argentina, but we are currently unable to predict
the effects that further instability in Argentina will have on our financial
position.
------------------------
Our principal executive offices are located at 6 Desta Drive, Midland, Texas
79705, and our phone number is (915) 620-0300.
S-4
THE OFFERING
ISSUER.................................... Key Energy Services, Inc., a Maryland corporation.
SECURITIES OFFERED........................ $100.0 million of 8 3/8% Series C Senior Notes due 2008.
SUBSIDIARY GUARANTORS..................... All of our domestic subsidiaries with material
operations will guarantee the notes. However, not all of
our subsidiaries are guarantors. Our foreign
subsidiaries, which operate in Argentina and Canada,
will not guarantee the notes. If we cannot make payments
on the notes when they are due, the guarantor
subsidiaries must make them instead.
MATURITY DATE............................. March 1, 2008.
INTEREST PAYMENT DATES.................... September 1 and March 1 commencing September 1, 2002.
OPTIONAL REDEMPTION....................... At any time on or after March 1, 2005, we may redeem all
or part of the notes at the redemption prices (expressed
as percentages of principal amount) listed below, plus
accrued and unpaid interest to the date of redemption,
if redeemed during the 12-month period commencing on
March 1 of the years set forth below:
YEAR REDEMPTION PRICE
---- ----------------
2005.............................. 104.188%
2006.............................. 102.094%
2007 and thereafter............... 100.000%
Before March 1, 2004, we may redeem up to 35% of the
aggregate principal amount of all the notes issued under
the indenture pursuant to which the notes offered by
this prospectus supplement are being issued at the
redemption price of 108.375% of the principal amount,
plus accrued and unpaid interest 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. See "Description of
Notes--Optional Redemption."
CHANGE OF CONTROL......................... If a change of control occurs, as described under
"Description of Notes--Repurchase at the Option of
Holders--Change of Control," each holder of notes will
have the right to require us to purchase all or a
portion of its notes at 101% of the principal amount,
plus accrued and unpaid interest to the date of
repurchase.
RANKING................................... The notes will be our senior unsecured obligations,
ranking equally with our existing and future senior
unsecured indebtedness, including our existing 8 3/8%
Senior Notes (which are referred to in this prospectus
supplement as the Series B Notes). However, the notes
will be effectively subordinated to all our secured
indebtedness to the extent of the value of the security
for that indebtedness. Assuming we had completed this
offering on December 31, 2001 and applied the proceeds
as described in "Use of Proceeds" and after giving
effect to the items described under the heading
"Capitalization," we would have had approximately
$446.0 million of indebtedness outstanding on a
consolidated basis (including the notes),
S-5
approximately $24.3 million of which would have been
secured indebtedness.
The indenture will permit us and certain of our
subsidiaries to borrow additional debt under one or more
credit facilities, all of which could be secured and
could therefore be effectively senior to the notes.
Furthermore, the notes will be effectively subordinated
to all indebtedness of our existing and future non-U.S.
subsidiaries and any subsidiaries we designate as
unrestricted subsidiaries because they will not
guarantee the notes.
CERTAIN COVENANTS......................... The indenture will limit our ability and the ability of
our restricted subsidiaries to, among other things:
- sell assets;
- make restricted payments;
- incur additional indebtedness;
- issue or sell preferred stock of restricted
subsidiaries;
- create or incur liens;
- place restrictions on distributions and other payments
from restricted subsidiaries;
- merge or consolidate with or transfer substantial
assets to another entity;
- engage in transactions with related persons;
- engage in sale and leaseback transactions; or
- 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. For more details, see "Description of
Notes--Certain Covenants."
USE OF PROCEEDS........................... We estimate the net proceeds from the offering will be
approximately $99.7 million. We will use approximately
$63.0 million of the net proceeds to repay in full our
outstanding revolving indebtedness under our senior
credit facility. The balance will be used for further
debt retirement, acquisitions and general corporate
purposes. See "Use of Proceeds."
EXCHANGE OFFER............................ We previously issued $175.0 million principal amount of
Series B Notes, which are substantially identical to the
notes offered under this prospectus supplement. We are
obligated, within 60 days of the date of this prospectus
supplement, to make an offer to all holders of the
existing Series B Notes to exchange those notes for
additional Series C Notes. That exchange offer will be
made pursuant to an exemption from registration under
the Securities Act. Assuming all holders of Series B
Notes exchange them for Series C Notes, there will be an
aggregate of $275.0 million of Series C Notes issued and
outstanding. There can be no assurance that any holder
of Series B Notes will exchange those notes for
Series C Notes.
S-6
RISK FACTORS
YOUR INVESTMENT IN THE NOTES WILL INVOLVE RISK. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS BEFORE DECIDING TO PURCHASE ANY NOTES.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS IS DEPENDENT ON CONDITIONS IN THE OIL AND NATURAL GAS INDUSTRY,
ESPECIALLY THE CAPITAL EXPENDITURES OF OIL AND NATURAL GAS COMPANIES.
The demand for our services is primarily influenced by current and
anticipated oil and natural gas prices. Prices for oil and natural gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas (including changes resulting from
the ability of the Organization of Petroleum Exporting Countries to establish
and maintain production quotas for oil prices), domestic and worldwide economic
conditions and political instability in oil producing countries. Weakness in oil
and natural gas prices may cause lower equipment rates and lower utilization 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 affect demand for our services
include:
- the level of development, exploration and production activity of, and
corresponding spending by, oil and natural gas companies;
- oil and natural gas production costs;
- government regulation; and
- conditions in the worldwide oil and natural gas industry.
In addition, we anticipate that prices for oil and natural gas will continue
to be volatile and affect the demand for and pricing of our services. 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. However, a material decline in oil or
natural gas prices or exploration activities over a sustained period of time
could materially adversely affect the demand for our services and, therefore,
our results of operations and financial condition.
Periods of diminished or weakened demand for our services have occurred in
the past. Since the end of the first quarter of fiscal 2002 and continuing
through the third quarter, we have experienced a decrease in the demand for our
services. We believe this trend is due to an overall weakening of demand for
onshore well services, which is attributable to lower prices for oil and natural
gas and general economic uncertainty. If these conditions continue, or worsen,
they could have a material adverse effect on our financial condition and results
of operations. 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.
AN ECONOMIC DOWNTURN MAY ADVERSELY AFFECT OUR BUSINESS.
The United States economy is currently believed to be in a recession. An
economic downturn may cause reduced demand for petroleum-based products and
natural gas. In addition, many oil and natural gas production companies often
reduce or delay expenditures to reduce costs, which in turn may cause a
reduction in the demand for our services during these periods. According to
industry data, in July 2001, there were approximately 1,293 active drilling rigs
in North America. As of December 2001, the number of active drilling rigs had
been reduced to 928. The number of active drilling rigs may be indicative of
demands for services such as those we provide. If the economic environment
worsens, our business may be further adversely impacted.
S-7
WE HAVE PURSUED, AND WILL 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:
- our ability to integrate acquired operations;
- the potential loss of key employees and customers of the acquired
companies; and
- an increase in our expenses and working capital requirements.
Any of these factors could adversely affect our ability to achieve
anticipated levels of earnings and 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, WE ARE PARTIALLY SELF-INSURED AND
THE INSURANCE WE DO HAVE 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:
- blow-outs;
- reservoir damage;
- loss of well control;
- cratering;
- fires;
- damage to the environment; and
- 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 self-insure to cover a portion of these liabilities. For losses in excess
of our self-insurance limits, we maintain insurance from unrelated commercial
carriers. 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
a reasonable cost. 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.
RISKS RELATING TO THE NOTES
WE MAY NOT BE ABLE TO GENERATE ENOUGH 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 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.
S-8
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 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.
FOLLOWING THIS OFFERING, 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.
