-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BOr5tHsENtF2EzisqtxfJ7ykmdE4X8qJ3nYuM556K7oQve0BeGWR3iZofEoz20iU XLmhNhNyzkNhD4KhzORiOw== 0001047469-98-031745.txt : 19980817 0001047469-98-031745.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031745 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL RESOURCES INC CENTRAL INDEX KEY: 0000732834 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 730767549 STATE OF INCORPORATION: OK FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61547 FILM NUMBER: 98691197 BUSINESS ADDRESS: STREET 1: 302 NORTH INDEPENDENCE, SUITE 1400 CITY: ENID STATE: OK ZIP: 73702 BUSINESS PHONE: 5802338955 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL GAS INC CENTRAL INDEX KEY: 0001068176 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 731363922 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61547-01 FILM NUMBER: 98691198 BUSINESS ADDRESS: STREET 1: 302 N INDEPENDENCE #300 STREET 2: C/O CONTINENTAL RESOURCES CITY: ENID STATE: OK ZIP: 73702 BUSINESS PHONE: 5802338955 MAIL ADDRESS: STREET 1: 302 N INDEPENDENCE #300 STREET 2: C/O CONTINENTAL RESOURCES CITY: ENID STATE: OK ZIP: 73702 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL CRUDE CO CENTRAL INDEX KEY: 0001068177 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 731363922 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61547-02 FILM NUMBER: 98691199 BUSINESS ADDRESS: STREET 1: 302 N INDEPENDENCE #300 STREET 2: C/O CONTINENTAL RESOURCES CITY: ENID STATE: OK ZIP: 73702 BUSINESS PHONE: 5802338955 MAIL ADDRESS: STREET 1: 302 N INDEPENDENCE #300 STREET 2: C/O CONTINENTAL RESOURCES CITY: ENID STATE: OK ZIP: 73702 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CONTINENTAL RESOURCES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 1311 73-0767549 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.)
-------------------------- 302 NORTH INDEPENDENCE ROGER CLEMENT SUITE 300 302 NORTH INDEPENDENCE ENID, OKLAHOMA 73701 SUITE 300 (580) 233-8955 ENID, OKLAHOMA 73701 (Address, including Zip Code, and (580) 233-8955 telephone (Name, address, including Zip number, including area code, of Code, and telephone number, registrant's principal including area code, of executive offices) agent for service) -------------------------- COPIES TO: THEODORE M. ELAM, ESQ. BRICE TARZWELL, ESQ. MCAFEE & TAFT A PROFESSIONAL CORPORATION TENTH FLOOR, TWO LEADERSHIP SQUARE OKLAHOMA CITY, OKLAHOMA 73102 (405) 235-9621 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement under the earlier effective registration statement for the same offering. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE 10 1/4% Senior Subordinated Notes due 2008................................ $150,000,000 100% $150,000,000 $44,250(1)
(1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(f)(2). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL REGISTRANTS CONTINENTAL GAS, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 1311 73-1363922 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
302 NORTH INDEPENDENCE, SUITE 300 ENID, OKLAHOMA 73701 (580) 233-8955 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROGER CLEMENT SENIOR VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER 302 NORTH INDEPENDENCE, SUITE 300 ENID, OKLAHOMA 73701 (580) 233-8955 (Name, address, including zip code, and telephone number, including area code, of agent for service) CONTINENTAL CRUDE CO. (Exact name of registrant as specified in its charter) OKLAHOMA 1311 73-1541220 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
302 NORTH INDEPENDENCE, SUITE 300 ENID, OKLAHOMA 73701 (580) 233-8955 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROGER CLEMENT SENIOR VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER 302 NORTH INDEPENDENCE, SUITE 300 ENID, OKLAHOMA 73701 (580) 233-8955 (Name, address, including zip code, and telephone number, including area code, of agent for service) PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION) INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. ISSUED AUGUST 14, 1998 OFFER TO EXCHANGE ALL OUTSTANDING 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 ($150,000,000 PRINCIPAL AMOUNT OUTSTANDING) FOR 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF CONTINENTAL RESOURCES, INC. ---------------- The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, unless extended (if and as extended, the "Expiration Date"). The Company will accept for exchange any and all validly tendered Old Notes on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE NEW NOTES OFFERED HEREBY. ------------------------ Continental Resources, Inc., an Oklahoma corporation (the "Company" or "Continental"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal to exchange $1,000 principal amount of its 10 1/4% Senior Subordinated Notes Due 2008 (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for each $1,000 principal amount of its outstanding 10 1/4% Senior Subordinated Notes Due 2008 (the "Old Notes"), of which an aggregate of $150,000,000 in principal amount is outstanding as of July , 1998. (COVER CONTINUED ON PAGE II.) ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ Interest on the New Notes will be paid in cash at a rate of 10 1/4% per annum on each February 1 and August 1, commencing February 1, 1999. The New Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after August 1, 2003 at 105.125% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after August 1, 2006. In addition, at any time prior to August 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the New Notes with the net proceeds of one or more sales of capital stock of the Company, at 110.250% of their principal amount, plus accrued interest; provided that after any such redemption at least $97.5 million aggregate principal amount of Notes remains outstanding. See "Description of the Notes." This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders of Old Notes as of , 1998. As of such date, there were registered holders of the Old Notes. The Company will not receive any proceeds from this Exchange offer. No dealer-manager is being used in connection with this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution." WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ------------------------ THE DATE OF THIS PROSPECTUS IS , 1998. The New Notes will be general unsecured obligations of the Company entitled to the benefits of the Indenture (as defined herein). The New Notes will be subordinated in right of payment to all existing and future Senior Debt, will rank PARI PASSU in right of payment with the Old Notes and all other senior indebtedness of the Company, and will rank senior in right of payment to all other subordinated indebtedness of the Company. The Old Notes and the New Notes (together, the "Notes") will be subordinated in right of payment to all existing and future Senior Debt, will rank PARI PASSU in right of payment to all other Senior Indebtedness and will rank senior in right of payment to all other subordinated indebtedness of the Subsidiary Guarantors. As of March 31, 1998, after giving pro forma effect to the Worland Field Acquisition (as defined herein) and the related financing, the Company would have had, on a consolidated basis, $3.9 million of Senior Debt (exclusive of $75.0 million of unused commitments under the Credit Facility), all of which would rank senior to the Notes, and the Company would have had no senior subordinated debt outstanding (exclusive of the Notes) and the Subsidiary Guarantors would have had no indebtedness outstanding other than the guarantees of the Credit Facility and the Subsidiary Guarantees. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the rights and preferences and will be subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the holders of the Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Old Notes held by them. Following the completion of the Exchange Offer, none of the Notes will be entitled to the contingent increase in interest rate provided pursuant to the Old Notes. The Exchange Offer is being made pursuant to the terms of the registration rights agreement (the "Registration Rights Agreement") entered into between the Company and Chase Securities Inc. (the "Initial Purchaser") pursuant to the terms of the Purchase Agreement dated July 21, 1998 between the Company and the Initial Purchases. The New Notes and the Old Notes are collectively referred to herein as the "Notes." See "The Exchange Offer--Purpose and Effect of the Exchange Offer." Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in no-action letters issued to third parties, the Company believes the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than broker-dealers, as set forth below, and any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and that such holder has no arrangement or understanding with any person to participate in the distribution of such New Notes. Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes or who is an affiliate of the Company may not rely upon such interpretations by the staff of the Commission and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Holders of Old Notes wishing to accept the Exchange offer must represent to the Company in the Letter of Transmittal that such conditions have been met. Each broker-dealer (other than an affiliate of the Company) that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the last date Old Notes are accepted for exchange pursuant to the Exchange Offer (the "Exchange Date"), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Any broker-dealer who is an affiliate of the Company may not rely on such no-action letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. ii TABLE OF CONTENTS
PAGE ----- Periodic Reports........................................................................................... iv Available Information...................................................................................... iv Summary.................................................................................................... 1 Risk Factors............................................................................................... 15 The Exchange Offer......................................................................................... 23 Unaudited Pro Forma Consolidated Financial Statements...................................................... 31 Selected Consolidated Financial Data....................................................................... 36 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 38 Business and Properties.................................................................................... 45 Management................................................................................................. 61 Summary Compensation Table................................................................................. 63 Certain Relationships and Related Transactions............................................................. 63 Principal Shareholders..................................................................................... 64 Description of Credit Facility............................................................................. 65 Description of Notes....................................................................................... 66 Certain United States Tax Consequences..................................................................... 98 Plan of Distribution....................................................................................... 102 Legal Matters.............................................................................................. 103 Experts.................................................................................................... 103 Glossary of Terms.......................................................................................... 104 Index to Financial Statements.............................................................................. F-1
------------------------ NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. ------------------------ THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD SHARES IN ANY JURISDICTION IN WHICH THIS EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. iii PERIODIC REPORTS The Company has agreed that, whether or not required by the rules and regulations of the Commission, so long as any Old Notes or New Notes are outstanding, the Company will file with the Commission all such reports and other information as it would be required to file with the Commission by Section 13(a) or 15(d) under the Securities Exchange Act of 1934 (the "Exchange Act") as if it were subject thereto. The Company will supply the Trustee appointed with respect to the Old Notes or New Notes and each holder of Old Notes or New Notes, without cost, copies of such report and other information. ------------------------ AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (the "Registration Statement"), which term includes all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the New Notes being offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contracts, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is not currently subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended. Upon effectiveness of a registration statement with respect to an exchange offer or a shelf registration statement with respect to resales of the Notes (see "Description of the Notes--Registration Rights"), the Company will become subject to the informational requirements of the Exchange Act. ------------------------ THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS". ALL STATEMENTS REGARDING THE COMPANY'S AND ITS SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. iv SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "CONTINENTAL" OR THE "COMPANY" INCLUDE CONTINENTAL RESOURCES, INC. AND ITS CONSOLIDATED SUBSIDIARIES. PRO FORMA INFORMATION GIVES EFFECT TO THE WORLAND FIELD ACQUISITION AND THE RELATED FINANCING, INCLUDING THE OFFERING. CERTAIN INDUSTRY TERMS ARE DEFINED IN THE GLOSSARY. THE COMPANY Continental is engaged in the development, exploitation, exploration and acquisition of oil and gas reserves, primarily in the Rocky Mountains and the Mid-Continent and, to a lesser extent, in the Gulf Coast region of Texas and Louisiana. In addition to its exploration, development and production activities, the Company owns and operates 1,000 miles of natural gas pipelines, five gas gathering systems and three gas processing plants in its operating areas. The Company also engages in natural gas marketing, gas pipeline construction and saltwater disposal. Capitalizing on its growth through the drill-bit and its acquisition strategy, on a pro forma basis the Company increased its estimated proved reserves from 12.7 MMBoe in 1993 to 64.9 MMBoe in 1997, and increased its annual production from 2.0 MMBoe in 1993 to 5.2 MMBoe in 1997. At December 31, 1997, on a pro forma basis, approximately 80% of the Company's estimated proved reserves were oil and approximately 63% of its total estimated reserves were classified as proved developed. At March 31, 1998, on a pro forma basis, the Company had interests in 1,390 producing wells of which it operated 1,112. In fiscal year 1997, the Company had pro forma revenues and EBITDA of $120.2 million and $61.0 million, respectively. During the first three months of 1998, the Company had pro forma revenues and EBITDA of $25.4 million and $11.2 million, respectively, reflecting lower prevailing oil and gas prices. The Company's Rocky Mountain activities are concentrated in the Williston Basin of North Dakota, South Dakota and Montana and in the Big Horn Basin of Wyoming. The Company's operations in the Williston Basin are focused on the Cedar Hills Field which the Company believes is, potentially, one of the largest onshore discoveries in the lower 48 states since 1971. The Cedar Hills Field represented approximately 45% of the PV-10 attributable to the Company's estimated proved reserves at December 31, 1997, on a pro forma basis. In the Williston Basin, the Company owns approximately 470,000 net leasehold acres and has interests in 322 gross (252 net) wells, has identified 105 potential drilling locations and conducts both primary drilling and enhanced recovery operations. The Company recently expanded its activities into the Big Horn Basin through the acquisition of producing and non-producing properties in the Worland Field. The Company currently owns approximately 35,000 net leasehold acres in the Big Horn Basin and has interests in 292 gross (125 net) producing wells which, on a pro forma basis, represented approximately 10% of the PV-10 attributable to the Company's estimated proved reserves at December 31, 1997. In the Big Horn Basin the Company has identified 164 potential drilling locations which represent significant opportunities. The Company's Mid-Continent activities are conducted primarily in the Anadarko Basin of western Oklahoma, southwestern Kansas and the Texas Panhandle and, to a lesser extent, in the Arkoma Basin of southeastern Oklahoma, and in southern Illinois. At December 31, 1997 the Company's Anadarko Basin properties represented approximately 95% of the PV-10 attributable to the Company's estimated proved reserves in the Mid-Continent and approximately 36% of the Company's total estimated proved reserves, on a pro forma basis. In the Anadarko Basin the Company owns approximately 57,000 net leasehold acres, has interests in 658 gross (408 net) producing wells and has identified 11 potential drilling locations. The Company also owns leasehold interests and expects to expand its exploration activities in the Arkoma Basin and Gulf Coast region of Texas and Louisiana. 1 BUSINESS STRENGTHS The Company believes that it has certain strengths that provide it with significant competitive advantages, including the following: PROVEN GROWTH RECORD. Continental has demonstrated consistent growth through a balanced program of development and exploratory drilling and acquisitions. During the five years ended December 31, 1997, the Company increased proved reserves by 411%, production by 161% and EBITDA by 414%, on a pro forma basis. SUBSTANTIAL DEVELOPMENT DRILLING INVENTORY. The Company has identified over 275 potential development drilling locations based on geological and geophysical evaluations. As of March 31, 1998, on a pro forma basis, the Company held approximately 590,000 net acres, of which approximately 64% were classified as undeveloped. Management believes that its current acreage holdings could support five to seven years of drilling activities based upon oil and gas prices in effect at March 31, 1998. LONG-LIFE NATURE OF RESERVES. Continental's producing reserves are primarily characterized by low rate, relatively stable, mature production that is subject to gradual decline rates. As a result of the long-lived nature of its properties, the Company has relatively low reinvestment requirements to maintain reserve quantities, primary and secondary production levels and reserve values. At December 31, 1997, on a pro forma basis, the Company's proved reserve life index was 12.5 years. SUCCESSFUL DRILLING RECORD. The Company has maintained a successful drilling record. In the blanket type Red River B formation of the Williston Basin, the Company's success rate during the three years ended December 31, 1997 was 92%, while in its other areas, the success rate was 65%, resulting in an overall success rate of 85%. During the five years ended December 31, 1997 the Company participated in 253 gross (175 net) wells which resulted in the addition of 24.9 MMBoe at an average cost of $5.50 per Boe. SIGNIFICANT OPERATIONAL CONTROL. Approximately 94% of the Company's pro forma PV-10 at December 31, 1997 was attributable to wells operated by the Company, giving Continental significant control over the amount and timing of capital expenditures and production, operating and marketing activities. TECHNOLOGICAL LEADERSHIP. The Company has demonstrated significant expertise in the rapidly evolving technologies of 3-D seismic evaluation and precision horizontal drilling, and is among the few companies in North America to successfully utilize high pressure air injection ("HPAI") enhanced recovery technology on a large scale. Through the combination of precision horizontal drilling and HPAI secondary recovery technology, the Company has significantly enhanced the recoverable reserves underlying its oil and gas properties. Since its inception, Continental has experienced a 300% to 400% increase in recoverable reserves through use of these technologies. EXPERIENCED AND COMMITTED MANAGEMENT. Continental's senior management team has extensive experience in the oil and gas industry. The Chief Executive Officer, Harold Hamm, began his career in the oil and gas industry in 1967 and has grown Continental's revenues to $120.2 million in 1997, on a pro forma basis. Seven senior officers have an average of 20 years of oil and gas industry experience. Additionally, the Company's technical staff, which includes ten petroleum engineers and ten geoscientists, has an average of over 20 years experience in the industry. BUSINESS STRATEGY The Company's strategy is to increase reserves, production and cash flow. Key elements of the Company's strategy are: MAINTAIN A BALANCED DRILLING PROGRAM. Continental has historically grown through a balanced program of exploratory and development drilling and acquisitions. Commencing in 1993, approximately 70% 2 of wells drilled have been development wells and the Company expects a similar balance from its current drilling inventory. Approximately 85% of current inventory is focused on further expansion and development of oil projects in the Rocky Mountains, while the remainder is focused on natural gas projects in the Mid-Continent and the Gulf Coast. The Company currently has an inventory of 275 potential development drilling locations. The drilling budget for 1998 is $36.0 million, which is expected to fund the drilling of 48 gross (33.6 net) wells; and for the three months ended March 31, 1998, the Company expended $12.9 million in drilling 15 gross (9.4 net) wells. MAXIMIZE RESERVE RECOVERY. The Company routinely uses advanced technology such as precision horizontal drilling, 3-D seismic technology and HPAI technology in its operations. Management believes that its expertise in horizontal drilling and its record of over 20 years of successfully utilizing HPAI technology provide the Company with a distinct competitive advantage for its development and exploration program. Since its inception, Continental has drilled 130 and participated in another 27 horizontal wells. The Company currently operates four of the eight active HPAI projects in North America and six traditional water-flood projects, and is evaluating three additional waterflood and two additional HPAI projects, as well as approximately 185 workovers of existing wells. The Company intends to continue to apply HPAI technology to its Cedar Hills Field and West Medicine Pole Hills properties to maximize oil recoveries. Based on its experience in operating HPAI projects, Continental believes that the use of HPAI technology in secondary recovery operations, coupled with precision horizontal drilling, will increase total oil recovery by 300% to 400% over average primary production, or by 50% over secondary recovery utilizing traditional waterflooding. ACQUISITIONS OF OIL AND GAS RESERVES. The Company focuses on acquisitions that (i) complement its existing exploration program, (ii) provide opportunities to utilize the Company's technological advantages, (iii) have the potential for enhanced recovery activities, and/or (iv) provide new core areas for the Company's operations. MAINTAIN LOW COST STRUCTURE. The management team is committed to a low cost structure in order to maximize cash flow and earnings. Continental has achieved low operating and general and administrative costs through economies of scale and geographic focus. Finding costs are expected to decline over time as the benefits of secondary recovery methods are realized. EXPAND GAS GATHERING AND MARKETING. Continental's extensive gas gathering infrastructure and its regional natural gas marketing operations are integral to the Company's low cost structure and high revenues per unit of gas production. The Company intends to expand its gas gathering systems to further improve the rate of return on drilling and development activities and to increase the throughput of natural gas from third parties. The gas marketing operations provide a ready market for increased production, allowing the Company to increase its marketing of third-party gas as well as its own production. RECENT EVENTS WORLAND FIELD ACQUISITION. The Company recently completed an $86.5 million acquisition of producing and non-producing oil and gas properties in the Worland Field of the Big Horn Basin in northern Wyoming, effective June 1, 1998 (the "Worland Field Acquisition"). Effective the same date, the Company sold an undivided 50% interest in the Worland Field properties (excluding inventory and certain items of equipment) to the Company's principal shareholder for $42.6 million. See "Certain Relationships and Related Transactions." All references to the Worland Field Acquisition and the related properties refer only to the Company's interest in the Worland Field properties after giving effect to the sale to the Company's principal shareholder. Continental's interests in the Worland Field include 35,000 net leasehold acres, on which are located 292 producing wells, 272 of which are operated by the Company. As of December 31, 1997, the estimated net proved reserves attributable to the Company's interest in the Worland Field properties were 32.0 3 MMBoe, with an estimated PV-10 of $25.4 million. The Worland Field properties include six identified exploratory prospects for further extension of the known producing reservoirs. The Worland Field Acquisition materially increases the Company's proved reserves and provides additional exploration and exploitation opportunities in areas similar to and near Continental's Williston Basin operating area. CEDAR HILLS FIELD TRANSACTION. On May 15, 1998, the Company entered into a definitive agreement whereby, effective December 1, 1998, Continental and an unrelated joint interest owner in the Cedar Hills Field will exchange undivided interests so that the Company will ultimately own working interests ranging from 90% to 92% in approximately 65,000 gross (59,000 net) leasehold acres in the northern half of the Cedar Hills Field and the joint interest owner will acquire a substantial portion of the Company's interests in the southern half of the Cedar Hills Field. As a result, the Company will enhance its ability to unitize all interests in the northern half of the Cedar Hills Field which is necessary in order for the Company to initiate its planned HPAI enhanced recovery operations. ------------------------ The Company's principal executive and operating offices are located at Suite 300, Continental Tower, 302 North Independence, Enid, Oklahoma 73701, and its telephone number is (580) 233-8955. 4 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER This Exchange Offer is being made pursuant to the terms of the registration rights agreement (the "Registration Rights Agreement") entered into between the Company and Chase Securities, Inc. (the "Initial Purchaser") pursuant to the terms of the Purchase Agreement dated July 21, 1998 between the Company and the Placement Agents. See "The Exchange Offer--Purpose and Effect of the Exchange Offer." The Exchange Offer................ Pursuant to the Exchange Offer, $1,000 principal amount of New Notes will be issued in exchange for each $1,000 principal amount of Old Notes that are validly tendered and not withdrawn. As of , 1998, there are registered holders of Old Notes and $150,000,000 aggregate principal amount of Old Notes are outstanding. Holders of Old Notes whose Old Notes are not tendered and accepted in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences and will be subject to the limitations applicable thereto under the Indenture governing the Old Notes and the New Notes. Following consummation of the Exchange Offer, the holders of Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Old Notes held by them. Following the completion of the Exchange Offer, none of the Notes will be entitled to the contingent increase in interest rate provided with respect to the Old Notes. Resale............................ Based on interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any holder thereof (other than broker-dealers, as set forth below, and any such holder that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and that such holder has no arrangement or understanding with any person to participate in the distribution of such New Notes. Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes or who is an affiliate of the Company may not rely upon such interpretations by the staff of the Commission and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liabilities under the Securities Act for which the holder is not indemnified by the Company. Each broker-dealer (other than an affiliate of the Company) that receives New Notes for its own account pursuant
5 to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. The Company has agreed that, for a period of 180 days after the Exchange Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Exchange Offer is not being made to, nor will the Company accept surrenders for exchange from, holders of Old Notes in any jurisdiction in which this Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, unless extended, in which case the term Expiration Date shall mean the latest date and time to which the Exchange Offer is extended. Any extension, if made, will be publicly announced through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. Conditions to the Exchange Offer........................... The Exchange Offer is subject to certain conditions, which may be waived by the Company. See "The Exchange Offer-- Conditions of the Exchange Offer." The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered. Procedures for Tendering Old Notes....................... Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or a facsimile thereof, together with such Old Notes and any other required documentation to United States Trust Company of New York, the Exchange Agent, at the address set forth herein and therein. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder, that neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the holder nor any such other person is an affiliate of the Company within the meaning of Rule 405 under the Securities Act. See "The Exchange Offer--Terms of the Exchange Offer--Procedures for Tendering Old Notes" and "The Exchange Offer--Terms of the Exchange Offer--Guaranteed Delivery Procedures." Special Procedures for Beneficial Owners.......................... Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or
6 other nominee and who wishes to tender such Old Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on its own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such owner's name or obtain a properly completed stock power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer--Procedures for Tendering Old Notes." Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date, must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Terms of the Exchange Offer-- Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes........... Subject to certain conditions (as described more fully in "The Exchange Offer--Conditions of the Exchange Offer"), the Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered as promptly as practicable following the Expiration Date. Withdrawal Rights................. Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer--Withdrawal of Tenders of Old Notes." Certain Federal Income Tax Considerations.................. For a discussion of certain federal income tax considerations relating to the exchange of New Notes for Old Notes, see "Certain United States Tax Consequences." Exchange Agent.................... United States Trust Company of New York is the Exchange Agent. The address, telephone number and facsimile number of the Exchange Agent are set forth in "The Exchange Offer-- Exchange Agent."
7 TERMS OF THE NEW NOTES The Exchange Offer applies to all $150,000,000 aggregate principal amount of Old Notes outstanding. The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes except that the New Notes will be registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. The New Notes will evidence the same debt as the Old Notes, will be entitled to the benefits of the Indenture and will be treated as a single class thereunder with any Old Notes that remain outstanding. Following the Exchange Offer, none of the Notes will be entitled to the contingent increase in interest rate provided for in accordance with the terms of the Registration Rights Agreement which rights will terminate upon consummation of the Exchange Offer. See "Description of the Notes." Issuer............................ Continental Resources, Inc. Securities Offered................ $150,000,000 aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2008. Maturity Date..................... August 1, 2008. Interest Payment Dates............ February 1 and August 1 of each year, commencing on February 1, 1999. Mandatory Redemption.............. None. Optional Redemption............... Except as described below, the Notes will not be redeemable at the Company's option prior to August 1, 2003. Thereafter, the Notes will be subject to redemption at any time at the option of the Company, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the applicable redemption date. In addition, prior to August 1, 2001, the Company may, at its option, on any one or more occasions, redeem up to 35% of the original aggregate principal amount of the Notes at a redemption price of 110.25% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net cash proceeds of one or more public offerings of common stock of the Company; provided that at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after the occurrence of such redemption. See "Description of Notes-- Optional Redemption." Change of Control................. Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time, on or prior to August 1, 2003 (but in no event more than 90 days after the occurrence of such Change of Control), to redeem the Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium as of, and accrued and unpaid interest, if any, to, the date of redemption, and (ii) if the Company does not so redeem the Notes, the Company will be required to offer to repurchase all or a portion of each Holder's Notes, at an offer price in each case equal to 101% of the aggregate principal amount of such Notes plus accrued and unpaid interest, if any, to the date of repurchase, and to repurchase all Notes tendered pursuant to such offer. The Credit Facility prohibits the Company from repurchasing any Notes pursuant to a Change of Control offer prior to the repayment in full of the Senior Debt under the Credit Facility. If a Change of Control were to occur, the Company may not have
8 sufficient available funds to purchase all Notes tendered pursuant to the Change of Control offer after first satisfying its obligations under the Credit Facility or other Senior Debt that may then be outstanding, if accelerated. The failure by the Company to purchase all Notes tendered pursuant to the Change of Control offer would constitute an Event of Default (as defined). If any Event of Default occurs, the Trustee (as defined) or holders of at least 25% in principal amount of the Notes then outstanding may declare the principal of and the accrued and unpaid interest on such Notes to be due and payable immediately. However, such repayment would be subject to certain subordination provisions in the Indenture (as defined). See "Risk Factors--Repurchase of Notes Upon a Change of Control and Certain Other Events" and "Description of Notes--Ranking and Subordination" and "--Repurchase at the Option of Holders--Change of Control," and "--Events of Default and Remedies." Ranking........................... The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future Senior Debt of the Company, which will include borrowings under the Credit Facility. The Notes will rank PARI PASSU in right of payment with all other senior subordinated debt of the Company and any other indebtedness which does not expressly provide that it is subordinated in right of payment to the Notes. As of March 31, 1998, on a pro forma basis after giving effect to the consummation of the Offering and the application of the proceeds therefrom and the Worland Field Acquisition and related financing, the aggregate principal amount of Senior Debt outstanding would have been approximately $3.9 million (exclusive of $75.0 million of unused commitments under the Credit Facility) and there would have been no senior subordinated debt outstanding (exclusive of the Notes). The Notes will also be effectively subordinated to all secured indebtedness of the Company, including indebtedness under the Credit Facility. See "Capitalization," "Description of Notes--Ranking and Subordination" and "Description of Credit Facility." Subsidiary Guarantees............. The Company's payment obligations under the Notes are jointly, severally and unconditionally guaranteed on a senior subordinated basis by each Restricted Subsidiary of the Company and any future Restricted Subsidiary of the Company. The Subsidiary Guarantees are subordinated to all Guarantor Senior Debt of the Subsidiary Guarantors substantially to the same extent and manner as the Notes are subordinated to Senior Debt. At March 31, 1998, on a pro forma basis, there would have been no Guarantor Senior Debt outstanding other than the guarantees of the Credit Facility and the Subsidiary Guarantees. Each Subsidiary Guarantee will be effectively subordinated to all secured indebtedness of the relevant Subsidiary Guarantor, including indebtedness under the Credit Facility. See "Description of Notes--Subsidiary Guarantees" and "Description of Credit Facility."
9 Certain Covenants................. The Notes are issued pursuant to an indenture (the "Indenture") containing certain covenants that, among other things, limits the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness and issue Disqualified Capital Stock (as defined), pay dividends, make distributions, make investments, make certain other Restricted Payments (as defined), enter into certain transactions with affiliates, dispose of certain assets, incur liens securing Indebtedness (as defined) of any kind other than Permitted Liens (as defined) and engage in mergers and consolidations. See "Description of Notes--Certain Covenants." Book-Entry; Delivery and Form........................ Transfers of Notes between participants and The Depository Trust Company ("DTC") will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. See "Description of the Notes."
USE OF PROCEEDS The Company will not receive any proceeds from the issuance of the New Notes pursuant to this Prospectus. RISK FACTORS See "Risk Factors," immediately following this Summary, for a discussion of certain factors relating to the Company, its business and an investment in the Notes. 10 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables set forth certain historical and pro forma financial data. The pro forma financial information gives effect to the Worland Field Acquisition and the related financing, including the Offering, as described in the notes to the Unaudited Pro Forma Financial Statements. The pro forma statement of operations data give effect to the Worland Field Acquisition and related financing, including the Offering, as if they had occurred on January 1, 1997, and the pro forma balance sheet data give effect to the Worland Field Acquisition and related financing, including the Offering, as if they had occurred on March 31, 1998. The pro forma financial information does not purport to represent what the Company's results of operations would have been if the Worland Field Acquisition and related financing, including the Offering, had been completed on such dates nor does it indicate the future financial position or future results of operations of the Company. The information set forth below should be read in conjunction with "Unaudited Pro Forma Consolidated Financial Statements," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Financial Statements included elsewhere herein.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------- --------------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1997 1997 1998 1998 --------- --------- --------- ----------- --------- --------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenue: Oil and gas sales............................. $ 30,576 $ 75,016 $ 78,599 $ 88,725 $ 20,826 $ 16,083 $ 17,299 Gathering, marketing and processing........... 20,639 25,766 25,021 25,021 10,714 6,639 6,639 Oil and gas service operations................ 6,148 6,491 6,405 6,405 2,005 1,467 1,467 --------- --------- --------- ----------- --------- --------- ----------- Total revenues.................................. 57,363 107,273 110,025 120,151 33,545 24,189 25,405 Operating costs and expenses: Production expenses and taxes................. 7,611 19,338 20,748 25,958 4,934 4,838 5,630 Exploration expenses.......................... 6,184 4,512 6,806 6,806 973 1,548 1,548 Gathering, marketing and processing........... 13,223 21,790 22,715 22,715 8,815 5,826 5,826 Oil and gas service operations................ 3,680 4,034 3,654 3,654 1,032 883 883 Depreciation, depletion and amortization...... 9,614 22,876 33,354 34,930 8,844 5,408 5,797 General and administrative.................... 8,260 9,155 8,990 8,990 1,760 2,215 2,215 --------- --------- --------- ----------- --------- --------- ----------- Total operating costs and expenses.............. 48,572 81,705 96,267 103,053 26,358 20,718 21,899 --------- --------- --------- ----------- --------- --------- ----------- Operating income................................ 8,791 25,568 13,758 17,098 7,187 3,471 3,506 Interest income................................. 137 312 241 1,591 82 243 325 Interest expense................................ 2,396 4,550 4,804 15,684 1,117 2,005 3,919 Other income (expense), net(1).................. (411) 233 8,061 8,061 483 6 6 --------- --------- --------- ----------- --------- --------- ----------- Income (loss) before income taxes............... 6,121 21,563 17,256 11,066 6,635 1,715 (82) Federal and state income taxes (benefit)(2)..... 2,252 8,238 (8,941) (8,941) 2,521 - - --------- --------- --------- ----------- --------- --------- ----------- Net income (loss)............................... $ 3,869 $ 13,325 $ 26,197 $ 20,007 $ 4,114 $ 1,715 $ (82) --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- OTHER FINANCIAL DATA: EBITDA(3)..................................... $ 24,315 $ 53,502 $ 54,721 $ 61,447 $ 17,569 $ 10,676 $ 11,297 Net cash provided by operations............... 18,985 41,724 51,477 46,963 17,889 4,015 1,499 Net cash used in investing.................... (58,022) (50,619) (78,359) (116,710) (17,396) (25,091) (63,441) Net cash provided by (used in) financing...... 37,994 10,494 24,863 99,190 (2,434) 21,062 74,247 Capital expenditures(4)....................... 58,226 50,341 80,937 114,838 19,454 24,681 58,581 RATIOS: EBITDA to interest expense.................... 10.1x 11.8x 11.4x 3.9x 15.7x 5.3x 2.9x Total debt to EBITDA.......................... 1.8x 1.0x 1.5x 2.5x N/A N/A N/A Earnings to fixed charges(5).................. 3.6x 5.7x 4.6x 1.7x 6.9x 1.9x 1.0x
11
AT MARCH 31, 1998 ---------------------- ACTUAL PRO FORMA --------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 1,287 $ 14,722 Total assets............................................................................. 200,801 253,986 Long-term debt, including current maturities............................................. 100,694 153,879 Stockholders' equity..................................................................... 79,979 79,979
- -------------------------- (1) In 1997, other income includes $7.5 million resulting from the settlement of certain litigation matters. (2) Effective June 1, 1997, the Company elected to be treated as a S Corporation for federal income tax purposes. The conversion resulted in the elimination of the Company's deferred income tax assets and liabilities existing at May 31, 1997, and, after being netted against the then existing tax provision, resulted in a net income tax benefit to the Company of $8.9 million. (3) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion, amortization and exploration expense, excluding proceeds from litigation settlements. EBITDA is not a measure of cash flow as determined by generally accepted accounting principles ("GAAP"). EBITDA should not be considered as an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP or as an indicator of a company's operating performance or liquidity. Certain items excluded from EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of EBITDA. The Company's computation of EBITDA may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA is a widely followed measure of operating performance and may also be used by investors to measure the Company's ability to meet future debt service requirements, if any. (4) Capital expenditures include costs related to acquisitions of producing oil and gas properties. (5) For purposes of computing the ratio of earnings to fixed charges, earnings are computed as income before taxes from continuing operations, plus fixed charges. Fixed charges consist of interest expense and amortization of costs incurred in the Offering. 12 SUMMARY RESERVE AND OPERATING DATA The following tables set forth summary information with respect to estimated proved oil and gas reserves and certain operating data as of December 31, 1995, 1996, 1997 and March 31, 1997 and 1998 and on a pro forma basis as of December 31, 1997 and March 31, 1998 to give effect to the Worland Field Acquisition. See "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business and Properties" "Reserve Engineers" and the Financial Statements included elsewhere herein.
YEAR ENDED DECEMBER 31, ------------------------------------------ PRO FORMA 1995 1996 1997 1997(1) --------- --------- --------- --------- ESTIMATED PROVED RESERVES (at December 31): Oil and condensate (MBbl)......................................... 17,501 19,492 24,719 51,967 Natural gas (MMcf)................................................ 54,820 50,535 49,378 77,848 Oil equivalents (MBoe)............................................ 26,638 27,915 32,949 64,942 Percent oil....................................................... 65.7% 69.8% 75.0% 80.0% Percentage proved developed....................................... 80.3% 84.0% 83.0% 63.0% PRODUCT PRICES (at December 31)(2): Oil and condensate (per Bbl)(3)................................... $ 23.00 $ 23.00 $ 18.06 $ 14.59 Natural gas (per Mcf)(3).......................................... 3.28 3.28 2.25 2.07 FUTURE NET CASH FLOWS BEFORE TAX ($000): Undiscounted(3)................................................... 405,329 420,211 386,810 545,029 Discounted(3)(4).................................................. 206,650 258,278 241,625 266,971 ESTIMATED RESERVE LIFE INDEX (years)(5)............................. 12.0 7.0 7.0 12.5 RESERVE ADDITIONS (MBoe): Acquisition....................................................... 6,968 307 - 31,993 Extensions, discoveries and revisions............................. 4,941 5,246 9,894 9,894 --------- --------- --------- --------- Net additions..................................................... 11,909 5,553 9,894 41,887 --------- --------- --------- --------- --------- --------- --------- --------- COSTS INCURRED ($000): Acquisitions...................................................... $ 16,293 $ 3,327 $ 476 $ 44,426 Exploration and development....................................... 22,516 37,501 59,060 59,060 --------- --------- --------- --------- Total costs incurred.............................................. $ 38,809 $ 40,828 $ 59,536 $ 103,486 --------- --------- --------- --------- --------- --------- --------- --------- AVERAGE FINDING COSTS (per Boe)(6).................................. $ 3.26 $ 7.35 $ 6.02 $ 2.47 THREE YEAR WEIGHTED AVERAGE FINDING COSTS (per Boe)(7)...................................................... 3.39 4.69 5.09 3.09
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------------------ ------------------------------- PRO PRO FORMA FORMA 1995 1996 1997 1997(8) 1997 1998 1998(8) --------- --------- --------- --------- --------- --------- --------- PRODUCTION VOLUMES(9): Oil and condensate (MBbls).................... 1,199 2,888 3,518 4,146 806 976 1,106 Natural gas (MMcf)............................ 5,880 6,527 5,789 6,399 1,369 1,494 1,679 Total (MBoe).................................. 2,179 3,976 4,483 5,213 1,034 1,225 1,386 UNIT ECONOMICS (per Boe): Average equivalent price(10).................. $ 14.03 $ 18.87 $ 17.53 $ 17.02 $ 20.14 $ 13.13 $ 12.48 Lifting cost(11).............................. 3.49 4.86 4.63 4.98 4.77 3.95 4.06 Depreciation, depletion and amortization(11)............................ 3.76 5.44 6.74 6.01 7.88 3.73 3.49 General and administrative expense(12)........ 2.74 1.64 1.47 1.26 0.86 1.44 1.27 --------- --------- --------- --------- --------- --------- --------- Gross margin.................................. $ 4.04 $ 6.93 $ 4.69 $ 4.77 $ 6.63 $ 4.01 $ 3.66 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See Notes to Summary Reserve and Operating Data. 13 NOTES TO SUMMARY RESERVE AND OPERATING DATA (1) To give effect to the Worland Field Acquisition as if it had occurred on December 31, 1997. (2) Reflects the actual realized prices received by the Company, including the results of the Company's hedging activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) In 1996, the Company changed its fiscal year-end from May 31 to December 31. Because reports on a December 31 year-end basis prior to 1996 were not available, information as of December 31, 1995 was determined from the Company's production, drilling, acquisition and sale data as applied to its December 31, 1996 reserve report. (4) Represents the present value of estimated future net cash flows before income tax discounted at 10%, using prices in effect at the end of the respective periods presented and including the effects of hedging activities. In accordance with applicable requirements of the Commission, estimates of the Company's proved reserves and future net cash flows are made using oil and gas sales prices estimated to be in effect as of the date of such reserve estimates and are held constant throughout the life of the properties (except to the extent a contract specifically provides for escalation). The prices used in calculating PV-10 as of December 31, 1997 were $18.06 per Bbl of oil and $2.25 per Mcf of natural gas. Average prices as of May 31, 1998, on a pro forma basis, were $11.86 per Bbl of oil and $1.68 per Mcf of natural gas. These prices, if applied to estimated proved reserves of the Company as of December 31, 1997, would result in a PV-10, on a pro forma basis, of $170.0 million at such date, as estimated by the Company. (5) Reserve life index is calculated by dividing proved reserves by annual production (on a Boe basis). (6) Average finding cost is calculated by dividing total costs incurred by reserve additions. (7) The three year weighted average finding cost is calculated by dividing the sum of the finding costs for the three years ended on December 31 of each of the referenced years by the sum of the reserve additions for each of such years. (8) To give effect to the Worland Field Acquisition as if it had occurred on January 1, 1997. (9) Production volumes are derived from the Company's production records and reflect actual quantities of oil and gas produced without regard to the time of receipt of proceeds from the sale of such production. (10) Calculated by dividing oil and gas revenues, as reflected on the Financial Statements, by production volumes on a Boe basis. Oil and gas revenues reflected in the Financial Statements are recognized as production is sold and may differ from oil and gas revenues reflected on the Company's production records which reflect oil and gas revenues by date of production. (11) Relates to drilling and development activities. (12) Relates to drilling and development activities, net of operating overhead income. 14 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE FOLLOWING FACTORS RELATING TO THE COMPANY AND THE OFFERING SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT IN THE NOTES OFFERED HEREBY. VOLATILITY OF OIL AND GAS PRICES The Company's revenues, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and gas and natural gas liquids, which are dependent upon numerous factors such as weather, economic, political and regulatory developments and competition from other sources of energy. The Company is affected more by fluctuations in oil prices than natural gas prices, because a majority of its production is oil. The volatile nature of the energy markets and the unpredictability of actions of OPEC members make it particularly difficult to estimate future prices of oil and gas and natural gas liquids. Prices of oil and gas and natural gas liquids are subject to wide fluctuations in response to relatively minor changes in circumstances, and there can be no assurance that future prolonged decreases in such prices will not occur. All of these factors are beyond the control of the Company. Any significant decline in oil and, to a lesser extent, in natural gas prices would have a material adverse effect on the Company's results of operations and financial condition. Although the Company may enter into hedging arrangements from time to time to reduce its exposure to price risks in the sale of its oil and gas, the Company's hedging arrangements are likely to apply to only a portion of its production and provide only limited price protection against fluctuations in the oil and gas markets. See "Management' s Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties--Oil and Gas Marketing." REPLACEMENT OF RESERVES The Company's future success depends upon its ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. Unless the Company successfully replaces the reserves that it produces (through successful development, exploration or acquisition), the Company's proved reserves will decline. There can be no assurance that the Company will continue to be successful in its effort to increase or replace its proved reserves. Approximately 37% of the Company's estimated proved reserves at December 31, 1997, on a pro forma basis, was attributable to undeveloped reserves. Recovery of such reserves will require significant capital expenditures and successful drilling operations. There can be no certainty regarding the results of developing these reserves. To the extent the Company is unsuccessful in replacing or expanding its estimated proved reserves, the Company may be unable to pay the principal of and interest on the Notes in accordance with their terms, or otherwise to satisfy certain of its covenants contained in the Indenture. See "Description of Notes--Certain Covenants." UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES AND FUTURE NET CASH FLOWS This Prospectus contains estimates of the Company's oil and gas reserves and the future net cash flows from those reserves which have been prepared by the Company and certain independent petroleum consultants. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. There are numerous uncertainties inherent in estimating quantities and future values of proved oil and gas reserves, including many factors beyond the control of the Company. Each of the estimates of proved oil and gas reserves, future net cash flows and discounted present values relies upon various assumptions, including assumptions required by the Commission as to constant oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. As a result, such estimates are 15 inherently imprecise. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves may vary substantially from those estimated in the report. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves set forth in this Prospectus. In addition, the Company's reserves may be subject to downward or upward revision, based upon production history, results of future exploration and development, prevailing oil and gas prices and other factors, many of which are beyond the Company's control. The PV-10 of the Company's proved oil and gas reserves does not necessarily represent the current or fair market value of such proved reserves, and the 10% discount rate required by the Commission may not reflect current interest rates, the Company's cost of capital or any risks associated with the development and production of the Company's proved oil and gas reserves. At December 31, 1997, the estimated future net cash flows and PV-10 of $545.0 million and $267.0 million, respectively, attributable to the Company's proved oil and gas reserves, on a pro forma basis, are based on prices in effect at that date ($14.59 per Bbl of oil and $2.07 per Mcf of natural gas), which may be materially different than actual future prices. As of May 31, 1998, the average prices were $11.86 Bbl of oil and $1.68 per Mcf of natural gas, on a pro forma basis. If such prices were applied to the Company's proved oil and gas reserves at December 31, 1997, the estimated future net cash flows and PV-10 at December 31, 1997 would have been approximately $425.0 million and $170.0 million, respectively. PROPERTY ACQUISITION RISKS The Company's growth strategy includes the acquisition of oil and gas properties. There can be no assurance, however, that the Company will be able to identify attractive acquisition opportunities, obtain financing for acquisitions on satisfactory terms or successfully acquire identified targets. In addition, no assurance can be given that the Company will be successful in integrating acquired businesses into its existing operations, and such integration may result in unforeseen operational difficulties or require a disproportionate amount of management's attention. Future acquisitions may be financed through the incurrence of additional indebtedness to the extent permitted under the Indenture or through the issuance of capital stock. Furthermore, there can be no assurance that competition for acquisition opportunities in these industries will not escalate, thereby increasing the cost to the Company of making further acquisitions or causing the Company to refrain from making additional acquisitions. The Company is subject to risks that properties acquired by it (including those acquired in the Worland Field Acquisition) will not perform as expected and that the returns from such properties will not support the indebtedness incurred or the other consideration used to acquire, or the capital expenditures needed to develop, the properties. The addition of the Worland Field properties may result in additional impairment of the Company's oil and gas properties to the extent the Company's net book value of such properties exceeds the projected discounted future net revenues of the related proved reserves. See "--Writedown of Carrying Values." In addition, expansion of the Company's operations may place a significant strain on the Company's management, financial and other resources. The Company's ability to manage future growth will depend upon its ability to monitor operations, maintain effective cost and other controls and significantly expand the Company's internal management, technical and accounting systems, all of which will result in higher operating expenses. Any failure to expand these areas and to implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with the growth of the Company's business could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the integration of acquired properties with existing operations will entail considerable expenses in advance of anticipated revenues and may cause substantial fluctuations in the Company's operating results. There can be no assurance that the Company will be able to successfully integrate the properties acquired and to be acquired or any other businesses it may acquire. 16 SUBSTANTIAL CAPITAL REQUIREMENTS The Company has made, and will continue to make, substantial capital expenditures in connection with the acquisition, development, exploitation, exploration and production of its oil and gas properties. Historically, the Company has funded its capital expenditures through borrowings from banks and from its principal stockholder, and cash flow from operations. Future cash flows and the availability of credit are subject to a number of variables, such as the level of production from existing wells, borrowing base determinations, prices of oil and gas and the Company's success in locating and producing new oil and gas reserves. If revenues were to decrease as a result of lower oil and gas prices, decreased production or otherwise, and the Company had no availability under its Credit Facility or other sources of borrowings, the Company could have limited ability to replace its oil and gas reserves or to maintain production at current levels, resulting in a decrease in production and revenues over time. If the Company's cash flow from operations and availability under the Credit Facility are not sufficient to satisfy its capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available. EFFECTS OF LEVERAGE At March 31, 1998, on a pro forma, consolidated basis, the Company and the Subsidiary Guarantors would have had $153.9 million of indebtedness (including current maturities of long-term indebtedness) compared to the Company's stockholders' equity of $80.0 million. See "Use of Proceeds" and "Capitalization." Although the Company's cash flow from operations has been sufficient to meet its debt service obligations in the past, there can be no assurance that the Company's operating results will continue to be sufficient for the Company to meet its obligations. See "Unaudited Pro Forma Consolidated Financial Statements," "Selected Consolidated Financial Data," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The degree to which the Company is leveraged could have important consequences to the holders of the Notes, including the following: (i) the Company's ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes may be impaired in the future; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal of and interest on the Notes and the borrowings under the Credit Facility, thereby reducing funds available to the Company for its operations and other purposes; (iii) certain of the Company's borrowings are and will continue to be at variable rates of interest, which expose the Company to the risk of increased interest rates; (iv) indebtedness outstanding under the Credit Facility is senior in right of payment of, is secured by substantially all of the Company's proved reserves and certain other assets, and will mature prior to the Notes; and (v) the Company may be substantially more leveraged than certain of its competitors, which may place it at a relative competitive disadvantage and make it more vulnerable to changing market conditions and regulations. See "Description of Credit Facility" and "Description of Notes." The Company's ability to make scheduled payments or to refinance its obligations with respect to its indebtedness will depend on its financial and operating performance, which, in turn, is subject to the volatility of oil and gas prices, production levels, prevailing economic conditions and to certain financial, business and other factors beyond its control. If the Company's cash flow and capital resources are insufficient to fund its debt service obligations, the Company may be forced to sell assets, obtain additional debt or equity financing or restructure its debt. Even if additional financing could be obtained, there can be no assurance that it would be on terms that are favorable or acceptable to the Company. There can be no assurance that the Company's cash flow and capital resources will be sufficient to pay its indebtedness in the future. In the absence of such operating results and resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations, and there can be no assurance as to the timing of such sales or the adequacy of the proceeds which the Company could realize therefrom. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Credit Facility." 17 RESTRICTIVE COVENANTS The Credit Facility and the Indenture include certain covenants that, among other things, restrict: (i) the making of investments, loans and advances and the paying of dividends and other restricted payments; (ii) the incurrence of additional indebtedness; (iii) the granting of liens, other than liens created pursuant to the Credit Facility and certain permitted liens; (iv) mergers, consolidations and sales of all or a substantial part of the Company's business or property; (v) the sale of assets; and (vi) the making of capital expenditures. The Credit Facility requires the Company to maintain certain financial ratios, including interest coverage and leverage ratios. All of these restrictive covenants may restrict the Company's ability to expand or pursue its business strategies. The ability of the Company to comply with these and other provisions of the Credit Facility may be affected by changes in economic or business conditions, results of operations or other events beyond the Company's control. The breach of any of these covenants could result in a default under the Credit Facility, in which case, depending on the actions taken by the lenders thereunder or their successors or assignees, such lenders could elect to declare all amounts borrowed under the Credit Facility, together with accrued interest, to be due and payable, and the Company could be prohibited from making payments with respect to the Notes until the default is cured or all Senior Debt is paid or satisfied in full. If the Company were unable to repay such borrowings, such lenders could proceed against their collateral. If the indebtedness under the Credit Facility were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company, including the Notes. See "Description of Credit Facility" and "Description of Notes--Ranking and Subordination." OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS Oil and gas drilling activities are subject to numerous risks, many of which are beyond the Company's control, including the risk that no commercially productive oil and gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure irregularities in formations, equipment failure or accidents, adverse weather conditions, title problems and shortages or delays in the delivery of equipment. The Company's future drilling activities may not be successful and, if unsuccessful, such failure will have an adverse effect on future results of operations and financial condition. The Company's properties may be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. Industry operating risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. In accordance with customary industry practice, the Company maintains insurance against the risks described above. There can be no assurance that any insurance will be adequate to cover losses or liabilities. The Company cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase. GAS GATHERING AND MARKETING The Company's gas gathering and marketing operations depend in large part on the ability of the Company to contract with third party producers to purchase their gas, to obtain sufficient volumes of committed natural gas reserves, to replace production from declining wells, to assess and respond to changing market conditions in negotiating gas purchase and sale agreements and to obtain satisfactory margins between the purchase price of its natural gas supply and the sales price for such natural gas. In addition, the Company's operations are subject to changes in regulations relating to gathering and marketing of oil and gas. The inability of the Company to attract new sources of third party natural gas or 18 to promptly respond to changing market conditions or regulations in connection with its gathering and marketing operations could have a material adverse effect on the Company's financial condition and results of operations. SUBORDINATION OF NOTES AND GUARANTEES The Notes are subordinated in right of payment to all existing and future Senior Debt of the Company, including borrowings under the Credit Facility. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes outstanding. The aggregate principal amount of Senior Debt of the Company, as of March 31, 1998, on a pro forma basis, would have been $3.9 million exclusive of $75.0 million of unused commitments under the Credit Facility. The Subsidiary Guarantees are subordinated to Guarantor Senior Debt to the same extent and in the same manner as the Notes are subordinated to Senior Debt. Additional Senior Debt may be incurred by the Company or the Subsidiary Guarantors from time to time, subject to certain restrictions. In addition to being subordinated to all existing and future Senior Debt of the Company, the Notes will not be secured by any of the Company's assets, unlike the borrowings under the Credit Facility. See "Description of Notes--Ranking and Subordination." POSSIBLE UNENFORCEABILITY OF SUBSIDIARY GUARANTEES The Company derives certain of its operating income from its subsidiaries. The holders of the Notes will have no direct claim against such subsidiaries other than a claim created by one or more of the Subsidiary Guarantees, which may themselves be subject to legal challenge in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of a Subsidiary Guarantor. See "--Fraudulent Conveyance Considerations." If such a challenge were upheld, such Subsidiary Guarantees would be invalid and unenforceable. To the extent that any of such Subsidiary Guarantees are not enforceable, the rights of the holders of the Notes to participate in any distribution of assets of any Subsidiary Guarantor upon liquidation, bankruptcy, reorganization or otherwise will, as is the case with other unsecured creditors of the Company, be subject to prior claims of creditors of that Subsidiary Guarantor. The Company relies in part upon distributions from its subsidiaries to generate the funds necessary to meet its obligations, including the payment of principal of and interest on the Notes. The Indenture contains covenants that restrict the ability of the Company's subsidiaries to enter into any agreement limiting distributions and transfers to the Company, including dividends. However, the ability of the Company's subsidiaries to make distributions may be restricted by among other things, applicable state corporate laws and other laws and regulations or by terms of agreements to which they are or may become a party. In addition, there can be no assurance that such distributions will be adequate to fund the interest and principal payments on the Credit Facility and the Notes when due. See "Description of Notes." REPURCHASE OF NOTES UPON A CHANGE OF CONTROL AND CERTAIN OTHER EVENTS Upon a Change of Control, holders of the Notes may have the right to require the Company to repurchase all Notes then outstanding at a purchase price equal to 101% of the principal amount thereof, plus accrued interest to the date of repurchase. In the event of certain asset dispositions, the Company will be required under certain circumstances to use the Excess Cash (as defined herein) to offer to repurchase the Notes at 100% of the principal amount thereof, plus accrued interest to the date of repurchase (an "Excess Cash Offer"). See "Description of Notes--Repurchase at the Option of Holders" and "--Certain Covenants." The events that constitute a Change of Control or require an Excess Cash Offer under the Indenture may also be events of default under the Credit Facility or other Senior Debt of the Company and the Subsidiary Guarantors, the terms of which may prohibit the purchase of the Notes by the Company until the Company's indebtedness under the Credit Facility or other Senior Debt is paid in full. In addition, such 19 events may permit the lenders under such debt instruments to accelerate the debt and, if the debt is not paid, to enforce security interests on substantially all the assets of the Company and the Subsidiary Guarantors, thereby limiting the Company's ability to raise cash to repurchase the Notes and reducing the practical benefit of the offer to repurchase provisions to the holders of the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." There can be no assurance that the Company will have sufficient funds available at the time of any Change of Control or Excess Cash Offer to make any debt payment (including repurchases of Notes) as described above. Any failure by the Company to repurchase Notes tendered pursuant to a Change of Control Offer (as defined herein) or an Excess Cash Offer will constitute an Event of Default under the Indenture. See "Description of Notes--Certain Covenants." RISK OF HEDGING ACTIVITIES From time to time the Company may use energy swap and forward sale arrangements to reduce its sensitivity to oil and gas price volatility. If the Company's reserves are not produced at the rates estimated by the Company due to inaccuracies in the reserve estimation process, operational difficulties or regulatory limitations, or otherwise, the Company would be required to satisfy its obligations under potentially unfavorable terms. If the Company enters into financial instrument contracts for the purpose of hedging prices and the estimated production volumes are less than the amount covered by these contracts, the Company would be required to mark-to-market these contracts and recognize any and all losses within the determination period. Further, under financial instrument contracts, the Company may be at risk for basis differential, which is the difference in the quoted financial price for contract settlement and the actual physical point of delivery price. The Company will from time to time attempt to mitigate basis differential risk by entering into physical basis swap contracts. Substantial variations between the assumptions and estimates used by the Company in the hedging activities and actual results experienced could materially adversely affect the Company's anticipated profit margins and its ability to manage risk associated with fluctuations in oil and gas prices. Furthermore, the fixed price sales and hedging contracts limit the benefits the Company will realize if actual prices rise above the contract prices. The Company had no energy swap or forward sale arrangements in place at December 31, 1997 or at March 31, 1998. WRITEDOWN OF CARRYING VALUES The Company periodically reviews the carrying value of its oil and gas properties in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets, including proved oil and gas properties, and certain identifiable intangibles to be held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset, an impairment loss is recognized in the form of additional depreciation, depletion and amortization expense. Measurement of an impairment loss for proved oil and gas properties is calculated on a property-by-property basis as the excess of the net book value of the property over the projected discounted future net cash flows of the impaired property, considering expected reserve additions and price and cost escalations. The Company may be required to write down the carrying value of its oil and gas properties when oil and gas prices are depressed or unusually volatile, which would result in a charge to earnings. Once incurred, a writedown of oil and gas properties is not reversible at a later date. 20 LAWS AND REGULATIONS; ENVIRONMENTAL RISK Oil and gas operations are subject to various federal, state and local governmental regulations which may be changed from time to time in response to economic or political conditions. From time to time, regulatory agencies have imposed price controls and limitations on production in order to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation and disposal of oil and gas, by-products thereof and other substances and materials produced or used in connection with oil and gas operations are subject to regulation under federal, state and local laws and regulations. See "Business and Properties--Regulation." The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous materials. These regulations subject the Company to increased operating costs and potential liability associated with the use and disposal of hazardous materials. Although these laws and regulations have not had a material adverse effect on the Company's financial condition or results of operations, there can be no assurance that the Company will not be required to make material expenditures in the future. If such laws and regulations become increasingly stringent in the future, it could lead to additional material costs for environmental compliance and remediation by the Company. See "Business and Properties--Regulation." The Company's twenty years of experience with the use of HPAI technology has not resulted in any known environmental claims. The Company's saltwater injection operations will pose certain risks of environmental liability to the Company. Although the Company will monitor the injection process, any leakage from the subsurface portions of the wells could cause degradation of fresh groundwater resources, potentially resulting in suspension of operation of the wells, fines and penalties from governmental agencies, expenditures for remediation of the affected resource, and liability to third parties for property damages and personal injuries. In addition, the sale by the Company of residual crude oil collected as part of the saltwater injection process could impose liability on the Company in the event the entity to which the oil was transferred fails to manage the material in accordance with applicable environmental health and safety laws. Any failure by the Company to obtain required permits for, control the use of, or adequately restrict the discharge of, hazardous substances under present or future regulations could subject the Company to substantial liability or could cause its operations to be suspended. Such liability or suspension of operations could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The Company operates in a highly competitive environment. The Company competes with major and independent oil and gas companies and with individual producers and developers for the acquisition of desirable oil and gas properties, as well as for the equipment and labor required to develop and operate such properties. Many of these competitors have financial and other resources substantially greater than those of the Company. See "Business and Properties--Competition." CONTROLLING SHAREHOLDER At July 31, 1998, Harold Hamm, President and Chief Executive Officer and a Director of the Company, beneficially owned 44,496 shares of Common Stock representing, in the aggregate, approximately 91% of the outstanding Common Stock of the Company. As a result, Harold Hamm is in a position to control the Company. The Company is provided oilfield services by several affiliated companies controlled by Harold Hamm. Such transactions will continue in the future and may result in conflicts of interest between the Company and such affiliated companies. There can be no assurance that such conflicts will be resolved in favor of the Company. If Harold Hamm ceases to be an executive officer of the Company, such would constitute an event of default under the Credit Facility, unless waived by the 21 requisite percentage of banks. See "Principal Shareholders," "Certain Relationships and Related Transactions" and "Description of Credit Facility." ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER The Notes are a new issue of securities for which there has been no public market and there can be no assurance that such a market for the Notes will develop or, if such a market develops, as to the liquidity of such market. The Company does not intend to apply for listing of the Notes on any securities exchange; however, the Notes have been designated for trading in the PORTAL market. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities, the performance of the Company and certain other factors. Although the Initial Purchaser has informed the Company that it intends to make a market in the Notes as permitted by applicable laws and regulations the Initial Purchaser is not obligated to do so and any such market making activities may be discontinued at any time without notice. See "Transfer Restrictions," "Exchange and Registration Rights Agreement" and "Plan of Distribution." FRAUDULENT CONVEYANCE CONSIDERATIONS The incurrence of indebtedness (such as the Notes) is subject to review under relevant federal bankruptcy and state fraudulent conveyance statutes in a bankruptcy or reorganization proceeding or a lawsuit by or on behalf of creditors of the Company. The Company's obligations under the Notes will be guaranteed on a subordinated, unsecured basis by existing and future Restricted Subsidiaries pursuant to the provisions of the Indenture. Under such laws, to the extent a court were to find that (a) the Notes or a Subsidiary Guarantee was incurred with the intent to hinder, delay or defraud any present or future creditor or that the Company or such Subsidiary Guarantor contemplated insolvency with a design to favor one or more creditors to the exclusion in whole or in part of other creditors or (b) at the time such person incurred obligations under the Notes or a Subsidiary Guarantee, it received less than fair consideration or reasonably equivalent value therefor, and (c) either (i) was insolvent, (ii) was rendered insolvent by such guarantee or pledge, (iii) was engaged in a business or transaction for which its remaining unencumbered assets constituted unreasonably small capital or (iv) intended to incur or believed that it would incur debts beyond its ability to pay such debts as they matured, such court could void such obligations and direct the return of any amounts paid with respect thereto. The measure of insolvency for purposes of the foregoing will vary depending on the law of the jurisdiction being applied. Generally, however, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its property at a fair valuation or if the present fair salable value of its assets is less than the amount that would be required to pay its probable liability on its existing debts as they become absolute and mature. There can be no assurance that, after providing for all prior claims, if any, there would be sufficient assets to satisfy the claims of the holders of the Notes relating to any voided portion of a Subsidiary Guarantee. To the extent a Subsidiary Guarantee is voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of the Company and any other Subsidiary Guarantors. 22 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Old Notes were sold by the Company on July 24, 1998 to Chase Securities, Inc. (the "Initial Purchaser") in reliance on Section 4(2) of the Securities Act. The Placement Agents offered and sold the Old Notes only (i) to "qualified institutional buyers" (as defined in Rule 144A) in compliance with Rule 144A and (ii) outside the United States to persons other than U.S. Persons, which term includes dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust), in reliance upon Regulation S under the Securities Act. In connection with the sale of the Old Notes, the Company and the Initial Purchaser entered into a Registration Rights Agreement dated as of July 21, 1998 (the "Registration Rights Agreement"), which requires the Company (i) to cause the Old Notes to be registered under the Securities Act, or (ii) to file with the Commission a registration statement under the Securities Act with respect to an issue of New Notes of the Company identical in all material respects to the Old Notes and use its best efforts to cause such registration statement to become effective under the Securities Act and, upon the effectiveness of that registration statement, to offer to the holders of the Old Notes the opportunity to exchange their Old Notes for a like principal amount of New Notes, which will be issued without a restrictive legend and which may be reoffered and resold by the holder without restrictions or limitations under the Securities Act. A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Exchange Offer is being made pursuant to the Registration Rights Agreement to satisfy the Company's obligations thereunder. The term "holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered on the Company's books or any other person who has obtained a properly completed stock power from the registered holder, or any person whose Old Notes are held of record by The Depository Trust Company ("DTC") who desires to deliver such Old Notes by book-entry transfer at DTC. The Company has not requested, and does not intend to request, an interpretation by the staff of the Commission with respect to whether the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for sale, resold or otherwise transferred by any holder without compliance with the registration and prospectus delivery provisions of the Securities Act. Based on interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than broker-dealers, as set forth below, and any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and that such holder has no arrangement or understanding with any person to participate in the distribution of such New Notes. Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes or who is an affiliate of the Company may not rely upon such interpretations by the staff of the Commission and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liabilities under the Securities Act for which the holder is not indemnified by the Company. Each broker-dealer (other than an affiliate of the Company) that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed that, for a period of 180 days after the Exchange Date, it will make the Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." 23 The Exchange Offer is not being made to, nor will the Company accept surrenders for exchange from, holders of Old Notes in any jurisdiction in which this Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. By tendering in the Exchange Offer, each holder of Old Notes will represent to the Company that, among other things, (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder, (ii) neither the holder of Old Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes, (iii) if the holder is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for Old Notes, neither the holder nor any such other person is engaged in or intends to participate in the distribution of such New Notes, and (iv) neither the holder nor any such other person is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or, if such holder is an "affiliate," that such holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Following the completion of the Exchange Offer, none of the Old Notes will be entitled to the contingent increase in interest rate applicable to the Old Notes. Following the consummation of the Exchange Offer, holders of Old Notes will not have any further registration rights, and the Old Notes will continue to be subject to certain restrictions on transfer. See "--Consequences of Failure to Exchange." Accordingly, the liquidity of the market for the Old Notes could be adversely affected. See "Risk Factors-- Consequences of the Exchange Offer on Non-Tendering Holders of the Old Notes." Participation in the Exchange Offer is voluntary and holders should carefully consider whether to accept. Holders of the Old Notes are urged to consult their financial and tax advisors in making their own decisions on whether to participate in the Exchange Offer. TERMS OF THE EXCHANGE OFFER GENERAL. Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in amounts that are integral multiples of $1,000 principal amount. The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes except that the New Notes will be registered under the Securities Act and, therefore, certificates representing New Notes will not bear legends restricting the transfer thereof. The New Notes will evidence the same debt as the Old Notes, will be entitled to the benefits of the Indenture and will be treated as a single class thereunder with any Old Notes that remain outstanding. The Exchange Offer is not conditioned upon any minimum number of Old Notes being tendered for exchange. As of , 1998, $150,000,000 aggregate principal amount of the Old Notes were outstanding, and there were registered Holders. This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders. Holders of Old Notes do not have any appraisal or dissenters' rights under the Oklahoma General Corporation Act or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the provisions of the Registration Rights Agreement and the applicable requirements of the Exchange Act, and the rules and regulations of the Commission thereunder. Old Notes which are not tendered for exchange in the Exchange Offer will remain outstanding and interest thereon will continue to accrue, but such Old Notes will not be entitled to any rights or benefits under the Registration Rights Agreement. 24 The Company will be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purposes of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Old Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes described below, in connection with the Exchange Offer. See "--Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Although the Company has no current intention to extend the Exchange Offer, the Company reserves the right to extend the Exchange Offer at any time and from time to time by giving oral or written notice to the Exchange Agent and by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service. During any extension of the Exchange Offer, all Old Notes previously tendered pursuant to the Exchange Offer and not withdrawn will remain subject to the Exchange Offer. The date of the exchange of the New Notes for Old Notes will be as soon as practicable following the Expiration Date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "--Conditions of the Exchange Offer" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. If the Exchange Offer is amended in any manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders, and the Company will extend the Exchange Offer for a period of time, depending upon the significance of the amendment and the manner of disclosure to the registered holders, if the Exchange Offer would otherwise expire during such period. In all cases, issuance of the New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of a properly completed and duly executed Letter of Transmittal and all other required documents; provided, however, that the Company reserves the absolute right to waive any conditions of the Exchange Offer or defects or irregularities in the tender of Old Notes. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old Notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged Old Notes or substitute Old Notes evidencing the unaccepted portion, as appropriate, will be returned without expense to the tendering holder, unless otherwise provided in the Letter of Transmittal, as promptly as practicable after the expiration or termination of the Exchange Offer. INTEREST ON THE NEW NOTES. Holders of Old Notes that are accepted for exchange will not receive accrued interest thereon at the time of exchange. However, each New Note will bear interest from the most recent date to which interest has been paid on the Old Notes or New Notes, or if no interest has been paid on the Old Notes or the New Notes, from June 12, 1998. 25 PROCEDURES FOR TENDERING OLD NOTES. The tender to the Company of Old Notes by a holder thereof pursuant to one of the procedures set forth below will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. A holder of the Old Notes may tender such Old Notes by (i) properly completing and signing a Letter of Transmittal or a facsimile thereof (all references in this Prospectus to a Letter of Transmittal shall be deemed to include a facsimile thereof) and delivering the same, together with any corresponding certificate or certificates representing the Old Notes being tendered (if in certificated form) and any required signature guarantees, to the Exchange Agent at its address set forth in the Letter of Transmittal on or prior to the Expiration Date (or complying with the procedure for book-entry transfer described below), or (ii) complying with the guaranteed delivery procedures described below. If tendered Old Notes are registered in the name of the signer of the Letter of Transmittal and the New Notes to be issued in exchange therefor are to be issued (and any untendered Old Notes are to be reissued) in the name of the registered holder (which term, for the purposes described herein, shall include any participant in DTC (also referred to as a book-entry facility) whose name appears on a security listing as the owner of Old Notes), the signature of such signer need not be guaranteed. In any other case, the tendered Old Notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to the Company and duly executed by the registered holder and the signature on the endorsement or instrument of transfer must be guaranteed by an eligible guarantor institution which is a member of one of the following recognized signature guarantee programs (an "Eligible Institution"): (i) The Securities Transfer Agents Medallion Program (STAMP), (ii) The New York Stock Exchange Medallion Signature Program (MSF), or (iii) The Stock Exchange Medallion Program (SEMP). If the New Notes or Old Notes not exchanged are to be delivered to an address other than that of the registered holder appearing on the note register for the Old Notes, the signature in the Letter of Transmittal must be guaranteed by an Eligible Institution. THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. The Company understands that the Exchange Agent has confirmed with DTC that any financial institution that is a participant in DTC's system may utilize DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes. The Company further understands that the Exchange Agent will request, within two business days after the date the Exchange Offer commences, that DTC establish an account with respect to the Old Notes for the purpose of facilitating the Exchange Offer, and any participant may make book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into the Exchange Agent's account in accordance with DTC's ATOP procedures for transfer. However, the exchange of the Old Notes so tendered will only be made after timely confirmation (a "Book-Entry Confirmation") of such book-entry transfer and timely receipt by the Exchange Agent of an Agent's Message (as defined in the next sentence), and any other documents required by the Letter of Transmittal. The term "Agent's Message" means a message, transmitted by DTC and received by the Exchange Agent and forming part of Book-Entry Confirmation, which states that DTC has received an express acknowledgment from a participant tendering Old Notes which are the subject of such Book-Entry Confirmation and that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. 26 A tender will be deemed to have been received as of the date when (i) the tendering holder's properly completed and duly signed Letter of Transmittal accompanied by the Old Notes (or a confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at DTC), is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to similar effect (as provided below) from an Eligible Institution is received by the Exchange Agent. Issuances of New Notes in exchange for Old Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to similar effect (as provided below) by an Eligible Institution will be made only against submission of a duly signed Letter of Transmittal (and any other required documents) and deposit of the tendered Old Notes. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of Old Notes will be determined by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders not in proper form or the acceptance for exchange of which may, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Exchange Offer or any defect or irregularity in the tender of any Old Notes. None of the Company, the Exchange Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. Any Old Notes received by the Exchange Agent that are not validly tendered and as to which the defects or irregularities have not been cured or waived, or if Old Notes are submitted in principal amount greater than the principal amount of Old Notes being tendered by such tendering holder, such unaccepted or non-exchanged Old Notes will be returned by the Exchange Agent to the tendering holder, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion (a) to purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date, and (b) to the extent permitted by applicable law, to purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers will differ from the terms of the Exchange Offer. GUARANTEED DELIVERY PROCEDURES. If the holder desires to accept the Exchange Offer and time will not permit a Letter of Transmittal or Old Notes to reach the Exchange Agent before the Expiration Date or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if the Exchange Agent has received at its office, on or prior to the Expiration Date, a letter, telegram or facsimile transmission from an Eligible Institution setting forth the name and address of the tendering holder, the name(s) in which the Old Notes are registered and the certificate number(s) of the Old Notes to be tendered, and stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the date of execution of such letter, telegram or facsimile transmission by the Eligible Institution, such Old Notes, in proper form for transfer (or a confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at DTC), will be delivered by such Eligible Institution together with a properly completed and duly executed Letter of Transmittal (and any other required documents). Unless Old Notes being tendered by the above-described method are deposited with the Exchange Agent within the time period set forth above (accompanied or preceded by a properly competed Letter of Transmittal and any other required documents), the Company may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery which may be used by Eligible Institutions for the purposes described in this paragraph are available from the Exchange Agent. TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL. The Letter of Transmittal contains, among other things, the following terms and conditions, which are part of the Exchange Offer. The party tendering Old Notes for exchange (the "Transferor") exchanges, assigns and transfers the Old Notes to the Company and irrevocably constitutes and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to cause the Old Notes to be assigned, transferred and exchanged. The Transferor represents and warrants that it has full power and authority to tender, exchange, assign and 27 transfer the Old Notes and to acquire New Notes issuable upon the exchange of such tendered Old Notes, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Old Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The Transferor also warrants that it will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the exchange, assignment and transfer of tendered Old Notes or to transfer ownership of such Old Notes on the account books maintained by DTC. All authority conferred by the Transferor will survive the death, bankruptcy or incapacity of the Transferor and every obligation of the Transferor shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of such Transferor. By executing a Letter of Transmittal, each holder will make to the Company the representations set forth above under the heading "--Purpose and Effect of the Exchange Offer." WITHDRAWAL OF TENDERS OF OLD NOTES. Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes), (iii) contain a statement that such holder is withdrawing its election to have such Old Notes exchanged, (iv) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old Notes register the transfer of such Old Notes in the name of the person withdrawing the tender, and (v) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. If Old Notes have been tendered pursuant to the procedure for book-entry transfer, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering Old Notes" at any time prior to the Expiration Date. CONDITIONS OF THE EXCHANGE OFFER Notwithstanding any other term of the Exchange Offer, or any extension of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as provided herein before the acceptance of such Old Notes, if: (a) any statute, rule or regulation shall have been enacted, or any action shall have been taken by any court or governmental authority which, in the reasonable judgment of the Company, would prohibit, restrict or otherwise render illegal consummation of the Exchange Offer; or (b) any change, or any development involving a prospective change, in the business or financial affairs of the Company or any of its subsidiaries has occurred which, in the sole judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or 28 (c) there shall occur a change in the current interpretations by the staff of the Commission which, in the Company's reasonable judgment, might materially impair the Company's ability to proceed with the Exchange Offer. If the Company determines in its sole discretion that any of the above conditions are not satisfied, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the Expiration Date, subject, however, to the right of holders to withdraw such Old Notes (see "--Terms of the Exchange Offer--Withdrawal of Tenders of Old Notes"), or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all validly tendered Old Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered holders, and the Company will extend the Exchange Offer for a period of time, depending upon the significance of the waiver and the manner of disclosure to the registered holders, if the Exchange Offer would otherwise expire during such period. EXCHANGE AGENT United States Trust Company of New York has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Mail: By Overnight Courier: By Hand: United States Trust Company United States Trust Company United States Trust Company of New York of New York of New York P. O. Box 844 Corporate Trust Operations 111 Broadway Cooper Station Department Lower Level New York, NY 10276-0844 770 Broadway - 13th Floor New York, NY 10006 Attn: Corporate Trust New York, NY 10003 Attn: Corporate Trust Services Services (registered or certified mail recommended) By Facsimile: (212) 420-6152 (For Eligible Institutions Only) Confirm by Telephone: (800) 548-6565
FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telecopy, telephone or in person by officers and regular employees of the Company and its affiliates. No additional compensation will be paid to any such officers and employees who engage in soliciting tenders. The Company has not retained any dealer-manager or other soliciting agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Prospectus, the Letter of Transmittal 29 and related documents to the beneficial owners of the Old Notes and in handling or forwarding tenders for exchange. The expenses to be incurred in connection with the Exchange Offer will be paid by the Company. Such expenses include fees and expenses of the Exchange Agent and transfer agent and registrar, accounting and legal fees and printing costs, among others. The Company will pay all transfer taxes, if any, applicable to the exchange of the Old Notes pursuant to the Exchange Offer. If, however, New Notes, or Old Notes for principal amounts not tendered or accepted for exchange, are to be delivered to, or are to be issued in the name of, any person other than the registered holder of the Old Notes tendered or if a transfer tax is imposed for any reason other than the exchange of the Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. CONSEQUENCES OF FAILURE TO EXCHANGE The Old Notes that are not exchanged for New Notes pursuant to the Exchange Offer will remain restricted securities within the meaning of Rule 144 of the Securities Act. Accordingly, such Old Notes may be resold only (i) to the Company or any subsidiary thereof, (ii) to a qualified institutional buyer in compliance with Rule 144A, (iii) to an institutional accredited investor that, prior to such transfer, furnishes to the Trustee a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Old Notes (the form of which letter can be obtained from the Trustee) and, if such transfer is in respect of an aggregate principal amount of Old Notes at the time of transfer of less than $100,000, an opinion of counsel acceptable to the Company that such transfer is in compliance with the Securities Act, (iv) outside the United States in compliance with Rule 904 under the Securities Act, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (vi) pursuant to an effective registration statement under the Securities Act. The liquidity of the Old Notes could be adversely affected by the Exchange Offer. Following the consummation of the Exchange Offer, holders of the Senior Preferred Stock will have no further registration rights under the Registration Rights Agreement and will not be entitled to the contingent increase in the dividend rate applicable to the Old Notes. 30 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The Unaudited Pro Forma Combined Statements of Operations and other financial data for the year ended December 31, 1997, and for the three months ended March 31, 1998, and the Unaudited Pro Forma Combined Balance Sheet at March 31, 1998, reflect the historical results and the historical financial position, respectively, of the Company, adjusted to give effect to the Offering and the application of the net proceeds therefrom, the completion of the Worland Field Acquisition and the related financing, as though each of the transactions had occurred on January 1, 1997 with regard to the Unaudited Pro Forma Combined Statements of Operations and on March 31, 1998 with regard to the Unaudited Pro Forma Combined Balance Sheet. The pro forma adjustments are based upon available information and assumptions that management of the Company believes are reasonable. The Unaudited Pro Forma Consolidated Financial Statements do not purport to represent the financial position or results of operations which would have occurred had such transactions been consummated on the dates indicated or the Company's financial position or results of operations for any future date or period. The Unaudited Pro Forma Consolidated Financial Statements and notes thereto should be read in conjunction with the Financial Statements included elsewhere in this Prospectus. 31 CONTINENTAL RESOURCES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AT MARCH 31, 1998
ADJUSTMENTS -------------------------------------------- WORLAND FIELD HISTORICAL ACQUISITION COMBINING OFFERING PRO FORMA ---------- -------------- ----------- --------------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents...................... $ 1,287 $ (77,850)(a) $ 1,437 $ 145,400(d) $ 14,572 78,000(b) (132,265)(e) Accounts receivable: Oil and gas sales............................ 9,228 9,228 9,228 Joint interest and other..................... 8,487 8,487 8,487 Inventories.................................... 3,834 1,400(a) 5,234 5,234 Prepaid expenses............................... 268 268 268 Advances to affiliates......................... 332 332 332 ---------- -------------- ----------- --------------- ----------- Total current assets............................. 23,436 1,550 24,986 13,135 38,121 ---------- -------------- ----------- --------------- ----------- Oil and gas properties: Producing properties........................... 210,111 23,900(a) 222,061 222,061 (11,950)(c) Non-producing properties....................... 17,666 61,200(a) 48,266 48,266 (30,600)(c) Gas gathering and processing facilities.......... 21,423 21,423 21,423 Service properties, equipment and other.......... 13,308 13,308 13,308 Less--accumulated depreciation, depletion and amortization.................................... (94,069) (94,069) (94,069) ---------- -------------- ----------- ----------- Total property and equipment, net................ 168,439 42,550 210,989 210,989 ---------- -------------- ----------- ----------- Other assets..................................... 8,926 (8,650)(a) 276 4,600(d) 4,876 ---------- -------------- ----------- --------------- ----------- Total assets..................................... $ 200,801 $ 35,450 $ 236,251 $ 17,735 $ 253,986 ---------- -------------- ----------- --------------- ----------- ---------- -------------- ----------- --------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................... $ 13,843 $ 13,843 $ 13,843 Current portion of long-term debt.............. 315 315 315 Revenues and royalties payable................. 3,578 3,578 3,578 Accrued liabilities and other.................. 2,493 2,493 2,493 ---------- ----------- ----------- Total current liabilities........................ 20,229 20,229 20,229 Long-term debt, net of current portion........... 100,379 $ 78,000(b) 135,829 $ 150,000(d) 153,564 (42,550)(c) (132,265)(e) Other non-current liabilities.................... 214 214 214 Stockholders' equity............................. 79,979 79,979 79,979 ---------- -------------- ----------- --------------- ----------- Total liabilities and stockholders' equity....... $ 200,801 $ 35,450 $ 236,251 $ 17,735 $ 253,986 ---------- -------------- ----------- --------------- ----------- ---------- -------------- ----------- --------------- -----------
See Notes to Unaudited Pro Forma Combined Balance Sheet. 32 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) To record the $86.5 million acquisition of producing and non-producing oil and gas properties in the Worland Field Acquisition, effective June 1, 1998. (b) To record indebtedness incurred under the Credit Facility to complete the Worland Field Acquisition. (c) To record the sale, effective June 1, 1998, for $42.6 million of an undivided 50% interest in the Worland Field properties (excluding inventory and certain equipment) acquired by the Company in the Worland Field Acquisition. The sale price was paid by the cancellation of indebtedness owed by the Company to its principal shareholder and the balance was paid in cash which was used to reduce the outstanding balance of the Credit Facility. (d) To record the proceeds from the Offering, net of estimated Offering costs of $4.6 million, and the related debt. (e) To record the use of the net proceeds of the Offering to reduce debt outstanding under the Credit Facility. 33 CONTINENTAL RESOURCES, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
ADJUSTMENTS ------------------------------------------ WORLAND FIELD HISTORICAL ACQUISITION COMBINING OFFERING PRO FORMA ----------- -------------- ----------- ------------- ----------- (DOLLARS IN THOUSANDS) Revenue: Oil and gas sales........................... $ 78,599 $ 10,126(a) $ 88,725 $ 88,725 Gathering, marketing and processing......... 25,021 25,021 25,021 Oil and gas service operations.............. 6,405 6,405 6,405 ----------- -------------- ----------- ----------- Total revenues................................ 110,025 10,126 120,151 120,151 Operating costs and expenses: Production expenses and taxes............... 20,748 5,210(a) 25,958 25,958 Exploration expenses........................ 6,806 6,806 6,806 Gathering, marketing and processing......... 22,715 22,715 22,715 Oil and gas service operations.............. 3,654 3,654 3,654 Depreciation, depletion and amortization.... 33,354 1,116(b) 34,470 $ 460(c) 34,930 General and administrative.................. 8,990 8,990 8,990 ----------- -------------- ----------- ------------- ----------- Total operating costs and expenses............ 96,267 6,326 102,593 460 103,053 ----------- -------------- ----------- ------------- ----------- Operating income.............................. 13,758 3,800 17,558 (460) 17,098 Interest income............................... 241 241 1,350(d) 1,591 Interest expense.............................. 4,804 4,804 10,880(e) 15,684 Other income (expense), net................... 8,061 8,061 8,061 ----------- -------------- ----------- ------------- ----------- Income before income taxes.................... 17,256 3,800 21,056 (9,990) 11,066 Federal and state income taxes (benefit)...... (8,941) (8,941) (8,941) ----------- -------------- ----------- ------------- ----------- Net income.................................... $ 26,197 $ 3,800 $ 29,997 $ (9,990) $ 20,007 ----------- -------------- ----------- ------------- ----------- ----------- -------------- ----------- ------------- -----------
- -------------------------- (a) To record the revenues and direct operating expenses attributable to the Company's net interest in oil and gas properties acquired in the Worland Field Acquisition for the periods indicated. (b) To record estimated pro forma depreciation, depletion and amortization related to the Company's net interest in the Worland Field properties as if the Worland Field Acquisition had occurred on January 1, 1997. The estimated pro forma depreciation, depletion and amortization was at an average rate of $1.53 per Boe based on an allocation of the purchase price to the individual properties acquired and the actual production during the year ended December 31, 1997. (c) To record the pro forma amortization of estimated costs of the Offering, assuming the Offering was completed on January 1, 1997. (d) To record the estimated pro forma interest income resulting from an investment at a 5% interest rate of the net proceeds of the Offering remaining after payment of the Credit Facility, assuming the Offering was consummated on January 1, 1997. (e) To record the pro forma effect of interest expense related to the Notes assuming (i) the Offering occurred on January 1, 1997 and (ii) the net proceeds from the Offering are used to reduce debt outstanding under the Credit Facility which was incurred to finance the Worland Field Acquisition, and taking into consideration the proceeds from the sale of a 50% interest in the Worland Field properties to the Company's principal shareholder as if the sale had occurred on January 1, 1997. In May 1998, the Company entered into a forward interest rate swap contract to hedge its exposure to changes in prevailing interest rates. Due to changes in treasury note rates, the Company paid $3.9 million to settle the forward interest rate swap contract. This payment will result in an increase of approximately 0.5% to the Company's effective interest rate or an increase in interest expense of approximately $0.4 million per year over the next 10 years. As this transaction was not directly attributable to the Offering of the Notes, no pro forma adjustments have been made to reflect its impact. 34 CONTINENTAL RESOURCES, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998
ADJUSTMENTS ------------------------------------------ WORLAND FIELD HISTORICAL ACQUISITION COMBINING OFFERING PRO FORMA ----------- -------------- ----------- ------------- ----------- (DOLLARS IN THOUSANDS) Revenue: Oil and gas sales........................... $ 16,083 $ 1,216(a) $ 17,299 $ 17,299 Gathering, marketing and processing......... 6,639 6,639 6,639 Oil and gas service operations.............. 1,467 1,467 1,467 ----------- -------------- ----------- ----------- Total revenues................................ 24,189 1,216 25,405 25,405 ----------- -------------- ----------- ----------- Operating costs and expenses: Production expenses and taxes............... 4,838 792(a) 5,630 5,630 Exploration expenses........................ 1,548 1,548 1,548 Gathering, marketing and processing......... 5,826 5,826 5,826 Oil and gas service operations.............. 883 883 883 Depreciation, depletion and amortization.... 5,408 274(b) 5,682 $ 115(c) 5,797 General and administrative.................. 2,215 2,215 2,215 ----------- -------------- ----------- ------------- ----------- Total operating costs and expenses............ 20,718 1,066 21,784 115 21,899 ----------- -------------- ----------- ------------- ----------- Operating income.............................. 3,471 150 3,621 (115) 3,506 Interest income............................... 243 243 82(d) 325 Interest expense.............................. 2,005 2,005 1,914(e) 3,919 Other income (expense), net................... 6 6 6 ----------- -------------- ----------- ------------- ----------- Income (loss) before income taxes 1,715 150 1,865 (1,947) (82) Federal and state income taxes................ - - - ----------- -------------- ----------- ------------- ----------- Net income (loss)............................. $ 1,715 $ 150 $ 1,865 $ (1,947) $ (82) ----------- -------------- ----------- ------------- ----------- ----------- -------------- ----------- ------------- -----------