On an as adjusted basis giving effect to the items described under the
heading "Capitalization," this offering and the application of the proceeds as
anticipated, we would have had $446.0 million of indebtedness outstanding at
December 31, 2001. 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 following this offering, our
increased leverage could, for example:
- make it more difficult for us to satisfy our obligations under the notes
or other indebtedness and, if we fail to comply with the requirements of
the other indebtedness, could result in an event of default on the notes
or such other indebtedness;
- require us to dedicate a substantial portion of our cash flow from
operations to required payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital expenditures
and other general business activities;
- limit our ability to obtain additional financing in the future for working
capital, capital expenditures and other general corporate activities;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- detract from our ability to successfully withstand a downturn in our
business or the economy generally; and
- 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 restricts us, and the terms of the indenture will
restrict us, from taking various actions, such as:
- incurring additional indebtedness;
- paying dividends;
- repurchasing junior indebtedness;
- making investments;
- entering into transactions with affiliates;
- merging or consolidating with other entities; and
- 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
S-9
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 corporate
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 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.
THE HOLDERS OF OUR SERIES B NOTES MAY OR MAY NOT ELECT TO EXCHANGE THEIR
SERIES B NOTES FOR SERIES C NOTES.
Although we are obligated to make an offer to exchange all of our
outstanding Series B Notes for additional Series C Notes, we will not provide
any incentive to the holders of our Series B Notes to exchange their notes for
new Series C Notes. Accordingly, we cannot assure you that any of the holders of
our Series B Notes will exchange their Series B Notes for Series C Notes. If the
holders of the Series B Notes do not exchange their Series B Notes for Series C
Notes, you may not experience the increased liquidity that could be associated
with owning notes of a larger series. On the other hand, if all or substantially
all of the holders of our Series B Notes do elect to exchange their Series B
Notes for our Series C Notes, the former holders of Series B Notes will hold a
majority of the outstanding principal amount of the Series C Notes. Therefore,
these former holders of the Series B Notes will have the controlling vote with
regard to all matters requiring the consent of holders owning a majority in
aggregate principal amount of the Series C Notes. In addition, if we issue any
other Series C Notes, the voting power of all existing Series C Note holders
will be further diluted by such issuance.
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 will be general unsecured senior obligations of us and our
subsidiary guarantors, and 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 December 31, 2001, as adjusted for the offering of the notes, our
total secured indebtedness was approximately $24.3 million. The indenture
permits us to incur additional secured indebtedness provided certain conditions
are met. In addition, not all of our subsidiaries will guarantee the notes,
which will be effectively subordinated to the liabilities of any of these
non-guarantor subsidiaries. Specifically, none of our foreign subsidiaries will
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 or the 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 outstanding 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
S-10
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:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay 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 determine whether a fraudulent transfer has
occurred. Generally, however, a guarantor would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets;
- 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
- it could not pay its debts as they become due.
YOUR ABILITY TO TRANSFER THE NOTES MAY BE LIMITED BY THE ABSENCE OF AN ACTIVE
TRADING MARKET AND THERE IS NO ASSURANCE THAT ANY ACTIVE TRADING MARKET WILL
DEVELOP FOR THE NOTES.
The notes are a new issue of securities for which there is no established
public market. The underwriters have has informed us that they intend to make a
market in the notes, as permitted by applicable laws and regulations; however,
the underwriters are is not obligated to make a market in the notes, and they
may discontinue their market-making activities at any time without notice.
Therefore, we cannot assure you that an active market for the notes will develop
or, if developed, that it will continue. 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.
S-11
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of our earnings to fixed charges for each of the periods indicated
is as follows:
SIX MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED
----------------------------------------------------------------- DECEMBER 31,
1997 1998 1999 2000 2001 2001
--------------------- -------- -------- -------- -------- ------------
2.52 2.61 -- -- 2.67 3.98
The pro forma ratio of our earnings to fixed charges as adjusted for the
effects of this offering for each of the periods indicated is as follows:
Year ended June 30, 2001.................................... 2.71
Six months ended December 31, 2001.......................... 3.79
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. There was no preferred
stock outstanding for any of the periods shown above. For the years ended
June 30, 1999 and 2000, earnings were insufficient to cover fixed charges by
$78.9 million and $28.0 million, respectively.
USE OF PROCEEDS
Our net proceeds from the sale of the notes are estimated to be
approximately $99.7 million. Based on outstanding balances as of February 20,
2002, we intend to use approximately $63.0 million of the net proceeds to repay
in full the revolver under our senior credit facility. The balance of the net
proceeds will be used for further debt retirement, acquisitions or general
corporate purposes. Our revolver currently bears interest at a weighted average
annual rate of 4.27% and matures in September 2003.
S-12
CAPITALIZATION
This table sets forth our total capitalization as of December 31, 2001 and
our capitalization as adjusted giving effect to (i) the redemption of a portion
of our 14% senior subordinated notes and the related extraordinary loss on
redemption, (ii) the net borrowings made under the revolver through the date
hereof to effect the redemption and (iii) this offering and the application of
the net proceeds from this offering.
AS
ACTUAL ADJUSTED
---------- --------
(in thousands)
Cash........................................................ $ 7,966 $ 44,666
========== ========
Current maturities of long-term debt and capital leases..... $ 8,215 $ 8,215
---------- --------
Long-term debt, less current maturities
Senior credit facility--Revolver(1)....................... $ 25,000 $ --
8 3/8% Senior notes....................................... 175,000 276,500
9 3/8% Senior notes....................................... 246 246
14% Senior subordinated notes, net of original issue
discount(2)............................................. 128,263 94,096
5% Convertible subordinated notes......................... 50,352 50,352
Capital leases............................................ 16,227 16,227
Other long-term debt...................................... 408 408
---------- --------
Total long-term debt, less current maturities............. 395,496 437,829
---------- --------
Total debt(3)............................................... $ 403,711 $446,044
========== ========
Stockholders' equity:
Common stock, $.10 par value, 200,000,000 shares
authorized, 108,371,945 shares issued................... $ 10,837 $ 10,837
Additional paid-in capital................................ 498,702 498,702
Treasury stock, 416,666 shares............................ (9,682) (9,682)
Accumulated other comprehensive income.................... (23,993) (23,993)
Retained earnings (deficit)............................... 80,221 74,945
---------- --------
Total stockholders' equity.............................. 556,085 550,809
---------- --------
Total capitalization........................................ $ 959,796 $996,853
========== ========
------------------------
(1) As of February 20, 2002, the principal amount outstanding under our revolver
under our senior credit facility is $63.0 million.
(2) On January 14, 2002, we exercised our right of redemption for approximately
$35.4 million principal amount of our 14% senior subordinated notes at a
price of 114% of the principal amount plus accrued interest. This
transaction resulted in an extraordinary loss of approximately
$5.3 million, net of tax.
(3) Total long-term debt, including current maturities, as of February 20, 2002,
is approximately $408.1 million.
S-13
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "Company"
refers only to Key Energy Services, Inc. and not to any of its subsidiaries.
The Company will issue the Notes under an indenture, as supplemented by a
supplemental indenture to be dated the date of the issuance of the Notes offered
by this prospectus supplement (together, the "Indenture") among itself, the
Guarantors and U.S. Bank National Association, a national banking association,
as trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act").
The Notes will be issued only in fully registered form and will have
substantially identical terms to the Company's existing Series B Notes. The
Company will be required to offer to exchange its existing Series B Notes for
additional Series C Notes. The purpose of the Company's offer to exchange its
existing Series B Notes is to create a single series of debt securities having a
total outstanding principal amount that is the combination of the Notes, the
existing Series B Notes and any additional notes issued pursuant to the
Indenture.
The following description is a summary of the material provisions of the
Indenture. It does not restate the terms of the Indenture in its entirety. We
urge you to read the Indenture because it, and not this description, defines
your rights as holders of the Notes. We will file a copy of the supplemental
indenture as an exhibit to a Form 8-K that will be incorporated by reference
into the registration statement which includes this prospectus supplement.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
The Notes:
- are general obligations of the Company;
- are not secured by any collateral;
- are PARI PASSU in right of payment to all existing and future unsecured
senior Indebtedness of the Company, including the Company's existing
Series B Notes;
- are senior in right of payment to the Company's existing subordinated
Indebtedness and any future Indebtedness of the Company, which by its
terms, is subordinated to the Notes; and
- are unconditionally guaranteed by the Guarantors.
THE GUARANTEES
The Notes are guaranteed by the following subsidiaries of the Company:
Yale E. Key, Inc.
Key Energy Drilling, Inc.
WellTech Eastern, Inc.
Odessa Exploration Incorporated
Kalkaska Oilfield Services, Inc.
Well-Co Oil Service, Inc.