- -------------------------- (a) To record the revenues and direct operating expenses attributable to the Company's net interest in oil and gas properties acquired in the Worland Field Acquisition for the periods indicated. (b) To record the estimated pro forma depreciation, depletion and amortization related to the Company's net interest in the Worland Field properties as if the Worland Field Acquisition had occurred on January 1, 1997. The estimated pro forma depreciation, depletion and amortization was at an average rate of $1.70 per Boe based on an estimated allocation of the purchase price to the individual properties acquired in 1998 and the actual production during the three months ended March 31, 1998. (c) To record the pro forma amortization of estimated costs of the Offering, assuming the Offering was completed on January 1, 1997. (d) To record the estimated pro forma interest income resulting from an investment at a 5% interest rate of the net proceeds of the Offering remaining after payment of the Credit Facility, assuming the Offering was consummated on January 1, 1997. (e) To record the pro forma effect of interest expense related to the Notes assuming (i) the Offering occurred on January 1, 1997 and (ii) the net proceeds from the Offering are used to reduce debt outstanding under the Credit Facility which was incurred to finance the Worland Field Acquisition, and taking into consideration the proceeds from the sale of a 50% interest in the Worland Field properties to the Company's principal shareholder as if the sale had occurred on January 1, 1997. In May 1998, the Company entered into a forward interest rate swap contract to hedge its exposure to changes in prevailing interest rates. Due to changes in treasury note rates, the Company paid $3.9 million to settle the forward interest rate swap contract. This payment will result in an increase of approximately 0.5% to the Company's effective interest rate or an increase in interest expense of approximately $0.4 million per year over the next 10 years. As this transaction was not directly attributable to the Offering of the Notes, no pro forma adjustments have been made to reflect its impact. 35 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected historical consolidated financial data for the periods ended and as of the dates indicated. The statements of operations and other financial data for the periods ended December 31, 1994, 1995, 1996 and 1997, and the balance sheet data as of December 31, 1995, 1996 and 1997 have been derived from, and should be reviewed in conjunction with, the consolidated financial statements of the Company, and the notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants. The statements of operations and other financial data for the periods ended December 31, 1993, March 31, 1997 and March 31, 1998, and the balance sheet data as of December 31, 1994, March 31, 1997 and March 31, 1998, have been derived from the unaudited financial statements of the Company, which, in the opinion of management, include all adjustments necessary to present fairly the data for such periods. The financial statements as of December 31, 1996, December 31, 1997 and March 31, 1998 and for the years ended December 31, 1995, 1996 and 1997 and for the periods ended March 31, 1997 and March 31, 1998 are included elsewhere in this Prospectus. The data should be read in conjunction with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the related notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- --------- 1993 1994 1995 1996 1997 1997 --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenue: Oil and gas sales........................................... $ 16,002 $ 21,427 $ 30,576 $ 75,016 $ 78,599 $ 20,826 Gathering, marketing and processing......................... 3,061 14,806 20,639 25,766 25,021 10,714 Oil and gas service operations.............................. 3,063 5,630 6,148 6,491 6,405 2,005 --------- --------- --------- --------- --------- --------- Total revenues................................................ 22,126 41,863 57,363 107,273 110,025 33,545 Operating costs and expenses: Production expenses and taxes............................... 2,455 6,905 7,611 19,338 20,748 4,934 Exploration expenses........................................ 1,996 6,338 6,184 4,512 6,806 973 Gathering, marketing and processing......................... 2,436 8,415 13,223 21,790 22,715 8,815 Oil and gas service operations.............................. 1,975 2,708 3,680 4,034 3,654 1,032 Depreciation, depletion and amortization.................... 4,816 6,068 9,614 22,876 33,354 8,844 General and administrative.................................. 3,658 6,396 8,260 9,155 8,990 1,760 --------- --------- --------- --------- --------- --------- Total operating costs and expenses............................ 17,336 36,830 48,572 81,705 96,267 26,358 --------- --------- --------- --------- --------- --------- Operating income.............................................. 4,790 5,033 8,791 25,568 13,758 7,187 Interest income............................................... 138 108 137 312 241 82 Interest expense.............................................. 314 670 2,396 4,550 4,804 1,117 Other revenue (expense), net(1),(2)........................... 4,132 -- (411) 233 8,061 483 --------- --------- --------- --------- --------- --------- Income before income taxes.................................... 8,746 4,471 6,121 21,563 17,256 6,635 Federal and state income taxes (benefit)(3)................... 2,974 1,596 2,252 8,238 (8,941) 2,521 --------- --------- --------- --------- --------- --------- Net income..................................................... $ 5,772 $ 2,875 $ 3,869 $ 13,325 $ 26,197 $ 4,114 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER FINANCIAL DATA: EBITDA(4)..................................................... $ 11,872 $ 17,547 $ 24,315 $ 53,502 $ 54,721 $ 17,569 Net cash provided by operations............................... 12,758 18,787 18,985 41,724 51,477 17,889 Net cash used in investing.................................... (12,402) (19,256) (58,022) (50,619) (78,359) (17,396) Net cash provided by (used in) financing...................... 2,963 (1,138) 37,994 10,494 24,863 (2,434) Capital expenditures(5)....................................... 11,818 20,143 58,226 50,341 80,937 19,454 RATIOS: EBITDA to interest expense.................................... 37.8x 26.2x 10.1x 11.8x 11.4x 15.7x Total debt to EBITDA.......................................... 0.6x 0.4x 1.8x 1.0x 1.5x N/A Earnings to fixed charges(6).................................. 28.9x 7.7x 3.6x 5.7x 4.6x 6.9x BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents..................................... $ 4,373 $ 2,766 $ 1,722 $ 3,320 $ 1,301 $ 1,379 Total assets.................................................. 49,592 56,759 107,825 145,693 188,386 150,787 Long-term debt, including current maturities.................. 7,514 6,272 44,265 54,759 79,632 53,664 Stockholders' equity.......................................... 32,008 34,883 38,752 52,077 78,264 58,712 1998 --------- STATEMENT OF OPERATIONS DATA: Revenue: Oil and gas sales........................................... $ 16,083 Gathering, marketing and processing......................... 6,639 Oil and gas service operations.............................. 1,467 --------- Total revenues................................................ 24,189 Operating costs and expenses: Production expenses and taxes............................... 4,838 Exploration expenses........................................ 1,548 Gathering, marketing and processing......................... 5,826 Oil and gas service operations.............................. 883 Depreciation, depletion and amortization.................... 5,408 General and administrative.................................. 2,215 --------- Total operating costs and expenses............................ 20,718 --------- Operating income.............................................. 3,471 Interest income............................................... 243 Interest expense.............................................. 2,005 Other revenue (expense), net(1),(2)........................... 6 --------- Income before income taxes.................................... 1,715 Federal and state income taxes (benefit)(3)................... -- --------- Net income..................................................... $ 1,715 --------- --------- OTHER FINANCIAL DATA: EBITDA(4)..................................................... $ 10,676 Net cash provided by operations............................... 4,015 Net cash used in investing.................................... (25,091) Net cash provided by (used in) financing...................... 21,062 Capital expenditures(5)....................................... 24,681 RATIOS: EBITDA to interest expense.................................... 5.3x Total debt to EBITDA.......................................... N/A Earnings to fixed charges(6).................................. 1.9x BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents..................................... $ 1,287 Total assets.................................................. 200,801 Long-term debt, including current maturities.................. 100,694 Stockholders' equity.......................................... 79,979
See Notes to Selected Consolidated Financial Data. 36 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) In 1993, other income includes $4.0 million resulting from the settlement of certain litigation matters. (2) In 1997, other income includes $7.5 million resulting from the settlement of certain litigation matters. (3) Effective June 1, 1997, the Company elected to be treated as a S Corporation for federal income tax purposes. The conversion resulted in the elimination of the Company's deferred income tax assets and liabilities existing at May 31, 1997 and, after being netted against the then existing tax provision, resulted in a net income tax benefit to the Company of $8.9 million. (4) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion, amortization and exploration expense, excluding proceeds from litigation settlements. EBITDA is not a measure of cash flow as determined in accordance with GAAP. EBITDA should not be considered as an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP or as an indicator of a company's operating performance or liquidity. Certain items excluded from EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of EBITDA. The Company's computation of EBITDA may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA is a widely followed measure of operating performance and may also be used by investors to measure the Company's ability to meet future debt service requirements, if any. (5) Capital expenditures include costs related to acquisitions of producing oil and gas properties. (6) For purposes of computing the ratio of earnings to fixed charges, earnings are computed as income before taxes from continuing operations, plus fixed charges. Fixed charges consist of interest expense and amortization of costs incurred in the Offering. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto and the Selected Consolidated Financial Data included elsewhere herein. OVERVIEW The Company's revenue, profitability and cash flow are substantially dependent upon prevailing prices for oil and gas and the volumes of oil and gas it produces. Although the Company produced more oil and gas in the first quarter of 1998 than in the first quarter of 1997, it experienced a significant decline in revenues, net income and EBITDA in the first quarter of 1998 compared to the first quarter of 1997 because of lower prevailing oil and gas prices. These lower prices have continued to adversely affect the Company's revenues and results of operation since March 31, 1998. Given the volatile nature of oil and gas prices, it is difficult to predict whether such effects will continue during the remainder of 1998. Average prices as of May 31, 1998, on a pro forma basis, were $11.86 per Bbl of oil and $1.68 per Mcf of natural gas compared to $18.06 per Bbl of oil and $2.25 per Mcf of natural gas as of December 31, 1997. If the May 31, 1998 pro forma prices were applied to the Company's estimated proved reserves as of December 31, 1997, the Company's pro forma PV-10 would have been approximately $170.0 million compared to a pro forma PV-10 of $267.0 million using December 31, 1997 prices. In addition, the Company's proved reserves and oil and gas production will decline as oil and gas are produced unless the Company is successful in acquiring producing properties or conducting successful exploration and development drilling activities. The Company uses the successful efforts method of accounting for its investment in oil and gas properties. Under the successful efforts method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and provide equipment for exploratory wells that find proved reserves and to drill and equip development wells are capitalized. These costs are amortized to operations on a unit-of-production method based on petroleum engineer estimates. Geological and geophysical costs, lease rentals and costs associated with unsuccessful exploratory wells are expensed as incurred. Maintenance and repairs are expensed as incurred, except that the cost of replacements or renewals that expand capacity or improve production are capitalized. Significant downward revisions of quantity estimates or declines in oil and gas prices that are not offset by other factors could result in a writedown for impairment of the carrying value of oil and gas properties. Once incurred, a writedown of oil and gas properties is not reversible at a later date, even if oil or gas prices increase. The Company is a S Corporation for federal income tax purposes. The Company currently anticipates it will pay quarterly dividends in amounts sufficient to enable the Company's shareholders to pay their income tax obligations with respect to the Company's taxable earnings. 38 RESULTS OF OPERATIONS The following tables set forth selected financial and operating information for each of the three years in the period ended December 31, 1997 and for the three months ended March 31, 1997 and 1998:
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, --------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- ---------- ---------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PRICE DATA) Revenues................................................ $ 57,363 $ 107,273 $ 110,025 $ 33,545 $ 24,189 Operating expenses...................................... 48,572 81,705 96,267 26,358 20,718 Non-Operating income (expense).......................... (2,670) (4,005) 3,498 552 1,756 Net income after tax.................................... 3,869 13,325 26,197 4,114 1,715 EBITDA(1)............................................... 24,315 53,502 54,721 17,569 10,676 Production Volumes(2): Oil and condensate (MBbls)............................ 1,199 2,888 3,518 806 976 Natural gas (MMcf).................................... 5,880 6,527 5,789 1,369 1,494 Oil equivalents (MBoe)................................ 2,179 3,976 4,483 1,034 1,225 Average Prices(3): Oil and condensate (per Bbl).......................... $ 17.11 $ 20.78 $ 18.61 $ 21.15 $ 13.77 Natural gas (per Mcf)................................. 1.40 2.13 2.21 2.76 1.77 Oil equivalents (per Boe)............................. 14.03 18.87 17.53 20.14 13.13
- -------------------------- (1) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion, amortization and exploration expense, excluding proceeds from litigation settlements. EBITDA is not a measure of cash flow as determined in accordance with GAAP. EBITDA should not be considered as an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP or as an indicator of a company's operating performance or liquidity. Certain items excluded from EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of EBITDA. The Company's computation of EBITDA may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA is a widely followed measure of operating performance and may also be used by investors to measure the Company's ability to meet future debt service requirements, if any. (2) Production volumes of oil and condensate, and natural gas, are derived from the Company's production records and reflect actual quantities produced without regard to the time of receipt of proceeds from the sale of such production. Production volumes of oil equivalents (on a Boe basis) are determined by dividing the total Mcfs of natural gas produced by six and by adding the resultant sum to barrels of oil and condensate produced. (3) Average prices of oil and condensate, and of natural gas, are derived from the Company's production records which are maintained on an "as produced" basis, which give effect to gas balancing and oil produced and in the tanks, and, accordingly, may differ from oil and gas revenues for the same periods as reflected in the Financial Statements. Average prices of oil equivalents were calculated by dividing oil and gas revenues, as reflected in the Financial Statements, by production volumes on a per Boe basis. Average sale prices per Boe realized by the Company, according to its production records which are maintained on an "as produced" basis, for the years ended December 31, 1995, 1996 and 1997, were $13.19, $18.59 and $17.53, respectively. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 OIL AND GAS SALES revenue in the first quarter of 1998 was $16.1 million, a decrease of $4.7 million, or 23%, from $20.8 million in the same period in 1997. In the first quarter of 1998, the Company sold an aggregate of 976 MBbls, a 21% increase over the 1997 period oil sales of 806 MBbls. The Company's natural gas sales in the first quarter of 1998 aggregated to 1,494 MMcf, a 9% increase over its natural gas sales of 1,369 MMcf in the same period in 1997. However, in the first quarter of 1998, the Company 39 received average prices of $13.77 per Bbl and $1.77 per Mcf, compared to $21.15 per Bbl and $2.76 per Mcf, respectively, for the same period in 1997. GATHERING, MARKETING AND PROCESSING revenue in the first quarter of 1998 was $6.6 million, a decrease of $4.1 million, or 38%, from $10.7 million in the same period in 1997, which was attributable primarily to lower prices for natural gas and natural gas liquids. OIL AND GAS SERVICE OPERATIONS revenue in the first quarter of 1998 was $1.5 million, a decrease of $0.5 million, or 27%, compared to $2.0 million in the same period in 1997, which was attributable to declining oil prices on reclaimed oil sales. PRODUCTION EXPENSES AND TAXES in the first quarter of 1998 were $4.8 million, a decrease of $0.1 million, or 2%, compared to $4.9 million in the same period in 1997, which was attributable to increased production efficiencies and lower gross production taxes per Boe due to price declines. EXPLORATION EXPENSES in the first quarter of 1998 were $1.5 million, an increase of $0.5 million, or 59%, compared to $1.0 million in the same period in 1997, resulting primarily from a $0.2 million increase in expired lease expense and a $0.2 million increase in dry hole expense. GATHERING, MARKETING AND PROCESSING EXPENSE in the first quarter of 1998 was $5.8 million, a $3.0 million, or 34% decrease compared to $8.8 million in the same period in 1997. The decrease was attributable primarily to lower prices for natural gas and natural gas liquids. OIL AND GAS SERVICE OPERATIONS EXPENSE in the first quarter of 1998 was $0.9 million, a $0.1 million, or 14% decrease from $1.0 million in the same period in 1997, which was attributable to reduced costs of reclaimed oil. DEPRECIATION, DEPLETION AND AMORTIZATION ("DD&A") EXPENSE in the first quarter of 1998 was $5.4 million, a $3.4 million, or 39% decrease compared to $8.8 million in 1997. DD&A expense related to oil and gas operations in the first quarter of 1998 was $4.6 million, a $3.6 million, or 44% decrease compared to $8.2 million in the same period in 1997. The decreases were attributable primarily to lower production levels in the 1998 period. The unit rate of DD&A expense per Boe in the first quarter of 1998 was $3.73, compared with $7.88 in the 1997 period. GENERAL AND ADMINISTRATIVE ("G&A") EXPENSE in the first quarter of 1998 was $2.2 million minus overhead reimbursement of $0.5 million for a net G&A expense of $1.7 million, or an increase of $0.8 million, or 43%, compared to G&A expense of $1.8 million in the first quarter of 1997 minus overhead reimbursement of $0.9 million for a net G&A expense of $0.9 million. The increase was primarily due to an employment and benefits increase of $0.2 million and a reduction of overhead reimbursement of $0.5 million. INTEREST EXPENSE in the first quarter of 1998 was $2.0 million, an increase of $0.9 million, or 80%, compared to $1.1 million in the 1997 period attributable primarily to higher levels of indebtedness outstanding during 1998. INTEREST AND OTHER INCOME in the first quarter of 1998 was $0.3 million, a decrease of $0.3 million, or 44%, from $0.6 million realized in the same period in 1997. The decrease was primarily attributable to fewer assets being sold in the 1998 period compared to the 1997 period. INCOME BEFORE INCOME TAXES in the first quarter of 1998 was $1.7 million, a decrease of $2.4 million, or 58%, from $4.1 million in the 1997 period, attributable primarily to lower revenues from oil and gas sales, gathering, marketing and processing, oil and gas service operations and other income partially offset by reduced production expenses and taxes, gathering, marketing and processing expenses, DD&A expense, partially offset by an increase in general and administrative expense. 40 NET INCOME in the first quarter of 1998 was $1.7 million, a decrease of $4.9 million, or 74%, compared to $6.6 million in the 1997 period, primarily attributable to lower income before income taxes caused by lower oil prices. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 OIL AND GAS SALES revenue in 1997 was $78.6 million, an increase of $3.6 million, or 5.0%, over $75.0 million in 1996. In 1997, the Company sold an aggregate of 3,518 MBbls, a 22% increase over 1996 oil sales of 2,888 MBbls. The Company's natural gas sales in 1997 aggregated to 5,789 MMcf, an 11% decrease over its 1996 natural gas sales of 6,527 MMcf. In 1997, the Company received average prices of $18.61 per Bbl and $2.21 per Mcf, compared to $20.78 per Bbl and $2.13 per Mcf, respectively, in 1996. GATHERING, MARKETING AND PROCESSING revenue in 1997 was $25.0 million, a decrease of $0.8 million, or 3.0%, from $25.8 million in 1996, which was attributable primarily to lower spot prices for natural gas. OIL AND GAS SERVICE OPERATIONS revenue in 1997 was $6.4 million, a decrease of $0.1 million, or 1%, compared to $6.5 million in 1996. PRODUCTION EXPENSES AND TAXES in 1997 were $20.7 million, an increase of $1.4 million, or 7%, compared to $19.3 million in 1996, which was attributable to a 13% increase in production volume offset by a 5% decrease in production costs per Boe. EXPLORATION EXPENSES were $6.8 million in 1997, an increase of $2.3 million, or 51%, compared to $4.5 million in 1996, resulting primarily from a $0.5 million increase in expired lease expense and a $1.0 million increase in 3-D seismic expenditures. GATHERING, MARKETING AND PROCESSING EXPENSE in 1997 was $22.7 million, a $0.9 million, or 4% increase, compared to $21.8 million, which in 1996 was attributable to reduced margins on natural gas and natural gas liquids. OIL AND GAS SERVICE OPERATIONS EXPENSE in 1997 was $3.7 million, a $0.3 million, or 9%, decrease from $4.0 million in 1996, attributable to a reduction in saltwater disposal activity and warehouse activity. DD&A EXPENSE in 1997 was $33.4 million, a $10.5 million, or 46% increase compared to $22.9 million in 1996. DD&A expense related to oil and gas operations in 1997 was $30.2 million, an $8.6 million, or 40% increase, compared to $21.6 million in 1996, attributable primarily to higher production levels in 1997. The unit rate of DD&A expense per Boe in 1997 was $6.74, compared with $5.44 in 1996. The 1997 DD&A rate included $5.0 million of additional impairment for writedown of certain long-lived assets in accordance with the provisions of SFAS No. 121, or $1.12 per Boe. G&A EXPENSE for 1997 was $9.0 million minus overhead reimbursement of $2.4 million for a net G&A expense of $6.6 million, which was equal to net G&A expense of 6.6 million in 1996. INTEREST EXPENSE in 1997 was $4.8 million, an increase of $0.2 million, or 6%, compared to $4.6 million in 1996, attributable primarily to higher levels of indebtedness outstanding during 1997. INTEREST AND OTHER INCOME in 1997 was $8.3 million, a $7.8 million, or 1,560%, increase over $0.5 million realized in 1996. The substantial increase in 1997 was primarily attributable to non-recurring income of approximately $7.5 million resulting from the settlement of certain litigation matters. INCOME BEFORE INCOME TAXES in 1997 was $17.3 million, a decrease of $4.3 million, or 20%, from $21.6 million in 1996, attributable primarily to increased production expenses and taxes, exploration expenses, gathering, marketing and processing expenses and DD&A expense, partially offset by an increase in total revenues of approximately $10.5 million, which included approximately $7.5 million related to the settlement of certain litigation matters. 41 NET INCOME in 1997 was $26.2 million, an increase of $12.9 million, or 97%, compared to $13.3 million in 1996, primarily attributable to an $8.9 million tax benefit realized in 1997, compared to a $8.2 million tax expense in 1996, and the recognition of approximately $7.5 million related to the settlement of certain litigation matters. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 OIL AND GAS SALES revenue in 1996 was $75.0 million, an increase of $44.4 million, or 145%, over $30.6 million in 1995. In 1996, the Company sold an aggregate of 2,888 MBbls, a 141% increase over 1995 oil sales of 1,199 MBbls. The Company's natural gas sales in 1996 aggregated to 6,527 MMcf, an 11% increase over its 1995 natural gas sales of 5,880 MMcf. In 1996, the Company received average prices of $20.78 per Bbl and $2.13 per Mcf, compared to $17.11 per Bbl and $1.40 per Mcf, respectively, in 1995. GATHERING, MARKETING AND PROCESSING revenue in 1996 was $25.8 million, an increase of $5.2 million, or 25%, from $20.6 million in 1995, attributable to increased throughput on the Company's natural gas gathering systems. OIL AND GAS SERVICE OPERATIONS revenue in 1996 was $6.5 million, an increase of $0.4 million, or 6%, compared to $6.1 million in 1995, attributable to an increase in warehouse pipe sales. PRODUCTION EXPENSES AND TAXES in 1996 were $19.3 million, an increase of $11.7 million, or 154%, compared to $7.6 million in 1995, attributable to increased production volumes. EXPLORATION EXPENSES in 1996 were $4.5 million, a decrease of $1.6 million, or 27%, compared to $6.2 million in 1995, resulting primarily from a reduction of dry hole expenses of $1.6 million. GATHERING, MARKETING AND PROCESSING EXPENSE in 1996 was $21.8 million, an $8.6 million, or 65% increase, compared to $13.2 million in 1995, was attributable to increased throughput on the Company's natural gas gathering systems. OIL AND GAS SERVICE OPERATIONS EXPENSE in 1996 was $4.0 million, a $0.3 million, or 10%, increase from $3.7 million in 1995, attributable to an increase in repairs on saltwater disposal wells. DD&A EXPENSE in 1996 was $22.9 million, a $13.3 million, or 138% increase compared to $9.6 million in 1995. DD&A expense related to oil and gas operations in 1996 was $21.6 million, a $12.6 million, or 140% increase, compared to $9.0 million in 1995, attributable primarily to higher production levels in 1996. The unit rate of DD&A expense per Boe in 1996 was $5.44, compared with $3.76 in 1995. The 1996 DD&A rate included $2.1 million of additional impairment for writedown of certain long-lived assets in accordance with the provisions of SFAS No. 121, or $0.53 per Boe. G&A EXPENSE in 1996 was $9.2 million minus overhead reimbursed of $2.6 million for a net G&A expense of $6.6 million, an increase of $0.6 million, or 9%, compared to G&A expense of $8.3 million in 1995 minus overhead reimbursement of $2.3 million for net G&A expense of $6 million. The increase was attributable to an increase in salaries and hiring of additional employees. INTEREST EXPENSE in 1996 was $4.6 million, an increase of $2.2 million, or 90%, compared to $2.4 million in 1995, attributable primarily to higher levels of indebtedness outstanding during 1996 related to drilling activities in North Dakota. INTEREST AND OTHER INCOME in 1996 was $0.5 million, a $0.8 million, or 299%, increase over $(0.3) million realized in 1995. The increase in 1996 was primarily attributable to gain on the sale of assets. INCOME BEFORE INCOME TAXES in 1996 was $21.6 million, an increase of $15.5 million, or 252%, from $6.1 million in 1995, attributable primarily to increased oil and gas sales and gathering, marketing and processing revenues, partially offset by increases in production expenses and taxes, gathering, marketing and processing expenses and DD&A expense. 42 NET INCOME in 1996 was $13.3 million, an increase of $9.4 million, or 244%, compared to $3.9 million in 1995, primarily attributable to increased income before income taxes partially offset by a larger income tax expense. LIQUIDITY AND CAPITAL RESOURCES During 1997, and the three months ended March 31, 1998, the Company utilized its beginning cash balance, cash flow from operations and financing provided by a bank and by the Company's principal shareholder to fund its exploration and development expenditures, as well as the construction of a natural gas processing plant and pipeline infrastructure in the Williston Basin. CASH FLOW FROM OPERATIONS. Net cash provided by operating activities was $51.5 million for 1997, a 23% and 171% increase from the $41.7 million and $19.0 million in 1996 and 1995, respectively. Net cash provided by operating activities was $4.0 million for the three months ended March 31, 1998, a 78% decrease from the $17.9 million for the three months ended March 31, 1997. Cash and short-term cash investments decreased to $1.3 million at December 31, 1997, from $3.3 million at year-end 1996, and decreased to $1.3 million at March 31, 1998, from $1.4 million at March 31, 1997. RESERVES ADDED AND FINDING COST. During 1997 and the three months ended March 31, 1998, the Company spent $59.5 million and $12.9 million, respectively, on acquisitions, exploration, exploitation and development of oil and gas properties. Total estimated proved reserves of natural gas decreased from 50.5 Bcf at year-end 1996 to 49.4 Bcf at year-end 1997, and estimated total proved oil reserves increased from 19.5 MMBbls at year-end 1996 to 24.7 MMBbls at year-end 1997. FINANCING. Total long-term debt at December 31, 1997 and March 31, 1998 was $79.6 million and $100.7 million, respectively, compared to $54.8 million and $53.7 million (including current portion) at December 31, 1996 and March 31, 1997, respectively. CREDIT FACILITY. Total long-term debt outstanding at December 31, 1997 and March 31, 1998, included $53.7 million and $72.4 million, respectively, of revolving credit debt under the Credit Facility. The Credit Facility matures May 14, 2001. The Credit Facility provides for interest based on the prime rate of Bank One Oklahoma, N.A., or the London Interbank Offered Rate rounded to the nearest 0.01%, adjusted for maximum cost of reserves rate, plus 100 to 175 basis points. The effective rate of interest under the Credit Facility at December 31, 1997 was 7.7% and at March 31, 1998 was 7.8%. Upon completion of the Offering and the application of the proceeds therefrom, the Credit Facility is expected to be amended and restated as a $75.0 million credit facility with a $75.0 million borrowing base. All other terms thereof are expected to remain substantially unchanged. CAPITAL EXPENDITURES. The Company expects higher production volumes in 1998 compared to 1997. The expected increase in volume is primarily due to the production associated with the Worland Field properties, as well as certain new oil and gas properties expected to commence production during the year. Revenue in 1998, however, has been and continues to be adversely impacted by lower prevailing oil and gas prices, which are expected to remain volatile. The Company's 1998 capital expenditures budget is $45.4 million, exclusive of acquisitions. During the three months ended March 31, 1998, the Company incurred $16.0 million of capital expenditures, exclusive of acquisitions. The Company expects to fund the 1998 capital budget through cash flow from operations and its Credit Facility. OTHER. The Company follows the "sales method" of accounting for its gas revenue, whereby the Company recognizes sales revenue on all gas sold, regardless of whether the sales are proportionate to the Company's ownership in the property. A liability is recognized only to the extent that the Company has a net imbalance in excess of its share of the reserves in the underlying properties. The Company's historical aggregate imbalance positions have been immaterial. The Company believes that any future periodic settlements of gas imbalances will have little impact on its liquidity. 43 The Company has sold a number of non-strategic oil and gas properties and other properties over the past three years, recognizing a pretax loss of approximately $411,000 in 1995, and pretax gains of approximately $233,000 and $674,000 in 1996 and 1997, respectively. Total amounts of oil and gas reserves associated with these dispositions during the last three years were 294 MBbls of oil and 2,298 MMcf of natural gas. YEAR 2000. Year 2000 issues result from the inability of computer programs or computerized equipment to accurately calculate, store or use a date subsequent to December 31, 1999. The erroneous date can be interpreted in a number of different ways; typically the year 2000 is represented as the year 1900. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has been advised by its computer consultant that the Company's mainframe computer and operating systems are year 2000 compliant. The Company's application software will be modified to be year 2000 compliant during 1998 and 1999 at a cost estimated to be less than $100,000. Assessment of other less critical software systems and various types of equipment is continuing and should be completed by November 1998. The Company believes that the potential impact, if any, of these systems not being year 2000 compliant will at most require employees to manually complete otherwise automated tasks or calculations. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems would not have a material adverse effect on the Company. HEDGING. From time to time, the Company may use energy swap and forward sale arrangements to reduce its sensitivity to oil and gas price volatility. However, the Company had no energy swap or forward sale arrangement in place at December 31, 1997 or at March 31, 1998. The Company has only limited involvement with derivative financial instruments, as defined in SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" and does not use them for trading purposes. The Company's objective is to hedge a portion of its exposure to price volatility from producing oil and natural gas. These arrangements expose the Company to the credit risk of its counterparties and to basis risk. 44 BUSINESS AND PROPERTIES GENERAL Continental is engaged in the development, exploitation, exploration and acquisition of oil and gas reserves, primarily in the Rocky Mountains and the Mid-Continent and, to a lesser extent, in the Gulf Coast region of Texas and Louisiana. In addition to its exploration, development and production activities, the Company owns and operates 1,000 miles of natural gas pipelines, five gas gathering systems and three gas processing plants in its operating areas. The Company also engages in natural gas marketing, gas pipeline construction and saltwater disposal. Capitalizing on its growth through the drill-bit and its acquisition strategy, on a pro forma basis the Company has increased its estimated proved reserves from 12.7 MMBoe in 1993 to 64.9 MMBoe in 1997, and increased its annual production from 2.0 MMBoe in 1993 to 5.2 MMBoe in 1997. At December 31, 1997, on a pro forma basis, approximately 80% of the Company's estimated proved reserves were oil and approximately 63% of its total estimated reserves were classified as proved developed. At March 31, 1998, on a pro forma basis, the Company had interests in 1,390 producing wells of which it operated 1,112. In fiscal year 1997, the Company had pro forma revenues and EBITDA of $120.2 million and $61.0 million, respectively. During the first three months of 1998, the Company had pro forma revenues and EBITDA of $25.4 million and $11.2 million, respectively, reflecting lower prevailing oil and gas prices. The Company's Rocky Mountain activities are concentrated in the Williston and Big Horn Basins. The Company's operations in the Williston Basin are focused on the Cedar Hills Field, which the Company believes is, potentially, one of the largest onshore discoveries in the lower 48 states since 1971. The Cedar Hills Field represented approximately 45% of the PV-10 attributable to the Company's estimated proved reserves at December 31, 1997, on a pro forma basis. In the Williston Basin, the Company owns approximately 470,000 net leasehold acres and has interests in 322 gross (252 net) wells, has identified 105 potential drilling locations and conducts both primary drilling and enhanced recovery operations. The Company recently expanded its activities into the Big Horn Basin through the acquisition of producing and non-producing properties in the Worland Field. The Company currently owns approximately 35,000 net leasehold acres in the Big Horn Basin and has interests in 292 gross (125 net) producing wells which, on a pro forma basis, represented approximately 10% of the PV-10 attributable to the Company's estimated proved reserves at December 31, 1997, and it operates 272 of such wells. In the Big Horn Basin the Company has identified 164 potential drilling locations which represent significant opportunities. The Company's Mid-Continent activities are conducted primarily in the Anadarko Basin of western Oklahoma, southwestern Kansas and the Texas Panhandle and, to a lesser extent, in the Arkoma Basin of southeastern Oklahoma and in southern Illinois. At December 31, 1997 the Company's Anadarko Basin properties represented approximately 95% of the PV-10 attributable to the Company's estimated proved reserves in the Mid-Continent and approximately 36% of the Company's total estimated proved reserves, on a pro forma basis. In the Anadarko Basin the Company owns approximately 57,000 net leasehold acres, has interests in 658 gross (408 net) producing wells and has identified 11 potential drilling locations. The Company also owns leasehold interests and expects to expand its exploration activities in the Arkoma Basin and Gulf Coast region of Texas and Louisiana. BUSINESS STRENGTHS The Company believes that it has certain strengths that provide it with significant competitive advantages, including the following: PROVEN GROWTH RECORD. Continental has demonstrated consistent growth through a balanced program of development and exploratory drilling and acquisitions. During the five years ended December 31, 1997, the Company increased proved reserves by 411%, production by 161% and EBITDA by 414%, on a pro forma basis. 45 SUBSTANTIAL DEVELOPMENT DRILLING INVENTORY. The Company has identified over 275 potential development drilling locations based on geological and geophysical evaluations. As of March 31, 1998, on a pro forma basis, the Company held approximately 590,000 net acres, of which approximately 64% were classified as undeveloped. Management believes that its current acreage holdings could support five to seven years of drilling activities based upon oil and gas prices in effect at March 31, 1998. LONG-LIFE NATURE OF RESERVES. Continental's producing reserves are primarily characterized by low rate, relatively stable, mature production that is subject to gradual decline rates. As a result of the long-lived nature of its properties, the Company has relatively low reinvestment requirements to maintain reserve quantities, primary and secondary production levels and reserve values. At December 31, 1997, on a pro forma basis, the Company's proved reserve life index was 12.5 years. SUCCESSFUL DRILLING RECORD. The Company has maintained a successful drilling record. In the blanket type Red River B formation of the Williston Basin, the Company's success rate during the three years ended December 31, 1997 was 92%, while in its other areas, the success rate was 65%, resulting in an overall success rate of 85%. During the five years ended December 31, 1997 the Company participated in 253 gross (175 net) wells which resulted in the addition of 24.9 MMBoe at an average cost of $5.50 per Boe. SIGNIFICANT OPERATIONAL CONTROL. Approximately 94% of the Company's PV-10 at December 31, 1997, on a pro forma basis, was attributable to wells operated by the Company, giving Continental significant control over the amount and timing of capital expenditures and production, operating and marketing activities. TECHNOLOGICAL LEADERSHIP. The Company has demonstrated significant expertise in the rapidly evolving technologies of 3-D seismic evaluation and precision horizontal drilling, and is among the few companies in North America to successfully utilize high pressure air injection ("HPAI") enhanced recovery technology on a large scale. Through the combination of precision horizontal drilling and HPAI secondary recovery technology, the Company has significantly enhanced the recoverable reserves underlying its oil and gas properties. Since its inception, Continental has experienced a 300% to 400% increase in recoverable reserves through use of these technologies. EXPERIENCED AND COMMITTED MANAGEMENT. Continental's senior management team has extensive experience in the oil and gas industry. The Chief Executive Officer, Harold Hamm, began his career in the oil and gas industry in 1967 and has grown Continental's revenues to $120.2 million in 1997, on a pro forma basis. Seven senior officers have an average of 20 years of oil and gas industry experience. Additionally, the Company's technical staff, which includes ten petroleum engineers and ten geoscientists, has an average of over 20 years experience in the industry. BUSINESS STRATEGY The Company's strategy is to increase reserves, production and cash flow. Key elements of the Company's strategy are: MAINTAIN A BALANCED DRILLING PROGRAM. Continental has historically grown through a balanced program of exploratory and development drilling and acquisitions. Commencing in 1993, approximately 70% of wells drilled by the Company have been development wells and the Company expects a similar balance from its current drilling inventory. Approximately 85% of the Company's current inventory is focused on further expansion and development of oil projects in the Rocky Mountains, while the remainder is focused on natural gas projects in the Mid-Continent and the Gulf Coast. The Company currently has an inventory of 275 potential development drilling locations. The Company's drilling budget for 1998 is $36.0 million, which is expected to fund the drilling of 48 gross (33.6 net) wells; and for the three months ended March 31, 1998, the Company expended $12.9 million in drilling 15 gross (9.4 net) wells. 46 MAXIMIZE RESERVE RECOVERY. The Company routinely uses advanced technology such as precision horizontal drilling, 3-D seismic technology and HPAI technology in its operations. Management believes that its expertise in horizontal drilling and its record of over 20 years of successfully utilizing HPAI technology provide the Company with a distinct competitive advantage for its development and exploration program. Since its inception, Continental has drilled 130 and participated in another 27 horizontal wells. The Company currently operates four of the eight active HPAI projects in North America and six traditional water-flood projects, and is evaluating three additional waterflood and two additional HPAI projects, as well as approximately 185 workovers of existing wells. The Company intends to continue to apply HPAI technology to its Cedar Hills Field and West Medicine Pole Hills properties to maximize oil recoveries. Based on its experience in operating HPAI projects, Continental believes that the use of HPAI technology coupled with precision horizonal drilling in secondary recovery operations will increase total oil recovery by 300% to 400% over average primary production, or by 50% over secondary recovery utilizing traditional waterflooding. ACQUISITIONS OF OIL AND GAS RESERVES. The Company focuses on acquisitions that (i) complement its existing exploration program, (ii) provide opportunities to utilize the Company's technological advantages, (iii) have the potential for enhanced recovery activities, and/or (iv) provide new core areas for the Company's operations. MAINTAIN LOW COST STRUCTURE. The management team is committed to a low cost structure in order to maximize cash flow and earnings. Continental has achieved low operating and general and administrative costs through economies of scale and geographic focus. The Company's finding costs are expected to decline over time as the benefits of secondary recovery methods are realized. EXPAND GAS GATHERING AND MARKETING. Continental's extensive gas gathering infrastructure and its regional natural gas marketing operations are integral to the Company's low cost structure and high revenues per unit of gas production. The Company intends to expand its gas gathering systems to further improve the rate of return on drilling and development activities and to increase the throughput of natural gas from third parties. The gas marketing operation provides a ready market for increased production, allowing the Company to increase its marketing of third-party gas as well as its own production. DEVELOPMENT, EXPLOITATION AND EXPLORATION ACTIVITIES DEVELOPMENT AND EXPLOITATION. The Company's development and exploitation activities include drilling of development wells, precision drilling of horizontal wells, infill drilling, waterfloods, workovers, recompletions and HPAI projects. The Company's development activities are focused primarily in the Rocky Mountains, specifically in the Cedar Hills Field, the Medicine Pole Hills, Buffalo, South Buffalo and West Buffalo Units in the Williston Basin and the Worland Field in the Big Horn Basin. Approximately 85% of the Company's development drilling inventory (275 wells) is focused on further expansion and development of these areas. In addition, the Company is planning two HPAI oil recovery projects and approximately 155 workovers of existing wells in the Rocky Mountains. In the Mid-Continent, the Company is evaluating four new waterflood projects to complement the six waterfloods it currently operates. All are oil projects in areas where the Company has operational experience and technical 47 expertise and benefits from economies of scale. The following table sets forth information pertaining to the Company's proven development inventory at March 31, 1998:
NUMBER OF DEVELOPMENT PROJECTS -------------------------------------------------------------- ENHANCED DRILLING WORKOVERS AND RECOVERY LOCATIONS RECOMPLETIONS PROJECTS TOTAL ------------- ----------------- --------------- ----- ROCKY MOUNTAINS: Williston Basin......................................... 90 10 2 102 Big Horn Basin.......................................... 158 146 - 304 MID-CONTINENT: Anadarko Basin.......................................... 11 22 3 36 Arkoma Basin............................................ 10 5 - 15 Southern Illinois....................................... - - 1 1 GULF COAST................................................ 6 2 - 8 -- --- --- --- TOTAL................................................. 275 185 6 466 -- -- --- --- --- --- --- ---
The Company currently anticipates that it will initiate 50 to 100 development projects in 1998. Assuming that 100 projects per year are initiated, the Company currently has more than a five year inventory of development projects. Continental expects to spend approximately $130 million over the next three years for development projects. EXPLORATION ACTIVITIES. The Company's existing inventory of exploration projects varies in risk and reward based on their depth, location and geology. The Company intends to use advanced technology, including 3-D seismic, horizontal drilling and improved completion techniques, to enhance a significant portion of the Company's existing and future exploration projects. The Company currently estimates that it will spend $3.1 million on seismic activities over the next three years. The Company is pursuing ten higher risk/reward exploration prospects in the Gulf Coast and Rocky Mountains. In these ten prospects, the Company has an inventory of 43 exploratory drilling locations in various stages of readiness. The Gulf Coast prospects include the Jefferson Island project in Iberia Parish, Louisiana, and the Pebble Beach project in Neuces County, Texas. The Jefferson Island project is an underdeveloped salt dome that produces from a series of prolific Miocene sands. To date the field has produced 22.0 MMBoe, from approximately one quarter of the total dome. The remaining three quarters of the dome are essentially unexplored or are underdeveloped. The Company controls 6,283 gross (2,742 net) acres over the entire salt dome and has identified 12 exploratory locations. The Company has an agreement with a third party who, at its expense, acquired 35 square miles of 3-D seismic data covering the entire salt dome, in exchange for which the third party will earn the right to a 50% interest in the project. The 3-D data is currently being processed and prepared for interpretation. Drilling is expected to commence in the fourth quarter of 1998. In the Pebble Beach project, 20 square miles of 3-D seismic data has been acquired over the project area and two wells have been drilled to date, neither of which was commercial. Currently, there are ten additional drilling locations in the Pebble Beach project based on 3-D seismic data. In the Rocky Mountains, the Company has identified ten exploratory prospects, representing 21 exploratory drilling locations. In the Lustre Field and the NE Autumn prospect of the Williston Basin, the Company owns approximately 90,000 net leasehold acres, and intends to combine 3-D seismic and horizontal drilling to further develop and explore for oil on this acreage. 48 The following table sets forth information pertaining to the Company's existing exploration project inventory at March 31, 1998:
NUMBER OF EXPLORATION PROJECTS -------------------------------------- DRILLING LOCATION 3-D SEISMIC --------------------- --------------- ROCKY MOUNTAINS: Williston Basin........................................................ 15 3 Big Horn Basin......................................................... 6 1 MID-CONTINENT............................................................ - - GULF COAST............................................................... 22 1 -- -- TOTAL.................................................................... 43 5 -- -- -- --
SPECIALIZED TECHNOLOGY HORIZONTAL DRILLING OPERATIONS. The Company's development, exploitation and exploration activities include extensive use of precision horizontal drilling. Through the use of precision horizontal drilling the Company has experienced a 400% to 700% increase in initial flow rates and, when coupled with HPAI secondary recovery operations, a 300% to 400% increase in recovered reserves. The increased recovered reserves, combined with increased production rates offered by horizontal drilling, permitted the Company to co-discover and develop the Cedar Hills Field from a reservoir that was historically perceived to be non-commercial. From inception, the Company had drilled 130 horizontal wells in the Rocky Mountains and Mid-Continent. The Company's primary horizontal drilling objectives are non-fractured reservoirs that decline at a slower rate than fractured reservoirs. For example, the horizontal wells in the Cedar Hills Field have an average productive life of approximately 25 years, based solely on primary production. HIGH PRESSURE AIR INJECTION. The Company has successfully utilized high pressure air injection technology to enhance the recovery of oil from its properties in the Medicine Pole Hills, Buffalo, West Buffalo and South Buffalo units in the Williston Basin. The Company expects to initiate HPAI in the Cedar Hills Field and expand its use in the western part of the Medicine Pole Hills Unit. HPAI consists of injecting compressed air into the target reservoir through an injection well. As the compressed air is forced deeper into the subsurface, air pressure and temperature increase, and the combination of pressure, fuel and high temperature develops a burn front, creating gasses which push further into the oil bearing formation. This pressure forces the oil in the formation to move away from the pressure and, eventually, into the Company's horizontal and vertical collector wells. In the Williston Basin, the use of HPAI technology in secondary recovery operations, when coupled with precision horizontal drilling, has increased total oil recovery by 300% to 400% over average primary production, or by 50% over secondary recovery utilizing traditional waterflooding. The Company's experience with HPAI technology has demonstrated that production response using HPAI technology generally occurs in one to three years, rather than five to six years using traditional waterflooding. The Company currently conducts four of the eight active HPAI projects in North America, the oldest of which has been operating for over 20 years. ACQUISITION ACTIVITIES The Company seeks to acquire properties that have the potential to be immediately accretive to cash flow, have long-lived, lower risk, relatively stable production potential, and provide long-term growth in production and reserves. The Company focuses on acquisitions that complement its existing exploration program, provide opportunities to utilize the Company's technological advantages, have the potential for enhanced recovery activities, and/or provide new core areas for the Company's operations. See "--Principal Oil and Gas Properties." 49 PRINCIPAL OIL AND GAS PROPERTIES Until 1993, the Company's oil and gas activities were focused in the Mid-Continent. In 1993 the Company made the strategic move to increase oil production and reserves by expanding its development and exploration activities into the Rocky Mountains. The Company currently controls approximately 505,000 net acres in the Rockies and is ranked among the largest oil producers in the Rocky Mountains. Continental's oil production is characterized by long lived, stable production with high secondary and enhanced oil recovery potential which perpetuates production and cash flow from its properties. On a pro forma basis, approximately 80% of its estimated proved reserves at December 31, 1997 were oil. To achieve a more balanced reserve mix, the Company is focusing on generating an increased inventory of natural gas drilling opportunities in the Mid-Continent and Gulf Coast. Currently, 85% of the Company's drilling inventory is focused on further expansion and development of its Rocky Mountain oil fields, and the remaining 15% is focused on natural gas projects in the Mid-Continent and Gulf Coast. The Company's Gulf Coast activities are conducted onshore the Texas and Louisiana coasts. In the Gulf Coast, the Company holds approximately 9,400 net leasehold acres and has identified 28 potential drilling locations. The following table provides information with respect to the Company's net proved reserves for its principal oil and gas properties as of December 31, 1997, on a pro forma basis:
OIL OIL GAS EQUIVALENT PERCENT OF AREA (MBBL) (MMCF) (MBOE) PV-10 - ------------------------------------------------------------- --------- --------- ----------- ----------- ROCKY MOUNTAINS: Williston Basin............................................ 21,495 4,741 22,285 52.9% Big Horn Basin............................................. 27,248 28,470 31,993 9.5 MID-CONTINENT: Anadarko Basin............................................. 3,039 41,427 9,944 35.6 Arkoma Basin............................................... - 2,967 494 1.4 Southern Illinois.......................................... 177 - 177 0.4 GULF COAST................................................... 8 243 49 0.2 --------- --------- ----------- ----- TOTALS....................................................... 51,967 77,848 64,942 100.0% --------- --------- ----------- ----- --------- --------- ----------- -----
ROCKY MOUNTAINS The Company's Rocky Mountain properties are located primarily in the Williston Basin of North Dakota, South Dakota and Montana and in the Big Horn Basin of Wyoming. Estimated proved reserves for its Rocky Mountains properties at December 31, 1997, on a pro forma basis, totaled 54.3 MMBoe and represented 62.4% of the Company's PV-10. Approximately 56.3% of these estimated proved reserves are proved developed. During the three months ended March 31, 1998, net daily production from these properties averaged 9,232 Bbls of oil and 1,589 Mcf of natural gas, or 9,497 Boe per day. The Company's leasehold interests include 143,760 net developed and 361,250 net undeveloped acres, which represent 24% and 61% of the Company's total leasehold, respectively. This leasehold is expected to be developed utilizing 3-D seismic, precision horizontal drilling and HPAI, where applicable. As of June 30, 1998, the Company's Rocky Mountain properties included an inventory of 248 development and 21 exploratory drilling locations. WILLISTON BASIN CEDAR HILLS FIELD. The Cedar Hills Field was discovered in November 1994 and is still under development. During the three months ended March 31, 1998, the Cedar Hills Field properties produced 6,569 net Bbls per day to the Company interests and represented 45% of the PV-10 attributable to the Company's estimated proved reserves as of December 31, 1997 on a pro forma basis. The Cedar Hills Field produces oil from the Red River "B" Formation, a thin (eight feet), non-fractured, blanket-type, dolomite 50 reservoir found at depths of 8,000 to 9,500 feet. All wells drilled by the Company in the Red River "B" Formation were drilled exclusively with precision horizontal drilling technology. The Cedar Hills Field covers approximately 200 square miles and has a known oil column of 1,000 feet. Through March 31, 1998, the Company drilled or participated in 139 gross (91 net) horizontal wells, of which 132 were successfully completed, for a 92% net success rate. The Company believes that the Red River "B" formation in the Cedar Hills Field is well suited for enhanced secondary recovery using HPAI technology. On four nearby HPAI projects operated by the Company, HPAI technology has increased oil recoveries 200% to 300% over primary recovery with ultimate recoveries reaching up to 40% of the original oil in place. The Company intends to initiate installation of HPAI secondary recovery on certain of its Cedar Hills Field properties upon completion of field unitization, which is expected to occur in 1999. The Company believes that HPAI could increase its total recovery from the Cedar Hills Field by as much as 75 million net barrels. On May 15, 1998, the Company and an unrelated joint interest owner entered into a definitive agreement to exchange undivided interests so that effective December 1, 1998 the Company will own working interests ranging from 90% to 92% in approximately 65,000 gross (59,000 net) leasehold acres in the northern half of the Cedar Hills Field. As a result, the Company will enhance its ability to unitize all interests in the northern half of the Cedar Hills Field, which is necessary in order for the Company to initiate the planned HPAI enhanced recovery operations in the Cedar Hills Field. As of June 30, 1998, there are 18 horizontal drilling locations in inventory, all of which are development well locations. MEDICINE POLE HILLS, BUFFALO, WEST BUFFALO AND SOUTH BUFFALO UNITS. In 1995, the Company acquired the following interests in four production units in the Williston Basin: Medicine Pole Hills (63%); Buffalo (86%); West Buffalo (82%); and South Buffalo (85%). During the three months ended March 31, 1998, these units produced 2,275 Bbls per day, net to the Company's interests, and represented 4.6 MMBoe or 7% of the pro forma PV-10 attributable to the Company's estimated proved reserves as of December 31, 1997. These units are HPAI enhanced recovery projects that produce from the Red River "B" Formation and are operated by the Company. These units were discovered and developed with conventional vertical drilling. The oldest vertical well in these units has been producing for 44 years, demonstrating the long lived production characteristic of the Red River "B" Formation. There are 104 producing wells in these units and current estimates of remaining reserve life range from four to 16 years. The Company plans to further develop these units and enhance production by drilling strategically placed horizontal wells. There are currently 54 development drilling locations identified in these units. LUSTRE AND MIDFORK FIELDS. In January 1992, the Company acquired the Lustre and Midfork Fields which, during the three months ended March 31, 1998, produced 369 Bopd to the Company's interests and represented 0.6 MMBoe or 1% of the pro forma PV-10 attributable to its estimated proved reserves as of December 31, 1997. Wells in both the Lustre and Midfork Fields produce from the Charles "C" dolomite, at depths of 5,500 to 6,000 feet. Historically, production from the Charles "C" has a low daily production rate and is long lived. There are currently 37 wells producing in the two fields, and no secondary recovery is underway in either field. The Company currently owns 90,000 net acres in the Lustre and Midfork Fields and plans to utilize 3-D seismic combined with horizontal drilling to further exploit the Charles "C" reservoir, and to generate drilling opportunities for deeper objectives underlying the Lustre and Midfork Fields as well as guide exploration for new fields on its substantial undeveloped leasehold. BIG HORN BASIN WORLAND FIELD. On May 14, 1998, the Company consummated the purchase for $86.5 million of producing and non-producing oil and gas properties and certain other related assets in the Worland Field, effective as of June 1, 1998. Subsequently, and effective as of June 1, 1998, the Company sold an undivided 50% interest in the Worland Field properties (excluding inventory and certain equipment) to the 51 Company's principal shareholder for $42.6 million. See "Certain Relationships and Related Transactions." The Worland Field properties cover 35,000 net leasehold acres in the Worland Field of the Big Horn Basin in northern Wyoming, of which 22,753 net acres are held by production and 12,135 net acres are non- producing or prospective. Approximately two-thirds of the Company's producing leases in the Worland Field are within five federal units, the largest of which (the Cottonwood Creek Unit) has been producing for over 40 years. All of the units produce principally from the Phosphoria formation, which is the most prolific oil producing formation in the Worland Field. Four of the units are unitized as to all depths, with the Cottonwood Creek Field Extension (Phosphoria) Unit being unitized only as to the Phosphoria formation. The Company is the operator of all five of the federal units. The Company also operates 40 of the 60 producing wells located on non-unitized acreage. The Company's Worland Field properties include interests in 292 producing wells, 272 of which are operated by the Company. As of December 31, 1997, the estimated net proved reserves attributable to the Company's Worland Field properties were approximately 32.0 MMBoe, with an estimated PV-10 of $25.4 million. Approximately 85% of these proved reserves consist of oil, principally in the Phosphoria formation. Oil produced from the Company's Worland Field properties is low gravity, sour (high sulphur content) crude, resulting in a lower sales price per barrel than non-sour crude, and is sold into a Marathon pipeline or is trucked from the lease. Gas produced from the Worland Field properties is also sour, resulting in a sale price that is less per Mcf than non-sour natural gas. In addition to the proved reserves, the Company has identified 158 locations on its Worland Field properties, to further develop and exploit the undeveloped portion of the Worland Field. Over 100 wells have been identified for acid fracture stimulation, most of which have been classified as having proved developed non-producing reserves. The Company believes that secondary and tertiary recovery projects will have significant potential for the addition of reserves. In addition, six drilling prospects have been identified on the Company's Worland Field properties in which prospects the Company and its principal shareholder, together, have a majority leasehold position, allowing for further exploration for and exploitation of the Phosphoria, Tensleep, Frontier and Muddy formations and other prospective formations for additional reserves. MID-CONTINENT The Company's Mid-Continent properties are located primarily in the Anadarko Basin of western Oklahoma, southwestern Kansas and the Texas Panhandle, and to a lesser extent, in the Arkoma Basin of southeastern Oklahoma ("Arkoma Basin"), and in southern Illinois. At December 31, 1997, the Company's estimated proved reserves in the Mid-Continent totaled 10.6 MMBoe, representing 37.4% of the Company's PV-10 at such date, on a pro forma basis, and 97% of these reserves were proved developed. At such date, approximately 70% of the Company's estimated proved reserves in the Mid-Continent were natural gas. Net daily production from these properties during the first quarter of 1998 averaged 1,374 Bbls of oil and 14,094 Mcf of natural gas, or 3,723 Boe to the Company's interests. The Company's Mid-Continent leasehold position includes 64,536 net developed and 10,853 net undeveloped acres, representing 11% and 2% of the Company's total pro forma leasehold, respectively, at March 31, 1998. As of June 30, 1998, the Company's Mid-Continent properties included an inventory of 21 development drilling locations, 11 of which were in the Anadarko Basin. ANADARKO BASIN. The Anadarko Basin properties contained 95% of the Company's estimated proved reserves for the Mid-Continent and 35.6% of the Company's total PV-10 at December 31, 1997, on a pro forma basis, and at such date, represented 53% of the Company's estimated proved reserves of natural gas. During the three months ended March 31, 1998, net daily production from its Anadarko Basin properties averaged 1,258 Bbls of oil and 12,684 Mcf of natural gas, or 3,372 Boe to the Company's interest from 658 gross (408 net) producing wells, 507 of which are operated by the Company. The Anadarko Basin wells produce from a variety of sands and carbonates in both stratigraphic and structural traps in the Arbuckle, 52 Oil Creek, Viola, Mississippian, Springer, Morrow, Red Ford, Oswego, Skinner and Tonkawa formations, at depths ranging from 6,000 to 12,000 feet. These properties are currently being re-evaluated for further development drilling and workover potential. OTHER MID-CONTINENT PROPERTIES. The Company's remaining Mid-Continent properties include those located in the Arkoma Basin and in southern Illinois. In the Arkoma Basin, the Company is focused on coal bed methane, where it owns approximately 14,000 acres and has 43 producing wells from the Hartshorne coal at depths of 2,500 to 3,500 feet. The Company plans to drill two pilot horizontal tests in the coal in 1998. In Illinois, the Company participates with another operator in two waterflood projects and up to three wells per year for production from shallow Mississippian age sands and carbonates. NET PRODUCTION, UNIT PRICES AND COSTS The following table presents certain information with respect to oil and gas production, prices and costs attributable to all oil and gas property interests owned by the Company for the periods shown:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------- ---------------------------------- PRO PRO FORMA FORMA 1995 1996 1997 1997(1) 1997 1998 1998(1) ---------- ---------- ---------- ---------- ---------- ---------- ---------- NET PRODUCTION DATA: Oil and condensate (MBbls)...................... 1,199 2,888 3,518 4,146 806 976 1,106 Natural gas (MMcf).............................. 5,880 6,527 5,789 6,399 1,369 1,494 1,679 Total (MBoe).................................... 2,179 3,976 4,483 5,213 1,034 1,225 1,386 UNIT ECONOMICS (per Boe): Average equivalent price(2)..................... $ 14.03 $ 18.87 $ 17.53 $ 17.02 $ 20.14 $ 13.13 $ 12.48 Lifting cost(3)................................. 3.49 4.86 4.63 4.98 4.77 3.95 4.06 DD&A expense(3)................................. 3.76 5.44 6.74 6.01 7.88 3.73 3.49 General and administrative expense(4)........... 2.74 1.64 1.47 1.26 0.86 1.44 1.27 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross margin.................................... $ 4.04 $ 6.93 $ 4.69 $ 4.77 $ 6.63 $ 4.01 $ 3.66 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- -------------------------- (1) Pro forma to reflect the Worland Field Acquisition as if it had occurred January 1, 1997. (2) Calculated by dividing oil and gas revenues, as reflected on the Financial Statements, by production volumes on a Boe basis. Oil and gas revenues reflected in the Financial Statements are recognized as production is sold and may differ from oil and gas revenues reflected on the Company's production records which reflect oil and gas revenues by date of production. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Related to drilling and development activities. (4) Related to drilling and development activities, net of operating overhead income. 53 PRODUCING WELLS The following table sets forth the number of productive wells in which the Company owned an interest as of March 31, 1998, on a pro forma basis:
OIL NATURAL GAS -------------------- ---------------------- GROSS NET GROSS NET --------- --- ----------- --- ROCKY MOUNTAINS: Williston Basin................................................................. 322 252 - - Big Horn Basin.................................................................. 292 125 - - MID-CONTINENT: Anadarko Basin.................................................................. 422 296 236 112 Other........................................................................... 70 34 38 31 GULF COAST........................................................................ 6 3 4 2 --------- --- --- --- Total......................................................................... 1,112 710 278 145 --------- --- --- --- --------- --- --- ---
ACREAGE The following table sets forth the Company's developed and undeveloped gross and net leasehold acreage as of March 31, 1998, on a pro forma basis:
DEVELOPED UNDEVELOPED -------------------- -------------------- GROSS NET GROSS NET --------- --------- --------- --------- ROCKY MOUNTAINS: Williston Basin.................................................... 160,297 121,007 464,050 349,115 Big Horn Basin..................................................... 47,492 22,753 24,269 12,135 MID-CONTINENT: Anadarko Basin..................................................... 80,977 49,991 13,005 6,953 Other.............................................................. 21,539 14,545 5,026 3,900 GULF COAST........................................................... 1,355 1,235 12,217 8,202 --------- --------- --------- --------- Total............................................................ 311,660 209,531 518,567 380,305 --------- --------- --------- --------- --------- --------- --------- ---------
DRILLING ACTIVITIES The following table sets forth the Company's drilling activity on its properties for the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1995 1996 1997 ---------------------- ---------------------- ---------------------- GROSS NET GROSS NET GROSS NET ----------- --------- ----------- --------- ----------- --------- DEVELOPMENT WELLS: Productive.................................... 19 14.50 49 28.43 63 42.41 Non-productive................................ 1 1.00 2 1.48 - - -- -- -- --------- --------- --------- Total....................................... 20 15.5 51 29.91 63 42.41 -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- EXPLORATORY WELLS: Productive.................................... 20 18.15 8 5.13 15 11.29 Non-productive................................ 4 3.00 5 3.17 5 1.98 -- -- -- --------- --------- --------- Total....................................... 24 21.15 13 8.30 20 13.27 -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- THREE MONTHS ENDED MARCH 31, 1998 ---------------------- GROSS NET ----------- --------- DEVELOPMENT WELLS: Productive.................................... 15 9.43 Non-productive................................ - - -- --------- Total....................................... 15 9.43 -- -- --------- --------- EXPLORATORY WELLS: Productive.................................... - - Non-productive................................ - - -- --------- Total....................................... - - -- -- --------- ---------
54 OIL AND GAS RESERVES The following table summarizes the estimates of the Company's net proved reserves and the related PV-10 of such reserves at the dates shown. Ryder Scott Company Petroleum Engineers ("Ryder Scott") prepared the reserve and present value data with respect to the Company's oil and gas properties which represented 72% of the PV-10 at December 31, 1997 and Worland Field properties which represented 77% of the PV-10 of the Worland Field properties at the same date. The Company prepared the reserve and present value data on all other Company and Worland Field properties.
AS OF DECEMBER 31, ------------------------------------------------- PRO FORMA 1995 1996 1997 1997(1) ------------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) RESERVE DATA: Proved developed reserves: Oil (MBbls)............................................... 12,627 15,265 19,411 30,819 Natural gas (MMcf)........................................ 52,588 49,082 47,676 60,394 Total (MBoe)............................................ 21,392 23,445 27,357 40,885 Proved undeveloped reserves: Oil (MBbls)............................................... 4,874 4,227 5,308 21,148 Natural gas (MMcf)........................................ 2,232 1,453 1,702 17,454 Total (MBoe)............................................ 5,246 4,469 5,592 24,057 Total proved reserves: Oil (MBbls)............................................... 17,501 19,492 24,719 51,967 Natural gas (MMcf)........................................ 54,820 50,535 49,378 77,848 Total (MBoe)............................................ 26,638 27,915 32,949 64,942 PV-10(2)(3)................................................. $ 206,650 $ 258,278 $ 241,625 $ 266,971
- ------------------------ (1) Pro forma to reflect the Worland Field Acquisition as if it had occurred on December 31, 1997. (2) PV-10 represents the present value of estimated future net cash flows before income tax discounted at 10% using prices in effect at the end of the respective periods presented and including the effects of hedging activities. In accordance with applicable requirements of the Commission, estimates of the Company's proved reserves and future net cash flows are made using oil and gas sales prices estimated to be in effect as of the date of such reserve estimates and are held constant throughout the life of the properties (except to the extent a contract specifically provides for escalation). The prices used in calculating PV-10 as of December 31, 1997 were $18.06 per Bbl of oil and $2.25 per Mcf of natural gas. The average prices used in calculating the pro forma PV-10 as of December 31, 1997 were $14.59 per Bbl of oil and $2.07 per Mcf of natural gas. Average prices as of May 31, 1998, on a pro forma basis, were $11.86 per Bbl of oil and $1.68 per Mcf of natural gas. These prices, if applied to estimated proved reserves of the Company as of December 31, 1997, would result in a PV-10, on a pro forma basis, of $170.0 million at such date, as estimated by the Company. (3) In 1996, the Company changed its fiscal year-end from May 31 to December 31. Because reports on a December 31 year-end basis prior to 1996 were not available, information as of December 31, 1995 was determined from the Company's production, drilling, acquisition and sale data as applied to its December 31, 1996 reserve report. Estimated quantities of proved reserves and future net cash flows therefrom are affected by oil and gas prices, which have fluctuated widely in recent years. There are numerous uncertainties inherent in estimating oil and gas reserves and their values, including many factors beyond the control of the producer. The reserve data set forth in this Prospectus represent only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers, 55 including those used by the Company, may vary. In addition, estimates of reserves are subject to revision based upon actual production, results of future development and exploration activities, prevailing oil and gas prices, operating costs and other factors, which revisions may be material. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. In general, the volume of production from oil and gas properties declines as reserves are depleted. Except to the extent the Company acquires properties containing proved reserves or conducts successful exploitation and development activities, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and gas production is, therefore, highly dependent upon its level of success in finding or acquiring additional reserves. See "Risk Factors--Replacement of Reserves" and "--Uncertainty of Estimates of Oil and Gas Reserves and Future Net Cash Flows." GAS GATHERING SYSTEMS The Company's gas gathering systems are owned by CGI. Natural gas and casinghead gas are purchased at the wellhead primarily under either market-sensitive percent-of-proceeds-index contracts or keep-whole gas purchase contracts. Under percent-of-proceeds-index contracts, CGI receives a fixed percentage of the monthly index posted price for natural gas and a fixed percentage of the resale price for natural gas liquids. CGI generally receives between 20% and 30% of the posted index price for natural gas sales and from 20% to 30% of the proceeds received from natural gas liquids sales. Under keep-whole gas purchase contracts, CGI retains all natural gas liquids recovered by its processing facilities and keeps the producers whole by returning to the producers at the tailgate of its plants an amount of residue gas equal on a BTU basis to the natural gas received at the plant inlet. The keep-whole component of the contract permits the Company to benefit when the value of natural gas liquids is greater as a liquid than as a portion of the residue gas stream. OIL AND GAS MARKETING The Company's oil and gas production is sold primarily under market sensitive or spot price contracts. The Company sells substantially all of its casinghead gas to purchasers under varying percentage-of-proceeds contracts. By the terms of these contracts, the Company receives a fixed percentage of the resale price received by the purchaser for sales of natural gas and natural gas liquids recovered after gathering and processing the Company's gas. The Company normally receives between 80% and 100% of the proceeds from natural gas sales and from 80% to 100% of the proceeds from natural gas liquids sales received by the Company's purchasers when the products are resold. The natural gas and natural gas liquids sold by these purchasers are sold primarily based on spot market prices. The revenues received by the Company from the sale of natural gas liquids is included in natural gas sales. As a result of the natural gas liquids contained in the Company's production, the Company has historically improved its price realization on its natural gas sales as compared to Henry Hub or other natural gas price indexes. For the year ended December 31, 1997, purchases of the Company's natural gas production by GPM Gas Corporation, Warren NGL, Inc., and Oklahoma Natural Gas Company accounted for 14.7%, 12.7% and 12.6% of the Company's total gas sales for such period, respectively. For the year ended December 31, 1997, purchases of the Company's oil production by Koch Oil Company and Sun Oil Company accounted for 74.2% and 10.0% of the Company's total oil sales for such period. Due to the availability of other markets, the Company does not believe that the loss of Koch Oil Company or any other crude oil or gas customer would have a material adverse effect on the Company's results of operations. Periodically the Company utilizes various hedging strategies to hedge the price of a portion of its future oil and gas production. The Company does not establish hedges in excess of its expected production. These strategies customarily emphasize forward-sale, fixed-price contracts for physical delivery of a specified quantity of production or swap arrangements that establish an index-related price above which 56 the Company pays the hedging partner and below which the Company is paid by the hedging partner. These contracts allow the Company to predict with greater certainty the effective oil and gas prices to be received for its hedged production and benefit the Company when market prices are less than the fixed prices provided in its forward-sale contracts. However, the Company does not benefit from market prices that are higher than the fixed prices in such contracts for its hedged production. As of March 31, 1998, no forward-sale contracts were in place with respect to the Company's future production from proved natural gas reserves. EMPLOYEES As of July 31, 1998, the Company employed 205 people, 79 of which were administrative personnel, [14] of which were geological personnel, 14 of which were engineers and the remainder were field personnel. The Company's future success will depend partially on its ability to attract, retain and motivate qualified personnel. The Company is not a party to any collective bargaining agreements and has not experienced any strikes or work stoppages. The Company considers its relations with its employees to be satisfactory. COMPETITION The oil and gas industry is highly competitive. The Company competes for the acquisition of oil and gas properties, primarily on the basis of the price to be paid for such properties, with numerous entities including major oil companies, other independent oil and gas concerns and individual producers and operators. Many of these competitors are large, well established companies and have financial and other resources substantially greater than those of the Company. The Company's ability to acquire additional oil and gas properties and to discover reserves in the future will depend upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. LEGAL PROCEEDINGS From time to time, the Company is party to litigation or other legal proceedings that it considers to be a part of the ordinary course of its business. The Company is not involved in any legal proceedings nor is it party to any pending or threatened claims that could reasonably be expected to have a material adverse effect on its financial condition or results of operations. REGULATION GENERAL. Various aspects of the Company's oil and gas operations are subject to extensive and continually changing regulation, as legislation affecting the oil and gas industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and regulations binding upon the oil and gas industry and its individual members. REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. The Federal Energy Regulatory Commission (the "FERC") regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. In the past, the federal government has regulated the prices at which oil and gas could be sold. While sales by producers of natural gas and all sales of crude oil, condensate and natural gas liquids can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. The Company's sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation are subject to extensive regulation and proposed regulation designed to increase competition within the natural gas industry, to remove various barriers and practices that historically limited non-pipeline natural gas sellers, including producers, from effectively competing with interstate pipelines for sales to local distribution companies and large industrial and commercial customers and to establish the 57 rates interstate pipelines may charge for their services. Similarly, the Oklahoma Corporation Commission and the Texas Railroad Commission have been reviewing changes to their regulations governing transportation and gathering services provided by intrastate pipelines and gatherers. While the changes being considered by these federal and state regulators would affect the Company only indirectly, they are intended to further enhance competition in natural gas markets. The Company cannot predict what further action the FERC or state regulators will take on these matters, however, the Company does not believe that any actions taken will have an effect materially different than the effect on other natural gas producers with which it competes. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC, state commissions and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue. OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. The price the Company receives from the sale of these products may be affected by the cost of transporting the products to market. ENVIRONMENTAL. Extensive federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment affect the Company's oil and gas operations. Numerous governmental departments issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial civil and even criminal penalties for failure to comply. Some laws, rules and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person or entity liable for environmental damages and cleanup costs without regard to negligence or fault on the part of such person or entity. Other laws, rules and regulations may restrict the rate of oil and gas production below the rate that would otherwise exist or even prohibit exploration and production activities in sensitive areas. In addition, state laws often require various forms of remedial action to prevent pollution, such as closure of inactive pits and plugging of abandoned wells. The regulatory burden on the oil and gas industry increases the Company's cost of doing business and consequently affects the Company's profitability. The Company believes that it is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company's operations. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements could have a material adverse effect upon the capital expenditures or competitive position of the Company. The Company currently owns or leases, and has in the past owned or leased, numerous properties that have been used for the exploration and production of oil and gas and for other uses associated with the oil and gas industry. Although the Company followed operating and disposal practices that it considered appropriate under applicable laws and regulations, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where such wastes were taken for disposal. In addition, the Company owns or leases properties that have been operated by third parties in the past. The Company could incur liability under the Comprehensive Environmental Response, Compensation and Liability Act or comparable state statutes for contamination caused by wastes it generated or for contamination existing on properties it owns or leases, even if the contamination was caused by the waste disposal practices of the prior owners or operators of the properties. In addition, it is not uncommon for landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of produced fluids or other pollutants into the environment. The Federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 ("RCRA"), regulates the generation, transportation, storage, treatment and disposal of hazardous 58 wastes and can require cleanup of hazardous waste disposal sites. RCRA currently excludes drilling fluids, produced waters and certain other wastes associated with the exploration, development or production of oil and gas from regulation as "hazardous waste." A similar exemption is contained in many of the state counterparts to RCRA. Disposal of such oil and gas exploration, development and production wastes usually is regulated by state law. Other wastes handled at exploration and production sites or used in the course of providing well services may not fall within this exclusion. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and gas industry in the future. From time to time legislation has been proposed in Congress that would revoke or alter the current exclusion of exploration, development and production wastes from the RCRA definition of "hazardous wastes" thereby potentially subjecting such wastes to more stringent handling and disposal requirements. If such legislation were enacted, or if changes to applicable state regulations required the wastes to be managed as hazardous wastes, it could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. The Company's operations are also subject to the Clean Air Act (the "CAA") and comparable state and local requirements. Amendments to the CAA were adopted in 1990 and contain provisions that may result in the gradual imposition of certain pollution control requirements with respect to air emissions from operations of the Company. The Company may be required to incur certain capital expenditures in the next several years for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions. However, the Company believes its operations will not be materially adversely affected by any such requirements, and the requirements are not expected to be any more burdensome to the Company than to other similarly situated companies involved in oil and gas exploration and production activities or well servicing activities. The Federal Water Pollution Control Act of 1972 (the "FWPCA") imposes restrictions and strict controls regarding the discharge of wastes, including produced waters and other oil and gas wastes, into navigable waters. These controls have become more stringent over the years, and it is probable that additional restrictions will be imposed in the future. Permits must be obtained to discharge pollutants into state and federal waters. The FWPCA provides for civil, criminal and administrative penalties for unauthorized discharges of oil and other hazardous substances and imposes substantial potential liability for the costs of removal or remediation. State laws governing discharges to water also provide varying civil, criminal and administrative penalties and impose liabilities in the case of a discharge of petroleum or its derivatives, or other hazardous substances, into state waters. In addition, the Environmental Protection Agency has promulgated regulations that require many oil and gas production sites, as well as other facilities, to obtain permits to discharge storm water runoff. The Company believes that compliance with existing requirements under the FWPCA and comparable state statutes will not have a material adverse effect on the Company's financial condition or results of operations. REGULATION OF OIL AND GAS EXPLORATION AND PRODUCTION. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulations include requiring permits and drilling bonds for the drilling of wells, regulating the location of wells, the method of drilling and casing wells, and the surface use and restoration of properties upon which wells are drilled. Many states also have statutes or regulations addressing conservation matters, including provisions for the utilization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the regulation of spacing, plugging and abandonment of such wells. Some state statutes limit the rate at which oil and gas can be produced from the Company's properties. See "Risk Factors--Laws and Regulations; Environmental Risk." TITLE TO PROPERTIES The Company believes it has satisfactory title to all of its properties in accordance with standards generally accepted in the oil and gas industry. As is customary in the oil and gas industry, the Company makes only a cursory review of title to farmout acreage and to undeveloped oil and gas leases upon 59 execution of any contracts. Prior to the commencement of drilling operations, a title examination is conducted and curative work is performed with respect to significant defects. To the extent title opinions or other investigations reflect title defects, the Company, rather than the seller of the undeveloped property, is typically responsible to cure any such title defects at its expense. If the Company were unable to remedy or cure any title defect of a nature such that it would not be prudent to commence drilling operations on the property, the Company could suffer a loss of its entire investment in the property. The Company has obtained title opinions on substantially all of its producing properties. Prior to completing an acquisition of producing oil and gas leases, the Company performs a title review on a material portion of the leases. The Company's oil and gas properties are subject to customary royalty interests, liens for current taxes and other burdens that the Company believes do not materially interfere with the use of or affect the value of such properties. 60 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth names, ages and titles of the directors and executive officers of the Company.
NAME AGE POSITION - ------------------------------- --- -------------------------------------------------------------------------- Harold Hamm(1)(2).............. 52 Chairman of the Board of Directors, President, Chief Executive Officer and Director Jack Stark(1)(3)............... 43 Senior Vice President--Exploration and Director Jeff Hume(1)(4)................ 47 Senior Vice President--Drilling Operations and Director Randy Moeder(1)(2)............. 38 Senior Vice President, General Counsel, Secretary and Director Roger Clement(1)(3)............ 53 Senior Vice President, Chief Financial Officer, Treasurer and Director Tom Luttrell................... 40 Senior Vice President--Land Jeff White..................... 31 Senior Vice President--Business Development
- -------------------------- (1) Member of the Executive, Compensation and Audit Committees. (2) Term expires in 2001. (3) Term expires in 2000. (4) Term expires in 1999. HAROLD HAMM, LL.M. has been President and Chief Executive Officer and a Director of the Company since its inception in 1967. Mr. Hamm has served as President of the Oklahoma Independent Petroleum Association Wildcatter's Club since 1989. Mr. Hamm was the founder and is Chairman of the Oklahoma Natural Gas Industry Task Force. Mr. Hamm has served as a member of the Interstate of Oil and Gas Compact Commission and is a founding board member of the Oklahoma Energy Resources Board. Mr. Hamm was named the 1992 Oklahoma Independent Petroleum Association Member of the Year. Mr. Hamm serves on the Tax Steering Committee of the Independent Petroleum Association of America and is a director of the Rocky Mountain Oil and Gas Association. JACK STARK joined the Company as Vice President of Exploration in June 1992 and was promoted to Senior Vice President in May 1998. Mr. Stark has been a Director of the Company since September 1996. He holds a Masters degree in Geology from Colorado State University and has 20 years of exploration experience in the Mid-Continent, Gulf Coast and Rocky Mountain regions. Prior to joining the Company, Mr. Stark was the exploration manager for the Western Mid-Continent Region for Pacific Enterprises from August 1988 to June 1992. From 1978 to 1988, he held various staff and middle management positions with Cities Service Co. and TXO Production Corp. Mr. Stark is a member of the American Association of Petroleum Geologists, Oklahoma Independent Petroleum Association, Rocky Mountain Association of Geologists, Houston Geological Society and Oklahoma Geological Society. JEFF HUME has been Vice President of Drilling Operations and a Director of the Company since September 1996 and was promoted to Senior Vice President in May, 1998. From May 1983 to September 1996, Mr. Hume was Vice President of Engineering and Operations. Prior to joining the Company, Mr. Hume held various engineering positions with Sun Oil Company, Monsanto Company and FCD Oil Corporation. Mr. Hume is a Registered Professional Engineer and member of the Society of Petroleum Engineers, Oklahoma Independent Petroleum Association, and the Oklahoma and National Professional Engineering Societies. RANDY MOEDER has been Vice President, General Counsel and a Director of the Company since November 1990 and has served as Secretary of the Company since February 1994 and as President of 61 Continental Gas, Inc. since January 1995 and was Vice President of Continental Gas, Inc. from November 1990 to January 1995. Mr. Moeder was promoted to Senior Vice President of the Company in May, 1998. From January 1988 to summer 1990, Mr. Moeder was in private law practice. From 1982 to 1988, Mr. Moeder held various positions with Amoco Corporation. Mr. Moeder is a member of the Oklahoma Independent Petroleum Association, the Oklahoma and American Bar Associations. Mr. Moeder is also a Certified Public Accountant. ROGER CLEMENT became Vice President, Chief Financial Officer and Treasurer and a Director of the Company in March 1989 and was promoted to Senior Vice President in May, 1998. Prior to joining the Company, Mr. Clement was a partner in the accounting firm of Hunter and Clement in Oklahoma City, Oklahoma. Mr. Clement is a Certified Public Accountant. TOM LUTTRELL has been Vice President--Land of the Company since February 1997 and was promoted to Senior Vice President in May, 1998. From 1991 to February 1997, Mr. Luttrell was Senior Landman of the Company. Prior to joining the Company, Mr. Luttrell served as a landman for Terra Resources, Inc., Pacific Enterprises Oil & Gas Company and Alexander Energy Corporation, all independent oil and gas exploration companies. Mr. Luttrell is a member of the American Association of Petroleum Landmen. JEFF WHITE has been Vice President--Business Development of the Company since July 1996 and was promoted to Senior Vice President--Business Development in May, 1998. From 1993 to July 1996, Mr. White served as Special Assistant to the Chairman of the Federal Deposit Insurance Corporation and also served as a Financial Analyst for the Federal Deposit Insurance Corporation. From July, 1990 to December, 1992, Mr. White served as a financial/budget analyst on issues relating to Resolution Trust Corporation funding. Prior to 1990, Mr. White served as an analyst to the Banking Committee of the House of Representatives. COMPOSITION OF BOARD OF DIRECTORS The Company's Board of Directors presently consists of five directors. Directors and executive officers of the Company are elected to serve until they resign or are removed, or are otherwise disqualified to serve, or until their successors are elected and qualified. Directors of the Company are elected for one-year terms at the annual meeting of stockholders. Officers of the Company are appointed at the Board's first meeting after each annual meeting of stockholders. DIRECTOR COMPENSATION Directors receive no additional compensation for services rendered as directors but are reimbursed for any out-of-pocket expenses incurred in attending meetings. EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation during 1997 earned by the Company's chief executive officer and its other four most highly compensated executive officers as of December 31, 1997 (the "Named Executive Officers"). 62 SUMMARY COMPENSATION TABLE
SECURITIES ANNUAL COMPENSATION UNDERLYING --------------------------- OTHER ANNUAL OPTION AWARDS ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) (# OF SHARES) COMPENSATION($)(2) - ----------------------------- ------------- ------------ ------------------- --------------- ------------------ Harold Hamm.................. $ 187,506.00 $ -- $ -- -- $ 857.12 Chairman of the Board, President, and Chief Executive Officer Jack Stark................... 116,550.32 10,249.50 -- -- 9,815.92 Senior Vice President-- Exploration Jeff Hume.................... 113,350.64 10,249.50 -- -- 11,162.12 Senior Vice President-- Operations Randy Moeder................. 90,743.18 10,436.86 -- -- 18,666.78 Senior Vice President, General Counsel and Secretary Roger Clement................ 89,968.00 9,718.83 -- -- 3,118.72 Senior Vice President, Chief Financial Officer and Treasurer
- ------------------------ (1) Represents the value of perquisites and other personal benefits in excess of 10% of annual salary and bonus for the year ended December 31, 1997, the Company paid no other annual compensation to its Named Executive Officers. (2) Represents contributions made by the Company to the accounts of the executive officer under the Company's profit sharing plan and under the Company's nonqualified compensation plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Continental does not have a separate compensation committee of its board of directors. The board of directors sets the compensation for its executive officers and Harold Hamm, Chairman of the Board and President, is a director and participates in these deliberations concerning executive officer compensation. Each of the directors of Continental also serve on the board of directors of subsidiaries of Continential. As such, each of the directors participates in the deliberations concerning executive officers' compensation for Continential and its subsidiaries. EMPLOYMENT AGREEMENTS The Company does not have any employment agreeements with its named Executive Officers. 63 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Set forth below is a description of transactions entered into between the Company and certain of its officers, directors, employees and stockholders since January 1, 1995. Certain of these transactions will continue in the future and may result in conflicts of interest between the Company and such individuals, and there can be no assurance that conflicts of interest will always be resolved in favor of the Company. OIL AND GAS OPERATIONS. In its capacity as operator of certain oil and gas properties, the Company obtains oilfield services from related companies. These services include leasehold acquisition, well location, site construction and other well site services, saltwater trucking, use of rigs for completion and workover of oil and gas wells and the rental of oil field tools and equipment. Harold Hamm is the chief executive officer and principal shareholder of each of these related companies. The aggregate amounts paid by Continental to these related companies during 1995, 1996, 1997 and during the three months ended March 31, 1998 were $5.9 million, $5.9 million, $11.9 million, and $3.5 million, respectively. The total amount paid to these affiliated companies, a portion of which is billed to other interest owners, was approximately $11.9 million in 1997. The services discussed above were provided at costs and upon terms that management believes are no less favorable to the Company than could have been obtained from unrelated parties. In addition, Harold Hamm and certain companies controlled by him own interests in wells operated by the Company. At December 31, 1997 and March 31, 1998, the Company owed such persons an aggregate of $200,000 and $100,000, respectively, representing their shares of oil and gas production sold by the Company. SHAREHOLDER LOANS AND ADVANCES. In 1997 and 1998, the Company obtained loans and advances from Harold Hamm and certain of his affiliates. Such loans and advances were unsecured and were repaid from time to time in varying amounts, with interest at an annual rate of 8.25%. The maximum aggregate amount of such loans and advances outstanding at any time during 1997 and during the three months ended March 31, 1998 was $22.0 million and $24.4 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." OFFICE LEASE. The Company leases office space under operating leases directly or indirectly from Harold Hamm and Continental Management Company, L.L.C., a Company owned in part by Harold Hamm. In 1997, the Company paid rents associated with these leases of approximately $294,000. PARTICIPATION IN WELLS. Certain officers and directors of the Company have participated and may participate in the future in wells drilled by the Company. In 1997, Harold Hamm participated in Company wells on terms similar to those available to unrelated third parties and was billed an aggregate of $515,000, for his share of drilling, completion, equipping and operating costs. At December 31, 1997, the aggregate unpaid balance owed to the Company by such officers and directors was $4,565, none of which was past due. Effective June 1, 1998, the Company sold an undivided 50% interest in the 70,000 net leasehold acres it acquired in the Worland Field Acquisition to its principal shareholder, Harold Hamm. The Worland Field sale did not include inventory and certain items of equipment which the Company had acquired in the Worland Field Acquisition. The $42.6 million purchase price paid by Harold Hamm equals the Company's cost basis in such leasehold acres. Harold Hamm paid $19.3 million of the purchase price in cash and the balance of $23.3 million by the cancellation of indebtedness owed by Harold Hamm to the Company. Harold Hamm is subject to the applicable unit agreements in place with respect to his interests in the Worland Field. Harold Hamm intends to sell some or all of the interests acquired from the Company, although no arrangements, understandings or agreements for any such sale currently exist. PRINCIPAL SHAREHOLDERS Harold Hamm, Chairman of the Board, President and Chief Executive Officer and a Director of the Company beneficially owns 44,496 shares (90.7%) of the Company's outstanding common stock. The remaining 4,545 shares (9.3%) of the outstanding common stock is beneficially owned by the Harold Hamm Delta Trust, an irrevocable trust over which Harold Hamm has no voting or investment power. 64 DESCRIPTION OF CREDIT FACILITY The following summary of the Credit Facility does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Credit Facility. Bank One, Oklahoma, N.A., as agent for the lenders under the Credit Facility ("Agent"), has consented to the terms of the Indenture and the issuance of the Notes. At July 31, 1998, $4.0 million was outstanding under the Credit Facility. The Credit Facility is payable in full on May 14, 2001. All amounts outstanding under the Credit Facility are secured by a first lien on substantially all of the Company's proved oil and gas reserves, wells, systems, plants, related personal property and contract rights. INTEREST AND FEES. Amounts advanced under the Credit Facility bear interest determined with reference to a sliding scale that takes into account the ratio of the aggregate amount outstanding to the Borrowing Base (as defined in the Credit Facility). The applicable rate may, at the Company's option, be based either on the LIBOR rate or the Agent's prime rate. The rates range from the LIBOR rate plus a margin of 100 to 175 basis points, or the Agent's prime rate with no margin. The Company pays a non-use fee of 0.1875% to 0.25% per annum on the amount by which the Borrowing Base exceeds the aggregate amount outstanding, and an agency fee equal to $50,000 per annum. BORROWING BASE. The amount of credit available at any time under the Credit Facility is the lesser of the commitment amount or the Borrowing Base. The commitment amount, initially, was $175.0 million. Upon completion of the Offering and application of the net proceeds therefrom, the commitment amount and the Borrowing Base was reduced to $75.0 million. The Borrowing Base is redetermined semi-annually by the banks and may be redetermined more frequently at the request of the Company, the Agent or banks holding 66 2/3% of the outstanding balance under the Credit Facility. To the extent the amount outstanding under the Credit Facility exceeds the Borrowing Base, the Company must either reduce the amount outstanding or furnish additional collateral. At June 30, 1998, the Borrowing Base was $175.0 million, which was more than the amount outstanding under the Credit Facility at that date. The next scheduled Borrowing Base redetermination date will be November 1, 1998. COVENANTS. The Credit Facility contains customary affirmative and restrictive covenants which, among other things, require periodic financial and reserve reporting, require that the Company not allow the ratio of its indebtedness to tangible net worth to exceed 3.25 to 1 as of the end of any fiscal quarter, require that the Company not allow its minimum debt service coverage ratio to be less than 1.2 to 1 as of the end of any fiscal quarter for the immediately preceding four quarters, maintain a current ratio of at least 1.0 to 1 at the end of any fiscal quarter, and limit the Company and its Restricted Subsidiaries with respect to indebtedness, liabilities, liens, dividends, loans, lines of business, transactions with affiliates, changes in management, investments, amendments to organizational documents, purchases and sales of assets and speculative trading activities, unless the requisite number of banks otherwise consent. EVENTS OF DEFAULT. The Credit Facility contains customary events of default, including, among other things and subject to applicable grace periods, payment defaults, material misrepresentations, covenant defaults, certain bankruptcy events, and judgment defaults. It also is an event of default under the Credit Facility if any indebtedness of the Company or the Restricted Subsidiaries in excess of $250,000, including the Notes, is accelerated or if a change in management occurs. 65 DESCRIPTION OF NOTES GENERAL The Old Notes were issued pursuant to the Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, as trustee (the "Trustee"). The New Notes will be issued under the Indenture, which will be subject to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). As used herein the term "Notes" includes the Old Notes and the New Notes. 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. The Notes are subject to all such terms, and Holders of the Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of certain provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions." The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to Senior Debt. The Notes will be guaranteed on a senior subordinated basis by each Restricted Subsidiary of the Company and any future Restricted Subsidiary of the Company. The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees will be general unsecured obligations of each of the Subsidiary Guarantors and will be subordinated in right of payment to all obligations of the Subsidiary Guarantors in respect of Guarantor Senior Debt. See "--Subsidiary Guarantees" and "Risk Factors-- Subordination of Notes and Guarantees." For purposes of this section, the term "Company" means Continental Resources, Inc. As of the date of the Indenture, all of the Company's Subsidiaries will be Restricted Subsidiaries. Under certain circumstances, however, the Company will be able to designate current and future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. See "--Certain Covenants." TERMS OF THE NOTES The Notes are limited in aggregate principal amount to $150 million and will mature on August 1, 2008. Interest on the Notes will accrue at the rate of 10 1/4% per annum and will be payable semi-annually in arrears on February 1 and August 1 of each year, commencing February 1, 1999, to Holders of the Notes of record on the immediately preceding January 15 and July 15. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium, if any, and interest on the Notes will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest may be made by check mailed to the Holders of the Notes at their respective addresses set forth in the applicable register of Holders of the Notes. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. The Notes will be fully registered as to principal and interest in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. OPTIONAL REDEMPTION Except as otherwise described below, the Notes will not be redeemable at the Company's option prior to August 1, 2003. Thereafter, the Notes will be subject to redemption at the option of the Company, in whole or in part, 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 to the 66 applicable redemption date, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:
YEAR PERCENTAGE - ---------------------------------------------------------------------------------- ----------- 2003.............................................................................. 105.125% 2004.............................................................................. 103.417% 2005.............................................................................. 101.708% 2006 and thereafter............................................................... 100.000%
Prior to August 1, 2001, the Company may, at its option, on any one or more occasions, redeem up to 35% of the original aggregate principal amount of the Notes at a redemption price equal to 110.25% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with all or a portion of the net proceeds of public sales of common stock of the Company; PROVIDED that at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after the occurrence of such redemption; and PROVIDED, FURTHER, that such redemption shall occur within 60 days of the date of the closing of the related sale of common stock of the Company. At any time on or prior to August 1, 2003, the Notes may also be redeemed as a whole at the option of the Company upon the occurrence of a Change of Control (but in no event more than 90 days after the occurrence of such Change of Control) at a redemption price equal to 100% of the principal amount thereof, plus the Applicable Premium as of, and accrued but unpaid interest, if any, to, the date of redemption (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date). SELECTION AND NOTICE In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if such other Notes are not so listed, on a pro rata basis, by lot or by such method as such Trustee shall deem fair and appropriate; PROVIDED that no Note 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 the Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on the Notes or portions of them called for redemption unless the Company defaults in payment of the redemption price. RANKING AND SUBORDINATION The payment of principal of, premium, if any, and interest on the Notes and any other payment obligations of the Company in respect of the Notes (including any obligation to repurchase the Notes) will be subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash of all Senior Debt, whether outstanding on the date of the Indenture or thereafter incurred. Upon any payment or distribution of property or securities to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, or in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of Senior Debt will be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt, whether or not a claim for such interest would be allowed in a proceeding) before the Holders of the Notes will be entitled to receive any payment with respect to the Notes, and until all Obligations with respect to Senior Debt are 67 paid in full, any distribution to which the Holders of the Notes would be entitled shall be made to the holders of Senior Debt (except that Holders of the Notes may receive payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). The Company also may not make any payment (whether by redemption, purchase, retirement, defeasance or otherwise) upon or in respect of the Notes (except from the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs ("payment default") or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits, or with the giving of notice or passage of time or both (unless cured or waived) will permit, holders of the Designated Senior Debt as to which such default relates to accelerate its maturity ("nonpayment default") and (solely with respect to this clause (ii)) the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders (or their representative) of any Designated Senior Debt. Cash payments on the Notes shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated or a default of the type described in clause (ix) under the caption "Events of Default and Remedies" has occurred and is continuing. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the date of commencement of the payment blockage period resulting from the immediately prior Payment Blockage Notice. No nonpayment default in respect of Designated Senior Debt that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of no less than 90 days. The Indenture further requires that the Company promptly notify holders of Senior Debt if payment of the Notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency of the Company, Holders of the Notes may recover less ratably than creditors of the Company who are holders of Senior Debt. As of March 31, 1998, on a pro forma basis, after giving effect to the Worland Field Acquisition and the related financings and the application of the net proceeds from the Offering, (i) the principal amount of Senior Debt outstanding would have been $3.9 million (exclusive of $75 million of unused commitments under the Credit Facility), (ii) there would have been no Senior Subordinated Debt of the Company outstanding (exclusive of the Notes) and (iii) the Subsidiary Guarantors would have had no Indebtedness outstanding other than guarantees of the Credit Facility and the Subsidiary Guarantees. The Indenture will limit, subject to certain financial tests, the amount of additional Indebtedness, including Senior Debt, that the Company and its Subsidiaries can incur. See "--Certain Covenants-- Incurrence of Indebtedness and Issuance of Disqualified Stock." SUBSIDIARY GUARANTEES The Company's payment obligations under the Notes will be jointly, severally and unconditionally guaranteed by each Subsidiary Guarantor and any future Restricted Subsidiary of the Company. The Subsidiary Guarantees will be subordinated to Guarantor Senior Debt of the Subsidiary Guarantors to the same extent and in the same manner as the Notes are subordinated to the Senior Debt. As of March 31, 1998, on a pro forma basis after giving effect to the Worland Field Acquisition and the relating financing and the Offering, there would have been no Guarantor Senior Debt of Subsidiary Guarantors outstanding other than the Subsidiary Guarantees and guarantees of borrowings under the Credit Facility. Although the Indenture contains limitations on the amount of additional Indebtedness that the Company's Restricted Subsidiaries may incur, under certain circumstances the amount of such Indebtedness could be 68 substantial and, in any case, such Indebtedness may be Guarantor Senior Debt. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock" and "--Ranking and Subordination". The obligations of each Subsidiary Guarantor will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor (including, without limitation, any guarantees in respect of Indebtedness under the Credit Facility) and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor may consolidate with or merge into or sell its assets to the Company or another Subsidiary Guarantor without limitation. Each Subsidiary Guarantor may consolidate with or merge into or sell all or substantially all its assets to a corporation, partnership or trust other than the Company or another Subsidiary Guarantor (whether or not affiliated with the Subsidiary Guarantor). Upon the sale or disposition of a Subsidiary Guarantor (by merger, consolidation, the sale of its Capital Stock or the sale of all or substantially all of its assets) to a Person (whether or not an Affiliate of the Subsidiary Guarantor) which is not a Subsidiary of the Company, which sale or disposition is otherwise in compliance with the Indenture (including the covenant described under "--Repurchase at the Option of Holders--Asset Sales"), such Subsidiary Guarantor will be deemed released from all its obligations under the Indenture and its Subsidiary Guarantee and such Subsidiary Guarantee will terminate; PROVIDED, HOWEVER, that any such termination will occur only to the extent that all obligations in respect of Indebtedness of such Subsidiary Guarantor under the Credit Facility and all of its guarantees of, and under all of its pledges of assets or other security interests which secure, any other Indebtedness of the Company will also terminate upon such release, sale or transfer. Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in accordance with the terms of the Indenture shall, upon such designation, be released and relieved of its obligations under its Subsidiary Guarantee and any Unrestricted Subsidiary whose designation as such is revoked and any newly formed or newly acquired Subsidiary that becomes a Restricted Subsidiary will be required to execute a Subsidiary Guarantee in accordance with the terms of the Indenture. MANDATORY REDEMPTION Except as set forth below under "--Repurchase at the Option of Holders," the Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of the Notes will, unless the Company shall have elected to redeem the Notes prior to August 1, 2003 upon a Change of Control as permitted by the third paragraph of "--Optional Redemption," have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Payment"). Within 30 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 offer to repurchase the Notes pursuant to the procedures required by the Indenture and described in such notice on a date no earlier than 30 days nor later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"). 69 On the Change of Control Payment Date, the Company will, to the extent lawful, (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all the Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the relevant Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of such Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of the 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 tendering 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 Indenture will provide that, prior to complying with the provisions of this covenant, but in any event within 30 days following a Change of Control, the Company will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of the Notes required by this covenant. 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. Except as described above with respect to a Change of Control, the Indenture will 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 will not be required to make a Change of Control Offer 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 developing 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 the 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. In the event that the Company makes an offer to purchase the Notes pursuant to the provisions of this "--Change of Control" covenant, the Company intends to comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Securities Exchange Act of 1934, as amended (the "Exchange Act"). ASSET SALES The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) 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 (as determined in good faith by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee, which determination shall be conclusive evidence of compliance with this provision) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 85% of the consideration therefor received by the Company or such Restricted Subsidiary from such Asset Sale is in the form of cash, Cash Equivalents, properties and capital assets to be used by the Company or any Restricted Subsidiary in the Oil and Gas Business or oil and gas properties owned or held by another Person which are to be used in the Oil and Gas Business of the Company or its Restricted Subsidiaries, or any combination thereof (collectively the "Cash Consideration"); PROVIDED that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted 70 Subsidiary from further liability and (y) any non-cash consideration received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 180 days of closing such Asset Sale, shall be deemed to be cash for purposes of this provision (to the extent of the cash received); PROVIDED, HOWEVER, that the Company and its Restricted Subsidiaries may make Asset Sales with a fair market value not exceeding $10 million in the aggregate in each fiscal year free from any of the restrictions, requirements or other provisions under this "--Asset Sales" section. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, in any order or combination, (a) to reduce Senior Debt or Guarantor Senior Debt, (b) to make Permitted Investments, (c) to make investments in interests in other Oil and Gas Businesses or (d) to make capital expenditures in respect of the Company's or its Restricted Subsidiaries' Oil and Gas Business or to purchase long-term assets that are used or useful in the Oil and Gas Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce Senior Debt that is revolving debt or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied as provided in the first sentence of this paragraph will (after the expiration of the periods specified in this paragraph) be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15 million, the Company will be required to make an offer to all Holders of the Notes and, to the extent required by the terms thereof, to all holders or lenders of Pari Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum principal amount of the Notes and any such Pari Passu Indebtedness to which the Asset Sale Offer applies that may be purchased out of the Excess Proceeds, at an offer price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in the Indenture or the agreements governing the Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount of the Notes and Pari Passu Indebtedness (or accreted value, as the case may be) tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of the Notes surrendered by Holders thereof and other Pari Passu Indebtedness surrendered by holders or lenders thereof, collectively, exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and Pari Passu Indebtedness to be purchased on a pro rata basis, based on the aggregate principal amount thereof (or accreted value, as the case may be) surrendered in such Asset Sale Offer. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. In the event that the Company makes an offer to purchase the Notes pursuant to the provisions of this "--Asset Sales" covenant, the Company intends to comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act. The Credit Facility may prohibit the Company from purchasing any Notes and also provides that certain change of control events with respect to the Company would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control or Asset Sale Offer occurs at a time when the Company is prohibited from purchasing the Notes by the terms of the Credit Facility or other agreements relating to other Senior Debt, the Company could seek the consent of its lenders to the purchase 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 may remain prohibited from purchasing the Notes. In such case, 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 the Credit Facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the Holders of the Notes. 71 CERTAIN COVENANTS RESTRICTED PAYMENTS The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Equity Interests of the Company or any Restricted Subsidiary (including, without limitation, any payment in connection with any merger or consolidation involving the Company) to the direct or indirect holders of Equity Interests of the Company or any Restricted Subsidiary in their capacity as such (other than dividends or distributions payable in Equity Interests of the Company or a Restricted Subsidiary (other than Disqualified Stock) and other than dividends or distributions payable to the Company or a Restricted Subsidiary so long as, in the case of any dividend or distribution payable on or in respect of any class or series of securities issued by a Subsidiary other than a Wholly Owned Restricted Subsidiary, the Company or a Restricted Subsidiary receives at least its pro rata share of such dividend or distribution in accordance with its Equity Interests in such class or series of securities); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any Subsidiary of the Company that is not a Wholly Owned Restricted Subsidiary of the Company; (iii) make any principal payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes, except at final maturity or as a mandatory or sinking fund repayment; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) 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 Disqualified Stock"; and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (1), (3), (4) and (6) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture 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 (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the date of the Indenture of Equity Interests of the Company or of debt securities of the Company that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted into Disqualified Stock), PLUS (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash or the receipt of properties used in the Oil and Gas Business, the lesser of (A) the net cash proceeds of such sale, liquidation or repayment or the fair market value of property received in exchange therefor and (B) the amount of such Restricted Investment, PROVIDED, however, that the foregoing provisions of this paragraph (c) will not prohibit Restricted Payments in an aggregate amount not to exceed $15 million. The foregoing 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 or other acquisition of any Equity 72 Interests of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than a sale of Disqualified Stock); PROVIDED that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (3) the defeasance, redemption or repurchase of subordinated Indebtedness with the net cash proceeds from an incurrence of subordinated Permitted Refinancing Debt or the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests (other than Disqualified Stock) of the Company; PROVIDED that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (4) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any of the Company's (or any of its Subsidiaries') employees pursuant to any management equity subscription agreement or stock option agreement in effect as of the date of the Indenture; PROVIDED that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $2 million in any twelve-month period; and PROVIDED FURTHER that no Default or Event of Default shall have occurred and be continuing immediately after such transaction; (5) repurchases of Equity Interests deemed to occur upon exercise of stock options if such Equity Interests represent a portion of the exercise price of such options; (6) the making of loans by the Company or any of its Restricted Subsidiaries to officers or directors of the Company; PROVIDED that the aggregate outstanding amount of such loans shall not exceed, at any time, $2 million plus any such loans outstanding on the date of the Indenture; and (7) during the period the Company is subject to Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and after such period to the extent relating to the liability for such period, the making of payments or distributions or the payment of dividends in amounts equal to the amounts required for the Company's stockholders to pay Federal, state and local income taxes to the extent such income taxes are attributable to the taxable income of the Company. The amount of all Restricted Payments (other than cash) shall be the fair market value (as determined in good faith by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or the applicable Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. In computing Consolidated Net Income of the Company under paragraph (c) above, (1) the Company shall use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (2) the Company shall be permitted to rely in good faith on the financial statements and other financial data derived from the books and records of the Company that are available on the date of determination. DESIGNATION OF UNRESTRICTED SUBSIDIARIES The Board of Directors of the Company may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under clause (c) of the first paragraph of the covenant "Restricted Payments." All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greater of the fair market value or the book value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. 