Key Rocky Mountain, Inc.
Key Four Corners, Inc.
Brooks Well Servicing, Inc.
S-14
Key Energy Services--South Texas, Inc.
Key Energy Services--California, Inc.
Watson Oilfield Service & Supply, Inc.
WellTech Mid-Continent, Inc.
Dawson Production Management, Inc.
Dawson Production Taylor, Inc.
Dawson Production Acquisition Corp.
Dawson Production Partners, L.P.
The Guarantees of these Notes:
- are general obligations of each Guarantor;
- are not secured by any collateral;
- are PARI PASSU in right of payment to all existing and future unsecured
senior Indebtedness of each Guarantor, including the guarantee by each
Guarantor with respect to the Company's existing Series B Notes; and
- 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.
As of the date of the Indenture, all of our subsidiaries will be "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "--Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the Indenture. Unrestricted Subsidiaries
will not guarantee the Notes.
Not all of our Restricted Subsidiaries will guarantee the Notes. The
following Subsidiaries will not guarantee the Notes or the Credit Facilities:
Production Systems, Inc., WellTech, Inc. (California), WellTech Oilfield
Services Limited, WellTech (Overseas) Limited, KEG Canal Properties, Inc., KEG
Villa Ashley, Inc., KEG Ama Heights, Inc., KEG Orleans Place, Inc., Pyramid Land
Corporation and our foreign Subsidiaries. In addition, future Subsidiaries will
not be required to guarantee the Notes except pursuant to the covenants
described below under "--Certain Covenants--Limitation on Issuances of
Guarantees of Indebtedness; Additional Guarantors."
In the event of a bankruptcy, liquidation or reorganization of any of these
non-guarantor subsidiaries, these 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. The guarantor subsidiaries generated over
90% of our consolidated revenues in the twelve-month period ended December 31,
2001 and held over 90% of our consolidated assets as of December 31, 2001.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue Notes with a maximum aggregate principal amount of
$100.0 million in this offering. The Company may issue additional notes under
the Indenture from time to time after this offering, including but not limited
to additional Series C Notes to be issued in exchange for the Company's existing
Series B Notes. Any offering of additional notes is subject to the covenant
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." The Notes and any additional
notes subsequently issued under the Indenture will be treated as a single class
for all purposes under the Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. The Company will issue Notes in
denominations of $1,000 and integral multiples of $1,000. The Notes will mature
on March 1, 2008.
Interest on these Notes will accrue at the rate of 8 3/8% per annum and will
be payable semi-annually in arrears on September 1 and March 1, commencing on
September 1, 2002. The
S-15
Company will make each interest payment to the Holders of record of these Notes
on the immediately preceding August 15 and February 15.
Interest on these Notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to the Company, the Company
will make all principal and premium payments on those Notes in accordance with
those instructions. All other payments on these Notes will be made at the office
or agency of the Paying Agent and Registrar within the City and State of New
York unless the Company elects to make interest payments by check mailed to the
Holders at their address set forth in the register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as Paying Agent and Registrar. The Company
may change the Paying Agent or Registrar without prior notice to the Holders of
the Notes, and the Company or any of its Subsidiaries may act as Paying Agent or
Registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
SUBSIDIARY GUARANTEES
The Guarantors will jointly and severally guarantee the Company's
obligations under the Notes. The obligations of each Guarantor under its
Subsidiary Guarantee will be limited as necessary to prevent that Subsidiary
Guarantee from constituting a fraudulent conveyance under applicable law. See
"Risk Factors--Risks Relating to the Notes."
A Guarantor may not consolidate with or merge with or into (whether or not
such Guarantor is the surviving Person), another Person unless either:
(1) the Person formed by or surviving any such consolidation or merger
(other than the Company or another Guarantor) assumes all the obligations of
that Guarantor pursuant to a supplemental indenture satisfactory to the
Trustee and immediately after giving effect to that transaction, no Default
or Event of Default exists; or
(2) the Subsidiary Guarantee is released pursuant to the next sentence.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale of all of the capital stock of a
Guarantor (including a sale by way of merger or consolidation), if
immediately after giving effect to such sale, there is no Default or Event
of Default that has occurred and is continuing; or
(2) if the Company designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary in accordance with the applicable
provisions of the Indenture.
S-16
In the event of a sale of all or any portion of the capital stock of a
Guarantor (including a sale by way of merger or consolidation), the provisions
regarding Asset Sales (including the obligation of the Company to apply the
proceeds thereof) shall apply. See "--Repurchase at the Option of Holders--
Asset Sales."
OPTIONAL REDEMPTION
At any time prior to March 1, 2004, the Company may on any one or more
occasions redeem up to 35% of the aggregate principal amount of Notes totally
issued under the Indenture at a redemption price of 108.375% of the principal
amount thereof, plus accrued unpaid interest, to the redemption date, with the
net cash proceeds of one or more Equity Offerings; PROVIDED that:
(1) at least 65% of the aggregate principal amount of Notes totally
issued remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by the Company and its Subsidiaries); and
(2) the redemption must occur within 90 days of the date of the closing
of such Equity Offering.
Except pursuant to the preceding paragraph, the Notes will not be redeemable
at the Company's option prior to March 1, 2005.
On or after March 1, 2005, the Company may redeem all or a part of these
Notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the twelve-month period beginning on March 1 of the years
indicated below:
YEAR PERCENTAGE
---- ----------
2005........................... 104.188%
2006........................... 102.094%
2007 and thereafter............ 100.000%
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of Notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that Holder's Notes pursuant to the Change of
Control Offer. In the Change of Control Offer, the Company will offer a Change
of Control Payment in cash equal to 101% of the aggregate principal amount of
Notes repurchased plus accrued and unpaid interest thereon, if any, to the date
of purchase. Within ten business days following any Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
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. The
Company 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 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, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Change of Control provisions of the Indenture by virtue of
such conflict.
S-17
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all 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 in respect of all Notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of Notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof.
The Company 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 the Company to make a Change of
Control Offer following a Change of Control will be applicable 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 Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Company's outstanding Credit Facility currently restricts the Company's
ability to purchase the Notes, and also provides that certain change of control
events with respect to the Company would constitute a default under such Credit
Facility. Any future credit agreements or other agreements relating to that
Credit Facility to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Notes, the Company could seek the
consent of its senior lenders to the purchase of the Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such a consent or refinance such borrowings, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under such Credit Facility.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The 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 Notes to require the Company to
repurchase such 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.
S-18
ASSET SALES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets 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 the Company's 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 the Company or
its 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 the
Company 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:
(a) any liabilities of the Company or any Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the Notes
or any Subsidiary Guarantee) that are assumed by the transferee of any
such assets;
(b) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by
the Company 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,
the Company may apply such Net Proceeds at its 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 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, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
S-19
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, the Company will
make an Asset Sale Offer to all Holders of Notes and all holders of other
Indebtedness that is PARI PASSU with the 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
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, to the date of purchase,
and will be payable in cash. If any Excess Proceeds remain after consummation of
an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate principal amount of
Notes and such other PARI PASSU Indebtedness tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the Trustee shall select the 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.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, the Trustee
will select Notes for redemption as follows:
(1) if the Notes are listed, in compliance with the requirements of the
principal national securities exchange on which the Notes are listed; or
(2) if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate.