73 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK The Indenture provides that 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 or issue any Disqualified Stock and the Company will not permit any of its Restricted Subsidiaries to issue any shares of Disqualified Stock to any Person other than the Company or a Wholly-Owned Restricted Subsidiary of the Company; PROVIDED, HOWEVER, that the Company and any Subsidiary Guarantor may incur Indebtedness or issue shares of Disqualified Stock if: (i) 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 2.5 to 1, determined on a pro forma basis as set forth in the definition of Fixed Charge Coverage Ratio; and (ii) no Default or Event of Default shall have occurred and be continuing at the time such additional Indebtedness is incurred or such Disqualified Stock is issued or would occur as a consequence of the incurrence of the additional Indebtedness or the issuance of the Disqualified Stock. Notwithstanding the foregoing, the Indenture does not prohibit any of the following (collectively, "Permitted Indebtedness"): (a) the Indebtedness evidenced by the Notes; (b) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to Credit Facilities, so long as the aggregate principal amount of all Indebtedness outstanding under all Credit Facilities does not, at any one time, exceed the greater of (i) $175 million and (ii) the Borrowing Base, provided that the Company may incur more than $175 million of Indebtedness pursuant to Credit Facilities only if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available would have been at least 2.0 to 1, determined on a pro forma basis as set forth in the definition of Fixed Charge Coverage Ratio; (c) the guarantee by any Subsidiary Guarantor of any Indebtedness that is permitted by the Indenture to be incurred by the Company; (d) all Indebtedness of the Company and its Restricted Subsidiaries in existence as of the date of the Indenture; (e) intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; PROVIDED, HOWEVER, that if the Company is the obligor on such Indebtedness, (A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary 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; (f) Indebtedness in connection with one or more standby letters of credit, guarantees, performance bonds or other reimbursement obligations, in each case, issued in the ordinary course of business and not in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includible in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the Oil and Gas Business, and other than the extension of credit represented by such letter of credit, guarantee or performance bond itself), not to exceed in the aggregate at any given time 5% of Total Assets; (g) Indebtedness under Interest Rate Hedging Agreements entered into for the purpose of limiting interest rate risks, PROVIDED that the obligations under such agreements are related to payment obligations on Indebtedness otherwise permitted by the terms of this covenant and that the aggregate notional principal amount of such agreements does not exceed 105% of the principal amount of the Indebtedness to which such agreements relate; (h) Indebtedness under Oil and Gas Hedging Contracts, PROVIDED that such contracts were entered into in the ordinary course of business for the purpose of limiting risks that arise in the ordinary course of business of the Company and its Restricted Subsidiaries; (i) the incurrence by the Company and its Restricted Subsidiaries of Indebtedness not otherwise permitted to be incurred pursuant 74 to this paragraph, PROVIDED that the aggregate principal amount of all Indebtedness incurred pursuant to this clause (i), together with all Permitted Refinancing Debt incurred pursuant to clause (j) of this paragraph in respect of Indebtedness previously incurred pursuant to this clause (i), does not exceed $20 million at any one time outstanding; (j) Permitted Refinancing Debt incurred in exchange for, or the net proceeds of which are used to refinance, extend, renew, replace, defease or refund, Indebtedness that was permitted by the Indenture to be incurred (including Indebtedness previously incurred pursuant to this clause (j), but excluding Indebtedness under clauses (b), (e), (f), (g), (h), (k), (l) and (m)); (k) accounts payable or other obligations of the Company or any Restricted Subsidiary to trade creditors created or assumed by the Company or such Restricted Subsidiary in the ordinary course of business in connection with the obtaining of goods or services; (l) Indebtedness consisting of obligations in respect of purchase price adjustments, guarantees or indemnities in connection with the acquisition or disposition of assets; (m) production imbalances occurring in the ordinary course of business that do not, at any one time outstanding, exceed 2% of the Total Assets of the Company; (n) rents and royalties due others incurred in the ordinary course of the Oil and Gas Business; and (o) Indebtedness of a Subsidiary Guarantor in respect of the Subsidiary Guarantee of such Subsidiary Guarantor. The Indenture provides that the Company will not permit any Unrestricted Subsidiary to incur any Indebtedness other than Non-Recourse Debt; PROVIDED, HOWEVER, if any such Indebtedness ceases to be Non-Recourse Debt, such event shall be deemed to constitute an incurrence of Indebtedness by the Company. NO LAYERING The Indenture provides that (i) the Company will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Notes and (ii) the Subsidiary Guarantors will not directly or indirectly incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to Guarantor Senior Debt and senior in any respect in right of payment to the Subsidiary Guarantees, PROVIDED, HOWEVER, that the foregoing limitations will not apply to distinctions between categories of Indebtedness that exist by reason of any Liens arising or created in accordance with the provisions of the Indenture in respect of some but not all such Indebtedness. LIENS The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien securing Indebtedness of any kind (other than Permitted Liens) upon any of its property or assets, now owned or hereafter acquired, unless all payments under the Notes are secured by such Lien prior to, or on an equal and ratable basis with, the Indebtedness so secured for so long as such Indebtedness is secured by such Lien. SALE AND LEASEBACK TRANSACTIONS The Indenture provides that 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 its Restricted Subsidiaries may enter into a sale and leaseback transaction if (i) the Company could have incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the test set forth in the first paragraph of the covenant described above under the caption "Incurrence of Indebtedness and Issuance of Disqualified Stock" or (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by a resolution the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and the transfer of assets in such sale 75 and leaseback transaction is permitted by, and the Company applies the net proceeds of such transaction in compliance with, the covenant described above under the caption "Repurchase at the Option of Holders-- Asset Sales." DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(x) pay dividends or make any other distributions to the Company or any of the Restricted Subsidiaries of the Company (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (y) pay any Indebtedness owed to the Company or any Restricted Subsidiaries of the Company, (ii) make loans or advances to the Company or any Restricted Subsidiaries of the Company or (iii) transfer any of its properties or assets to the Company or any Restricted Subsidiaries of the Company, except for such encumbrances or restrictions existing under or by reason of (a) the Credit Facility as in effect as of the date of the Indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof or any other Credit Facility, PROVIDED that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements, refinancings or other Credit Facilities are no more restrictive with respect to such dividend and other payment restrictions than those contained in the Credit Facility as in effect on the date of the Indenture, (b) the Indenture and the Notes, (c) applicable law, (d) 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, in the case of Indebtedness, 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 and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired, PROVIDED that, such Indebtedness or Capital Stock was permitted by the terms of the Indenture to be incurred, (e) customary non-assignment provisions in leases entered into in the ordinary course of business, (f) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (g) Permitted Refinancing Debt, PROVIDED that the restrictions contained in the agreements governing such Permitted Refinancing Debt are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (h) any other security agreement, instrument or document relating to Senior Debt hereafter in effect, provided that such encumbrances or restrictions are customary in connection with such documents and that the terms and conditions of such encumbrances or restrictions are no more restrictive than those encumbrances or restrictions imposed in connection with the Credit Facility, (i) Permitted Liens, (j) customary provisions in joint venture agreements and other similar agreements relating to the distribution of revenues from such joint venture or other business venture, or (k) any agreement relating to a sale and leaseback transaction or capital lease, but only on the property subject to such transaction or lease and only to the extent that such restrictions or encumbrances are customary with respect to a sale and leaseback transaction or capital lease. LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES The Indenture provides that the Company will not sell or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any shares of its Capital Stock except (i) to the Company or a Wholly Owned Restricted Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or other disposition, such Restricted Subsidiary remains a Restricted Subsidiary, (iii) shares of nonvoting Capital Stock of Restricted Subsidiaries may be issued or sold to employees or directors of the Company or any Subsidiary, or (iv) if all shares of Capital Stock of such Restricted Subsidiary are sold or otherwise disposed. In connection with any sale or disposition of Capital Stock of a Restricted Subsidiary, the 76 Company will be required to comply with the covenant described under the caption "Repurchase at the Option of Holders--Asset Sales" above. MERGER, CONSOLIDATION, OR SALE OF ASSETS The Indenture provides that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets, in one or more related transactions, to another Person, and the Company may not permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions would, in the aggregate, result in a sale, assignment, transfer, lease, conveyance, or other disposition of all or substantially all of the properties or assets of the Company to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (the "Surviving Entity") is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Surviving Entity (if the Company is not the continuing obligor under the Indenture) assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately before and after giving effect to such transaction or series of transactions no Default or Event of Default exists; (iv) immediately after giving effect to such transaction or series of transactions on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company and its Restricted Subsidiaries which becomes the obligation of the Company or any of its Restricted Subsidiaries as a result of such transaction as having been incurred at the time of such transaction or series of transactions), the Consolidated Net Worth of the Company or the Surviving Entity (if the Company is not the continuing obligor under the Indenture) is equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions; and (v) the Company or the Surviving Entity (if the Company is not the continuing obligor under the Indenture) will, at the time of such transaction or series of transactions and after giving pro forma effect thereto as if such transaction or series of transactions had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Disqualified Stock." Each Subsidiary Guarantor, if any, unless it is the other party to the transactions described above, shall have confirmed by supplemental indenture that its Subsidiary Guarantee shall apply to such Person's obligations under the Indenture and the Notes. Notwithstanding the restrictions described in the foregoing clauses (iv) and (v), any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company, and any Wholly Owned Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to another Wholly Owned Restricted Subsidiary. TRANSACTIONS WITH AFFILIATES The Indenture provides that 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 contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any of its Affiliates (each of the foregoing, an "Affiliate Transaction"), unless (i) 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 (ii) 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 $1 million but less than or equal to $5 million, an Officer's Certificate certifying that such Affiliate Transaction complies with clause (i) above, (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving 77 aggregate consideration in excess of $5 million but less than or equal to $10 million, a resolution of the Board of Directors set forth in an Officer's Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved in good faith by a majority of the members of the Board of Directors who have no financial interest in such Affiliate Transaction, which resolution shall be conclusive evidence of compliance with this provision, and (c) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10 million, an Officer's Certificate as described in clause (b) above and an opinion as to the fairness to the Company or such Subsidiary of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal, engineering or investment banking firm of national standing (for purposes of this clause (c) such opinion and the resolution described in clause (b) above shall be conclusive evidence of compliance with this provision); PROVIDED that the following shall not be deemed Affiliate Transactions: (1) reasonable fees and compensation paid to (including issuances and grants of securities and stock options), and employment agreements and stock option and ownership plans for the benefit of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors or senior management, (2) transactions contemplated by any employment agreement or other compensation plan or arrangement entered into by the Company or any of its Subsidiaries in the ordinary course of business and consistent with past practice of the Company or such Subsidiary, (3) transactions between or among the Company and/or its Restricted Subsidiaries, (4) Restricted Payments and Permitted Investments that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments" and the definition of Permitted Investments, (5) indemnification payments made to officers, directors and employees of the Company or its Subsidiaries pursuant to charter, by-law, statutory or contractual provisions, (6) any contracts, agreements and understandings existing as of the date of the Indenture, and (7) oil and gas leasehold acquisition, drilling, well servicing and leasehold operations services provided by or to such Affiliate in the ordinary course of the Oil and Gas Business 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. ADDITIONAL SUBSIDIARY GUARANTEES The Indenture provides that if the Company or any of its Restricted Subsidiaries shall acquire or create another Restricted Subsidiary after the date of the Indenture, then such newly acquired or created Restricted Subsidiary will be required to execute a Subsidiary Guarantee in accordance with the terms of the Indenture. BUSINESS ACTIVITIES The Company will not, and will not permit any Restricted Subsidiary to, engage in any material respect in any business other than the Oil and Gas Business. COMMISSION REPORTS Notwithstanding that the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission and, within 15 days after such filing, provide the Trustee and Holders with the annual reports and the information, documents and other reports which are specified in Sections 13 and 15(d) of the Exchange Act. In the event that the Company is not permitted to file such reports, documents and information with the Commission, the Company will provide substantially similar information to the Trustee and the Holders as if the Company were subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act within 15 days of the date the Company would have been obligated to file such reports with the Commission, were the Company permitted to file such reports with the Commission. The Company also will comply with the other provisions of Section 314(a) of the Trust Indenture Act. 78 EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default: (i) a default for 30 consecutive days in the payment when due of interest on the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) a default in payment when due of the principal of or premium, if any, on the Notes (whether or not prohibited by the subordination provisions of the Indenture); (iii) the failure by the Company or a Subsidiary Guarantor to comply with its obligations under "Certain Covenants--Merger, Consolidation or Sale of Assets" above; (iv) the failure by the Company for 30 days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding to comply with the provisions described under the captions "Repurchase at the Option of Holders" and "Certain Covenants" other than the provisions described under "--Merger, Consolidation or Sale of Assets"; (v) failure by the Company for 60 consecutive days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding to comply with any of its other agreements in the Indenture or the Notes; (vi) 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 a Subsidiary Guarantor, or any Person acting on behalf of such Subsidiary Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; (vii) a default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (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 is then existing a Payment Default or the maturity of which has been so accelerated, aggregates $10 million or more; (viii) the failure by the Company or any of its Restricted Subsidiaries to pay final, non-appealable judgments aggregating in excess of $10 million, which judgments remain unpaid or discharged for a period of 60 days; and (ix) certain events of bankruptcy or insolvency with respect to the Company or any of its Restricted Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal of and accrued but unpaid interest on such Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any Restricted Subsidiary, all outstanding Notes will become due and payable without further action or notice. 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 Notes then outstanding 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 or premium on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, within five business days of becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 79 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 have each Subsidiary Guarantor's, if any, obligation discharged with respect to its Subsidiary Guarantee ("Legal Defeasance") except for (i) the rights of Holders of such outstanding Notes to receive payments in respect of the principal of, premium, if any, or interest on such Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to such Notes concerning issuing temporary Notes, registration of such Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) 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 released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default. 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. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) 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, 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; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to such 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 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; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to such 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; (iv) no Default or Event of Default shall have occurred and be continuing 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 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; (v) 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 Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) 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; (vii) 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 the Notes over the other creditors of the Company, or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Trustee an Officers' Certificate and an opinion of counsel, each stating that 80 all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may, subject to certain restrictions, 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 the Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, the Notes), and any existing default or compliance with any provision of the Indenture or the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (i) reduce the principal amount of the Notes whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes as described above under "Optional Redemption" or "Repurchase at the Option of Holders", (iii) reduce the rate of or change the time for payment of interest on any Note, (iv) 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 principal amount of such Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Note payable in money other than that stated in the Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of the Notes to receive payments of principal of or premium, if any, or interest on the Notes, (vii) make any change in the foregoing amendment and waiver provisions or (viii) except as provided under the third paragraph of "Subsidiary Guarantees" or "Legal Defeasance and Covenant Defeasance," release a Subsidiary Guarantor, if any, from its obligations under its Subsidiary Guarantee, if any, or make any change in a Subsidiary Guaranty, if any, that would adversely affect the Holders. In addition, any amendment to the provisions of Article 10 of the Indenture (which relates to subordination) will require the consent of the Holders of at least 66 2/3% in principal amount of the Notes then outstanding if such amendment would adversely affect the rights of Holders of such Notes. However, no amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or any group or representative thereof authorized to give a consent) consents to such change. Notwithstanding the foregoing, without the consent of any Holder of the Notes the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided, however, that the uncertificated Notes are issued in registered form for purposes of section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to provide for the assumption of the Company's obligations to Holders of the Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the 81 Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to add Guarantees with respect to the Notes or to secure the Notes, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of 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 (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of the Notes, unless such Holder shall have offered to such Trustee security and indemnity satisfactory to it against any loss, liability or expense. GOVERNING LAW The Indenture, the Notes and the Subsidiary Guarantees provide that they will be governed by the laws of the State of New York. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full definition 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, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or becomes a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) 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" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), 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. "APPLICABLE PREMIUM" means, with respect to a Note at the redemption date, the greater of (i) 1% of the principal amount of such Note and (ii) the excess of (A) the present value at such time of (1) the redemption price of such Note at August 1, 2003 (such redemption price being described under "--Optional Redemption"), PLUS (2) all required interest payments (excluding accrued but unpaid interest) due on such Note through August 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the then-outstanding principal amount of such Note. "ASSET SALE" means (i) the sale, lease, conveyance or other disposition by the Company or any of its Restricted Subsidiaries (but excluding the creation of a Lien) of any assets including, without limitation, by 82 way of a sale and leaseback (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its 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 described above under "--Repurchase at the Option of Holders--Asset Sales"), and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Subsidiaries (including the sale by the Company or a Restricted Subsidiary of Equity Interests in an Unrestricted Subsidiary), in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $5 million or (b) for Net Proceeds in excess of $5 million. Notwithstanding the foregoing, the following shall not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Restricted Subsidiary of the Company or by a Restricted Subsidiary of the Company to the Company or to another Restricted Subsidiary of the Company, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company, (iii) the making of a Restricted Payment or Permitted Investment that is permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments"; provided that the sale, lease, conveyance or other disposition by the Company or any of its Restricted Subsidiaries of an Investment shall be deemed an Asset Sale, (iv) the abandonment, farm-out, lease or sublease of undeveloped oil and gas properties in the ordinary course of business, (v) the trade or exchange by the Company or any Restricted Subsidiary of the Company of any oil and gas property or interest therein owned or held by the Company or such Restricted Subsidiary for any oil and gas property or interest therein owned or held by another Person, including any cash or Cash Equivalents necessary in order to achieve an exchange of equivalent value; provided that any such cash or Cash Equivalents received by the Company or such Restricted Subsidiary will be subject to the provisions described in the second and third paragraphs under "Repurchase at the Option of Holders--Asset Sales," which the Board of Directors of the Company determines in good faith by resolution to be of approximately equivalent value, (vi) the sale or transfer of hydrocarbons or other mineral products in the ordinary course of business, (vii) the sale of oil and gas properties in connection with tax credit transactions complying with Section 29 or any successor or analogous provisions of the Internal Revenue Code or (viii) the sale or transfer of surplus or obsolete equipment in the ordinary course of business. "ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) 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). "BORROWING BASE" means, as of any date, the aggregate amount of borrowing availability as of such date under all Credit Facilities that determines availability on the basis of a borrowing base or other asset-based calculation. "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 such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited), (iv) in the case of a limited liability company or similar entity, any membership or similar interests therein and (v) 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. 83 "CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than twelve months from the date of acquisition, (iii) 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 lender party to any of the Credit Facilities or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having a rating of at least P1 from Moody's Investors Service, Inc. (or its successor) and a rating of at least A1 from Standard & Poor's Rating Group (or its successor) and (vi) investments in money market or other mutual funds substantially all of whose assets comprise securities of types described in clauses (ii) through (v) above. "CHANGE OF CONTROL" means the occurrence of any of the following: (i) prior to the first public offering of Voting Stock of the Company, either (x) Permitted Holders cease to be the "beneficial owner(s)" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company, or (y) Permitted Holders cease to be entitled by voting power, contract or otherwise to elect or cause the election of directors of the Company having a majority of the total voting power of the Board or Directors, in each case, whether as a result of issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by any Permitted Holder or otherwise (for purposes of this clause (i) and clause (ii) below, Permitted Holders shall be deemed to beneficially own any Voting Stock of an entity (the "specified entity") held by any other entity (the "parent entity") so long as the Permitted Holders beneficially own, directly or indirectly, a majority of the Voting Stock of the parent entity; (ii) following the first public offering of Voting Stock of the Company, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in clause (i) above, except that a Person shall be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire within one year), directly or indirectly, of more than 50% of the Voting Stock of the Company; PROVIDED that the Permitted Holders beneficially own (as defined in clause (i) above), directly or indirectly, in the aggregate a lesser percentage of the Voting Stock of the Company than such other Person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors; (iii) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "Person" or group of related Persons (a "Group"); (as such term is used in Sections 13(d) and 14(d) of the Exchange Act); (iv) the adoption of a plan relating to the liquidation or dissolution of the Company; and (v) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. 84 "COMMISSION" means the Securities and Exchange Commission. "CONSOLIDATED CASH FLOW" means, with respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period increased by (i) an amount equal to any extraordinary or non-recurring loss, and any net loss realized in connection with an Asset Sale (together with any related provision for taxes) to the extent such losses were included in computing such Consolidated Net Income, PLUS (ii) 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 included in computing such Consolidated Net Income, PLUS (iii) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of 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 letters of credit or bankers' acceptance financings, and net payments (if any) pursuant to Interest Rate Hedging Agreements), to the extent that any such expense was included in computing such Consolidated Net Income, PLUS (iv) depreciation, depletion and amortization expenses (including amortization of goodwill and other intangibles) for such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, depletion and amortization expenses were included in computing such Consolidated Net Income, PLUS (v) exploration expenses for such Person and its Restricted Subsidiaries for such period to the extent such exploration expenses were included in computing such Consolidated Net Income, PLUS (vi) costs incurred in connection with acquisitions that would be eligible for capitalization treatment under GAAP, but have been expensed at the time of incurrence, PLUS (vii) other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period, including, without limitation, any ceiling limitation writedowns and non-cash losses or charges to net income resulting from the net change in value of such Person's mark-to-market portfolio of Oil and Gas Commodity Price Risk Management Contracts, to the extent that such other non-cash charges were included in computing such Consolidated Net Income, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation, depletion and amortization and other non-cash charges and expenses of, a Restricted Subsidiary of the relevant Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person and only if a corresponding amount would be permitted at the date of determination to be dividended to such Person by such Restricted Subsidiary without prior governmental approval (that has not been obtained), and without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Restricted Subsidiary or its stockholders. "CONSOLIDATED NET INCOME" means, with respect to any 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 (i) the Net Income (but not loss) 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 referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) 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 and (iv) the cumulative effect of a change in accounting principles shall be excluded; provided, however, that for 85 purposes of a determination pursuant to the provisions of the covenant described above under the caption "--Certain Covenants--Restricted Payments", there will be deducted from the Net Income of the Company and its Restricted Subsidiaries for such period an amount equal to payments, distributions and dividends paid by the Company pursuant to clause (7) of the second paragraph of such covenant. "CONSOLIDATED NET WORTH" means the total of the amounts shown on the balance sheet of the Company and its consolidated Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending prior to the taking of any action for the purpose of which the determination is being made and for which financial statements are available (but in no event ending more than 135 days prior to the taking of such action), as (i) the par or stated value of all outstanding Capital Stock of the Company, plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit (in each case excluding any minority interest) and (B) any amounts attributable to Disqualified Stock. "CREDIT FACILITY" means that certain Credit Agreement, dated as of May 14, 1998, among the Company, Bank One, Oklahoma, N.A., as Agent and lender and the other parties thereto, including any related notes, guarantees, security or pledge agreements, collateral documents, instruments and agreements executed by the Company or any Subsidiary of the Company in connection therewith, and in each case as amended, restated, modified, renewed, increased, supplemented, refunded, replaced or refinanced, in whole or in part, from time to time, whether or not with the same or other lenders or agents and whether provided under the original Credit Facility or any other credit agreement or indenture. "CREDIT FACILITIES" means, with respect to the Company, one or more debt facilities (including, without limitation, the Credit Facility) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, production payments, 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, increased, supplemented, refunded, replaced or refinanced in whole or in part from time to time. Indebtedness under Credit Facilities outstanding on the date on which the Notes are first issued and authenticated under the Indenture (after giving effect to the use of proceeds thereof) shall be deemed to have been incurred on such date in reliance on the exception provided by clause (b) of the definition of Permitted Indebtedness. "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 SENIOR DEBT" means (i) the Credit Facility and (ii) any other Senior Debt permitted under the Indenture which, at the date of determination, has an aggregate principal amount outstanding of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $10 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Debt as "Designated Senior Debt" for purposes of the Indenture. "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) or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, is convertible or is exchangeable for Indebtedness or Disqualified Stock or redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the date that is 91 days after (x) the date on which the Notes mature or (y) the date on which there are no Notes outstanding. "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). "FIXED CHARGES" means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash 86 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 Interest Rate Hedging Agreements), (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, (iii) any interest expense on Indebtedness of another Person that is guaranteed by such Person or any of its Restricted Subsidiaries or secured by a Lien on assets of such Person or any of its Restricted Subsidiaries (whether or not such guarantee or Lien is called upon) and (iv) the product of (a) all cash dividend payments (and non-cash dividend payments in the case of a Person that is a Restricted Subsidiary, unless paid in Equity Interests that are not Disqualified Stock) on any series of preferred stock of such Person or any of its Restricted Subsidiaries, 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. When calculating the amount of Fixed Charges, any interest expense attributable to any Person shall be included in such calculation to the same extent the Net Income of such Person was included in the calculation of Consolidated Net Income in connection with calculating the Fixed Charge Coverage Ratio. "FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the Company 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 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 making the computation referred to above, (i) acquisitions that have been made by the referent 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 (including, without limitation, any acquisition to occur on the Calculation Date) shall be deemed to have occurred on the first day of the four-quarter reference period and any cost savings or expense reductions attributable at the time of such computation or to be attributable in the future to such acquisition, shall be included in such computation, to the extent that such adjustments would be permitted under Article 11 of Regulation S-X and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, (ii) the net proceeds of Indebtedness incurred or Disqualified Stock issued by the referent Person pursuant to the first paragraph of the covenant described under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock" 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 been received by the referent Person or any of its Restricted Subsidiaries on the first day of the four-quarter reference period and applied to its intended use on such date, (iii) 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 (iv) 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 referent 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 87 by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issuance Date. "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, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "GUARANTOR SENIOR DEBT" means any Indebtedness of a Subsidiary Guarantor permitted to be incurred under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Subsidiary Guarantee of such Subsidiary Guarantor, including interest accruing subsequent to the filing of, or which would have accrued but for the filing of, a petition of bankruptcy, whether or not such interest is an allowable claim in such bankruptcy proceeding. Notwithstanding anything to the contrary in the foregoing sentence, Guarantor Senior Debt will not include (a) any liability for federal, state, local or other taxes owed or owing by any Subsidiary Guarantor, (b) any obligation of a Subsidiary Guarantor to the Company or to any other Restricted Subsidiary of the Company, (c) any accounts payable or trade liabilities of a Subsidiary Guarantor arising in the ordinary course of business (including instruments evidencing such liabilities), (d) any Indebtedness of a Subsidiary Guarantor that is incurred in violation of the Indenture, (e) Indebtedness of a Subsidiary Guarantor which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Subsidiary Guarantor, and (f) Indebtedness evidenced by a Subsidiary Guarantee. "INDEBTEDNESS" means, with respect to any Person, without duplication, (a) any indebtedness of such Person, whether or not contingent, (i) in respect of borrowed money, (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) evidenced by letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances, (iv) representing Capital Lease Obligations, (v) representing the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable, (vi) representing any obligations in respect of Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts, and (vii) in respect of any production payment, (b) all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person), (c) obligations of such Person in respect of production imbalances, (d) Acquired Debt of such Person, (e) Attributable Debt of such Person, and (f) to the extent not otherwise included in the foregoing, the guarantee by such Person of any Indebtedness of any other Person. The amount of Indebtedness of any Person at any date will be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, on the occurrence of the contingency giving rise to the obligation, of any contingent obligations described above. The amount of Indebtedness at any date in respect of (i) Credit Facilities shall be the outstanding principal amount thereof at such date plus any outstanding letters of credit (or reimbursement obligations in respect thereof) issued thereunder at such date and (ii) Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts at such date shall be an amount equal to the net termination value of such agreement or arrangement giving rise to such obligation that would be payable at such time. "INTEREST RATE HEDGING AGREEMENTS" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "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 but excluding trade credit and other ordinary course advances customarily made in the Oil and Gas Business), advances (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), capital contributions, purchases or other acquisitions for 88 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; PROVIDED that the following shall not constitute Investments: (i) an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities of the Company, (ii) Interest Rate Hedging Agreements entered into in accordance with the limitations set forth in clause (g) of the second paragraph of the covenant described under the caption "--Certain Covenants-- Incurrence of Indebtedness and Issuance of Disqualified Stock," (iii) Oil and Gas Hedging Agreements entered into in accordance with the limitations set forth in clause (h) of the second paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock", (iv) endorsements of negotiable instruments and documents in the ordinary course of business, (v) extensions of trade credit on commercially reasonable terms in accordance with normal trade practices, and (vi) Cash Equivalents, bonds, notes, debentures or other securities received in compliance with covenants described under the caption "--Repurchase at the Option of Holders--Asset Sales." 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 entity is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of. "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). "NET INCOME" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain or loss, together with any related provision for taxes on such gain or loss, realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) 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 (ii) any extraordinary or nonrecurring gain or loss, together with any related provision for taxes on such extraordinary or nonrecurring 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, but excluding cash amounts placed in escrow, until such amounts are released to the Company), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting, investment banking and other professional fees and expenses, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under any Senior Debt) 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 and any reserve established for future liabilities. 89 "NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness), or (b) is directly or indirectly liable (as guarantor or otherwise); and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time, or both) any holder of any other Indebtedness of the Company or any 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 (iii) the explicit terms of which provide that there is no recourse against any of the assets of the Company or its Restricted Subsidiaries. "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "OIL AND GAS BUSINESS" means (i) the acquisition, exploration, exploitation, development, operation and disposition of interests in oil, gas and other hydrocarbon properties, (ii) the gathering, marketing, distribution, treating, processing, storage, selling and transporting of any production from such interests or properties of the Company and its Subsidiaries and the marketing of oil and gas obtained from unrelated Persons, (iii) any business relating to exploration for or development, production, treatment, processing, storage, transportation, gathering or marketing of oil, gas and other minerals and products produced in association therewith, (iv) any business relating to oilfield sales and service and (v) any activity that is ancillary to or necessary or appropriate for the activities described in clauses (i) through (iv) of this definition. "OIL AND GAS HEDGING CONTRACTS" means any oil and gas purchase or commodity price risk management hedging agreement, and other agreement or arrangement, entered into in the ordinary course of business, in each case, that is designed to provide protection against oil and gas price fluctuations. "PARI PASSU INDEBTEDNESS" means Indebtedness that ranks PARI PASSU in right of payment to the Notes. "PERMITTED HOLDERS" means (i) any stockholder of the Company on the Issue Date; (ii) family members or relatives of the persons described in clause (i); (iii) any trusts created for the benefit of the persons described in clauses (i) or (ii); (iv) in the event of the incompetence or death of any of the persons described in clauses (i) or (ii), such person's estate, executor, administrator, committee or other personal representatives or beneficiaries; and (v) any Permitted Holder Subsidiary. "PERMITTED HOLDER SUBSIDIARY" means, with respect to any Permitted Holder, (i) any corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by one or more Permitted Holders, or by one or more other Permitted Holder Subsidiaries of such Permitted Holders, or by one or more Permitted Holders and one or more other Permitted Holder Subsidiaries of such Permitted Holders, (ii) any general partnership, limited liability company, joint venture or similar entity more than 50% of the outstanding partnership, membership or similar interest of which is owned directly or indirectly, by one or more Permitted Holders, or by one or more other Permitted Holder Subsidiaries of such Permitted Holders, or by one or more Permitted Holders and one or more other Permitted Holder Subsidiaries of such Permitted Holders and (iii) any limited partnership of which one or more Permitted Holders or any Permitted Holder Subsidiary of such Permitted Holders is a general partner. "PERMITTED INDEBTEDNESS" has the meaning given in the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock." "PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of the Company in a Person if, as a result of such Investment and any related transactions that at the time of such Investment are contractually mandated to occur, (i) such Person becomes a Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys all or substantially all of its assets to, or is liquidated into, the Company or a Restricted 90 Subsidiary of the Company; (d) any Investment made as a result of the receipt of non-cash portion of the 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 not constituting an Asset Sale by reason of the 5 million threshold contained in the definition thereof; (e) any Investment by the Company in any Person engaged in the Oil and Gas Business or assets used in the Oil and Gas Business in exchange for Equity Interests in the Company (other than Disqualified Stock), (f) shares of Capital Stock received in connection with any good faith settlement of a bankruptcy proceeding involving a trade creditor, (g) Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts; (h) loans and advances to employees in the ordinary course of business for bona fide business purposes; (i) operating agreements, joint ventures, partnership agreements, working interests, royalty interests, mineral leases, processing agreements, farm-out or farm-in agreements, contracts for the sale, transportation or exchange of oil and natural gas, unitization agreements, pooling arrangements, area of mutual interest agreements, production sharing agreements or other similar or customary agreements, transactions, properties, interests or arrangements, and Investments and expenditures in connection therewith or pursuant thereto, in each case made or entered into in the ordinary course of the Oil and Gas Business, excluding however, Investments in corporations other than any Investment received pursuant to the Asset Sale provision; and (j) any other Investments in any Person or Persons not otherwise permitted to be made pursuant to clauses (a)-(i) above, when taken together with all other Investments made pursuant to this clause (j) that are at the time outstanding, having an aggregate amount (such amount to be calculated on a cost basis) not to exceed the greater of (i) $15 million and (ii) 5% of Total Assets, as calculated at the time of such Investment. "PERMITTED LIENS" means (i) Liens securing Indebtedness of a Subsidiary or Liens securing Senior Debt that is outstanding on the date of issuance of the Notes and Liens securing Senior Debt that is permitted by the terms of the Indenture to be incurred; (ii) Liens in favor of the Company or any Restricted Subsidiary; (iii) Liens on property existing at the time of acquisition thereof by the Company or any Subsidiary of the Company and Liens on property or assets of a Subsidiary existing at the time it became a Subsidiary, provided that such Lien was not created in contemplation of the acquisition of the property, and provided further that no such Lien shall extend to any assets other than the acquired property or the property of the acquired Subsidiary; (iv) Liens incurred on deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance or other kinds of social security, or to secure the payment or performance of tenders, statutory or regulatory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business (including lessee or operator obligations under statutes, governmental regulations or instruments related to the ownership, exploration and production of oil, gas and minerals on state or federal lands or waters); (v) Liens existing on the date of the Indenture; (vi) 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; (vii) statutory liens of landlords, mechanics, suppliers, vendors, warehousemen, carriers or other like Liens arising in the ordinary course of business; 91 (viii) judgment Liens not giving rise to an Event of Default so long as any appropriate legal proceeding that may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceeding may be initiated shall not have expired; (ix) Liens on, or related to, properties or assets to secure all or part of the costs incurred in the ordinary course of the Oil and Gas Business for the exploration, exploitation, drilling, development, production, gathering, processing, transportation, marketing, storage or operation thereof; (x) Liens on pipeline or pipeline facilities that arise under operation of law; (xi) Liens arising under operating agreements, joint venture agreements, partnership agreements, oil and gas leases, farm-out or farm-in agreements, division orders, contracts for the sale, transportation or exchange of oil or natural gas, unitization and pooling declarations and agreements, area of mutual interest agreements and other agreements that are customary in the Oil and Gas Business; (xii) Liens reserved in oil and gas mineral leases for bonus or rental payments and for compliance with the terms of such leases; (xiii) Liens securing the Notes; (xiv) Liens constituting survey exceptions, encumbrances, easements, and reservations of, and rights to others for, rights-of-way, zoning and other restrictions as to the use of real properties, and minor defects of title which, in the case of any of the foregoing, do not secure the payment of borrowed money, and in the aggregate do not materially adversely affect the value of the assets of the Company and its Restricted Subsidiaries, taken as a whole, or materially impair the use of such properties for the purposes for which such properties are held by the Company or such subsidiaries; (xv) any interest or title of a lessor under any Capital Lease Obligation or operating lease; (xvi) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of defeasing Indebtedness of the Company or any of the Restricted Subsidiaries; (xvii) Liens securing obligations under Interest Rate Hedging Agreements or Oil and Gas Commodity Price Risk Management Contracts; (xviii) Liens upon specific items of inventory or other goods and proceeds of the Company or any Restricted Subsidiary securing the Company's or such Restricted Subsidiary's, as the case may be, obligations in respect of bankers' acceptances issued or created for the account of the Company or such Restricted Subsidiary, as the case may be, to facilitate the purchase, shipment or storage of such inventory or other goods; (xix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (xx) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (xxi) Liens encumbering deposits made to secure Obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xxii) Liens securing Purchase Money Debt; provided however that the related Purchase Money Debt shall not be secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets acquired by the Company with the proceeds of such Purchase Money Debt; 92 (xxiii) Liens on the Capital Stock of Unrestricted Subsidiaries; (xxiv) Liens to secure any Permitted Refinancing Debt, provided that the Indebtedness so exchanged, extended, refinanced, renewed, replaced, defeased or refunded was secured by Liens permitted pursuant to clause (iii) or (v) of this definition, provided however, that (a) such new Liens shall be limited to all or part of the same property that secured the original Lien, plus improvements on the property and (b) the Permitted Refinancing Debt secured by such Lien at such time is not increased to any amount greater than the sum of (x) the outstanding principal amount or, if greater, the committed amount of the Indebtedness secured by Liens described under clause (iii) or (v) of this definition at the time the original Lien became a Lien permitted in accordance with the Indenture and (y) an amount necessary to pay any fees and expenses, including premiums, related to such exchange, extension, refinancing, renewal, replacement, defeasement or refunding; (xxv) Liens securing Attributable Debt under any sale and leaseback transaction permitted by the terms of the Indenture, but only on the property subject to such sale and leaseback transaction; and (xxvi) Liens not otherwise permitted by clauses (i) through (xxv) that are incurred in the ordinary course of business of the Company or any Subsidiary with respect to obligations that do not exceed $5 million at any one time outstanding. "PERMITTED REFINANCING DEBT" 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 (other than Indebtedness incurred under a Credit Facility) of the Company or any of its Restricted Subsidiaries; PROVIDED that: (i) the principal amount of such Permitted Refinancing Debt does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith (other than increases resulting from the capitalization of interest or fees)); (ii) such Permitted Refinancing Debt has a final maturity date on or later 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; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes or the Subsidiary Guarantees, as the case may be, such Permitted Refinancing Debt has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes or the Subsidiary Guarantees, as the case may be, on terms at least as favorable taken as a whole to the Holders of the Notes, or the Subsidiary Guarantees, as the case may be, as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "PURCHASE MONEY DEBT" means Indebtedness incurred in connection with the purchase by the Company or any of its Subsidiaries of any equipment, real or personal property, or any other asset, other than Equity Interests of any Person (i) as to which the obligee expressly waives the provisions of Section 1111 (b) of Title 11, United States Code; (ii) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness), or (b) is directly or indirectly liable (as guarantor or otherwise) other than the pledge of the equipment, real or personal property or other assets acquired with the proceeds of such Indebtedness; (iii) no default with respect to which (including any rights that the holders thereof may have to take enforcement actions against an Unrestricted Subsidiary) would permit (upon notice, lapse of time, or both) any holder of any other 93 Indebtedness 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 (iv) the explicit terms of which provide that there is no recourse against any of the assets of the Company or its Restricted Subsidiaries, other than recourse against the equipment, real or personal property or other assets acquired with the proceeds of such Indebtedness. "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED SUBSIDIARY" means any direct or indirect Subsidiary of the Company that is not an Unrestricted Subsidiary. "SENIOR DEBT" means (i) Indebtedness of the Company or any Subsidiary of the Company under or in respect of any Credit Facility, whether for principal, interest (including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law, whether or not the claim for such interest is allowed as a claim in such proceeding), reimbursement obligations, fees, commissions, expenses, indemnities or other amounts, and (ii) any other Indebtedness permitted under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes. Notwithstanding anything to the contrary in the foregoing sentence, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of the Indenture (other than Indebtedness under (i) the Credit Facility or (ii) any other Credit Facility that is incurred on the basis of a representation by the Company to the applicable lenders that it is permitted to incur such Indebtedness under the Indenture). "SUBSIDIARY" means, with respect to any Person, (i) 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 (ii) 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 one or more Subsidiaries of such Person (or any combination thereof). "SUBSIDIARY GUARANTEE" means any guarantee of any Subsidiary of the Company under the Indenture and the Notes in accordance with the provisions of the Indenture. "SUBSIDIARY GUARANTORS" means each Restricted Subsidiary of the Company existing on the date of the Indenture (such Subsidiaries being Continental Gas, Inc. and Continental Crude Co.), and any future Restricted Subsidiary of the Company that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, and, in each case, their respective successors and assigns. "TOTAL ASSETS" means, with respect to any Person, the total consolidated assets of such Person and its Restricted Subsidiaries, as shown on the most recent balance sheet of such Person. "TREASURY RATE" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two Business Days prior to the redemption date (or, if such Statistical Release is no longer published, any publicly available source or similar market data)) most nearly equal to the period from the redemption date to August 1, 2003; PROVIDED that if the period from the redemption date to August 1, 2003 is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the period from 94 the redemption date to August 1, 2003 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company which at the time of determination shall be an Unrestricted Subsidiary (as designated by the Board of Directors of the Company, as provided below) and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary or a Person becoming a Subsidiary through merger or consolidation or Investment therein) to be an Unrestricted Subsidiary only if (a) such Subsidiary does not own any Capital Stock of, or own or hold any Lien on any property of, any other Subsidiary of the Company which is not a Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary; (b) all the Indebtedness of such Subsidiary shall, at the date of designation, and will at all times thereafter, consist of Non-Recourse Debt; (c) the Company certifies that such designation complies with the limitations of the "Restricted Payments" covenant; (d) such Subsidiary, either alone or in the aggregate with all other Unrestricted Subsidiaries, does not operate, directly or indirectly, all or substantially all of the business of the Company and its Subsidiaries; (e) such Subsidiary does not, directly or indirectly, own any Indebtedness of or Equity Interest in, and has no investments in, the Company or any Restricted Subsidiary; (f) such Subsidiary is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (g) on the date such Subsidiary is designated an Unrestricted Subsidiary, such Subsidiary is not a party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary with terms substantially less favorable to the Company or such Restricted Subsidiary than those that might have been obtained from Persons who are not Affiliates of the Company. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a resolution of the Board of Directors of the Company giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, if shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred as of such date. The Board of Directors of the Company may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED, that (i) immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof and the Company could incur at least $1.00 of additional Indebtedness (excluding Permitted Indebtedness) pursuant to the first paragraph of the "Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant on a pro forma basis taking into account such designation and (ii) such Subsidiary executes a Subsidiary Guarantee pursuant to the terms of the Indenture. "VOTING STOCK" of an entity means all classes of Capital Stock of such entity then outstanding and normally entitled to vote in the election of directors or all interests in such entity with the ability to control the management or actions of such entity. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) 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 (ii) 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, directly or indirectly, by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person. 