No Notes of $1,000 or less shall 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 Notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion of
the original Note will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
SUSPENDED COVENANTS
During any period of time that the Notes have an Investment Grade Rating
from either of the Rating Agencies and no Default has occurred and is continuing
under the Indenture, the Company and its 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":
- "--Restricted Payments,"
- "--Incurrence of Indebtedness and Issuance of Preferred Stock,"
- "--Sale and Leaseback Transactions" (to the extent set forth in that
covenant),
- "--Dividend and Other Payment Restrictions Affecting Subsidiaries,"
- "--Merger, Consolidation or Sale of Assets" (to the extent set forth in
that covenant),
- "--Transactions with Affiliates,"
S-20
- "--Business Activities" and
- "--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 the Company at
such time 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":
- "--Limitations on Issuances of Guarantees of Indebtedness; Additional
Guarantors,"
- "--Liens,"
- "--Designation of Restricted and Unrestricted Subsidiaries,"
- "--Payments for Consent" and
- "--Reports"
will not be so suspended; and PROVIDED FURTHER, that if the Company and its
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 Notes an Investment Grade
Rating withdraws its or their ratings or downgrades the ratings assigned to the
Notes below the Investment Grade Ratings so that the 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, the Company and
its 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
Notes are issued. As a result, during any period in which the Company and its
Restricted Subsidiaries are not subject to the Suspended Covenants, the Notes
will be entitled to substantially reduced covenant protection.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any
of its Restricted Subsidiaries) or to the direct or indirect holders of the
Company's or any of its 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 the Company
or a Restricted Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company or any Restricted Subsidiary of
the
S-21
Company (other than any such Equity Interests owned by the Company or any
Restricted Subsidiary of the Company);
(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 Notes or the Subsidiary Guarantees, except a payment of
interest, principal, premium or liquidated damages at the Stated Maturity
thereof or in accordance with the mandatory provisions thereof without
giving effect to any amendment thereof (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 thereof; and
(2) with respect to all Restricted Payments other than regular dividends
on Qualified Preferred Stock, the Company would, at the time of such
Restricted Payment and after giving pro forma effect thereto 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 the Company and its Restricted
Subsidiaries after April 1, 1999 (excluding Restricted Payments permitted by
clauses (2), (3) and (4) of the next succeeding paragraph), is less than the
sum, without duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from April 1, 1999 to the end of the
Company's 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 the Company
since April 1, 1999 as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of the Company that have been converted into or exchanged for
such Equity Interests (other than Equity Interests (or Disqualified Stock
or debt securities) sold to a Subsidiary of the Company), plus
(c) to the extent that any Restricted Investment that was made after
March 6, 2001 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.
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The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said 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 Indebtedness of the Company or any Guarantor that is
subordinated to the Notes or of any Equity Interests of the Company or any
Restricted Subsidiary in exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to a Subsidiary of the
Company) of, Equity Interests of the Company (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
Indebtedness of the Company or any Guarantor that is subordinated to the
Notes with the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness;
(4) the declaration or payment of any dividend or other distribution by
a Restricted Subsidiary of the Company 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 of
the Company held by any member of the Company's (or any of its
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 any of 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 the Company
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 appraisal 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, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this
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"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
The Company will not, and will not permit any of its 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 the
Company will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock or Disqualified
Stock; PROVIDED, HOWEVER, that the Company and any Guarantor may incur
Indebtedness (including Acquired Debt) or issue Disqualified Stock, if:
(1) the Fixed Charge Coverage Ratio for the Company's 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 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 the Company of additional Indebtedness under
Credit Facilities; PROVIDED that the aggregate principal amount of all
Indebtedness of the Company and its 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 the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by the Company of Indebtedness represented by the
Series B Notes, the Series B Guarantees, up to an aggregate of
$175.0 million principal amount of Series C Notes issued in exchange for the
Series B Notes and related guarantees and the Series B Indenture;
(4) the incurrence by the Company or any of its 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 the
business of the Company or 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 the Company or any of its 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;
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(7) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
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 the Company 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 the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause (7);
(8) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations;
(9) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(10) the incurrence by the Company or any of its 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 replace any
Indebtedness incurred pursuant to this clause (10), not to exceed
$100.0 million outstanding at any time;
(11) the incurrence by the Company's 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 of the Company 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 Fixed Charges of the Company 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, the
Company, in its 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
The Company will not, and will not permit any of its 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 Notes (or a Guarantee of the 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 Notes or the
Guarantees of the Notes) with the other obligations so secured until such time
as such other obligations are no longer secured by such Lien.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, and will not permit any of its 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 the Company or any of the Company's Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by, its
profits, or pay any indebtedness owed to the Company or any of the Company's
Restricted Subsidiaries;
(2) make loans or advances to the Company or any of the Company's
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of
the Company's Restricted Subsidiaries.
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
March 6, 2001 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 the Board of Directors of the Company, with respect
to such dividend and other payment restrictions than those contained in such
Credit Facilities or such Existing Indebtedness, as in effect on March 6,
2001;
(2) the Indenture, the Series B Indenture, the Guarantees, the Series B
Guarantees, the Notes and the Series B Notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its 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 the Board of Directors of the
Company, 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 the right of the Company or any of its Restricted
Subsidiaries to dispose of the assets subject to such Lien;
S-26
(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 a Subsidiary of the Company
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
The Company may not, directly or indirectly: (1) consolidate or merge with
or into another Person (whether or not the Company is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of its properties or assets, in one or more related
transactions, to another Person, unless:
(1) either: (a) the Company is 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 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
the obligations of the Company under the Notes and the Indenture pursuant to
a supplemental indenture in form satisfactory to the Trustee or any
agreements reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) the Company 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, the Company may not, directly or indirectly, lease all or
substantially all of its 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 the Company and any of its Wholly
Owned Subsidiaries or any of the Guarantors.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its 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,
S-27
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
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person; and
(2) the Company delivers 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:
(1) any employment agreement or arrangements (including loan
arrangements and advances) with officers and employees entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees and the provision of customary
indemnification arrangements to officers, directors and employees of the
Company or its 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 the Company and its 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.
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SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction; PROVIDED that the Company or
any Restricted Subsidiary of the Company that is a Guarantor may enter into a
sale and leaseback transaction if:
(1) the Company 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 the Company and its 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 the Company applies 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
The Company will not permit any of its Restricted Subsidiaries, directly or
indirectly, to guarantee or pledge any assets to secure the payment of any
Indebtedness of the Company under any Credit Facility unless such Restricted
Subsidiary contemporaneously executes and delivers a supplemental indenture
providing for the Guarantee of the payment of the Notes by such Restricted
Subsidiary in the form provided in the Indenture.
Notwithstanding the preceding paragraph, any Subsidiary Guarantee of the
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
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
PAYMENTS FOR CONSENT
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the Notes unless
such consideration is offered to be paid and is paid to all Holders of the Notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or amendment.
NO AMENDMENT OF SUBORDINATION PROVISIONS
Without the consent of each Holder of Notes so affected, the Company 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
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(ii) alter the redemption provisions or the price or terms at which the Company
is 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 Commission, so long as any Notes are
outstanding, the Company will furnish to the Holders of Notes, within the time
periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company 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 the Company's independent public
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, whether or not required by the Commission, the Company will
file a copy of all of the information and reports referred to in clauses
(1) and (2) above with the Commission for public availability within the time
periods specified in the Commission's rules and regulations (unless the
Commission 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 the
Notes;
(2) default in payment when due of the principal of or premium, if any,
on the Notes, (including in connection with an offer to purchase);
(3) failure by the Company or any of its 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 the Company or any holder of the Notes; and failure by the
Company or any of its 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 the Company or any holder of the Notes;
(4) failure by the Company or any of its Restricted Subsidiaries to
comply with any of the other agreements in the Indenture and such failure
has continued for 60 days after notice to the Company by the Trustee or the
holders of at least 25% in aggregate principal amount of the 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 the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the
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Company or any of its 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 the Company or any of its 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, any Subsidiary Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to the
Company or any of its 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 the Company, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding 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 Notes may declare all
the Notes to be due and payable immediately.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
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 Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
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 Notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Notes pursuant to the optional
redemption provisions of the Indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the 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 or on
behalf of the Company with the intention of avoiding the prohibition on
redemption of the 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 Notes.
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is 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 obligations of the
Company or the Guarantors under the 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 Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes and all obligations
of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes
when such payments are due from the trust referred to below;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the 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 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 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the 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 or nationally recognized investment banking firm
expressed in a written certification thereof delivered to the Trustee, to
pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may
be, and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the date of
the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax
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purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the outstanding 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: (a) 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 (b) 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 the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound;
(6) the Company 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) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(8) the Company 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 Notes held by a non-consenting Holder):
(1) reduce the principal amount of 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 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 Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration);
(5) make any Note payable in money other than that stated in the Notes;
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(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium, if any, or interest on the Notes;
(7) waive a redemption payment with respect to any 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 Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) to provide for the assumption of the Company's obligations to
Holders of Notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act;
or
(6) to add Guarantors of the Notes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged, and will cease to be of further effect as
to all Notes issued thereunder, when:
(1) either:
(a) all Notes that have been authenticated, except lost, stolen or
destroyed Notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to the
Company, have been delivered to the Trustee for cancellation; or
(b) all 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 the Company has 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 Notes not delivered to the Trustee for cancellation
for principal, premium 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 the Company or any
Guarantor is a party or by which the Company or any Guarantor is bound;
(3) if the conditions in clause (1)(a) above have not been satisfied,
the Company shall have delivered to the Trustee an Opinion of Counsel
reasonably acceptable to the Trustee confirming to the effect that Holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such deposit, satisfaction and discharge had not
occurred;
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(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit; or (b) 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 deposit;
(5) the Company has paid or caused to be paid all sums payable by it
under the Indenture; and
(6) the Company has 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, the Company 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.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of the Company or any Guarantor, the
Indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be issued in the form of one or more Global Notes (the
"Global Notes"). The Global Notes will be deposited on the date of the closing
of this offering with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co., as nominee of DTC (such nominee being
referred to herein as the "Global Note Holder"). Except as set forth below,
Notes will be issued in registered, global form in minimum denominations of
$1,000 and integral multiples of $1,000.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"--Exchange of Global Notes for Certificated Notes." In addition, transfers of
beneficial interests in the Global Notes will be subject to the applicable rules
and procedures of DTC and its direct or indirect participants (including, if
applicable, those of Euroclear and Clearstream), which may change from time to
time.
Prospective purchasers are advised that the laws of some states require that
certain Persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer beneficial interests in a Global
Note to such Persons will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Notes will not be considered the owners or Holders of the Notes under the
Indenture for any purpose, including with respect to the giving of any
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directions, instructions or approvals to the trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of DTC or for maintaining, supervising or reviewing any records
of DTC relating to the Notes.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC, Euroclear
and Clearstream are provided solely as a matter of convenience. These operations
and procedures are solely within the control of their respective settlement
systems and are subject to changes by them. The Company takes no responsibility
for these operations and procedures and urges investors to contact the systems
or their participants directly to discuss these matters.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Direct Participants") deposit with DTC.
DTC also facilitates the settlements among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized/book-entry changes to Direct Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct Participants of the DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the National Association
of Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to the
DTC and its Direct and Indirect Participants are on file with the Securities and
Exchange Commission (the "Commission").
Purchases of Notes under DTC's system must be made by or through Direct
Participants, which will receive a credit for such Notes on DTC's records. The
ownership interest of each Beneficial Owner is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchase, but Beneficial Owners are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which such Beneficial Owner entered into the transaction.
Transfers of ownership interests in the Global Notes representing the Notes are
to be accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners of the Notes will not receive
certificated Notes representing their ownership interests therein, except in the
event that use of the book-entry system for such Notes is discontinued.
To facilitate subsequent transfers, all Global Notes representing the Notes
which are deposited with, or on behalf of, the Depositary are registered in the
name of DTC's partnership nominee, Cede & Co. or such other name as may be
requested by an authorized representative of DTC. The deposit Global Notes with,
or on behalf of, DTC and their registration in the name of Cede & Co. or such
other nominee do not effect any change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Global Notes representing the
Notes; DTC's records reflect only the identity of the Direct Participants to
whose accounts such Notes are credited, which may or may not be the Beneficial
Owners. The Direct Participants will remain responsible for keeping account of
their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
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Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote
with respect to the Global Notes representing the Notes. Under its usual
procedure, the Depositary mails an omnibus proxy to the Company as soon as
possible after the applicable record date. The omnibus proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose accounts
the Notes are credited on the applicable record date (identified in a listing
attached to the omnibus proxy).
Payment of principal, premium, if any, and interest, on the Global Notes
representing the Notes will be made to Cede & Co., or such other nominee as may
be requested by an authorized representative of DTC. DTC's practice is to credit
Direct Participants' accounts, upon DTC's receipt of funds and corresponding
detail information from the Company or the Trustee on payable date in accordance
with their respective holdings shown on the DTC's records. Payments by Direct
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers registered in "street name," and will be the responsibility of such
Participants and not of DTC, the Trustee or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal, premium, if any, and/or interest, if any, to DTC is the
responsibility of the Company or the Trustee, disbursement of such payments to
Direct Participants shall be the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners shall be the responsibility of Direct and
Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Notes at any time by giving reasonable notice to the Company or
the Trustee. Under such circumstances, in the event that a successor securities
depository is not obtained, certificated Notes are required to be printed and
delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
certificated Notes will be printed and delivered.
The information in this section concerning DTC and the DTC's system has been
obtained from sources that the Company believes to be reliable, but the Company
takes no responsibility for the accuracy thereof.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company fails to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) the Company, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default with
respect to the Notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the restrictive legend referred to in "Notice to
Investors," unless that legend is not required by applicable law.
Neither the Company nor the trustee will be liable for any delay by the
Global Note Holder or DTC in identifying the beneficial owners of Notes and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note Holder or DTC for all purposes.
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EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the Indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such Notes. See "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the Notes represented by the Global
Notes (including principal, interest and premium, if any) by wire transfer of
immediately available funds to the accounts specified by the Global Note Holder.
We will make all payments of principal, interest and premium, if any, with
respect to certificated notes by wire transfer of immediately available funds to
the accounts specified by the Holders of certificated notes or, at our option,
at the office or agency of the paying agent and registrar within the City and
State of New York unless we elect to make interest payments by mailing a check
to each such Holder's registered address. The Notes represented by the Global
Notes are expected to trade in DTC's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such notes will, therefore, be
required by DTC to be settled in immediately available funds.
EXCHANGE OFFER
The Company has agreed to offer to all holders of the existing Series B
Notes to exchange their Series B Notes for Series C Notes. The exchange offer
must commence within 60 days of this offering and be completed within 120 days
of this offering. In the exchange offer, holders of Series B Notes will be able
to exchange their principal amount of Series B Notes for a like principal amount
of Series C Notes. The terms and covenants of the Series B Notes and the
Series C Notes are substantially identical. There is an aggregate of
$175.0 million of the Series B Notes currently outstanding. The exchange offer
is expected to be made pursuant to an exemption from registration under the
Securities Act.
CERTAIN DEFINITIONS
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.
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"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:
(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.
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"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.
"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
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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.
"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 period, 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
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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;
(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 March 6, 2001; 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.
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"EXISTING INDEBTEDNESS" means up to $357.0 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the Series B Notes) in existence on March 6, 2001, 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 March 6, 2001, and any such oil
and gas assets received in exchange for oil and gas assets held by Odessa as of
March 6, 2001.
"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 March 6, 2001, with
respect to (i) any Credit Facility that was in place prior to March 6, 2001,
(ii) the Series B 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
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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
(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 were in effect on March 6, 2001.
"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; Key Rocky Mountain, Inc., a Delaware corporation; Key Four
Corners, Inc., a Delaware corporation; Brooks Well Servicing, Inc., 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:
(1) borrowed money;
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(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.
"NOTES" means the $100.0 million in aggregate principal amount of the
Company's 8 3/8% Series C Senior Notes due 2008 issued pursuant to the Indenture
and any other notes issued under the Indenture.
"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 March 6, 2001, 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 Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness and the
proceeds thereof;
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(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 March 6, 2001;
(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.
"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.
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"SENIOR SUBORDINATED NOTES" means the Company's 14% Senior Subordinated
Notes due 2009 issued pursuant to the Senior Subordinated Note Indenture.
"SERIES B GUARANTEES" means the guarantees provided by the Guarantors with
respect to the Series B Notes.
"SERIES B INDENTURE" means the indenture, dated as of March 6, 2001, between
the Company, the Guarantors and The Chase Manhattan Bank, as trustee.
"SERIES B NOTES" means the $175.0 million in aggregate principal amount of
the Company's 8 3/8% Series B Senior Notes due 2008 issued pursuant to the
Series B 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
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(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.