95 BOOK-ENTRY; DELIVERY AND FORM The certificates representing the New Notes will initially be represented by one or more permanent global Notes in definitive, fully registered form without interest coupons (each a "Restricted Global Note"; and together with the Regulation S Global Note, the "Global Notes") and will be deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC. Old Notes sold in offshore transactions in reliance on Regulation S under the Securities Act were initially represented by one or more temporary global Notes in definitive, fully registered form without interest coupons (each a "Temporary Regulation S Global Note") and were deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC for the accounts of Euroclear and Cedel Bank. The Temporary Regulation S Global Note is exchangeable for one or more permanent global Notes (each a "Permanent Regulation S Global Note"; and together with the Temporary Regulation S Global Notes, the "Regulation S Global Note") on or after the 40th day following July 24, 1998 upon certification that the beneficial interests in such global Note are owned by non-U.S. persons. Prior to the 40th day after the Closing Date, beneficial interests in the Temporary Regulation S Global Note may only be held through Euroclear or Cedel Bank. Ownership of beneficial interests in a Global Note are limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in a Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers may hold their interests in a Restricted Global Note directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. Investors may hold their interests in a Regulation S Global Note directly through Cedel Bank or Euroclear, if they are participants in such systems, or indirectly through organizations that are participants in such systems. Cedel Bank and Euroclear will hold interests in the Regulation S Global Notes on behalf of their participants through DTC. So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes. No beneficial owner of an interest in a Global Note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture and, if applicable, those of Euroclear and Cedel Bank. Payments of the principal of, and interest on, a Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Company, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. Transfers between participants in Euroclear and Cedel Bank will be effected in the ordinary way in accordance with their respective rules and operating procedures. 96 The Company expects that DTC will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Global Note are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC will exchange the applicable Global Note for Certificated Notes, which it will distribute to its participants and which may be legended as set forth under the heading "Transfer Restrictions." The Company understands that DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing procedures in order to facilitate transfers of interests in a Global Note among participants of DTC, Euroclear and Cedel Bank, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC, Euroclear or Cedel Bank or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by the Company within 90 days, the Company will issue Certificated Notes, which may bear the legend referred to under "Transfer Restrictions," in exchange for the Global Notes. Holders of an interest in a Global Note may receive Certificated Notes, which may bear the legend referred to under "Transfer Restrictions," in accordance with DTC's rules and procedures in addition to those provided for under the Indenture. 97 CERTAIN UNITED STATES TAX CONSEQUENCES The following summary describes certain United States federal income and estate tax consequences resulting from the purchase, ownership, and disposition of Notes as of the date hereof. It deals only with Notes held as capital assets by initial purchasers who purchased Notes at the initial issue price. Further, this discussion does not address the situation of persons who may be subject to special tax rules, including, by way of illustration and not limitation, rules applicable to dealers in securities or currencies, financial institutions, tax-exempt entities, life insurance companies, persons who hold Notes as a hedge, as part of a constructive sale, or as a position in a "straddle" for income tax purposes, or to persons who have a "functional currency" other than the U.S. Dollar. As used herein, a "United States Holder" means a beneficial owner who is a citizen or resident of the United States, a corporation, limited liability company or partnership (unless the Treasury regulations provide otherwise) created or organized in or under the laws of the United States or any political subdivision thereof, an estate the income of which is subject to U.S. federal income taxation regardless of its source, or a trust which is subject to the supervision of a court within the United States and the control of one or more U.S. persons as described in Section 7701(a)(30) of the Code. As used herein, the term "Non-United States Holder" means any person or entity that is not a United States Holder. An individual may, subject to certain exceptions, be deemed to be a resident (as opposed to a non-resident alien) of the United States by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during a three year period ending in the current calendar year, determined by counting each day present in the U.S. during the current calendar year as a full day, each day present in the U.S. during the immediately preceding calendar year as one-third of a day, and each day present in the U.S. during the second preceding year as one-sixth of a day. The discussion set forth below is based upon the provisions of the Code, the Treasury Regulations, and administrative and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified with possible retroactive effect so as to result in federal income tax consequences different from those discussed below. This summary does not purport to cover all possible tax consequences associated with the purchase, ownership, and disposition of Notes, such as any applicable foreign, state, local, or other tax laws, nor to address all relevant estate or gift tax considerations. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP, OR DISPOSITION OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. TAX CONSEQUENCES TO UNITED STATES HOLDERS INTEREST ON THE NOTES The Notes were not issued with original issue discount ("OID"). Except as described below, interest on a Note will be taxable to a United States Holder as ordinary income from domestic cources at the time it is paid or accrued in accordance with the United States Holder's regular method of accounting for United States tax purposes. SALE, RETIREMENT, OR OTHER DISPOSITION OF NOTES Upon the sale, retirement, or other disposition of a Note (including any sale to the Company in connection with the Company's option to purchase the Note), a holder will recognize gain or loss equal to the difference between the amount realized on the sale, retirement, or other disposition and the holder's tax basis in the Note. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if, at the time of the sale, retirement, or other disposition, the Note has been held for more than one year. The Taxpayer Relief Act of 1997 includes substantial changes to the federal taxation of capital gains recognized by certain noncorporate taxpayers, such as individuals, including a 20% maximum tax rate for 98 certain gains from the sale of capital assets held for more than 18 months. The deductibility of capital losses is subject to certain limitations. A holder's tax basis in a Note will, in general, equal the cost of the Note to the holder. TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS INTEREST ON NOTES Subject to the discussion below concerning backup withholding, no withholding of United States federal income tax will be required with respect to the payment by the Company or any paying agent of principal or interest on a Note owned by a Non-United States Holder, provided that the beneficial owner (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of Section 871(h)(3) of the Code and the regulations thereunder, (ii) is not a controlled foreign corporation related, directly or indirectly, to the Company through stock ownership, (iii) is not a bank whose receipt of interest on a Note is described in Section 881(c)(3)(A) of the Code and (iv) satisfies the statement requirement (described generally below) set forth in Section 871(h) and Section 881(c) of the Code and the regulations thereunder. To satisfy the requirement referred to in clause (iv) above, the beneficial owner of such Note, or a financial institution holding the Note on behalf of such owner, must provide, in accordance with specified procedures, the Company or its paying agent with a statement to the effect that the beneficial owner is not a U.S. person. These requirements will be met if (1) the beneficial owner provides his name and address, and certifies, under penalties of perjury, that he is not a U.S. person (which certification may be made on an IRS Form W-8 (or successor form)) or (2) a financial institution holding the Note on behalf of the beneficial owner certifies, under penalties of perjury, that such statement has been received by it and furnishes a paying agent with a copy thereof. Under finalized Treasury Regulations, the statement requirement referred to in clause (iv) above may also be satisfied with other documentary evidence for interest paid after December 31, 1999 with respect to an offshore account or through certain foreign intermediaries. In the event any of the above requirements are not satisfied, the Company will nonetheless not withhold federal income tax on interest paid to a Non-United States Holder if it receives IRS Form 4224 (or successor form) from the Non-United States Holder, establishing that such income is effectively connected with the conduct of a trade or business in the United States, unless the Company has knowledge to the contrary. Interest paid to a Non-United States Holder (other than a partnership) which is effectively connected with the conduct by the holder of a trade or business in the United States is generally taxed at the graduated rates that are applicable to United States persons. In the case of a Non-United States Holder that is a corporation, such effectively connected income may also be subject to the United States federal branch profits tax (which is generally imposed on a foreign corporation on the deemed repatriation from the United States of effectively connected earnings and profits) at a 30% rate (unless the rate is reduced or eliminated by an applicable income tax treaty and the holder is a qualified resident of the treaty country). In the case of a partnership that has foreign partners (i.e., persons who would be Non-United States Holders if they held the Notes directly), such effectively connected income allocable to the foreign partner would generally be subject to United Stated federal withholding tax (regardless of whether such income is, in fact, distributed to such foreign partner) at a 35% rate if the foreign partner is a corporation, or at a 39.6% rate if the foreign partner is not a corporation. Any foreign partner of such a partnership would be entitled to a credit against his United States federal income tax for his share of the withholding tax paid by the partnership. If a Non-United States Holder cannot satisfy the requirements of any of the above-described exceptions to withholding, payments of interest made to a Non-United States Holder will be subject to a 30% withholding tax unless the beneficial owner of the Note provides the Company or its paying agent, as 99 the case may be, with a properly executed IRS Form 1001 (or successor form) claiming an exemption from or reduced rate of withholding under the benefit of an applicable tax treaty. Under the Final Regulations, Non-United States Holders will generally be required to provide IRS Form W-8 in lieu of IRS Form 4224 or IRS Form 1001, although alternative documentation may be applicable in certain situations. SALE, EXCHANGE, REDEMPTION OR OTHER DISPOSITION OF NOTES A Non-United States Holder will generally not be subject to United States federal income tax with respect to gain recognized on a sale, exchange, redemption or other disposition of Notes unless (i) the gain is effectively connected with a trade or business of the Non-United States Holder in the United States, (ii) in the case of a Non-United States Holder who is an individual and holds the Notes as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, or (iii) the Non-United States Holder is subject to tax pursuant to certain provisions of the Code applicable to United States expatriates. Subject to the discussion below concerning backup withholding, no withholding of United States federal income tax will be required with respect to any gain or income realized by a Non-United States Holder upon the sale, exchange, retirement or other disposition of a Note. Gains derived by a Non-United States Holder (other than a partnership) from the sale or other disposition of Notes that are effectively connected with the conduct by the Holder of a trade or business in the United States are generally taxed at the graduated rates that are applicable to United States persons. In the case of a Non-United States Holder that is a corporation, such effectively connected income may also be subject to the United States branch profits tax. In the case of a partnership that has foreign partners (i.e., persons who would be Non-United States Holders if they held the Notes directly) withholding will be made at a 35% rate if the foreign partner is a corporation, or at 39.6% rate if the foreign partner is not a corporation. Any foreign partner of such a partnership would be entitled to a credit against his United States federal income tax for his share of the withholding tax paid by the partnership. If an individual Non-United States Holder falls under clause (ii) of the immediately preceding paragraph of this discussion, he will be subject to a flat 30% tax on the gain derived from the sale or other disposition, which may be offset by United States capital losses recognized within the same taxable year as such sale or other disposition (notwithstanding the fact that he is not considered a resident of the United States). FEDERAL ESTATE TAX A Note beneficially owned by an individual who at the time of death is a Non-United States Holder will not be subject to United States federal estate tax as a result of such individual's death, provided that such individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of Section 871(h)(3) of the Code and provided that the interest payments with respect to such Note would not have been, if received at the time of such individual's death, effectively connected with the conduct of a United States trade or business by such individual. INFORMATION REPORTING AND BACKUP WITHHOLDING In general, information reporting requirements will apply to certain payments of principal and interest on the Notes and to the proceeds of sale of a Note made to United States Holders other than certain exempt recipients (such as corporations). A 31% backup withholding tax will apply to such payments if the United States Holder fails to provide a taxpayer identification number or certification of foreign or other exempt status or fails to report in full dividend and interest income. No information reporting or backup withholding will be required with respect to payments made by the Company or any paying agent to Non-United States Holders if a statement described in clause 100 (iv) under "Tax Consequences to Non-United States Holders--Interest on Notes" has been received and the payor does not have actual knowledge that the beneficial owner is a United States person. Information reporting and backup withholding will not apply if payments of interest on a Note are made outside the United States to an account maintained at an office or branch of a United States or foreign bank or other financial institution, provided certain procedures are in place, and are observed, between the Company and the foreign bank or financial institution. Payments on the sale, exchange or other disposition of a Note made to or through a foreign office of a broker generally will not be subject to backup withholding. However, payments made by a broker that is a United States person, a controlled foreign corporation for United States federal income tax purposes, a foreign person 50 percent or more of whose gross income is effectively connected with a United States trade or business for a specified three year period, or (with respect to payments after December 31, 1999) a foreign partnership with certain connections to the United States, will be subject to information reporting unless the broker has in its records documentary evidence that the beneficial owner is not a United States person and certain other conditions are met, or the beneficial owner otherwise establishes an exemption. Backup withholding may apply to any payment that such broker is required to report if the broker has actual knowledge that the payee is a United States person. Payments to or through the United States office of a custodian, nominee or agent or the payment by the United States office of a broker of the proceeds of a sale will be subject to information reporting and backup withholding unless the Holder certifies, under penalties of perjury, that it is not a United States person or otherwise establishes an exemption. For payments made after December 31, 1999, with respect to Notes held by foreign partnerships, Treasury regulations require that the certification described in (iv) under "Tax Consequences to Non-United States Holders--Interest on Notes" above be provided by the partners, rather than by the foreign partnership, and that the partnership provide certain information, including a United States taxpayer identification number. A look-through rule will apply in the case of tiered partnerships. Non-United States Holders should consult their tax advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedures for obtaining such an exemption, if available. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the Non-United States Holder's U.S. federal income tax liability and may entitle such Holder to a refund, provided the required information is furnished to the IRS. EFFECT OF EXCHANGE The exchange of Old Notes for New Notes in the Exchange Offer should not constitute a taxable event to holders. Consequently, no gain or loss will be recognized by a holder upon receipt of an Exchange Note, the holding period of the New Note will include the holding period of the Old Note exchanged therefor, and the basis of the New Note will be the same as the basis of the Note immediately before the exchange. In any event, persons considering the exchange of Old Notes for New Notes should consult their own tax advisors concerning the United States federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. 101 PLAN OF DISTRIBUTION There has previously been only a limited secondary market and no public market for the Old Notes. The Company does not intend to apply for the listing of the Notes on a national securities exchange or for their quotation through The Nasdaq Stock Market. The Notes are eligible for trading in the PORTAL market. The Company has been advised by the Initial Purchaser that the Initial Purchaser currently intends to make a market in the Notes; however, the Initial Purchaser is not obligated to do so and any market making may be discontinued by any Placement Agent at any time. In addition, such market making activity may be limited during the Exchange Offer. Therefore, there can be no assurance that an active market for the Old Notes or the New Notes will develop. If a trading market does not develop or is not maintained, holders of Notes may experience difficulty in reselling Notes. If a trading market develops for the Notes, future trading prices of such securities will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on such factors, such securities may trade at a discount from their offering price. BROKER-DEALERS WHO DID NOT ACQUIRE OLD NOTES AS A RESULT OF MARKET MAKING ACTIVITIES OR TRADING ACTIVITIES MAY NOT PARTICIPATE IN THE EXCHANGE OFFER. With respect to resale of New Notes, based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that a holder (other than a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act or a "broker" or "dealer" registered under the Exchange Act) who exchanges Old Notes for New Notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes, will be allowed to resell the New Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the New Notes a prospectus that satisfies the requirements of Section 10 thereof. However, if any holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such holder cannot rely on the position of the staff of the Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988) or similar no-action letters or any similar interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. As contemplated by the no-action letters mentioned above and the Registration Rights Agreement, each holder accepting the Exchange Offer is required to represent to the Company in the Letter of Transmittal that (i) the New Notes are to be acquired by the holder in the ordinary course of business, (ii) the holder is not engaging and does not intend to engage in the distribution of the New Notes, and (iii) the holder acknowledges that, if such holder participates in the Exchange Offer for the purpose of distributing the New Notes, such holder must comply with the registration and prospectus delivery requirements of the Securities Act and cannot rely on the above no-action letters. Any broker or dealer registered under the Exchange Act (each a "Broker-Dealer") who holds Old Notes that were acquired for its own account as a result of market-making activities or other trading activities (other than Old Notes acquired directly from the Company or an affiliate of the Company) may exchange such Old Notes for New Notes pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed an underwriter within the meaning of the Securities Act and, therefore, must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of the New Notes received by it in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of this Prospectus. The Company has agreed to cause the Exchange Offer Registration Statement, of which this Prospectus is a part, to remain continuously effective for a period of 180 days, if required, from the Exchange Date, and to make this Prospectus, as amended or supplemented, available to any such Broker-Dealer for use in connection with resales. Any Broker-Dealer participating in 102 the Exchange Offer will be required to acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of New Notes received by it in the Exchange Offer. The delivery by a Broker-Dealer of a prospectus in connection with resales of New Notes shall not be deemed to be an admission by such Broker-Dealer that it is an underwriter within the meaning of the Securities Act. The Company will not receive any proceeds from any sale of New Notes by a Broker-Dealer. New Notes received by Broker-Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Broker-Dealer and/or the purchasers of any such New Notes. LEGAL MATTERS Certain legal matters with respect to the validity of the Notes are being passed upon for the Company by McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma. EXPERTS The Financial Statements of the Company and of the oil and gas properties included in the Worland Field Acquisition included in this Prospectus, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. Certain information relating to the estimated proved reserves of oil and natural gas and the related estimates of future net cash flows and present values thereof as of December 31, 1997, included in this Prospectus and in the notes to the financial statements of the Company have been prepared by Ryder Scott Company Petroleum Engineers, Denver, Colorado. 103 GLOSSARY OF TERMS The definitions set forth below shall apply to the indicated terms as used in this Prospectus. All volumes of natural gas referred to herein are stated at the legal pressure base to the state or area where the reserves exit and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple. BBL. One stock tank barrel, or 42 U.S. gallons liquid volume. BCF. One billion cubic feet of natural gas. BOE. One barrel of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. COMMERCIAL WELL; COMMERCIALLY PRODUCTIVE WELL. An oil and gas well which produces oil and gas in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. COMPLETION. The installation of permanent equipment for the production of oil and natural gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. DEVELOPED ACREAGE. The number of acres which are allocated or assignable to producing wells or wells capable of production. DEVELOPMENT WELL. A well drilled within the proved areas of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive. DRY HOLE OR WELL. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. EXPLORATORY WELL. A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir. FIELD. An area consisting of a single reservoir or multiple reservoirs all grouped or related to the same individual geological structural feature and/or stratigraphic condition. FORMATION. A succession of sedimentary beds that were deposited under the same general geologic conditions. GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in which a working interest is owned. HORIZONTAL DRILLING. A drilling technique that permits the operator to contact and intersect a larger portion of the producing horizon than conventional vertical drilling techniques and can result in both increased production rates and greater ultimate recoveries of hydrocarbons. Horizontal wells are drilled at angles greater than 70 degrees from vertical. MBBLS. One thousand barrels of oil. MBOE. One thousand barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural gas. MCF. One thousand cubic feet. MCFE. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. 104 MMBBLS. One million barrels of oil. MMBOE. One million barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural gas. MMCF. One million cubic feet. MMCFE. One million cubic feet of gas equivalent determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural gas. NET ACRES OR NET WELLS. The sum of the fractional working interests owned in gross acres or gross wells, as the case may be. OIL. Crude oil, condensate and natural gas liquids. PV-10. When used with respect to oil and natural gas reserves, the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. PRODUCTIVE WELL. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and capable of production. PROVED DEVELOPED RESERVES. Proved reserves that are expected to be recovered from existing wellbores, whether or not currently producing, without drilling additional wells. Production of such reserves may require a recompletion. PROVED UNDEVELOPED LOCATION. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves. PROVED UNDEVELOPED RESERVES. Proved reserves that are expected to be recovered from new wells on undrilled acreage. RECOMPLETION. The completion for production of an existing wellbore in another formation from that in which the well has been previously completed. RESERVE LIFE. A ratio determined by dividing the existing reserves by production from such reserves for the prior twelve month period. RESERVOIR. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reserves. ROYALTY INTEREST. An interest in an oil and natural gas property entitling the owner to a share of oil or natural gas production free of costs of production. UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. WELLBORE. The hole drilled by the bit. 105 WORKING INTEREST. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. WORKOVER. Operations on a producing well to restore or increase production. 106 INDEX TO FINANCIAL STATEMENTS CONTINENTAL RESOURCES, INC. Report of Independent Public Accountants............................................. F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997, and March 31, 1998 (Unaudited)........................................................................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997, and for the Three Months Ended March 31, 1997 and 1998 (Unaudited)........... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997, and for the Three Months Ended March 31, 1998 (Unaudited)..... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997, and for the Three Months Ended March 31, 1997 and 1998 (Unaudited)........... F-6 Notes to Consolidated Financial Statements........................................... F-7 BASS ENTERPRISES PRODUCTION CO. Report of Independent Public Accountants............................................. F-18 Statements of Revenues and Direct Operating Expenses of Oil and Gas Properties Included in the Purchase Agreement Between Continental Resources, Inc. and Bass Enterprises Production Co. for the Years Ended December 31, 1995, 1996 and 1997, and for the Three Months Ended March 31, 1997 and 1998 (Unaudited)................. F-19 Notes to Statements of Revenues and Direct Operating Expenses of Oil and Gas Properties Included in the Purchase Agreement Between Continental Resources, Inc. and Bass Enterprises Production Co................................................. F-20
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Continental Resources, Inc.: We have audited the accompanying consolidated balance sheets of Continental Resources, Inc. (an Oklahoma corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements and the supplementary information referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Continental Resources, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Oklahoma City, Oklahoma, April 22, 1998 F-2 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, MARCH 31, ------------------------------ -------------- 1996 1997 1998 -------------- -------------- -------------- (UNAUDITED) CURRENT ASSETS: Cash............................................................ $ 3,320,130 $ 1,301,115 $ 1,287,389 Accounts receivable-- Oil and gas sales............................................. 15,249,670 11,432,273 9,227,937 Joint interest and other, net................................. 5,923,216 13,711,270 8,486,547 Inventories..................................................... 3,556,190 3,548,547 3,833,592 Prepaid income taxes............................................ 1,764,484 -- -- Prepaid expenses................................................ 2,072,124 382,725 268,919 Advances to affiliates.......................................... 460,551 59,541 331,550 -------------- -------------- -------------- Total current assets........................................ 32,346,365 30,435,471 23,435,934 -------------- -------------- -------------- PROPERTY AND EQUIPMENT: Oil and gas properties (successful efforts method)-- Producing properties.......................................... 137,403,821 195,785,302 210,110,962 Nonproducing leaseholds....................................... 16,878,253 17,047,404 17,666,103 Gas gathering and processing facilities......................... 8,430,318 20,794,944 21,422,605 Service properties, equipment and other......................... 8,453,513 12,848,701 13,307,634 -------------- -------------- -------------- Total property and equipment................................ 171,165,905 246,476,351 262,507,304 Less--Accumulated depreciation, depletion and amortization.............................................. 57,845,700 88,559,352 94,068,917 -------------- -------------- -------------- Net property and equipment.................................. 113,320,205 157,916,999 168,438,387 -------------- -------------- -------------- OTHER ASSETS...................................................... 26,195 33,696 8,926,901 -------------- -------------- -------------- Total assets................................................ $ 145,692,765 $ 188,386,166 $ 200,801,222 -------------- -------------- -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................ $ 17,635,561 $ 19,614,068 $ 13,842,585 Current portion of long-term debt............................... 3,422,447 315,113 315,113 Revenues and royalties payable.................................. 6,807,664 7,497,011 3,578,428 Accrued liabilities and other................................... 2,212,397 3,164,735 2,493,171 -------------- -------------- -------------- Total current liabilities................................... 30,078,069 30,590,927 20,229,297 -------------- -------------- -------------- LONG-TERM DEBT, net of current portion............................ 51,336,696 79,316,913 100,379,265 DEFERRED INCOME TAXES............................................. 11,978,570 -- -- OTHER NONCURRENT LIABILITIES...................................... 222,207 213,877 213,330 STOCKHOLDERS' EQUITY: Common stock, $1 par value, 75,000 shares authorized, 49,045 shares issued................................................. 49,045 49,045 49,041 Additional paid-in capital...................................... 2,731,075 2,731,075 2,721,079 Treasury stock, 4 shares, at cost............................... -- (10,000) -- Retained earnings............................................... 49,297,103 75,494,329 77,209,210 -------------- -------------- -------------- Total stockholders' equity.................................. 52,077,223 78,264,449 79,979,330 -------------- -------------- -------------- Total liabilities and stockholders' equity.................. $ 145,692,765 $ 188,386,166 $ 200,801,222 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE YEARS ENDED DECEMBER 31 ENDED MARCH 31, ------------------------------------ ---------------------- 1995 1996 1997 1997 1998 ---------- ----------- ----------- ---------- ---------- (UNAUDITED) REVENUES: Oil and gas sales............................ $30,575,937 $75,016,352 $78,599,075 $20,825,748 $16,083,121 Gathering, marketing and processing.......... 20,638,962 25,765,782 25,020,764 10,713,943 6,638,707 Oil and gas service operations............... 6,148,487 6,490,759 6,405,387 2,005,114 1,466,784 ---------- ----------- ----------- ---------- ---------- Total revenues............................. 57,363,386 107,272,893 110,025,226 33,544,805 24,188,612 ---------- ----------- ----------- ---------- ---------- OPERATING COSTS AND EXPENSES: Production expenses and taxes................ 7,610,850 19,337,987 20,748,414 4,933,930 4,838,219 Exploration expenses......................... 6,184,239 4,512,355 6,806,491 972,926 1,547,901 Gathering, marketing and processing.......... 13,223,476 21,789,861 22,715,336 8,815,385 5,825,507 Oil and gas service operations............... 3,680,089 4,033,547 3,654,277 1,031,731 882,511 Depreciation, depletion and amortization..... 9,613,747 22,875,743 33,354,430 8,844,007 5,408,010 General and administrative................... 8,260,416 9,154,725 8,988,984 1,760,023 2,215,855 ---------- ----------- ----------- ---------- ---------- Total operating costs and expenses......... 48,572,817 81,704,218 96,267,932 26,358,002 20,718,003 ---------- ----------- ----------- ---------- ---------- OPERATING INCOME............................... 8,790,569 25,568,675 13,757,294 7,186,803 3,470,609 ---------- ----------- ----------- ---------- ---------- OTHER INCOME AND EXPENSES Interest income.............................. 136,757 311,981 241,456 82,355 242,923 Interest expense............................. 2,395,626 4,550,488 4,803,837 1,116,495 2,005,019 Other income (expense)....................... (410,765) 232,947 8,060,863 482,596 6,368 ---------- ----------- ----------- ---------- ---------- Total other income and (expenses).......... (2,669,634) (4,005,560) 3,498,482 (551,544) (1,755,728) ---------- ----------- ----------- ---------- ---------- INCOME BEFORE INCOME TAXES..................... 6,120,935 21,563,115 17,255,776 6,635,259 1,714,881 INCOME TAX BENEFIT (EXPENSE)................... (2,251,591) (8,238,124) 8,941,450 (2,521,398) -- ---------- ----------- ----------- ---------- ---------- NET INCOME..................................... $3,869,344 $13,324,991 $26,197,226 $4,113,861 $1,714,881 ---------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- EARNINGS PER COMMON SHARE...................... $ 78.89 $ 271.69 $ 534.18 $ 83.88 $ 34.97 ---------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
ADDITIONAL TOTAL COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS' STOCK CAPITAL STOCK EARNINGS EQUITY --------- ------------ ---------- ------------- ------------- BALANCE, December 31, 1994.................... $ 49,045 $ 2,731,075 $ -- $ 32,102,768 $ 34,882,888 Net income.................................. -- -- -- 3,869,344 3,869,344 --------- ------------ ---------- ------------- ------------- BALANCE, December 31, 1995.................... 49,045 2,731,075 -- 35,972,112 38,752,232 Net income.................................. -- -- -- 13,324,991 13,324,991 --------- ------------ ---------- ------------- ------------- BALANCE, December 31, 1996.................... 49,045 2,731,075 -- 49,297,103 52,077,223 Purchase shares of treasury stock........... -- -- (10,000) -- (10,000) Net income.................................. -- -- -- 26,197,226 26,197,226 --------- ------------ ---------- ------------- ------------- BALANCE, December 31, 1997.................... 49,045 2,731,075 (10,000) 75,494,329 78,264,449 --------- ------------ ---------- ------------- ------------- Retirement of treasury stock (unaudited).... (4) (9,996) 10,000 -- -- Net income (unaudited)...................... -- -- -- 1,714,881 1,714,881 --------- ------------ ---------- ------------- ------------- BALANCE, March 31, 1998 (unaudited)........... $ 49,041 $ 2,721,079 $ -- $ 77,209,210 $ 79,979,330 --------- ------------ ---------- ------------- ------------- --------- ------------ ---------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS FOR THE YEARS ENDED DECEMBER 31 ENDED MARCH 31 ------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 3,869,344 $13,324,991 $26,197,226 $ 4,113,861 $ 1,714,881 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation, depletion and amortization..... 9,613,747 22,875,743 33,354,430 8,844,007 5,408,010 (Gain)/loss on sale of assets................ 410,765 (232,947) (674,091) (482,596) (4,393) Dry hole cost and impairment of undeveloped leases..................................... 2,417,378 1,167,204 1,467,235 972,926 -- Deferred income taxes........................ 1,618,130 8,238,124 (11,978,570) 1,680,932 -- Changes in current assets and liabilities-- Increase in accounts receivable................ (5,273,021) (10,238,194) (3,970,657) 905,010 7,429,059 Decrease/(increase) in inventories............. (102,471) (624,052) 7,643 (178,613) (285,045) Decrease/(increase) in prepaid income taxes and expenses..................................... (58,964) 1,246,074 3,453,883 1,416,794 113,806 Increase in accounts payable................... 9,561,493 264,922 1,978,507 725,925 (5,771,483) Increase/(decrease) in revenues and royalties payable...................................... (504,304) 5,230,072 689,347 (356,918) (3,918,583) Increase/(decrease) in accrued liabilities and other........................................ (2,567,587) 471,680 952,338 247,256 (671,564) ----------- ----------- ----------- ----------- ----------- Net cash provided by operating activities............................... 18,984,510 41,723,617 51,477,291 17,888,584 4,014,688 ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration and development.................... (37,212,880) (43,588,567) (63,701,798) (15,787,308) (14,944,359) Gas gathering and processing facilities and service properties, equipment and other...... (4,720,755) (3,428,080) (16,759,814) (3,461,385) (1,086,595) Purchase of producing properties............... (16,292,607) (3,323,952) (475,535) (204,810) (8,650,000) Proceeds from sale of assets................... 204,116 182,040 2,176,948 1,666,852 3,400 Advances from (to) affiliates.................. -- (460,551) 401,010 390,551 (413,213) ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities...... (58,022,126) (50,619,110) (78,359,189) (17,396,100) (25,090,767) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock....................... -- -- (10,000) -- -- Proceeds from line of credit and other........... 41,034,977 14,144,383 33,493,240 -- 18,650,000 Repayment of line of credit and other............ (3,041,181) (3,650,610) (30,570,357) (2,433,740) (77,647) Loans from majority stockholder.................. -- -- 21,950,000 -- 2,490,000 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities............................... 37,993,796 10,493,773 24,862,883 (2,433,740) 21,062,353 ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH.................... (1,043,820) 1,598,280 (2,019,015) (1,941,256) (13,726) CASH, beginning of period.......................... 2,765,670 1,721,850 3,320,130 3,320,130 1,301,115 ----------- ----------- ----------- ----------- ----------- CASH, end of period................................ $ 1,721,850 $ 3,320,130 $ 1,301,115 $ 1,378,874 $ 1,287,389 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid.................................... $ 2,395,626 $ 4,550,488 $ 4,301,977 $ 1,116,495 $ 1,340,986 Income taxes paid................................ $ 2,713,000 $ 589,000 $ 300,000 $ -- $ 998,617
The accompanying notes are an integral part of these consolidated financial statements. F-6 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION: Continental Resources, Inc. ("CRI") was incorporated in Oklahoma on November 16, 1967, as Shelly Dean Oil Company. On September 23, 1976, the name was changed to Hamm Production Company. In January 1987, the Company acquired all of the assets and assumed the debt of Continental Trend Resources, Inc. Affiliated entities, J.S. Aviation and Wheatland Oil Co. were merged into Hamm Production Company, and the corporate name was changed to Continental Trend Resources, Inc. at that time. In 1991, the Company's name was changed to Continental Resources, Inc. The Company has one wholly-owned subsidiary, Continental Gas, Inc. ("CGI"). CGI was incorporated in April 1990. CRI's principal business is oil and natural gas exploration, development and production. CRI has interests in approximately 1,000 wells and serves as the operator in the majority of such wells. CRI's operations are primarily in Oklahoma, North Dakota, South Dakota, Montana, Illinois and Texas. CGI is engaged principally in natural gas marketing, gathering and processing activities and operates six gas gathering systems and two gas processing plants in Oklahoma. In addition, CGI participates with CRI in certain oil and natural gas wells. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts and operations of CRI and CGI (collectively the "Company"). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. INTERIM FINANCIAL INFORMATION The interim consolidated financial statements as of March 31, 1998, and for the three months ended March 31, 1997 and 1998, are unaudited, and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the consolidated interim financial statements have been included. ACCOUNTS RECEIVABLE The Company operates exclusively in the oil and natural gas exploration and production, gas gathering and processing and gas marketing industries. The Company's joint interest receivables at December 31, 1996 and 1997, are recorded net of an allowance for doubtful accounts of approximately $200,000 and $467,000, respectively, in the accompanying consolidated balance sheets. INVENTORIES Inventories consist primarily of tubular goods, production equipment and crude oil in tanks, which are stated at the lower of average cost or market. At December 31, 1996 and 1997, tubular goods and production equipment totaled approximately $2,773,000 and $2,692,000, respectively; crude oil in tanks totaled approximately $783,000 and $856,000, respectively. F-7 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) PROPERTY AND EQUIPMENT The Company utilizes the successful efforts method of accounting for oil and gas activities whereby costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves and to drill and equip development wells are capitalized. These costs are amortized to operations on a unit-of-production method based on proved developed oil and gas reserves, allocated property by property, as estimated by petroleum engineers. Geological and geophysical costs, lease rentals and costs associated with unsuccessful exploratory wells are expensed as incurred. Nonproducing leaseholds are periodically assessed for impairment based on exploration results and planned drilling activity. Maintenance and repairs are expensed as incurred, except that the costs of replacements or renewals that expand capacity or improve production are capitalized. Gas gathering systems and gas processing plants are depreciated using the straight-line method over an estimated useful life of 14 years. Service properties and equipment and other is depreciated using the straight-line method over estimated useful lives of 5 to 40 years. INCOME TAXES The Company filed a consolidated income tax return based on a May 31 fiscal tax year end. Through May 31, 1997, deferred income taxes were provided for temporary differences between financial reporting and income tax bases of assets and liabilities. The estimated Federal and state income taxes on income or loss generated between June 1 and December 31 is included in deferred income taxes at each calendar year end prior to December 31, 1997. Effective June 1, 1997, the Company converted to an "S-corporation" under Subchapter S of the Internal Revenue Code. As a result, income taxes attributable to Federal taxable income of the Company after May 31, 1997, if any, will be payable by the stockholders of the Company. The effect of eliminating the deferred tax assets and liabilities were recognized in the results of operations for the year ended December 31, 1997, the year of adoption. EARNINGS PER COMMON SHARE Earnings per common share includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. There are no common stock equivalents or securities outstanding which would result in material dilution. The weighted-average number of shares used to compute earnings per common share was 49,045 in 1995 and 1996 and 49,042 in 1997. FUTURES CONTRACTS CGI, in the normal course of business, enters into fixed price contracts for either the purchase or sale of natural gas at future dates. Due to fluctuations in the natural gas market, CGI buys or sells natural gas futures contracts to hedge the price and basis risk associated with the specifically identified purchase or sales contracts. CGI accounts for changes in the market value of futures contracts as a deferred gain or loss until the production month of the hedged transaction, at which time the gain or loss on the natural gas futures contract is recognized in the results of operations. At December 31, 1996 and 1997, there were no open natural gas futures contracts. Net gains and losses on futures contracts are included in gas gathering, F-8 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) marketing and processing revenues in the accompanying consolidated statements of operations and were immaterial for the years ended December 31, 1995, 1996 and 1997. GAS BALANCING ARRANGEMENTS The Company follows the "sales method" of accounting for its gas revenue whereby the Company recognizes sales revenue on all gas sold to its purchasers, regardless of whether the sales are proportionate to the Company's ownership in the property. A liability is recognized only to the extent that the Company has a net imbalance in excess of their share of the reserves in the underlying properties. The Company's aggregate imbalance positions at December 31, 1996 and 1997 were not material. SIGNIFICANT CUSTOMER During 1995, 1996 and 1997 approximately 13.1%, 41.3% and 46.6%, respectively, of the Company's total revenue were derived from sales made to a single customer. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash, trade receivables, trade payables and bank debt. The carrying value of cash, trade receivables and trade payables are considered to be representative of their respective fair values, due to the short maturity of these instruments. The fair value of bank debt approximates its carrying value based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. PRESENTATION Certain prior year information has been reclassified to conform to the 1997 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Of the estimates and assumptions that affect reported results, the estimate of the Company's oil and natural gas reserves, which is used to compute depreciation, depletion, amortization and impairment on producing oil and gas properties, is the most significant. F-9 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. LONG-TERM DEBT: Long-term debt as of December 31, 1996 and 1997, consists of the following:
1996 1997 ------------- ------------- Line of credit agreement (a)............................................. $ 54,759,143 $ 53,725,403 Notes payable to majority stockholder (b)................................ -- 21,950,000 Note payable to General Electric Capital Corporation (c)................. -- 3,865,962 Capital lease agreements (d)............................................. -- 90,661 ------------- ------------- Outstanding debt....................................................... 54,759,143 79,632,026 Less--Current portion.................................................... 3,422,447 315,113 ------------- ------------- Total long-term debt................................................... $ 51,336,696 $ 79,316,913 ------------- ------------- ------------- -------------
(a) The line of credit with a bank allows borrowings up to $75,000,000. The Company has collateralized the loan with substantially all of its oil and natural gas interests, and gathering, marketing and processing properties. This loan bears interest at either Wall Street Journal Prime (8.5% at December 31, 1997) or Adjusted LIBOR which includes the LIBOR rate (5.9% for ninety day LIBOR at December 31, 1997) posted in the Wall Street Journal adjusted for a capacity fee. The LIBOR rate can be locked in for thirty, sixty or ninety days as determined by the Company through the use of various principal tranches; or the Company can elect to leave the interest amount based on the Prime interest rate. Interest is payable monthly on Prime balances and at the expiration of LIBOR tranches with all outstanding principal and interest due at maturity on December 31, 2000. (b) Throughout 1997 (May to December), CRI and CGI entered into various notes with the majority stockholder of the Company. These notes bear interest at 8.25% with interest payments due monthly or quarterly for twenty-four to thirty-six months. On December 31, 1997, the notes between CRI and the majority shareholder were combined into one note totaling $21,750,000 bearing interest at 8.25% with interest payments due on a quarterly basis for twenty-four months. The balance is to be paid in full by December 31, 2002. The note between CGI and the majority shareholder bears interest at 8.25% with interest payments due on a quarterly basis for thirty-six months. After the three-year period, the balance owed by CGI can be converted to an amortization schedule payable by November 2002. Subsequent to December 31, 1997, the CGI note was paid in full. (c) In July 1997, the Company borrowed $4,000,000 from General Electric Capital Corporation to finance the purchase of an airplane. The note accrues interest at 7.91% to be paid in one hundred nineteen (119) consecutive monthly installments of principal and interest of $48,341 each and a final installment of approximately $48,000. It is secured by the airplane. (d) During 1997, the Company entered into two capital lease agreements to purchase a copier and computer equipment. The agreements require monthly payments of principal and interest for forty-two and sixty months, respectively. F-10 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. LONG-TERM DEBT: (CONTINUED) The annual maturities of debt subsequent to December 31, 1997, are as follows: 1998................................................... $ 315,113 1999................................................... 338,423 2000................................................... 61,335,261 2001................................................... 7,711,569 2002 and thereafter.................................... 9,931,660 ---------- Total maturities..................................... $79,632,026 ---------- ----------
4. INCOME TAXES: The Company follows Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." As mentioned in Note 2, effective June 1, 1997, the Company converted to an S-Corporation resulting in the taxable income or loss of the Company from that date being reported to the shareholders and included in their respective Federal and state income tax returns. Accordingly, the deferred income tax assets and liabilities at May 31, 1997, were eliminated through recording a provision for income tax benefit. The components of income tax expense (benefit) are as follows:
(IN THOUSANDS) 1995 1996 1997 --------- --------- ---------- Current........................................................ $ 633 $ -- $ 3,038 Deferred....................................................... 1,619 8,238 (11,979) --------- --------- ---------- Income tax expense (benefit)............................... $ 2,252 $ 8,238 $ (8,941) --------- --------- ---------- --------- --------- ----------
The provision for income taxes differs from an amount computed at the statutory rates at December 31, as follows:
(IN THOUSANDS) 1995 1996 1997 --------- --------- ---------- Federal income tax at statutory rates.......................... $ 2,142 $ 7,547 $ 6,040 State income taxes............................................. 184 647 518 Statutory depletion............................................ (73) - - Nondeductible expenses......................................... 4 21 30 Conversion to S-corporation.................................... - - (15,529) Other.......................................................... (5) 23 - --------- --------- ---------- Income tax expense (benefit)................................. $ 2,252 $ 8,238 $ (8,941) --------- --------- ---------- --------- --------- ----------
F-11 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES: (CONTINUED) Deferred tax assets and (liabilities) at December 31, 1996, arising from temporary differences between tax bases and the financial reporting carrying amounts for certain assets and liabilities are as follows (in thousands): Exploration and development costs................................. $ (11,532) Alternative minimum tax carryforward.............................. 1,789 Investment tax credit carryforward................................ 717 Net operating loss carryforward................................... 1,836 Income between tax year end and December 31....................... (5,537) Other............................................................. 748 --------- $ (11,979) --------- ---------
The investment tax credit carryforward was utilized during the Company's tax year ended May 31, 1997. 5. COMMITMENTS AND CONTINGENCIES: The Company maintains a defined contribution pension plan for its employees under which it contributes to the plan 4% of the annual compensation of all employees at least 21 years old with a minimum of six months service. Pension expense for the years ended December 31, 1995, 1996 and 1997, was approximately $144,000, $152,000 and $242,000, respectively. The Company and other affiliated companies participate jointly in a self-insurance pool (the "Pool") covering health and workers' compensation claims made by employees up to the first $50,000 and $500,000, respectively, per claim. Any amounts paid above these are reinsured through third-party providers. Premiums charged to the Company are based on estimated costs per employee of the Pool. Premiums are expensed as incurred. No additional premium assessments are anticipated for periods prior to December 31, 1997. Property and general liability insurance is maintained through third-party providers with a $50,000 deductible on each policy. The Company is involved in various legal proceedings in the normal course of business, none of which, in the opinion of management, will have a material adverse effect on the financial position or results of operations of the Company. The Company has been successful in Federal courts in its lawsuit against a gas purchaser arising from tortious interference with business relations. A judgment was awarded for actual and punitive damages under the Federal lawsuit totaling $30,269,000 plus accrued interest. In May 1996, this decision was remanded by the U.S. Supreme Court back to the Tenth Circuit Court of Appeals for further consideration. No amounts were included in the accompanying financial statements for this judgment as the ultimate outcome was uncertain at December 31, 1996. During 1997, this lawsuit was settled with an aggregate judgment of $9,500,000 of which the Company's share was approximately $7,500,000. It is included in other income in the accompanying statement of operations for the year ended December 31, 1997. Due to the nature of the oil and gas business, the Company is exposed to possible environmental risks. The Company has implemented various policies and procedures to avoid environmental contamination and risks from environmental contamination. The Company is not aware of any material potential environmental issues or claims. F-12 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. RELATED PARTY TRANSACTIONS: The Company, acting as operator on certain properties, utilizes affiliated companies to provide oilfield services such as drilling and trucking. The total amount paid to these companies, a portion of which is billed to other interest owners, was approximately $5,899,000, $5,870,000 and $11,852,000 during the years ended December 31, 1995, 1996 and 1997, respectively. These services are provided at amounts which management believes approximate the costs which would have been paid to an unrelated party for the same services. At December 31, 1996 and 1997, the Company owed approximately $826,000 and $1,094,000, respectively, to these companies which is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. These companies and other companies owned by the Company's majority stockholder also own interests in wells operated by the Company. At December 31, 1996 and 1997, approximately $461,000 and $336,000, respectively, from affiliated companies is included in joint interest accounts receivable in the accompanying consolidated balance sheets. Beginning in 1996, a portion of the Company's Oklahoma, South Dakota, North Dakota and Montana crude oil production sold by the Company to an unrelated third party purchaser was resold to an affiliate of the Company. During the years ended December 31, 1996 and 1997, the Company and CGI advanced certain amounts to affiliates primarily for operating expenditures. The advances outstanding to affiliates at December 31, 1996 and 1997, totaled approximately $461,000 and $60,000, respectively. Interest income earned during the years ended December 31, 1995, 1996 and 1997, was approximately $13,000, $33,000 and $33,000, respectively, on advances to affiliates. The Company leases office space under operating leases directly or indirectly from the majority stockholder. Rents paid associated with these leases totaled approximately $228,000, $232,000 and $294,000 for the years ended December 31, 1995, 1996 and 1997, respectively. During 1997, advances were made to the Company from the majority stockholder. Interest paid or accrued during the year related to these advances totaled approximately $744,000. 7. IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company adopted SFAS No. 121 in the year ended December 31, 1996. During 1996 and 1997, the Company reviewed its oil and gas properties which are maintained under the successful efforts method of accounting, to identify properties with excess of net book value over projected future net revenue of such properties. Any such excess net book values identified were evaluated further considering such factors as future price escalation, probability of additional oil and gas reserves and a discount to present value. If an impairment was determined appropriate an additional charge was added to depreciation, depletion and amortization ("DD&A") expense. The Company recognized additional DD&A impairment in 1996 and 1997 of approximately $2,100,000 and $5,000,000, respectively. 8. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): PROVED OIL AND GAS RESERVES (UNAUDITED) The following reserve information was developed from reserve reports as of December 31, 1996 and 1997, prepared by independent reserve engineers and by the Company's internal reserve engineers and set F-13 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) forth the changes in estimated quantities of proved oil and gas reserves of the Company during each of the three years presented. Information prior to December 31, 1996, was determined from the Company's production, drilling, acquisition and sale data as applied to the December 31, 1996, reserve reports as reports on a December 31 year-end basis prior to 1996 were not available.