S-51
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain United States federal income tax
considerations that may be relevant to the acquisition, ownership and
disposition of notes by U.S. and non-U.S. holders, each as defined below, who
purchase notes in the offering. The following discussion does not purport to be
a full description of all United States federal income tax considerations that
may be relevant to a decision to purchase the notes or to the holding or
disposition of the notes and does not address any other taxes that might be
applicable to a holder of the notes, such as tax consequences arising under the
tax laws of any state, locality or foreign jurisdiction. The United States
federal taxing authorities may take a position with respect to these
consequences that differs from this discussion. Further, this discussion does
not address all aspects of federal income taxation that may be relevant to
particular holders in light of their particular circumstances and does not deal
with persons who are subject to special tax rules, such as dealers in securities
or currencies, traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings, financial institutions, insurance
companies, tax-exempt entities, persons holding the notes as part of a hedging
or conversion transaction, a straddle or a constructive sale and persons whose
functional currency is not the United States dollar. The discussion below
assumes that the notes are held as capital assets within the meaning of
section 1221 of the Internal Revenue Code.
Unless the context otherwise requires, capitalized terms used and not
otherwise defined in this section of this prospectus supplement have the
meanings set forth in the definitions section under "Description of
Notes--Certain Definitions."
If a partnership holds notes, the tax treatment of a partner generally will
depend upon the status of the partner and the activities of the partnership. If
you are a partner of a partnership holding the notes, you should consult your
tax advisor.
The discussion of the United States federal income tax considerations below
is based on currently existing provisions of the Code, the applicable Treasury
Regulations promulgated thereunder, judicial decisions and administrative
interpretations, all of which are subject to change, possibly on a retroactive
basis. Because individual circumstances may differ, you are strongly urged to
consult your tax advisor with respect to your particular tax situation and the
particular tax effects of any state, local, non-United States or other tax laws
and possible changes in the tax laws.
As used in this prospectus supplement, a U.S. holder means a beneficial
owner of a note who is, for United States federal income tax purposes:
- a citizen or resident of the United States;
- a partnership or corporation created or organized in or under the laws of
the United States or of any of its political subdivisions;
- any estate (other than a foreign estate); or
- a trust, if either a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust, or the trust has a valid election in effect under
applicable Treasury Regulations to be treated as a United States person.
As used this prospectus supplement, a non-U.S. holder means a beneficial
owner of a note who is not a U.S. holder.
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TAX CONSIDERATIONS FOR U.S. HOLDERS
TAXATION OF STATED INTEREST
A U.S. holder generally will be required to include in gross income as
ordinary interest income the stated interest on a note at the time that the
interest accrues or is received, in accordance with the U.S. holder's regular
method of accounting for United States federal income tax purposes.
BOND PREMIUM ON NOTES
The notes will be issued with "bond premium," as defined below. If a holder
acquires a note at a bond premium, either at original issuance or subsequently,
the holder may elect to amortize the premium under the Treasury Regulations. If
the election is made, the holder of a note generally offsets bond premium
allocable to an accrual period against qualified stated interest income
allocable to the accrual period.
Amortizable bond premium in excess of qualified stated interest for an
accrual period is allowed as a bond premium deduction. The amount allowable as a
bond premium deduction for any accrual period is limited to the amount by which
the holder's aggregate interest inclusions on the note for prior accrual periods
exceeds the aggregate bond premium deductions in the prior accrual periods. Any
bond premium deduction taken reduces the holder's tax basis in the note. Any
excess deduction is carried forward as bond premium in successive accrual
periods.
The amortizable bond premium on a note generally will be equal to the
amount, if any, by which the holder's initial tax basis in the note exceeds the
sum of all amounts payable on a note, other than qualified stated interest (or
if it results in a smaller amortizable bond premium, the amount payable on an
earlier call date). Under the Treasury Regulations, the amortizable bond premium
deduction will be treated as accruing in each accrual period under a constant
yield method over the term of the note. In certain circumstances, such as a call
or prepayment of a note, the offset or deduction for unamortized bond premium
may be accelerated.
The "accrual periods" of a note, other than the initial accrual period, are
each of the six-month periods during the term of the notes that end on
September 1 and March 1 of each year.
For the above consequences to apply, the holder must make an election in the
manner prescribed in Treasury Regulations Section 1.171-4. The election applies
not only to the notes, but also to all bonds held by the holder during or after
the taxable year to which the election applies, including all bonds thereafter
acquired. The election is binding for all subsequent taxable years and may be
revoked only with the consent of the Commissioner of Internal Revenue.
MARKET DISCOUNT
The resale of a note may be affected by the "market discount" provisions of
the Code. For these purposes, the market discount on a note generally will be
equal to the amount, if any, by which the stated redemption price at maturity of
the note immediately after its acquisition exceeds the holder's tax basis in the
note. The "stated redemption price at maturity" of each note will include all
cash payments, other than stated interest to the extent that it is
unconditionally payable at least annually at a single fixed rate, which we refer
to as "qualified stated interest", required to be made thereunder until
maturity. Qualified stated interest on the notes is 8 3/8% per annum. Subject to
a DE MINIMIS exception, these provisions generally require a holder of a note
acquired at a market discount to treat as ordinary income any gain recognized on
the disposition of the note to the extent of the "accrued market discount" on
the note at the time of disposition. In general, market discount on a note will
be treated as accruing on a straight-line basis over the term of the note, or,
at the election of the holder, under a constant yield method.
S-53
In addition, any holder of a note acquired at a market discount may be
required to defer the deduction of a portion of the interest on any indebtedness
incurred or maintained to purchase or carry the note until the note is disposed
of in a taxable transaction. The foregoing rule will not apply if the holder
elects to include accrued market discount in income currently.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. holder generally will recognize gain or loss on the sale, exchange,
redemption, retirement or other disposition of a note in an amount equal to the
difference between the amount of cash and the fair market value of any property
received (other than amounts received in respect of accrued interest which will
be taxable as ordinary income) and the U.S. holder's tax basis in the note. A
U.S. holder's tax basis in a note generally will be its cost, increased by any
accrued market discount previously included in income by the holder and
decreased by any bond premium offset or payments that are not payments of stated
interest. Subject to the market discount rules discussed above, gain or loss
recognized on the sale, exchange, retirement or other taxable disposition of a
note, including amounts attributable to DE MINIMIS original issue discount,
generally will be capital gain or loss. In the case of a noncorporate U.S.
holder, the federal income tax rate applicable to capital gains will depend upon
the holder's holding period for the notes, with a preferential rate available
for notes held for more than one year that varies according to the holder's
marginal tax rate for ordinary income. The deductibility of capital losses is
subject to various limitations depending on the holder's particular facts.
TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
TAXATION OF INTEREST
Generally, payments of principal or interest on the notes by us or our
paying agent to a non-U.S. holder will not be subject to U.S. federal income or
income withholding tax, if, in the case of interest, the interest qualifies as
"portfolio interest" under the following requirements:
- the non-U.S. holder does not actually own, and is not deemed to own under
any applicable Treasury Regulations, 10% or more of the combined voting
power of all classes of our stock entitled to vote within the meaning of
section 871(h)(3) of the Code;
- the non-U.S. holder is not, for United States federal income tax purposes,
a controlled foreign corporation related to us either through actual
ownership or deemed to be related to us through constructive ownership
under the applicable Code provisions;
- the non-U.S. holder is not a bank that acquired the notes in consideration
for an extension of credit made pursuant to a loan agreement entered into
in the ordinary course of business;
- the interest income is not effectively connected with a United States
trade or business of the non-U.S. holder; and
- either:
- the non-U.S. holder provides us or our paying agent with an IRS
Form W-8 BEN, or a suitable substitute form, signed under penalties of
perjury, that includes its name and address and certifies as to its
non-U.S. status in compliance with applicable law and Treasury
Regulations; or
- in the event a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business holds the note on behalf of the
beneficial owner and provides a statement to us or our agent signed
under penalties of perjury in which the organization, bank or financial
institution certifies that the appropriate IRS form or suitable
substitute has been received by it from the non-U.S.
S-54
holder or from another financial institution acting on behalf of the
non-U.S. holder and furnishes us or our agent with a copy.
In the case of notes held by a foreign partnership, the certification
described above normally is provided by the partners as well as by the foreign
partnership and the partnership provides other specified information. Other
methods may be available to satisfy the certification requirements described
above, depending upon the circumstances applicable to the non-U.S. holder.
If the portfolio interest requirements are not met and the requirements
applicable to treatment of the interest as effectively connected with the
conduct of a United States trade or business described below are not met, a
non-U.S. holder will be subject to United States federal withholding tax at a
rate of 30% with respect to payments of interest on the notes, unless the non-US
holder provides us with a properly executed IRS Form W-8 BEN, or a successor
form, claiming an exemption from or reduction in withholding tax under an
applicable tax treaty.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A non-U.S. holder generally will not be subject to United States federal
income or withholding tax on gain realized on the sale, exchange, redemption,
retirement or other disposition of a note, unless the non-U.S. holder is an
individual who is present in the United States for 183 days or more in the
taxable year of the disposition, and other applicable conditions are met, or the
gain is effectively connected with the conduct by the non-U.S. holder of a trade
or business in the United States.
If a non-U.S. holder is engaged in a trade or business in the United States
and if interest on the note or gain realized on the disposition of the note is
effectively connected with the conduct of the trade or business, the non-U.S.
holder usually will be subject to regular United States federal income tax on
the interest or gain in the same manner as if it were a U.S. holder, unless an
applicable treaty provides otherwise. In addition, if the non-U.S. holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%, or
a lower rate provided by an applicable treaty, of its effectively connected
earnings and profits for the taxable year, with specified adjustments. For this
purpose, interest on a note will be included in the foreign corporation's
earnings and profits. Even though the effectively connected income is subject to
income tax, and may be subject to the branch profits tax, it generally is not
subject to withholding if the non-U.S. holder delivers a properly executed IRS
Form W-8 ECI, or a successor form, to the payor.
TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS AND NON-U.S. HOLDERS
INFORMATION REPORTING AND BACKUP WITHHOLDING
Noncorporate U.S. holders generally will be subject to information reporting
and may be subject to a backup withholding tax of up to 30% with respect to
payments on, and the proceeds of disposition of, a note. In the case of a U.S.
holder, backup withholding will apply only if such holder:
- fails to furnish its taxpayer identification number;
- furnishes an incorrect taxpayer identification number;
- is notified by the IRS that it has failed to properly report payments of
interest or dividends; or
- in some circumstances, fails to certify, under penalties of perjury, that
it has furnished a correct taxpayer identification number and has not been
notified by the IRS that it is subject to backup withholding for failure
to report interest and dividend payments.
Backup withholding and information reporting generally will not apply to
payments made by us or our paying agent to a non-U.S. holder on a note if the
certification described under "Tax Considerations for Non-U.S. Holders" is
provided or the non-U.S. holder otherwise establishes an
S-55
exemption, and the payor does not have actual knowledge that the holder is a
U.S. holder or that the conditions of any other exemption are not, in fact,
satisfied. The payment of proceeds from the disposition of a note to or through
a non-United States office of a broker, as defined in applicable Treasury
Regulations, that is:
- a United States person;
- a controlled foreign corporation for United States federal income tax
purposes;
- a foreign person 50% or more of whose gross income from all sources for
the three prior years is from activities effectively connected with the
conduct of a United States trade or business; or
- a foreign partnership, if at any time during its tax year, either more
than 50% of its income or capital interests are owned by U.S. holders or
the partnership is engaged in the conduct of a United States trade or
business,
will be subject to information reporting requirements unless the broker has
documentary evidence in its files of the holder's non-U.S. holder status and has
no actual knowledge to the contrary or the non-U.S. holder otherwise establishes
an exemption. Backup withholding normally will not apply to any payment of the
proceeds from the sale of a note made to or through a foreign office of a
broker; however, backup withholding may apply if the broker has actual knowledge
that the payee is a U.S. holder. Payments of the proceeds from the sale of a
note to or through the United States office of a broker are subject to
information reporting and possible backup withholding unless the holder
certifies, under penalties of perjury, that it is not a U.S. holder and that
other conditions are met or the holder otherwise establishes an exemption,
provided that the broker does not have actual knowledge that the holder is a
U.S. holder or that the conditions of any other exemption are not, in fact,
satisfied.
Holders of notes should consult their tax advisors regarding the application
of backup withholding under their particular circumstances, the availability of
an exemption from backup withholding and the procedure for obtaining an
exemption.
The amount of any backup withholding will be allowed as a credit against the
holder's United States federal income tax liability and may entitle the holder
to a refund if the required information is furnished to the IRS.
THE ABOVE DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR NON-UNITED STATES TAX LAWS
AND ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
S-56
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Subject to certain conditions, each underwriter has severally agreed to
purchase from us and we have agreed to sell to each underwriter the aggregate
principal amount of notes set forth opposite their names below:
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
------------ ----------------
Lehman Brothers Inc......................................... $ 57,500,000
Bear, Stearns & Co. Inc..................................... $ 37,500,000
First Albany Corporation.................................... $ 5,000,000
------------
Total................................................... $100,000,000
============
The underwriters propose to offer part of the notes to the public at the
public offering price set forth on the cover page of this prospectus supplement
and in part to certain dealers at a price that represents a concession not in
excess of .25% of the principal amount of the notes. The underwriters may allow,
and such dealers may reallow, a concession not in excess of .12% of the
principal amount of the notes to certain other dealers. After the initial
offering of the notes, the offering price and other selling terms may from time
to time be varied by the underwriters.
In connection with this offering, the underwriters may purchase and sell the
notes in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created by the
underwriters in connection with the offering. Stabilizing transactions consist
of certain bids or purchases for the purpose of preventing or retarding a
decline in the market price of the notes, and short positions created by the
underwriters involve the sale by the underwriters of a greater aggregate
principal amount of notes than they are required to purchase from us. The
underwriters also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the notes sold in the offering may be reclaimed
by the underwriters if such notes are repurchased by the underwriters in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the notes, which may be higher than the
price that might otherwise prevail in the open market, and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
in the over-the-counter market or otherwise.
The notes are a new issue of securities with no established trading market.
We have been advised by the underwriters that they intend to make a market in
the notes, but they are not obligated to do so and may discontinue any market
making at any time without notice. We cannot assure you as to the liquidity of
the trading market for the notes. The notes will not be listed on any securities
exchange.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act.
In the ordinary course of its business, the underwriters and their
affiliates have engaged, and may in the future engage, in commercial banking
and/or investment banking transactions with us and our affiliates. They have
received customary fees and commissions for these transactions.
You should read "Plan of Distribution" in the accompanying prospectus for
further information regarding the distribution of the notes.
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LEGAL MATTERS
Certain legal matters relating to the validity of the notes will be passed
upon for us by Porter & Hedges, L.L.P., Houston, Texas. Certain legal matters
relating to the offering of the notes will be passed upon for the underwriters
by Latham & Watkins, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Key Energy Services,
Inc. as of June 30, 2001 and 2000, and for each of the years in the three-year
period ended June 30, 2001, have been incorporated by reference herein in
reliance upon the report of KPMG LLP, independent accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
S-58
PROSPECTUS
[LOGO]
$500,000,000
KEY ENERGY SERVICES, INC.
Debt Securities
Preferred Stock
Common 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 debt securities, preferred stock, common stock and
warrants covered by this prospectus from time to time;
- 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 7 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 illegal.
This Prospectus is dated April 16, 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
Ratio of Earnings to Fixed Charges.......................... 6
Forward-looking Statements.................................. 7
Risk Factors................................................ 7
Use of Proceeds............................................. 11
Plan of Distribution........................................ 12
Description of Debt Securities.............................. 14
Description of Capital Stock................................ 19
Description of Warrants..................................... 20
Legal Matters............................................... 20
Experts..................................................... 20
2
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 (Reg. No.
333-67665) 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;
- 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;
- Proxy Statement on Schedule 14A, dated November 17, 1998;
- Tender Offer Statements on Schedule 14D-1, filed on August 17, 1998 and on
Schedule 14D-1/A filed on August 26, 1998, September 2, 1998 and
September 15, 1998; and
- The description of our common stock contained in Form 8-A dated March 27,
1998, including any amendments or reports that 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 33% 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.
RECENT DEVELOPMENTS
DAWSON ACQUISITION. In September 1998, we purchased Dawson Production
Services, Inc., which was the third largest onshore oil and gas well service and
workover company in the United States based on the number of rigs they owned and
available industry data. Our share of the domestic onshore well service rig
fleet has increased from approximately 3% at February 1996 to approximately 33%
currently.
RESTRUCTURING PLAN. In response to the current industry downturn caused by
historically low oil and gas prices and the resulting slowdown in our business,
on December 7, 1998, we announced a company-wide restructuring plan to reduce
operating costs beyond those achieved through our consolidation efforts. The
plan involved a reduction in the size of our management and on-site work force,
salary reductions of up to 20% for senior management, the combination of
previously separate operating
4
divisions and the elimination of redundant divisional overhead and facilities.
We currently expect approximately $9 million of annualized cost savings from
this plan within the next six months. The restructuring plan resulted in a
one-time pretax charge to earnings of approximately $6.7 million in the second
fiscal quarter ending December 31, 1998. This charge includes severance payments
and other termination benefits to terminated employees, lease commitments
related to closed facilities and environmental studies performed on closed
leased yard locations. Approximately 110 employees were terminated, all of which
served in either executive or supervisory positions. We expect to complete the
plan by June 30, 1999. The major components of the restructuring charge and
costs incurred to date are as follows (in thousands):
COSTS INCURRED
RESTRUCTURING AS OF BALANCE AS OF
CHARGE DECEMBER 31, 1998 DECEMBER 31, 1998
------------- ----------------- -----------------
Severance/employee costs................ $6,231 $(834) $5,397
Lease commitments....................... 433 -- 433
Environmental cleanup................... 35 -- 35
------ ----- ------
Total................................. $6,699 $(834) $5,865
====== ===== ======
In addition, we have completed the integration of Dawson into our business,
from which we expect annualized cost savings of approximately $12 million. In
connection with the Dawson acquisition, we anticipate we will incur an
additional, extraordinary pretax charge of approximately $6.1 million in the
third fiscal quarter ending March 31, 1999, expensing debt issuance costs and
fees related to the syndication of our bridge credit facility.
DEMAND FOR OUR SERVICES. Due to weakness of oil and gas prices, demand for
our services declined throughout the second fiscal quarter ending December 31,
1998 and has continued to decline during the third fiscal quarter ending March
31, 1999. By December 31, 1998, oilfield service industry activities were at
depressed levels because many oil companies either reached their 1998 capital
budget targets or reduced spending in light of the current commodity price
environment. If oil and gas prices remain at or above the levels encountered at
the end of calendar 1998, we believe average monthly oilfield services spending
by oil and gas companies in calendar 1999 will be at levels greater than at the
end of calendar 1998 as companies implement their 1999 capital budgets, although
much of their spending could be weighted toward the end of the calendar year.
Should this scenario materialize, our results, including EBITDA and financial
condition could be materially and adversely impacted in our third and fourth
quarters of fiscal 1999.
RENEGOTIATION OF FINANCIAL COVENANTS. In light of market conditions, in
December 1998 we renegotiated certain financial covenants in our credit facility
to levels designed to allow us to remain in compliance for the remainder of
calendar 1999. However, if demand for our services does not increase and our
operating performance does not improve from the levels of November and December
of 1998, we may require further covenant relief or waivers from our lenders
during calendar 1999 to remain in compliance with certain of our financial
covenants.
We believe if demand for our services increases, our aggressive
restructuring plan and other cost saving initiatives have positioned us for
strong performance. No assurance can be given, however, that we will be able to
realize the anticipated cost savings from the restructuring plan or that demand
for our services will return to or exceed historical levels.
------------------------
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.
5
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, SIX MONTHS ENDED
----------------------------------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1998 1998
---- -------- -------- -------- -------- ----------------
2.65 2.57 2.62 2.52 2.61 0.60
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 interest factor.
6
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.
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. In addition, when oil prices are weak, fewer wells are drilled,
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.
7
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. The following chart shows
certain important credit statistics:
DECEMBER 31, 1998
-----------------
(DOLLARS IN
THOUSANDS)
Total debt.................................................. $849,381
Stockholders' equity........................................ 144,622
Debt to equity ratio........................................ 5.87:1
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 $30 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.
8
RISKS ASSOCIATED WITH INTEGRATION OF ACQUISITIONS -- WE HAVE PURSUED, AND INTEND
TO CONTINUE TO PURSUE, ACQUISITIONS. OUR BUSINESS MAY BE ADVERSELY AFFECTED IF
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 liabilities 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 workers. We
believe that our wage rates are competitive with the wage rates of our
competitors and
9
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 IF
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 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
10
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 March 1, 1999, we had 18,293,180 shares of common stock outstanding.
As of such date, approximately 10.3 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. In addition, 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. There can be no assurance that
these factors will not have an adverse effect on the trading prices of our
securities.
USE OF PROCEEDS
Except as otherwise described in any prospectus supplement, the net proceeds
from the sale of securities will be used for general corporate purposes, which
may include refinancings of indebtedness, working capital, capital expenditures,
acquisitions and repurchases and redemptions of securities.
11
PLAN OF DISTRIBUTION
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 supplement, 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 may sell the securities through underwriters, agents or dealers or
directly to purchasers. A prospectus supplement will set forth the terms of each
specific offering, including the name or names of any underwriters or agents,
the purchase price of the securities and the proceeds to us from such sales, any
delayed delivery arrangements, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale, the securities will be acquired by the
underwriters for their own account and may be resold from time to time in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The securities may be
offered to the public either through underwriting syndicates represented by one
or
12
more managing underwriters or directly by one or more firms acting as
underwriters. The underwriter or underwriters with respect to a particular
underwritten offering and, if an underwriting syndicate is used, the managing
underwriter or underwriters will be set forth on the cover of such prospectus
supplement. Unless otherwise set forth in the prospectus supplement, the
underwriters will be obligated to purchase all the securities if any are
purchased.
During and after an offering through underwriters, the underwriters may
purchase and sell the securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters also may impose a penalty bid, under which selling concessions
allowed to syndicate members or other broker-dealers for the securities they
sell for their account may be reclaimed by the syndicate if the syndicate
repurchases the securities in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
securities then offered, which may be higher than the price that might otherwise
prevail in the open market, and, if commenced, may be discontinued at any time.
We may sell the securities directly or through agents we designate from time
to time. Any agent involved in the offer or sale of the securities covered by
this prospectus will be named, and any commissions payable by us to an agent
will be set forth, in a prospectus supplement relating thereto. Unless otherwise
indicated in a prospectus supplement, any such agent will be acting on a best
efforts basis for the period of its appointment.
If dealers are used in any of the sales of securities covered by this
prospectus, we will sell those securities to dealers as principals. The dealers
may then resell the securities to the public at varying prices the dealers
determine at the time of resale. The names of the dealers and the terms of the
transactions will be set forth in a prospectus supplement.
We may sell the securities directly to institutional investors or others who
may be deemed to be underwriters within the meaning of the Securities Act with
respect to any sale thereof. The terms of any such sales will be described in a
prospectus supplement.
If so indicated in a prospectus supplement, we will authorize agents,
underwriters or dealers to solicit offers from certain types of institutions to
purchase securities from us at the public offering price set forth in the
prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. These contracts will be
subject only to those conditions set forth in the prospectus supplement, and the
prospectus supplement will set forth the commission payable for solicitation of
such contracts.
Agents, dealers and underwriters may be entitled under agreements entered
into with us to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which such agents, dealers or underwriters may be required to make
in respect thereof. Agents, dealers and underwriters may be customers of, engage
in transactions with, or perform services on our behalf.
Any debt securities, preferred stock or warrants may, but are not expected
to be, listed on any securities exchange.
13
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
- will be 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;
14
- 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 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
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payment in full of all senior debt. The subordinated indenture provides that no
payment of principal, interest or any 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 fail 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 our 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 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 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.
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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 date of
the debt securities of the series. If this happens, the holders of the debt
securities of the series
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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.
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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
that date, we had 18,293,180 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." Any additional common stock we issue will also be listed on
the NYSE.
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.
VOTING RIGHTS. Each share of our currently outstanding 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.
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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,
preferred stock, debt securities and warrants will be passed upon by Porter &
Hedges, L.L.P., Houston, Texas.
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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$100,000,000
[LOGO]
KEY ENERGY SERVICES, INC.
8 3/8% SENIOR NOTES
DUE 2008
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PROSPECTUS SUPPLEMENT
February 22, 2002
PROSPECTUS
April 16, 1999
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LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
FIRST ALBANY CORPORATION