CRUDE OIL AND NATURAL GAS CONDENSATE (MMCF) (BBLS IN THOUSANDS) ----------- ------------------- Proved reserves as of December 31, 1994........................................ 55,900 7,591 Revisions of previous estimates.............................................. -- -- Extensions, discoveries and other additions.................................. 4,747 4,150 Production................................................................... (5,880) (1,199) Sale of minerals in place.................................................... -- -- Purchase of minerals in place................................................ 53 6,959 ----------- ------ Proved reserves as of December 31, 1995........................................ 54,820 17,501 Revisions of previous estimates.............................................. -- -- Extensions, discoveries and other additions.................................. 2,232 4,874 Production................................................................... (6,527) (2,888) Sale of minerals in place.................................................... (387) (236) Purchase of minerals in place................................................ 397 241 ----------- ------ Proved reserves as of December 31, 1996........................................ 50,535 19,492 Revisions of previous estimates.............................................. 3,640 6,731 Extensions, discoveries and other additions.................................. 2,903 2,072 Production................................................................... (5,789) (3,518) Sale of minerals in place.................................................... (1,911) (58) Purchase of minerals in place................................................ -- -- ----------- ------ Proved reserves as of December 31, 1997........................................ 49,378 24,719 ----------- ------ ----------- ------
Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves. Oil and gas reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be precisely measured, and estimates of engineers other than the Company's might differ materially from the estimates set forth herein. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. Gas imbalance receivables and liabilities for each of the three years ended December 31, 1995, 1996 and 1997, were not material and have not been included in the reserve estimates. F-14 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) PROVED DEVELOPED OIL AND GAS RESERVES (UNAUDITED) The following reserve information was developed by the Company and set forth the estimated quantities of proved developed oil and gas reserves of the Company as of the beginning of each year.
CRUDE OIL AND NATURAL GAS CONDENSATE PROVED DEVELOPED RESERVES (MMCF) (BBLS IN THOUSANDS) - ----------------------------------------------------------- ----------- ------------------- January 1, 1995 55,900 7,591 January 1, 1996 52,588 12,627 January 1, 1997 49,082 15,265 January 1, 1998 47,676 19,411
Proved developed reserves are proved reserves which are expected to be recovered through existing wells with existing equipment and operating methods. COSTS INCURRED IN OIL AND GAS ACTIVITIES Costs incurred in connection with the Company's oil and gas acquisition, exploration and development activities during the year are shown below (in thousands of dollars). Amounts are presented in accordance with SFAS No. 19, and may not agree with amounts determined using traditional industry definitions.
1995 1996 1997 --------- --------- --------- Property acquisition costs: Proved............................................................... $ 16,293 $ 3,327 $ 476 Unproved............................................................. 14,697 6,085 4,641 --------- --------- --------- Total property acquisition costs................................... 30,990 9,412 5,117 Exploration costs...................................................... 18,276 16,901 9,792 Development costs...................................................... 4,240 20,600 49,268 --------- --------- --------- Total.............................................................. $ 53,506 $ 46,913 $ 64,177 --------- --------- --------- --------- --------- ---------
AGGREGATE CAPITALIZED COSTS Aggregate capitalized costs relating to the Company's oil and gas producing activities, and related accumulated DD&A, as of December 31 (in thousands of dollars):
1996 1997 ---------- ---------- Unproved oil and gas properties................................................. $ 16,878 $ 17,047 Proved oil and gas properties................................................... 137,404 195,785 ---------- ---------- Total......................................................................... 154,282 212,832 Less--Accumulated DD&A.......................................................... 51,282 82,157 ---------- ---------- Net capitalized costs........................................................... $ 103,000 $ 130,675 ---------- ---------- ---------- ----------
F-15 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) OIL AND GAS OPERATIONS (UNAUDITED) Aggregate results of operations for each period ended December 31, in connection with the Company's oil and gas producing activities are shown below (in thousands of dollars):
1995 1996 1997 --------- --------- --------- Revenues............................................................... $ 30,576 $ 75,016 $ 78,599 Production costs....................................................... 7,611 19,338 20,748 Exploration expenses................................................... 6,184 4,512 6,806 DD&A and valuation provision*.......................................... 8,999 21,635 30,202 --------- --------- --------- Income................................................................. 7,782 29,531 20,843 Income tax expense**................................................... 2,957 11,222 3,300 --------- --------- --------- Results of operations from producing activities (excluding corporate overhead and interest costs)......................................... $ 4,825 $ 18,309 $ 17,543 --------- --------- --------- --------- --------- ---------
- -------------------------- * Includes $2.1 million and $5 million in 1996 and 1997, respectively, of additional DD&A as a result of adoption of SFAS No. 121. ** The 1997 income tax provision was computed based on estimated oil and gas operations income for the five months ended May 31, 1997, times the estimated effective income tax rate. The Company's S-Corporation status was effective June 1, 1997. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED) The following information is based on the Company's best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of December 31, 1995, 1996, and 1997 as required by Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 69. The Standard requires the use of a 10 percent discount rate. This information is not the fair market value nor does it represent the expected present value of future cash flows of the Company's proved oil and gas reserves (in thousands of dollars).
1995 1996 1997 ----------- ----------- ----------- Future cash inflows.............................................. $ 619,081 $ 612,158 $ 576,330 Future production and development costs.......................... (213,752) (191,947) (189,520) Future income tax expenses....................................... (145,620) (141,487) -- ----------- ----------- ----------- Future net cash flows............................................ 259,709 278,724 386,810 10% annual discount for estimated timing of cash flows........... (105,182) (101,591) (145,185) ----------- ----------- ----------- Standardized measure of discounted future net cash flows......... $ 154,527 $ 177,133 $ 241,625 ----------- ----------- ----------- ----------- ----------- -----------
Future cash inflows are computed by applying year-end prices of oil and gas relating to the Company's proved reserves to the year-end quantities of those reserves. The year-end weighted average oil price utilized in the computation of future cash inflows was approximately $18.06 per BBL at December 31, 1997 and $23.00 per BBL at December 31, 1995 and 1996. The year-end weighted average gas price utilized in the computation of future cash inflows was approximately $2.25 per MCF at December 31, 1997 and $3.28 per MCF at December 31, 1995 and 1996. F-16 CONTINENTAL RESOURCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) Future production and development costs, which include dismantlement and restoration expense, are computed by estimating the expenditures to be incurred in developing and producing the Company's proved oil and gas reserves at the end of the year, based on year-end costs, and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate year-end statutory tax rates to the future pretax net cash flows relating to the Company's proved oil and gas reserves, less the tax bases of the properties involved. The future income tax expenses give effect to tax credits and allowances, but do not reflect the impact of general and administrative costs and exploration expenses of ongoing operations relating to the Company's proved oil and gas reserves. Income taxes were not computed at December 31, 1997, as the Company elected S-Corporation status effective June 1, 1997. Principal changes in the aggregate standardized measure of discounted future net cash flows attributable to the Company's proved oil and gas reserves at year-end are shown below (in thousands of dollars):
1995 1996 1997 ---------- ---------- ---------- Standardized measure of discounted future net cash flows at the beginning of the year............................................ $ 126,687 $ 154,527 $ 177,133 Extensions, discoveries and improved recovery, less related costs............................................................ 23,489 28,815 16,352 Revisions of previous quantity estimates........................... -- -- 58,001 Changes in estimated future development costs...................... -- -- (36,901) Purchases/sales of minerals in place............................... 27,615 -- (3,233) Net changes in prices and production costs......................... -- -- (51,456) Accretion of discount.............................................. 12,669 15,453 17,713 Sales of oil and gas produced, net of production costs............. (22,965) (55,678) (57,851) Development costs incurred during the period....................... -- 23,212 32,474 Net change in income taxes......................................... (15,787) 3,200 89,915 Change in timing of estimated future production, and other......... 2,819 7,604 (522) ---------- ---------- ---------- Standardized measure of discounted future net cash flows at the end of the year...................................................... $ 154,527 $ 177,133 $ 241,625 ---------- ---------- ---------- ---------- ---------- ----------
The standardized measure and changes in standardized measure prior to December 31, 1996, were determined from production, drilling, acquisition and sale records of the Company applied to the reserve reports as of December 31, 1996, without revision for oil and gas price assumptions. F-17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Continental Resources, Inc.: We have audited the accompanying statements of revenues and direct operating expenses of the oil and gas properties included in the Purchase Agreement between Continental Resources Inc. and Bass Enterprises Production Co. (the "Properties") for the three years in the period ended December 31, 1997. These statements are the responsibility of Continental Resources management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of revenues and direct operating expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of revenues and direct operating expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying statements of revenues and direct operating expenses were prepared in connection with the purchase of the Properties and, as described in Note 1, exclude general and administrative expenses, depreciation, depletion and amortization, interest, income tax expenses, and other items as these expenses would not be comparable to those resulting from the proposed future operations of the Properties. In our opinion, the statements of revenues and direct operating expenses referred to above present fairly, in all material respects, the revenues and direct operating expenses of the Properties for the three years in the period ended December 31, 1997. ARTHUR ANDERSEN LLP Oklahoma City, Oklahoma, June 4, 1998 F-18 STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF OIL AND GAS PROPERTIES INCLUDED IN THE PURCHASE AGREEMENT BETWEEN CONTINENTAL RESOURCES, INC. AND BASS ENTERPRISES PRODUCTION CO.
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------ -------------------------- 1995 1996 1997 1997 1998 ------------ ------------- ------------- ------------ ------------ (UNAUDITED) REVENUES: Oil sales.............................. $ 9,002,941 $ 13,463,786 $ 9,993,174 $ 3,155,080 $ 1,175,029 Gas sales.............................. 189,592 110,020 132,750 29,831 40,587 ------------ ------------- ------------- ------------ ------------ Total revenues....................... 9,192,533 13,573,806 10,125,924 3,184,911 1,215,616 DIRECT OPERATING EXPENSES: Production and operating expenses...... 3,634,950 4,845,364 5,209,488 1,378,475 792,241 ------------ ------------- ------------- ------------ ------------ REVENUES IN EXCESS OF DIRECT OPERATING EXPENSES............................... $ 5,557,583 $ 8,728,442 $ 4,916,436 $ 1,806,436 $ 423,375 ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
The accompanying notes are an integral part of these financial statements. F-19 NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF OIL AND GAS PROPERTIES INCLUDED IN THE PURCHASE AGREEMENT BETWEEN CONTINENTAL RESOURCES, INC. AND BASS ENTERPRISES PRODUCTION CO. 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The accompanying statements present revenues and direct operating expenses of working and royalty interests in oil and gas properties located near the town of Worland in the Bighorn Basin of Wyoming included in the Purchase Agreement between Continental Resources, Inc. ("Continental") and Bass Enterprises Production Co., adjusted for Continental's sale of a 50% interest in the oil and gas properties to Continental's majority shareholder (the "Properties"). The accompanying statements of revenues and direct operating expenses were prepared on the accrual basis of accounting and relate only to the Properties described above. These historical results may not be indicative of future operations. The statements do not include general and administrative expenses, interest, depreciation, depletion and amortization, Federal and state income taxes and other items because such amounts would not be indicative of those expenses which will be incurred by Continental. The unaudited statements of revenues and direct operating expenses for the three-month periods ended March 31, 1997 and 1998, in the opinion of Continental management, were prepared on a basis consistent with the audited statements of revenues and direct operating expenses of the Properties for the three years in the period ended December 31, 1997, and include all adjustments, consisting only of normal recurring accruals, necessary to present fairly the revenues and direct operating expenses for the indicated periods. USE OF ESTIMATES The preparation of the statements of revenues and direct operating expenses in conformity with generally accepted accounting principles requires Continental to make estimates and assumptions that affect the reported amounts of revenues and direct operating expenses during the reporting periods. Actual results could differ from those estimates as additional information becomes available. CONCENTRATION OF REVENUE AND LIMITED NUMBER OF CUSTOMERS Approximately 84%, 78% and 75% of revenues were derived from one property during 1995, 1996 and 1997, respectively. In addition, virtually all of the production of the properties was purchased by three purchasers during the periods. 2. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): PROVED OIL AND GAS RESERVES (UNAUDITED) The following reserve information was developed from reserve reports as of January 1, 1998, prepared by independent reserve engineers and set forth the changes in estimated quantities of proved oil and gas reserves of the Properties during each of the three years presented. Information prior to January 1, 1998, F-20 NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF OIL AND GAS PROPERTIES INCLUDED IN THE PURCHASE AGREEMENT BETWEEN CONTINENTAL RESOURCES, INC. AND BASS ENTERPRISES PRODUCTION CO. (CONTINUED) 2. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) was determined from production and drilling as applied to the January 1, 1998, reserve reports as reports prior to January 1, 1998, were not available.
CRUDE OIL AND NATURAL GAS CONDENSATE (MMCF) (BBLS IN THOUSANDS) ----------- ------------------- Proved reserves as of December 31, 1994.............................. 29,791 26,783 Extensions, discoveries and other additions........................ -- 592 Production......................................................... (367) (565) ----------- ------ Proved reserves as of December 31, 1995.............................. 29,424 26,810 Extensions, discoveries and other additions........................ 177 1,119 Production......................................................... (521) (675) ----------- ------ Proved reserves as of December 31, 1996.............................. 29,080 27,254 Extensions, discoveries and other additions........................ -- 622 Production......................................................... (610) (628) ----------- ------ Proved reserves as of December 31, 1997.............................. 28,470 27,248 ----------- ------ ----------- ------
Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves. Oil and gas reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be precisely measured, and estimates of other engineers might differ materially from the estimates set forth herein. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. PROVED DEVELOPED OIL AND GAS RESERVES (UNAUDITED) The following reserve information was developed by Continental and set forth the estimated quantities of proved developed oil and gas reserves of the Properties as of the beginning of each year.
CRUDE OIL AND NATURAL GAS CONDENSATE (BBLS IN PROVED DEVELOPED RESERVES (MMCF) THOUSANDS) - --------------------------------------------------------------------- ----------- ------------------- January 1, 1995...................................................... 13,889 10,879 January 1, 1996...................................................... 13,699 10,906 January 1, 1997...................................................... 13,355 11,350 January 1, 1998...................................................... 12,565 11,344
F-21 NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF OIL AND GAS PROPERTIES INCLUDED IN THE PURCHASE AGREEMENT BETWEEN CONTINENTAL RESOURCES, INC. AND BASS ENTERPRISES PRODUCTION CO. (CONTINUED) 2. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) Proved developed reserves are proved reserves which are expected to be recovered through existing wells with existing equipment and operating methods. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED) The following information is based on Continental's best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of December 31, 1995, 1996, and 1997 as required by Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 69. The Standard requires the use of a 10 percent discount rate. This information is not the fair market value nor does it represent the expected present value of future cash flows of Continental's proved oil and gas reserves (in thousands of dollars).
1995 1996 1997 ---------- ---------- ---------- Future cash inflows................................................ $ 361,538 $ 348,847 $ 339,212 Future production and development costs............................ 204,874 192,407 180,945 ---------- ---------- ---------- Future net cash flows.............................................. 156,664 156,440 158,267 10% annual discount for estimated timing of cash flows............. 137,116 135,184 132,876 ---------- ---------- ---------- Standardized measure of discounted future net cash flows........... $ 19,548 $ 21,256 $ 25,391 ---------- ---------- ---------- ---------- ---------- ----------
Future cash inflows are computed by applying year-end prices of oil and gas relating to the Properties' proved reserves to the year-end quantities of those reserves. The year-end weighted average oil price utilized in the computation of future cash inflows was approximately $11.44 per BBL at December 31, 1995, 1996 and 1997. The year-end weighted average gas price utilized in the computation of future cash inflows was approximately $1.00 per MCF at December 31, 1995, 1996 and 1997. Future production and development costs, which include dismantlement and restoration expense, are computed by estimating the expenditures to be incurred in developing and producing the Properties' proved oil and gas reserves at the end of the year, based on year-end 1997 costs, and assuming continuation of existing economic conditions. F-22 NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF OIL AND GAS PROPERTIES INCLUDED IN THE PURCHASE AGREEMENT BETWEEN CONTINENTAL RESOURCES, INC. AND BASS ENTERPRISES PRODUCTION CO. (CONTINUED) 2. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): (CONTINUED) Principal changes in the aggregate standardized measure of discounted future net cash flows attributable to the Properties' proved oil and gas reserves at year-end are shown below (in thousands of dollars):
1995 1996 1997 ---------- ---------- ---------- Standardized measure of discounted future net cash flows at the beginning of the year............................................ $ 16,715 $ 19,548 $ 21,256 Extensions, discoveries and improved recovery, less related costs............................................................ 468 884 491 Accretion of discount.............................................. 1,778 1,932 2,308 Sales of oil and gas produced, net of production costs............. (5,558) (8,729) (4,917) Development costs incurred during the period....................... 6,145 7,621 6,253 ---------- ---------- ---------- Standardized measure of discounted future net cash flows at the end of the year...................................................... $ 19,548 $ 21,256 $ 25,391 ---------- ---------- ---------- ---------- ---------- ----------
The standardized measure and changes in standardized measure prior to December 31, 1997, were determined from production and drilling records of the Properties applied to the reserve reports as of January 1, 1998, without revision for oil and gas price assumptions. F-23 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by the Oklahoma General Corporation Act under which the Company is incorporated, the Company's Certificate of Incorporation, as amended, provides for indemnification of each of the Company's officers and directors against (a) expenses, including attorney's fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any action, suit or proceeding brought by reason of his being or having been a director, officer, employee or agent of the Company, or of any other corporation, partnership, joint venture, or other enterprise at the request of the Company, other than an action by or in the right of the Company, provided that he acted in good faith and in a manner he reasonably believed to be in the best interest of the Company, and with respect to any criminal action, he had no reasonable cause to believe that his conduct was unlawful and (b) expenses (including attorney's fees) actually and reasonably incurred by him in connection with the defense or settlement of any action or suit by or in the right of the Company brought by reason of his being or having been a director, officer, employee or agent of the Company, or any other corporation, partnership, joint venture, or other enterprise at the request of the Company, provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged liable to the Company, unless and only to the extent that the court in which such action or suit was decided has determined that the person is fairly and reasonably entitled to indemnification for such expenses which the court shall deem proper. The Company's bylaws provide for similar indemnification. These provisions may be sufficiently broad to indemnify such persons for liabilities arising under the Securities Act of 1933, as amended. The Company's directors and officers are also insured against claims arising out of the performance of their duties in such capacities. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBERS DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 3.1 Registrant's Certificate of Incorporation, as amended and restated 3.2 Registrant's By-laws, as amended and restated 4.1 Restated Credit Agreement dated May 12, 1998 among Continental Resources, Inc. and Continental Gas, Inc., as Borrowers and Bank One, Oklahoma, N.A. and the Institutions named therein as Banks and Bank One, Oklahoma, N.A., as Agent (the "Credit Agreement") 4.2 Form of Revolving Note under the Credit Agreement 4.3 Indenture dated as of July 24, 1998 between the Registrant, as Issuer, the Subsidiary Guarantors named therein and United States Trust Company of New York, as Trustee 4.4 Exchange and Registration Rights Agreement dated July 24, 1998 between the Registrant, the Subsidiary Guarantors named therein and Chase Securities, Inc. 5 Opinion of McAfee & Taft A Professional Corporation 10.1 Purchase and Sale Agreement dated March 28, 1998 by and between Bass Enterprises Production Co., et al. as Sellers and Continental Resources, Inc. as Buyer
II-1
EXHIBIT NUMBERS DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 10.2 Worland Area Purchase and Sale Agreement, as amended, dated June 25, 1998 by and between Continental Resources, Inc. as Seller and Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 as Buyer 12.1 Statement re computation of ratio of debt to EBITDA 12.2 Statement re computation of ratio of earnings to fixed charges 12.3 Statement re computation of ratio of EBITDA to interest expense 21 Subsidiaries 23.1 Consent of McAfee & Taft A Professional Corporation is contained in Exhibit 5 hereto 23.2 Consent of Arthur Andersen LLP 25 Statement of eligibility of Trustee 27 Financial Data Schedule 99.1 Letter of Transmittal 99.2 Notice of Guarantee of Delivery 99.3 Company letter 99.4 Client letter 99.5 Guidelines for certification of taxpayer identification number
(b) Financial Statement Schedules None II-2 ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registration pursuant to the provisions described under Item 20, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnifications against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oklahoma City, State of Oklahoma, on the 14th day of August, 1998. CONTINENTAL RESOURCES, INC. By: /s/ HAROLD HAMM ----------------------------------------- Harold Hamm CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the 14th day of August, 1998.
NAME TITLE - ------------------------------ -------------------------- Chairman of the Board, /s/ HAROLD HAMM President and Chief - ------------------------------ Executive Officer Harold Hamm (Principal Executive Officer) and Director /s/ JACK H. STARK - ------------------------------ Senior Vice President and Jack H. Stark Director Senior Vice President, Treasurer and Chief /s/ ROGER V. CLEMENT Financial Officer - ------------------------------ (Principal Financial and Roger V. Clement Accounting Officer) and Director /s/ JEFF HUME - ------------------------------ Senior Vice President, Jeff Hume Director /s/ RANDY MOEDER Senior Vice President, - ------------------------------ General Counsel, Randy Moeder Secretary and Director
II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following additional Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oklahoma City, State of Oklahoma, on August 14th, 1998. CONTINENTAL GAS, INC. By: /s/ HAROLD HAMM ----------------------------------------- Harold Hamm CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on August 14th, 1998. SIGNATURE TITLE - ------------------------------ ---------------------------------------- /s/ HAROLD HAMM Chairman of the Board, Chief Executive - ------------------------------ Officer (Principal Executive Officer) Harold Hamm and Director of Continental Gas, Inc. /s/ RANDY MOEDER - ------------------------------ President and Director of Continental Randy Moeder Gas, Inc. Assistant Secretary and Chief Financial /s/ ROGER V. CLEMENT Officer (Principal Financial Officer - ------------------------------ and Principal Accounting Officer) of Roger V. Clement Continental Gas, Inc. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following additional Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oklahoma City, State of Oklahoma, on August 14th, 1998. CONTINENTAL CRUDE, INC. By: /s/ JEFF WHITE ----------------------------------------- Jeff White PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on August 14th, 1998. SIGNATURE TITLE - ------------------------------ ---------------------------------------- /s/ JEFF WHITE President, Chief Executive Officer - ------------------------------ (Principal Executive Officer) and Jeff White Director of Continental Crude Co. Treasurer and Chief Financial Officer /s/ ROGER V. CLEMENT (Principal Financial Officer and - ------------------------------ Principal Accounting Officer) and Roger V. Clement Director of Continental Crude Co. /s/ RANDY MOEDER - ------------------------------ Secretary Randy Moeder II-6 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CONTINENTAL RESOURCES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 1311 73-0767549 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.)
------------------------ 302 NORTH INDEPENDENCE ROGER CLEMENT SUITE 300 302 NORTH INDEPENDENCE ENID, OKLAHOMA 73701 SUITE 300 (580) 233-8955 ENID, OKLAHOMA 73701 (Address, including Zip Code, and (580) 233-8955 telephone (Name, address, including Zip number, including area code, of Code, and telephone number, registrant's principal including area code, of executive offices) agent for service) ------------------------ COPIES TO: THEODORE M. ELAM, ESQ. BRICE TARZWELL, ESQ. MCAFEE & TAFT A PROFESSIONAL CORPORATION TENTH FLOOR, TWO LEADERSHIP SQUARE OKLAHOMA CITY, OKLAHOMA 73102 (405) 235-9621 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX TO EXHIBITS
EXHIBIT NUMBERS DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 3.1 Registrant's Certificate of Incorporation, as amended and restated 3.2 Registrant's By-laws, as amended and restated 4.1 Restated Credit Agreement dated May 12, 1998 among Continental Resources, Inc. and Continental Gas, Inc., as Borrowers and Bank One, Oklahoma, N.A. and the Institutions named therein as Banks and Bank One, Oklahoma, N.A., as Agent (the "Credit Agreement") 4.2 Form of Revolving Note under the Credit Agreement 4.3 Indenture dated as of July 24, 1998 between the Registrant, as Issuer, the Subsidiary Guarantors named therein and United States Trust Company of New York, as Trustee 4.4 Exchange and Registration Rights Agreement dated July 24, 1998 between the Registrant, the Subsidiary Guarantors named therein and Chase Securities, Inc. 5 Opinion of McAfee & Taft A Professional Corporation 10.1 Purchase and Sale Agreement dated March 28, 1998 by and between Bass Enterprises Production Co., et al. as Sellers and Continental Resources, Inc. as Buyer 10.2 Worland Area Purchase and Sale Agreement, as amended, dated June 25, 1998 by and between Continental Resources, Inc. as Seller and Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 as Buyer 12.1 Statement re computation of ratio of debt to EBITDA 12.2 Statement re computation of ratio of earnings to fixed charges 12.3 Statement re computation of ratio of EBITDA to interest expense 21 Subsidiaries 23.1 Consent of McAfee & Taft A Professional Corporation is contained in Exhibit 5 hereto 23.2 Consent of Arthur Andersen LLP 25 Statement of eligibility of Trustee 27 Financial Data Schedule 99.1 Letter of Transmittal 99.2 Notice of Guaranteed Delivery 99.3 Company letter 99.4 Client letter 99.5 Guidelines for certification of taxpayer identification number
EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 OFFICE OF THE SECRETARY OF STATE STATE OF OKLAHOMA [GREAT SEAL OF THE STATE OF OKLAHOMA -- 1907] RESTATED CERTIFICATE OF INCORPORATION WHEREAS, the Restated Certificate of Incorporation of CONTINENTAL RESOURCES, INC. has been filed in the office of the Secretary of State as provided by the laws of the State of Oklahoma. NOW THEREFORE, I, the undersigned, Secretary of State of the State of Oklahoma, by virtue of the powers vested in my bylaw, do hereby issue this certificate evidencing such filing. IN TESTIMONY WHEREOF, I hereunto set my hand and cause to be affixed the Great Seal of the State of Oklahoma. Filed in the City of Oklahoma City this 21st day of January, 1998. [Great Seal of the State of Oklahoma -- 1907] /s/ TOM COLE Secretary of State By: /s/ REGINA DAVIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION I, Randy Moeder, certify that I am the Senior Vice President and Secretary, of Continental Resources, Inc., a corporation organized and existing under the laws of the State of Oklahoma (the "Corporation"), and do hereby further certify as follows: 1. The name of this Corporation is Continental Resources, Inc. 2. The name under which the Corporation was originally incorporated was Shelly Dean Oil Co. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Oklahoma on November 16, 1967, with amendments thereto filed on September 23, 1976, June 30, 1980, January 30, 1987, June 21, 1991, September 30, 1991 and April 28, 1996. 3. This Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 1077 and 1080 of the Oklahoma General Corporation Act (the "Act") by the written consent of the holders of not less than a majority the outstanding stock of the Corporation entitled to vote thereon, and written notice of the corporate action has been given to the shareholders of the Corporation, if any, who have not so consented in writing, all in accordance with the provisions of the Act. 4. The text of the Certificate of Incorporation of the Corporation is amended and restated to read in its entirety as follows: FIRST. The name of the Corporation is: CONTINENTAL RESOURCES, INC. SECOND. The address of the registered office of the Corporation in the State of Oklahoma is 302 North Independence, 3rd Floor, County of Garfield, Enid, Oklahoma 73701. The name of the Corporation's registered agent at such address is Harold Hamm. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Act. FOURTH. The total number of shares of capital stock which the Corporation shall have authority to issue is 1,075,000 shares, divided into 75,000 shares designated as Common Stock, par value $1.00 per share, and 1,000,000 shares designated as preferred stock, par value $.01 per share. The preferences, qualifications, limitations, restrictions and the special or relative rights in respect of the shares of each class are as follows: PREFERRED. The Preferred Stock may be issued from time to time in one or more series. All shares of -2- Preferred Stock shall be of equal rank and shall be identical, except in respect of the matters that may be fixed and determined by the Board of Directors of the Corporation (the "Board") as hereinafter provided, and each share of each series shall be identical with all other shares of such series, except as to the date from which dividends are cumulative, if applicable. The Board is hereby authorized to cause such shares to be issued in one or more series and with respect to each such series prior to the issuance thereof to fix and determine the designation, powers, preferences and rights of the shares of each such series then the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board shall determine; (e) Whether or not shares of that series shall be redeemable, and if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution and winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences or limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or set apart from payment before any dividends shall be paid or declared or set apart for payment on the Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the -3- Corporation the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. COMMON. Each of the shares of Common Stock of the Corporation shall be equal in all respects to each others share. The holders of shares of Common Stock shall be entitled to one vote for each share of Common Stock held with respect to all matters as to which the Common Stock is entitled to be voted. Subject to the preferential and other dividend rights applicable to Preferred Stock, the holders of shares of Common Stock shall be entitled to receive such dividends (payable in cash, stock or otherwise) as may be declared on the Common Stock by the Board at any time or from time to time out of any funds legally available therefore. In the event of any voluntary or involuntary liquidation, distribution or winding up of the Corporation, after distribution in full of the preferential and/or other amounts to be distributed to the holders of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive all of the remaining assets of the Corporation available for distribution to its shareholders, ratably in portion to the number of shares of Common Stock held by them. FIFTH. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 1053 of the Act, or (iv) for any transaction from which the director derived any improper personal benefit. If the Act is amended after approval by the stockholders of this article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Act, as so amended. SIXTH. For the purposes of this Section Sixth: "Continuing Director" means any member of the Board who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. "Exchange Act" means the Securities Exchange Act of 1934, as amended. -4- "Fair Market Value" means the highest closing price, during the 30-day period ending on the date in question, of the Common Stock on the principal securities exchange registered under the Exchange Act on which such stock is listed, or in the national market system maintained by the National Association of Securities Dealers, Inc., or, if the stock is not listed on any such exchange or designated as a national market system security, the highest closing bid quotation with respect to a share of such stock during the 30-day period ending on the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith. "Interested Stockholder" has the meaning ascribed to such term under Section 1090.3 of the Act. Any direct or indirect purchase by the Corporation, or any subsidiary of the Corporation, of any Common Stock, or any securities convertible to Common Stock, from a person or persons known by a majority of the Continuing Directors of the Corporation to be an Interested Stockholder, or any agreement in respect thereof, at a price in excess of the Fair Market Value shall require the affirmative vote of not less than 66 2/3% of the votes cast by the holders of all then outstanding shares of Common Stock, excluding for this purpose shares of Common Stock owned beneficially by the Interested Stockholder, unless a greater vote shall be required by law. Such affirmative vote shall not be required for a purchase or other acquisition of Common Stock, or any securities convertible to Common Stock, pursuant to an offer made on substantially the same terms to all holders of Common Stock, or securities convertible to Common Stock, and complying with the applicable requirements of the Exchange Act and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act, rules or regulations). Further, such affirmative vote shall not be required for any purchase effected on the open market and not the result of a privately-negotiated transaction. The Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Section Sixth, on the basis of information known to them after reasonable inquiry, whether a person is an Interested Stockholder and the number of shares of Common Stock owned beneficially by any person. SEVENTH. The business and affairs of the Corporation shall be under the direction of the Board. The number of directors which shall constitute the Board (i) shall be not less than three nor more than nine, and (ii) shall be determined by resolution adopted either (A) by a vote of not less than two-thirds (2/3) of the members of the Board then serving, or (B) at an annual or special meeting of the shareholders of the Corporation by the affirmative vote of the holders of not less than two-thirds (2/3) of the outstanding stock entitled to vote for the election of directors. No reduction in the number of directors shall have the effect of removing any director prior to the expiration of such director's term. -5- The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board. The term of the initial Class I directors shall terminate on the date of the 1999 annual meeting of the shareholders of the Corporation (the "Annual Meeting"), the term of the initial Class II directors shall terminate on the date of the 2000 Annual Meeting, and the term of the initial Class III directors shall terminate on the date of the 2001 Annual Meeting. At each Annual Meeting beginning in 1999, successors to the class of directors whose term expires at that Annual Meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned by the Board among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. A director shall hold office until the Annual Meeting for the year in which such director's term expires and until such director's successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board, however, may be filled by a majority of the directors then in office, even if less than a quorum, or by the sole remaining director. Election of directors need not be by written ballot unless otherwise provided in the Bylaws. EIGHTH. The Corporation shall indemnify the following persons in the following manner: (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the Corporation (other than a judicial action or suit brought by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee, trustee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to hereafter as an "Agent"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Agent in connection with such action, suit or proceeding if the Agent acted in good faith and in a manner the Agent reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe the Agent's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) the Agent did not act in good faith and in a manner which the Agent reasonably believed to be in or not opposed to the best interests of the Corporation, or (ii) with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that the Agent's conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit -6- brought by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees), actually and reasonably incurred by the Agent in connection with the defense or settlement of such action or suit if the Agent acted in good faith and in a manner the Agent reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which the Agent shall have been adjudged to be liable for gross negligence or misconduct in the performance of the Agent's duty to the Corporation, unless and only to the extent that a District Court of Oklahoma, or the court in which such action or suit was brought, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Agent is fairly and reasonably entitled to indemnity for such expenses which a District Court of Oklahoma or other such court shall deem proper. (c) Any indemnification under Subsection (a) or (b) of this Section (unless ordered by a court) shall be made by the Corporation unless a determination is reasonably and promptly made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that either (y) the Agent did not act in good faith and in a manner which the Agent reasonably believed to be in or not opposed to the best interests of the Corporation, or (z) with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that the Agent's conduct was unlawful. (d) Notwithstanding the other provisions of this Section, to the extent that an Agent has been successful on the merits or otherwise, including the dismissal of an action without prejudice or the settlement of an action without admission of liability, in defense of any proceeding or in defense of any claim, issue or matter therein, such Agent shall be indemnified against all expenses incurred in connection therewith. (e) Except as limited by this Subsection (e), expenses incurred in any action, suit, proceeding or investigation shall be paid by the Corporation in advance of the final disposition of such matter, if the Agent shall undertake to repay such amount in the event that it is ultimately determined, as provided herein, that the Agent is not entitled to indemnification. Notwithstanding the foregoing, no advance shall be made by the Corporation if a determination is reasonably and promptly made by the Board by a majority vote of a quorum of disinterested directors, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested-directors so directs) by independent legal counsel in a written opinion, that, based upon the facts known to the Board or counsel at the time such determination is made, the Agent acted in bad faith and in a manner that the Agent did not believe to be in or not opposed to the best interest of the Corporation, or, with respect to any criminal proceeding, that Agent believed or had reasonable cause to believe the Agent's conduct was unlawful. In no event shall any advance be made in instances where the Board or independent legal counsel reasonably determines that the Agent deliberately breached the Agent's duty to the Corporation or its shareholders. (f) Any indemnification or advance under Subsections (a), (b), (c), (d) or (e) of -7- this Section shall be made promptly, and in any event within ninety (90) days, upon the written request of the Agent, unless with respect to applications under Subsections (a), (b), (c) or (e) of this Section, a determination is reasonably and promptly made by the Board by a majority vote of a quorum of disinterested directors that such Agent acted in a manner set forth in such Subsections as to justify the Corporation in not indemnifying or making an advance to the Agent. In the event no quorum of disinterested directors is obtainable, the Board shall promptly direct that independent legal counsel shall decide whether the Agent acted in the manner set forth in such Subsections as to justify the Corporation not indemnifying or making an advance to the Agent. The right to indemnification or advances as granted by this Section shall be enforceable by the Agent in any court of competent jurisdiction, if the Board or independent legal counsel denies the claim, in whole or in part, or if no disposition of such claim is made within ninety (90) days. The Agent's expenses incurred in connection with successfully establishing the Agent's right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. (g) The indemnification provided by this Section shall not be deemed exclusive of any other rights to which an Agent seeking indemnification may be entitled under any Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in the Agent's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification under this Section shall be deemed to be provided by a contract between the Corporation and the Agent who serves in such capacity at any time while this Amended and Restated Certificate of Incorporation and the relevant provisions of the Act and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. (h) Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such Agent and incurred by such Agent in any such capacity, or arising out of the Agent's status as such, whether or not the Corporation would have the power to indemnify the Agent against such liability under the provisions of this Section. (i) For the purposes of this Section, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee, trustee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as such person would if such person had served the resulting or surviving corporation in the same capacity. (j) For purposes of this Section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee, trustee or agent of the -8- Corporation which imposes duties on, or involves services by, such director, officer, employee, trustee or agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonable believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Section. (k) If this Section or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Section that shall not have been invalidated, or by any other applicable agreement or law. NINTH. In furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation as set forth in the Bylaws. TENTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Oklahoma may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 1106 of Title 18 of the Act, or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 1100 of Title 18 of the Act, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. ELEVENTH. The Corporation reserves, subject to the provisions of the Act or any other applicable statute, the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding stock of this Corporation having voting power, voting together as a single class, shall be required to amend, repeal or adopt any provisions inconsistent with -9- Sections Fifth, Sixth, Seventh, Eighth and Eleventh of this Amended and Restated Certificate of Incorporation. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by Randy Moeder, its Senior Vice President, and attested and attested by Randy Moeder, its Secretary, this 15th day of July, 1998. /s/ RANDY MOEDER Randy Moeder, Senior Vice President ATTEST: /s/ RANDY MOEDER -10- EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 CONTINENTAL RESOURCES, INC. (A OKLAHOMA CORPORATION) AMENDED AND RESTATED BYLAWS (INCLUDING ALL AMENDMENTS THROUGH JULY 1, 1998) ARTICLE I OFFICES SECTION 1.01 REGISTERED OFFICE. The registered office of Continental Resources, Inc. (hereinafter called the Corporation) in the State of Oklahoma shall be at 302 N. Independence, 3rd Floor, Enid, Garfield County, Oklahoma 73701, and the name of the registered agent in charge thereof shall be Harold Hamm. SECTION 1.02 OTHER OFFICES. The Corporation may also have an office or offices at such other place or places, either within or without the State of Oklahoma, as the Board of Directors (hereinafter called the Board) may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.01 ANNUAL MEETINGS. The annual meetings of the Shareholders shall be held on the first Tuesday in the month of December in each year at the hour of 10:00 o'clock a.m., for the purpose of electing Directors and for the transaction of such other business as may come before the meetings. If the day fixed for the annual meeting shall be a legal holiday in the State of Oklahoma, such meeting shall be held on the next succeeding business day. If the election of Directors shall not be held on the date designated herein for any annual meeting of the Shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the Shareholders as soon thereafter as convenient. SECTION 2.02 SPECIAL MEETINGS. Special meetings of the Shareholders, for any purpose or purposes, may be called by the President or by the Board and shall be called by the President at the request of the holders of a majority of all the outstanding shares of the Corporation entitled to vote at the meeting. SECTION 2.03 PLACE OF MEETINGS. Meetings of the Shareholders of the Corporation shall be held at the principal office of the Corporation or at any other place, within or without the State of Oklahoma, designated by a majority of the Board. SECTION 2.04 NOTICE OF MEETINGS. Except as otherwise required by law, notice of each meeting of the Shareholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each Shareholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to such Shareholder personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to such Shareholder at such Shareholder's address as it appears on the records of the Corporation. Except as otherwise expressly required by law, no publication of any notice of a meeting of the Shareholders shall be required. Every notice of a meeting of the Shareholders shall state the place, date and hour of the meeting, and, in the case of a special meeting, shall also state the purpose or purposes for which the meeting is called. Notice of any meeting of Shareholders shall not be required to be given to any Shareholder who shall have waived such notice and such notice shall be deemed waived by any Shareholder who shall attend such meeting in person or by proxy, except any Shareholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise expressly required by law, notice of any adjourned meeting of the Shareholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. SECTION 2.05 QUORUM. Except in the case of any meeting for the election of Directors summarily ordered as provided by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the Shareholders of the Corporation or any adjournment thereof. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the Shareholders present in person or by proxy and entitled to vote thereat or, in the absence thereof, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.06 VOTING. (a) Each Shareholder shall, at each meeting of the Shareholders, be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by such Shareholder and registered in such Shareholder's name on the books of the Corporation: (i) On the date fixed pursuant to Section 6.05 of these Bylaws as the record date for the determination of Shareholders entitled to notice of and to vote at such meetings; or (ii) If no such record date shall have been so fixed, then (A) at the close of business on the day next preceding the day on which notice of the meeting shall be given or (B) if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which the meeting shall be held. -2- (b) Shares of its own stock belonging to the Corporation, or to another corporation if a majority of the shares entitled to vote for the election of Directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation the pledgor shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or the pledgee's proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the Oklahoma General Corporation Act. (c) Any such voting rights may be exercised by the Shareholder entitled thereto in person or by such Shareholder's proxy appointed by an instrument in writing, subscribed by such Shareholder or by such Shareholder's attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a Shareholder who may theretofore have given a proxy shall not have the effect of revoking the same unless such Shareholder shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of the Shareholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority in voting interest of the Shareholders present in person or by proxy and entitled to vote thereat and thereon, a quorum being present. All elections of Directors shall be decided by a plurality. The vote at any meeting of the Shareholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot each ballot shall be signed by the Shareholder voting, or by such Shareholder's proxy, if there be such proxy, and it shall state the number of shares voted. SECTION 2.07 LIST OF SHAREHOLDERS. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of Shareholders, a complete list of the Shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Shareholder and the number of shares registered in the name of each Shareholder. Such list shall be open to the examination of any Shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Shareholder who is present. SECTION 2.08 JUDGES. If at any meeting of the Shareholders a vote by written ballot shall be taken on any question, the chairman of such meeting may appoint a judge or -3- judges to act with respect to such vote. Each judge so appointed shall first subscribe an oath faithfully to execute the duties of a judge at such meeting with strict impartiality and according to the best of his ability. Such judges shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of judges shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The judges need not be Shareholders of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which such judge shall have a material interest. SECTION 2.09 ACTION WITHOUT MEETING. Any action required to be taken or which may be taken at any annual or special meeting of Shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of action without a meeting by less than unanimous written consent shall be given to those Shareholders who have not consented in writing. ARTICLE III BOARD OF DIRECTORS SECTION 3.01 GENERAL POWERS. The property, business and affairs of the Corporation shall be managed by the Board. SECTION 3.02 NUMBER AND TERM OF OFFICE. The number and term of office of the Directors shall be determined in accordance with the Corporation's Certificate of Incorporation. SECTION 3.03 ELECTION OF DIRECTORS. All elections of Directors shall be decided by a plurality in voting interest of the Shareholders present in person or by proxy and entitled to vote thereon at the meeting at which such election is held, a quorum being present. SECTION 3.04 CHAIRMAN OF THE BOARD. The members of the Board shall elect one of such members to serve as the Chairman of the Board of the Corporation. The Chairman of the Board shall serve in such capacity until such person resigns, is removed from the Board or is replaced by the majority vote of the Board. SECTION 3.05 RESIGNATIONS. Any Director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, it all take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such -4- resignation shall not be necessary to make it effective. SECTION 3.06 VACANCIES. Except as otherwise provided in the Certificate of Incorporation, any vacancy in the Board, whether because of death, resignation, disqualification, an increase in the authorized number of Directors, or any other cause, may be filled by vote of the majority of the remaining Directors, although less than a quorum. Each Director so chosen to fill a vacancy shall hold office until such Director's successor shall have been elected and shall qualify or until such Director shall resign or shall have been removed in the manner hereinafter provided. SECTION 3.07 PLACE OF MEETING, ETC. The Board may hold any of its meetings at such place or places within or without the State of Oklahoma as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 3.08 REGULAR MEETINGS. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. SECTION 3.09 SPECIAL MEETINGS. Special meetings of the Board shall be held whenever called by the President, the Chairman or a majority of the Directors then in office. Except as otherwise provided by law or by these Bylaws, notice of the time and place of each such special meeting shall be mailed to each Director, addressed to such Director's residence or usual place of business, at least five (5) days before the day on which the meeting is to be held, or shall be given by telephonic notice at least twenty-four (24) hours before the time of such scheduled meeting. Except where otherwise required by law or by these Bylaws, notice of the purpose of a special meeting need not be given. Notice of any meeting of the Board shall not be required to be given to any Director who is present at such meeting, except a Director who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3.10 QUORUM AND MANNER OF ACTING. Except as otherwise provided in the Certificate of Incorporation, these Bylaws or by law, the presence of a majority of Directors then in office shall be required to constitute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the Directors present. In the absence of a quorum, a majority of Directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The Directors shall act only as a Board, and the individual Directors shall have no power as such. -5- SECTION 3.11 ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 3.12 REMOVAL OF DIRECTORS. The entire Board of Directors or any individual director may be removed from office, with or without cause, by a vote of the shareholders holding a majority of the outstanding shares entitled to vote at any annual or special meeting of shareholders. In the event any one or more directors are so removed, new directors may be elected at the same meeting. SECTION 3.13 COMPENSATION. The Directors shall receive only such compensation for their services as Directors as may be allowed by resolution of the Board. The Board may also provide that the Corporation shall reimburse each such Director for any expense incurred by such Director on account of such Director's attendance at any meetings of the Board or committees of the Board. Neither the payment of such compensation nor the reimbursement of such expenses shall be construed to preclude any Director from serving the Corporation or its subsidiaries in any other capacity and receiving compensation therefor. SECTION 3.14 COMMITTEES. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation. Any such committee shall keep written minutes of its meetings and report the same to the Board at the next regular meeting of the Board. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. SECTION 3.15 ADVISORY COMMITTEE. The Board may appoint such person or persons as it may select to an advisory committee to the Board who shall be authorized to participate in such meetings of the Board as determined by it. Once established, this advisory committee shall be known as the Advisory Board. Members of the Advisory Board shall not have the rights or obligations of members of the Board and shall not participate in any voting thereof. Members of the Advisory Board shall be entitled to such compensation as the Board may determine from time to time. -6- ARTICLE IV OFFICERS SECTION 4.01 NUMBER. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents (the number thereof and their respective titles to be determined by the Board), a Secretary and a Treasurer. SECTION 4.02 ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers of the Corporation, except such officers as may be appointed in accordance with Section 4.03, shall be elected annually by the Board at the first meeting thereof held after the election thereof. Each officer shall hold office until a successor shall have been duly chosen and shall qualify or until such officer's resignation or removal in the manner hereinafter provided. SECTION 4.03 ASSISTANTS, AGENTS AND EMPLOYEES, ETC. In addition to the officers specified in Section 4.01, the Board may appoint other assistants, agents and employees as it may deem necessary or advisable, including one or more Assistant Secretaries, and one or more Assistant Treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as the Board may from time to time determine. The Board may delegate to any officer of the Corporation or any committee of the Board the power to appoint, remove and prescribe the duties of any such assistants, agents or employees. SECTION 4.04 REMOVAL. Any officer, assistant, agent or employee of the Corporation may be removed, with or without cause, at any time (i) in the case of an officer, assistant, agent or employee elected by the Board, only by resolution of the Board, and (ii) in the case of any other officer, assistant, agent or employee, by any officer of the Corporation or committee of the Board upon whom or which such power of removal may be conferred by the Board. SECTION 4.05 RESIGNATIONS. Any officer or assistant may resign at any time by giving written notice of resignation to the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, upon receipt thereof by the Board or the Secretary, as the case may be; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.06 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or other cause, may be filled for the unexpired portion of the term thereof in the manner prescribed in these Bylaws for regular appointments or elections to such office. SECTION 4.07 THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the shareholders, of the Board and of all committees of which he is a member. He shall have such power and perform such duties as may be authorized by the Board. -7- SECTION 4.08 THE PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President shall be the chief executive officer of the Corporation. The President (i) shall have the overall supervision of the business of the Corporation and shall direct the affairs and policies of the Corporation, subject to any directions which may be given by the Board, (ii) shall have authority to designate the duties and powers of officers (other than the Chairman) and delegate special powers and duties to specified officers, so long as such designations shall not be inconsistent with the laws of the State of Oklahoma, these Bylaws or any action of the Board, and (iii) shall, in general, have all other powers and shall perform all other duties incident to the chief executive officer of a corporation and such other powers and duties as may be prescribed by the Board from time to time. SECTION 4.09 THE VICE PRESIDENTS. Each Vice President shall have such powers and perform such duties as the President or the Board may from time to time prescribe. At the request of the President, or in case of the President's absence or inability to act upon the request of the Board, a Vice President shall perform the duties of the President and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. SECTION 4.10 THE SECRETARY. The Secretary (i) shall, if present, record the proceedings of all meeting of the Board, of the Shareholders, and of all committees of which a secretary shall not have been appointed, in one or more books provided for that purpose, (ii) shall see that all notices are duly given in accordance with these Bylaws and as required by law, (iii) shall be custodian of the seal of the Corporation and shall affix and attest the seal to all documents to be executed on behalf of the Corporation under its seal, and (iv) shall, in general, perform all the duties incident to the office of Secretary and such other duties as may from time to time be assigned by the Board. SECTION 4.11 THE TREASURER. The Treasurer (i) shall have the general care and custody of the funds and securities of the Corporation and shall deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected by the Board, (ii) shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever, (iii) shall exercise general supervision over expenditures and disbursements made by officers, agents and employees of the Corporation and the preparation of such records and reports in connection therewith as may be necessary or desirable, and (iv) shall, in general, perform all other duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board. SECTION 4.12 COMPENSATION. The compensation of the officers of the Corporation shall be fixed from time to time by the Board. -8- ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 5.01 EXECUTION OF CONTRACTS. The Board, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board or by these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any material contract or to incur on behalf of the Corporation any indebtedness for borrowed money in any material amount. SECTION 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such officer, assistant, agent or attorney shall give such bond, if any, as the Board may require. SECTION 5.03 DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the President, any Vice President or the Treasurer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. SECTION 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. -9- ARTICLE VI SHARES AND THEIR TRANSFER SECTION 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by such Shareholder. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the President or a Vice President, and by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any of or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 6.04. SECTION 6.02 TRANSFERS OF STOCK. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 6.03, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 6.03 REGULATIONS. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. -10- SECTION 6.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper to do so. SECTION 6.05 FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. In order that the Corporation may determine the Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days nor less than ten (10) days prior to any other action. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of Shareholders entitled to notice of or to vote at a meeting of Shareholders shall apply to any adjournment of such meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VII DIVIDENDS SECTION 7.01 DECLARATION. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in any manner and upon the terms and conditions provided by law and its Certificate of Incorporation. SECTION 7.02 DETERMINATION OF SHAREHOLDERS ENTITLED TO DIVIDENDS. The Board of Directors shall fix a time, not exceeding forty (40) days preceding date of payment, as a record date for the determination of the shareholders entitled to dividends, and only registered shareholders on the date so fixed shall be entitled to such dividends, notwithstanding any transfer of any shares on the books of the Corporation after the date of record. ARTICLE VIII MISCELLANEOUS SECTION 8.01 SEAL. The Board shall, if required by the laws of any applicable jurisdiction, adopt a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and showing that the Corporation was incorporated in the State of -11- Oklahoma. SECTION 8.02 WAIVER OF NOTICES. Whenever notice is required to be given by these Bylaws or the Certificate of Incorporation or by law, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. SECTION 8.03 AMENDMENTS. Except otherwise set forth in the Corporation's Certificate of Incorporation, these Bylaws, or any of them, may be altered, amended or repealed, and new Bylaws may be made (i) by the Board, by vote of a majority of the number of Directors then in office, or (ii) by the Shareholders, at any annual meeting of Shareholders, without previous notice, or at any special meeting of Shareholders, provided that notice of such proposed amendment, modification, repeal or adoption is given in the notice of special meeting. Any Bylaws made or altered by the Shareholders may be altered or repealed by either the Board or the Shareholders in accordance with the Corporation's Certificate of Incorporation and these Bylaws. -12- EX-4.1 4 EXHIBIT 4.1 RESTATED CREDIT AGREEMENT AMONG CONTINENTAL RESOURCES, INC. AND CONTINENTAL GAS, INC., AS BORROWERS AND BANK ONE, OKLAHOMA, N.A. AND THE INSTITUTIONS NAMED HEREIN AS BANKS AND BANK ONE, OKLAHOMA, N.A., AS AGENT MAY 14, 1998 TABLE OF CONTENTS Page No. 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Commitments of the Bank . . . . . . . . . . . . . . . . . . . . . . . . 13 (a) TERMS OF REVOLVING COMMITMENT. . . . . . . . . . . . . . . . . . . 13 (b) PROCEDURE FOR BORROWING. . . . . . . . . . . . . . . . . . . . . . 14 (c) LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . 14 (d) PROCEDURE FOR OBTAINING LETTERS OF CREDIT. . . . . . . . . . . . . 15 (e) VOLUNTARY REDUCTION OF REVOLVING COMMITMENT. . . . . . . . . . . . 16 (f) MANDATORY COMMITMENT REDUCTIONS. . . . . . . . . . . . . . . . . . 16 (g) SEVERAL OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . 16 3. Notes Evidencing Loans. . . . . . . . . . . . . . . . . . . . . . . . . 17 (a) FORM OF REVOLVING NOTES . . . . . . . . . . . . . . . . . . . . . 17 (b) ISSUANCE OF ADDITIONAL NOTES . . . . . . . . . . . . . . . . . . . 17 (c) INTEREST RATE. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (d) PAYMENT OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . . 17 (e) PAYMENT OF PRINCIPAL . . . . . . . . . . . . . . . . . . . . . . . 17 (f) PAYMENT TO BANKS . . . . . . . . . . . . . . . . . . . . . . . . . 18 (g) SHARING OF PAYMENTS, ETC.. . . . . . . . . . . . . . . . . . . . . 18 (h) NON-RECEIPT OF FUNDS BY THE AGENT. . . . . . . . . . . . . . . . . 18 (i) CAPITAL ADEQUACY . . . . . . . . . . . . . . . . . . . . . . . . . 19 4. Interest Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (a) OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (b) INTEREST RATE DETERMINATION. . . . . . . . . . . . . . . . . . . . 20 (c) CONVERSION OPTION. . . . . . . . . . . . . . . . . . . . . . . . . 20 (d) RECOUPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5. Change of Circumstances . . . . . . . . . . . . . . . . . . . . . . . . 21 (a) UNAVAILABILITY OF FUNDS OR INADEQUACY OF PRICING . . . . . . . . . 21 (b) CHANGE IN LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (c) INCREASED COST OR REDUCED RETURN . . . . . . . . . . . . . . . . . 22 (d) DISCRETION OF BANK AS TO MANNER OF FUNDING . . . . . . . . . . . . 24 (e) BREAKAGE FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6. Collateral Security . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (a) PLEDGE OF COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . 24 (b) DOCUMENTATION AND TITLE REVIEW . . . . . . . . . . . . . . . . . . 25 -i- (c) LETTERS IN LIEU OF TRANSFER ORDERS . . . . . . . . . . . . . . . . 25 7. Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (a) INITIAL BORROWING BASE . . . . . . . . . . . . . . . . . . . . . . 26 (b) SUBSEQUENT DETERMINATIONS OF BORROWING BASE. . . . . . . . . . . . 26 8. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (a) UNUSED COMMITMENT FEE. . . . . . . . . . . . . . . . . . . . . . . 28 (b) THE LETTER OF CREDIT FEE . . . . . . . . . . . . . . . . . . . . . 28 (c) AGENCY FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (d) OTHER FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (a) VOLUNTARY PREPAYMENTS. . . . . . . . . . . . . . . . . . . . . . . 29 (b) MANDATORY PREPAYMENT FOR BORROWING BASE DEFICIENCY . . . . . . . . 29 10. Representations and Warranties. . . . . . . . . . . . . . . . . . . . . 29 (a) CREATION AND EXISTENCE.. . . . . . . . . . . . . . . . . . . . . . 29 (b) POWER AND AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . 30 (c) BINDING OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . 30 (d) NO LEGAL BAR OR RESULTANT LIEN . . . . . . . . . . . . . . . . . . 30 (e) NO CONSENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (f) FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . . . . . . 31 (g) LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (h) LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (i) TAXES; GOVERNMENTAL CHARGES. . . . . . . . . . . . . . . . . . . . 31 (j) TITLES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (k) DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (l) CASUALTIES; TAKING OF PROPERTIES . . . . . . . . . . . . . . . . . 32 (m) USE OF PROCEEDS; MARGIN STOCK. . . . . . . . . . . . . . . . . . . 32 (n) LOCATION OF BUSINESS AND OFFICES . . . . . . . . . . . . . . . . . 32 (o) COMPLIANCE WITH THE LAW. . . . . . . . . . . . . . . . . . . . . . 32 (p) NO MATERIAL MISSTATEMENTS. . . . . . . . . . . . . . . . . . . . . 33 (q) ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (r) PUBLIC UTILITY HOLDING COMPANY ACT . . . . . . . . . . . . . . . . 33 (s) SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (t) ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . 33 (u) LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (v) GAS CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (w) YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . 34 (x) DELHI OAKDALE LATERAL SYSTEM . . . . . . . . . . . . . . . . . . . 34 (y) ALINE GATHERING SYSTEM . . . . . . . . . . . . . . . . . . . . . . 34 -ii- 11. Conditions of Lending . . . . . . . . . . . . . . . . . . . . . . . . . 35 12. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . 37 (a) FINANCIAL STATEMENTS AND REPORTS . . . . . . . . . . . . . . . . . 37 (b) CERTIFICATES OF COMPLIANCE . . . . . . . . . . . . . . . . . . . . 38 (c) ACCOUNTANTS' CERTIFICATE . . . . . . . . . . . . . . . . . . . . . 39 (d) TAXES AND OTHER LIENS. . . . . . . . . . . . . . . . . . . . . . . 39 (e) COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . 39 (f) FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . 39 (g) PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . 40 (h) INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (i) ACCOUNTS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . 40 (j) RIGHT OF INSPECTION. . . . . . . . . . . . . . . . . . . . . . . . 40 (k) NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . . . 41 (l) ERISA INFORMATION AND COMPLIANCE . . . . . . . . . . . . . . . . . 41 (m) ENVIRONMENTAL REPORTS AND NOTICES. . . . . . . . . . . . . . . . . 41 (n) COMPLIANCE AND MAINTENANCE . . . . . . . . . . . . . . . . . . . . 42 (o) OPERATION OF PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 42 (p) COMPLIANCE WITH LEASES AND OTHER INSTRUMENTS . . . . . . . . . . . 43 (q) CERTAIN ADDITIONAL ASSURANCES REGARDING MAINTENANCE AND OPERATIONS OF PROPERTIES . . . . . . . . . . . . . . . . . . . . . 43 (r) SALE OF CERTAIN ASSETS/PREPAYMENT OF PROCEEDS. . . . . . . . . . . 43 (s) TITLE MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (t) CURATIVE MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 44 (u) CHANGE OF PRINCIPAL PLACE OF BUSINESS. . . . . . . . . . . . . . . 44 (v) OPERATING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . 44 (w) YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . 45 (x) ADDITIONAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . 45 (y) ALINE GATHERING SYSTEM . . . . . . . . . . . . . . . . . . . . . . 45 (z) LETTERS IN LIEU OF TRANSFER ORDERS . . . . . . . . . . . . . . . . 45 (aa) DIVISION ORDERS. . . . . . . . . . . . . . . . . . . . . . . . . . 45 (ab) TAKE OR PAY AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 46 13. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . 46 (a) NEGATIVE PLEDGE. . . . . . . . . . . . . . . . . . . . . . . . . . 46 (b) CURRENT RATIO. . . . . . . . . . . . . . . . . . . . . . . . . . . 46 (c) RATIO OF DEBT TO MINIMUM TANGIBLE NET WORTH. . . . . . . . . . . . 46 (d) MINIMUM DEBT SERVICE COVERAGE RATIO. . . . . . . . . . . . . . . . 47 (e) CONSOLIDATIONS AND MERGERS . . . . . . . . . . . . . . . . . . . . 47 (f) DEBTS, GUARANTIES AND OTHER OBLIGATIONS. . . . . . . . . . . . . . 47 (g) DIVIDENDS OR DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . 48 (h) LOANS AND ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . 48 -iii- (i) SALE OR DISCOUNT OF RECEIVABLES. . . . . . . . . . . . . . . . . . 49 (j) NATURE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 49 (k) TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . 49 (l) HEDGING TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 49 (m) INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (n) AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS . . . . . . . . . 50 14. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 15. The Agent and the Banks . . . . . . . . . . . . . . . . . . . . . . . . 53 (a) APPOINTMENT AND AUTHORIZATION. . . . . . . . . . . . . . . . . . . 53 (b) NOTE HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 (c) CONSULTATION WITH COUNSEL. . . . . . . . . . . . . . . . . . . . . 54 (d) DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 (e) RESIGNATION OR REMOVAL OF AGENT. . . . . . . . . . . . . . . . . . 54 (f) RESPONSIBILITY OF AGENT. . . . . . . . . . . . . . . . . . . . . . 55 (g) INDEPENDENT INVESTIGATION. . . . . . . . . . . . . . . . . . . . . 56 (h) INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 57 (i) BENEFIT OF SECTION 15. . . . . . . . . . . . . . . . . . . . . . . 57 (j) PRO RATA TREATMENT . . . . . . . . . . . . . . . . . . . . . . . . 57 (k) ASSUMPTION AS TO PAYMENTS. . . . . . . . . . . . . . . . . . . . . 58 (l) OTHER FINANCINGS . . . . . . . . . . . . . . . . . . . . . . . . . 58 (m) INTERESTS OF BANKS . . . . . . . . . . . . . . . . . . . . . . . . 58 (n) INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 16. Exercise of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 59 17. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 18. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 19. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 20. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 21. Invalid Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . 61 22. Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . 61 23. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 24. Multiple Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 62 -iv- 25. Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 26. Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 27. Parties Bound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 28. Assignments and Participations. . . . . . . . . . . . . . . . . . . . . 62 29. Choice of Forum: Consent to Service of Process and Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 30. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . 65 31. Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 32. Financial Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
-v- EXHIBITS - -------- Exhibit "A" - Notice of Borrowing Exhibit "B" - Revolving Note Exhibit "C" - Certificate of Compliance Exhibit "D" - Form of Assignment and Acceptance Agreement Exhibit "E" - Form of Subordination Agreement SCHEDULES Schedule 1 - Liens Schedule 2 - Financial Condition Schedule 3 - Liabilities Schedule 4 - Litigation Schedule 5 - Subsidiaries Schedule 6 - Environmental Matters Schedule 7 - Gas Contract Schedule 8 - Title Matters Schedule 9 - Curative Matters
-vi- RESTATED CREDIT AGREEMENT THIS RESTATED CREDIT AGREEMENT (hereinafter referred to as the "Agreement") executed as of the 14th day of May, 1998, by and among CONTINENTAL RESOURCES, INC., an Oklahoma corporation ("Resources") and CONTINENTAL GAS, INC., an Oklahoma corporation ("Gas") (Resources and Gas are hereinafter collectively referred to as "Borrowers" and individually as a "Borrower") and BANK ONE, OKLAHOMA, N.A., a national banking association ("Bank One-Oklahoma"), and each of the financial institutions which is a party hereto (as evidenced by the signature pages to this Agreement) or which may from time to time become a party hereto pursuant to the provisions of Section 28 hereof or any successor or assignee thereof (hereinafter collectively referred to as "Banks", and individually, "Bank") and Bank One-Oklahoma, as Agent. W I T N E S S E T H: WHEREAS, Borrowers and Bank One-Oklahoma (formerly named Liberty Bank and Trust Company of Oklahoma City, N.A.) entered into a Credit Agreement dated as of November 29, 1995 (the "Original Credit Agreement") under the terms of which Bank One-Oklahoma agreed, subject to the satisfaction of certain conditions precedent set forth therein, to provide Borrowers with a revolving loan facility in amounts of up to $75,000,000; and WHEREAS, the Credit Agreement was amended pursuant to a First Amendment to Credit Agreement dated as of December 23, 1996, a Second Amendment to Credit Agreement dated as of July 21, 1997, a Third Amendment to Credit Agreement by virtue of a letter dated as of September 30, 1997, a Fourth Amendment to Credit Agreement dated as of December 31, 1997 and a Fifth Amendment to Credit Agreement dated as of May 8, 1998; and WHEREAS, the Borrowers and Bank One-Oklahoma have agreed to restate the Credit Agreement to increase the amount of the revolving loan facility available thereunder and to make certain other changes thereto. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereby agree to restate the Credit Agreement as follows: 1. DEFINITIONS. When used herein the terms "Agent", "Agreement", "Bank", "Banks", "Bank One-Oklahoma", "Borrower", "Borrowers", "Gas" and "Resources" shall have the meanings indicated above. When used herein the following terms shall have the following meanings: "ADVANCE OR ADVANCES" shall mean a loan or loans hereunder. "AFFILIATE" shall mean any Person which, directly or indirectly, controls, is controlled by or is under common control with the relevant Person. For the -1- purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean a member of the board of directors, a partner or an officer of such Person, or any other Person with possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership (of record, as trustee, or by proxy) of voting shares, partnership interests or voting rights, through a management contract or otherwise. Any Person owning or controlling directly or indirectly ten percent or more of the voting shares, partnership interests or voting rights, or other equity interest of another Person shall be deemed to be an Affiliate of such Person. "ALINE GATHERING SYSTEM" shall mean that System located in the State of Oklahoma and described in the Security Instruments. "ASSIGNMENT AND ACCEPTANCE" shall mean a document substantially in the form of Exhibit "D" hereto. "BORROWING BASE" shall mean the value assigned by the Banks from time to time to the Oil and Gas Properties pursuant to Section 7 hereof. Until the next determination of the Borrowing Base pursuant to Section 7(b) hereof, the Borrowing Base shall be $175,000,000.00. "BORROWING DATE" shall mean the date elected by Borrowers pursuant to Section 2(b) hereof for an Advance on the Revolving Loan. "BUSINESS DAY" shall mean the normal banking hours during any day (other than Saturdays or Sundays) that banks are legally open for business in Oklahoma City, Oklahoma. "CHANGE OF MANAGEMENT" shall occur if there is any material change in the ownership and/or management personnel of either Borrower. Notwithstanding the foregoing, as long as (i) Harold Hamm owns a controlling beneficial interest or ownership in Resources; (ii) Harold Hamm continues to act as CEO of Resources; and (iii) Resources owns 100% of all of the issued and outstanding shares of common stock of Gas, Borrowers shall be entitled to make changes in their ownership and management. For the purposes hereof, "controlling interest" is defined as beneficial ownership of 50% of all issued and outstanding shares of common stock plus one additional share thereof. "CURRENT ASSETS" shall mean the total of the Borrowers' consolidated current assets determined in accordance with GAAP, plus, as of any date, the current unused availability on the Revolving Commitment. -2- "CURRENT LIABILITIES" shall mean the total of Borrowers' consolidated current obligations as determined in accordance with GAAP, excluding therefrom current maturities due on the Revolving Loan. "DEBT" shall mean, with respect to any Person, all obligations and liabilities of such Person to any other Person including, without limitation, all debts, claims, overdrafts, contingent liabilities and indebtedness heretofore, now and/or from time to time hereafter owing, due or payable, however, evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, operation of law or otherwise as shown in Borrowers' Financial Statements. "DEBT SERVICE COVERAGE RATIO" shall mean the sum of (i) quarterly Net Income for the immediately preceding four (4) fiscal quarters including the quarter then ended, adjusted for any nonrecurring or extraordinary items, minus any dividends, plus (ii) depreciation, depletion and amortization, lease impairment, interest expense, deferred income tax expense and uncapitalized, discretionary exploration expenses, all as determined in accordance with GAAP for such period, DIVIDED BY (i) 1/6th of the principal balance outstanding as of such date on the Revolving Loans plus (ii) total interest expense for the immediately preceding four (4) fiscal quarters including the quarter then ended, plus (iii) any other current maturities of long-term debt. "DEFAULT" shall mean any Event of Default and the occurrence of an event or condition which would with the giving of any requisite notice and/or passage of time or both constitute an Event of Default. "DEFAULT RATE" shall mean a per annum variable rate of interest equal to the Prime Rate as then in effect plus five percent (5%), calculated on the basis of a year of 360 days and actual number of days elapsed (including the first day but excluding the last day), but in no event exceeding the Maximum Rate. "DEFAULTING BANK" shall mean the term "Defaulting Bank" is used herein as defined in Section 3(g) hereof. "DELHI LEASE" shall mean that pipeline lease and any and all extensions and renewals thereof from Delhi Gas Pipeline Corporation to Gas covering the Delhi Oakdale Lateral System. "DELHI OAKDALE LATERAL SYSTEM" shall mean that portion of the Aline Gathering System leased from Delhi Gas Pipeline Corporation. "DELTA TRUST" shall mean the Harold Hamm Delta Trust, Harold Hamm, Grantor, dated December 31, 1996. -3- "EFFECTIVE DATE" shall mean the date of this Agreement. "ELIGIBLE ASSIGNEE" shall mean any of (i) a Bank or any Affiliate of a Bank; (ii) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000.00, provided that such bank is acting through a branch or agency located in the United States; (iv) a Person that is primarily engaged in the business of commercial banking and that (A) is a subsidiary of a Bank, (B) a subsidiary of a Person of which a Bank is a subsidiary, or (C) a Person of which a Bank is a subsidiary; (v) any other entity (other than a natural person) which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including, but not limited to, insurance companies, mutual funds, investments funds and lease financing companies; and (vi) with respect to any Bank that is a fund that invests in loans, any other fund that invests in loans and is managed by the same investment advisor of such Bank or by an Affiliate of such investment advisor (and treating all such funds so managed as a single Eligible Assignee); provided, however, that no Affiliate of either Borrower shall be an Eligible Assignee. "ENVIRONMENTAL LAWS" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Super Fund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601, ET SEQ., the Resource Conservation and Recovery Act, as amended by the Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. Section 6901, ET SEQ., the Clean Air Act, 42 U.S.C.A. Section 1251, ET SEQ., the Toxic Substances Control Act, 15 U.S.C.A. Section 2601, ET SEQ., The Oil Pollution Act of 1990, 33 U.S.G. Section 2701, ET SEQ., and all other laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, order and restrictions of any federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign, relating to air pollution, water pollution, noise control and/or the handling, discharge, disposal or recovery of on-site or off-site asbestos or "hazardous substances" as defined by 42 U.S.C. Section 9601, ET SEQ., as amended, as each of the foregoing may be amended from time to time. "ENVIRONMENTAL LIABILITY" shall mean any claim, demand, obligation, cause of action, order, violation, damage, injury, judgment, penalty or fine, cost of enforcement, cost of remedial action or any other costs or expense whatsoever, including reasonable attorneys' fees and disbursements, resulting from the violation or alleged violation of any Environmental Law or the imposition of any -4- Environmental Lien (as hereinafter defined) which could reasonably be expected to individually or in the aggregate have a Material Adverse Effect. "ENVIRONMENTAL LIEN" shall mean a Lien in favor of any court, governmental agency or instrumentality or any other Person (i) for any Environmental Liability or (ii) for damages arising from or cost incurred by such court or governmental agency or instrumentality or other person in response to a release or threatened release of asbestos or "hazardous substance" into the environment, the imposition of which Lien could reasonably be expected to have a Material Adverse Effect. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "FINANCIAL STATEMENTS" shall mean balance sheets, income statements, statements of cash flow and appropriate footnotes and schedules, prepared in accordance with GAAP. "GAAP" shall mean generally accepted accounting principles, consistently applied. "INTEREST PAYMENT DATE" shall mean the earlier of (i) the last day of each Interest Period or (ii) the last day of each calendar month. "INTEREST PERIOD" shall mean any Prime Rate Interest Period, or LIBOR Interest Period, as applicable. "LETTERS OF CREDIT" shall mean the term "Letters of Credit" is used herein as defined in Section 2(c) hereof. "LIBOR INTEREST PERIOD" shall mean with respect to any LIBOR Loan (i) initially, the period commencing on the date such LIBOR Loan is made and ending one (1), two (2), three (3) or six (6) months thereafter as selected by the Borrowers pursuant to Section 4(a)(ii), and (ii) thereafter, each period commencing on the day following the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrowers pursuant to Section 4(a)(ii); provided, however, that (i) if any LIBOR Interest Period would otherwise expire on a day which is not a London Business Day, such Interest Period shall expire on the next succeeding London Business Day unless the result of such extension would be to extend such Interest Period into the next calendar month, in which case such Interest Period shall end on the immediately preceding London Business Day, (ii) if any LIBOR Interest Period begins on the last London Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such -5- Interest Period) such Interest Period shall end on the last London Business Day of a calendar month, and (iii) any LIBOR Interest Period which would otherwise expire after the Maturity Date shall end on such Maturity Date. "LIBOR LOAN" shall mean any loan during any period which bears interest at the LIBOR Rate, or which would bear interest at such rate if the Maximum Rate ceiling was not in effect at a particular time. "LIBOR MARGIN" shall mean: (i) one and three-quarters percent (1.75%) per annum whenever the Total Outstandings are 90% or greater of the Borrowing Base in effect at the time in question; (ii) one and one-half percent (1.50%) per annum whenever the Total Outstandings are equal to or greater than 75%, but less than 90%, of the Borrowing Base in effect at the time in question; (iii) one and one-quarter percent (1.25%) per annum whenever the Total Outstandings are equal to or greater than 50% but less than 75% of the Borrowing Base in effect at the time in question; or (iv) one percent (1%) per annum whenever the Total Outstandings are less than 50% of the Borrowing Base in effect at the time in question. "LIBOR RATE" shall mean with respect to any LIBOR Interest Period, the offered rate of interest (rounded upward, if necessary, to the nearest whole multiple of 1/16th of 1%) for U.S. Dollar deposits of not less than $1,000,000 as of 11:00 A.M. City of London, England time two (2) London Business Days prior to the first date of each LIBOR Interest Period as shown on the display designated as "British Bankers Assoc. Interest Settlement Rates" on the Telerate system ("Telerate"), Page 3750 or Page 3740, or such other page or pages as may replace such pages on Telerate for the purpose of displaying such rate. Provided, however, that if such rate is not available on Telerate then such offered rate shall be otherwise independently obtained by Agent from an alternate, substantially similar independent source available to Agent or shall be calculated by Agent by substantially similar methodology as that theretofore used to determine such offered rate in Telerate. "LIEN" shall mean any mortgage, deed of trust, pledge, security interest, assignment, encumbrance or lien (statutory or otherwise) of every kind and character. -6- "LOAN" shall mean the Revolving Loan. "LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Subordination Agreement, the Security Instruments and all other documents executed in connection with the transaction described in this Agreement. "LONDON BUSINESS DAY" shall mean a Business Day on which dealings in U.S. Dollar deposits are carried on in the London interbank market. "MAJORITY BANKS" shall mean Banks holding 66-2/3% or more of the Revolving Commitments or if the Revolving Commitments have been terminated, Banks holding 66-2/3% of the outstanding Loans. "MATERIAL ADVERSE EFFECT" shall mean any circumstance or event which could have a material adverse effect on (i) the assets or properties, liabilities, financial condition, business, operations, affairs or circumstances of either Borrower, or (ii) the ability of either Borrower to carry out its respective business as of the date of this Agreement or as proposed at the date of this Agreement to be conducted or to meet their obligations under the Notes, this Agreement or the other Loan Documents on a timely basis. "MAXIMUM RATE" shall mean at any particular time in question, the maximum non-usurious rate of interest which under applicable law may then be charged on the Note. If such Maximum Rate changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to Borrowers from time to time as of the effective date of each change in such Maximum Rate. "MONTHLY COMMITMENT REDUCTION" is used herein, as defined in Section 2(f) hereof. "NET INCOME" shall mean Borrowers' consolidated net income after income taxes calculated in accordance with GAAP. "1984 TRUST" shall mean the Revocable Inter Vivos Trust of Harold G. Hamm, dated April 23, 1984, as amended. "NOTES" shall mean the Revolving Notes, substantially in the form of Exhibit "B" hereto issued or to be issued hereunder to each Bank, respectively, to evidence the indebtedness to such Bank arising by reason of the Advances on the Revolving Loan, together with all modifications, renewals and extensions thereof or any part thereof. -7- "OIL AND GAS PROPERTIES" shall mean all oil, gas and mineral properties and interests, related personal properties, in which Borrowers grant to the Banks either a first and prior lien and security interest pursuant to Section 6 hereof. "OTHER FINANCING" shall mean the term "Other Financing" is used herein as defined in Section 15(l) hereof. "PAYOR" is used herein as defined in Section 3(h)hereof. "PERMITTED LIENS" shall mean (i) royalties, overriding royalties, reversionary interests, production payments and similar burdens; (ii) joint operating agreements, sales contracts or other arrangements for the sale of production of oil, gas or associated liquid or gaseous hydrocarbons which would not (when considered cumulatively with the matters discussed in clause (i) above) deprive either Borrower of any material right in respect of any such Borrower's assets or properties (except for rights customarily granted with respect to such contracts and arrangements); (iii) statutory Liens for taxes or other assessments that are not yet delinquent (or that, if delinquent, are being contested in good faith by appropriate proceedings, levy and execution thereon having been stayed and continue to be stayed and for which such Borrower has set aside on its books adequate reserves in accordance with GAAP); (iv) easements, rights of way, servitudes, permits, surface leases and other rights in respect to surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like, conditions, covenants and other restrictions, and easements of streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights of way on, over or in respect of either Borrower's assets or properties and that do not individually or in the aggregate, cause a Material Adverse Effect; (v) materialmen's, mechanic's, repairman's, employee's, warehousemen's, landlord's, carrier's, pipeline's, contractor's, sub-contractor's, operator's, non-operator's (arising under operating or joint operating agreements), and other Liens (including any financing statements filed in respect thereof) incidental to obligations incurred by either Borrower in connection with the construction, maintenance, development, transportation, storage or operation of such Borrower's assets or properties to the extent not delinquent (or which, if delinquent, are being contested in good faith by appropriate proceedings and for which such Borrower has set aside on its books adequate reserves in accordance with GAAP); (vi) all contracts, agreements and instruments, and all defects and irregularities and other matters affecting either Borrower's assets and properties which were in existence at the time such Borrower's assets and properties were originally acquired by such Borrower and all routine operational agreements entered into in the ordinary course of business, which contracts, agreements, instruments, defects, irregularities and other matters and routine operational agreements are not such as to, individually or in the aggregate, interfere materially with the operation, value or use of such Borrower's assets and properties, considered in the aggregate; (vii) liens in connection with -8- workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations; (viii) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted in good faith and levy and execution thereon have been stayed and continue to be stayed; (ix) rights reserved to or vested in any municipality, governmental, statutory or other public authority to control or regulate either Borrower's assets and properties in any manner, and all applicable laws, rules and orders from any governmental authority; (x) landlord's liens; (xi) Liens incurred pursuant to the Security Instruments or otherwise created in favor of the Agent or the Banks pursuant to the Loan Documents; and (xii) Liens existing at the date of this Agreement which have been disclosed to Banks in the Borrowers' December 31, 1997 Financial Statements or identified in Schedule "1" hereto and (xiii) Liens covering properties which are not Oil and Gas Properties and the value of which is less than $500,000 in the aggregate. "PERSON" shall mean an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PIPELINES" shall mean and include Gas' gas gathering and/or residue pipeline systems in the State of Oklahoma associated with the gathering and/or transportation of gas and the delivery of gas or residue gas to purchasers or transporters (as the same now exist or as may hereafter be extended), including, but not by way of limitation, the Right-Of-Way Properties and all buildings, structures, attachments, fittings and fixtures, facilities, tools, materials, equipment, machinery, appliances, pipeline, piping, powerlines, electrical systems, metering and calibration facilities, compressors, dehydrators, sponge units, instrument and equipment housing, equipment storage facilities, tanks, engines, valves, traps, pumps, motors, instruments, fencing, office equipment, expanders, heat exchangers, chillers, separators, cooling towers, boilers and reboilers, turbines, generators, meters and instruments, fractionators, stills, debutanizers, heaters, coolers, stabilizers, scrubbers, absorbers, reabsorbers, flash towers, oil reclaimers, loading racks, injection facilities, accumulators, economizers, fans, condensers and valves, and appurtenances of every nature and kind whatsoever now or hereafter forming a part of, appertaining to or used or for use in connection with said Pipeline. "PLANS" shall mean any plan subject to Title IV of ERISA and maintained by either Borrower, or any such plan to which either Borrower is required to contribute on behalf of its employees. "PLANT" shall mean the fee property and surface leases in Oklahoma associated with the processing of hydrocarbons and including, but not by way of -9- limitation, together with all property, real or personal, associated therewith including all buildings, structures, attachments, fittings and fixtures, facilities, tools, materials, equipment, machinery, appliances, pipeline, piping, powerlines, electrical systems, metering and calibration facilities, compressors, dehydrators, sponge units, instrument and equipment housing, equipment storage facilities, tanks, engines, valves, traps, pumps, motors, instruments, fencing, office equipment, expanders, heat exchangers, chillers, separators, cooling towers, boilers and reboilers, turbines, generators, meters and instruments, fractionators, stills, debutanizers, heaters, coolers, stabilizers, scrubbers, absorbers, reabsorbers, flash towers, oil reclaimers, loading racks, injection facilities, accumulators, economizers, fans, condensers and valves, and appurtenances of every nature and kind whatsoever now or hereafter forming a part of, located on, appertaining to or used or for use in connection with said fee property and surface leases. "PRIME RATE" shall mean as of any date, the fluctuating rate of interest per annum established from time to time by Agent as its Prime Rate (which rate of interest may not be the lowest, best or most favorable rate of interest which Agent may charge on loans to its customers). Each change in the Prime Rate shall become effective without prior notice to Borrowers automatically as of the opening of business on the date of such change in the Prime Rate. "PRIME RATE INTEREST PERIOD" shall mean with respect to any Prime Rate Loan, the period ending on the last day of each month, provided, however, that (i) if any Prime Rate Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, and (ii) if any Prime Rate Interest Period would otherwise end after the Maturity Date such Interest Period shall end on the Maturity Date. "PRIME RATE LOANS" shall mean any loan during any period which bears interest based upon the Prime Rate or which would bear interest based upon the Prime Rate if the Maximum Rate ceiling was not in effect at that particular time. "PRIME RATE MARGIN" shall be zero percent (0%). "PRO RATA OR PRO RATA PART" shall mean for each Bank, (i) for all purposes where no Loan is outstanding, such Bank's Revolving Commitment Percentage and (ii) otherwise, the proportion which the portion of the outstanding Loans owed to such Bank bears to the aggregate outstanding Loans owed to all Banks at the time in question. "REIMBURSEMENT OBLIGATIONS" shall mean at any time, the obligations of the Borrowers in respect of all Letters of Credit then outstanding to reimburse amounts actually paid by any Bank in respect of any drawing or drawings under a Letter of -10- Credit. "REQUIRED PAYMENT" is used herein as defined in Section 3(h) hereof. "REVOLVING COMMITMENT" shall mean (A) for all Banks, the LESSER of (i) $175,000,000 or (ii) the Borrowing Base in effect from time to time, in each case as reduced from time to time pursuant to Sections 2 and 7 hereof, and (B) as to any Bank, its obligation to make Advances hereunder on the Revolving Loan and purchase participations in Letters of Credit issued hereunder by the Agent in amounts not exceeding, in the aggregate, an amount equal to such Bank's Revolving Loan Commitment Percentage times the total Revolving Commitment as of any date. The Revolving Commitment of each Bank hereunder shall be adjusted from time to time to reflect assignments made by such Bank pursuant to Section 28 hereof. Each reduction in the Revolving Commitment shall result in a Pro Rata reduction in each Bank's Revolving Commitment. "REVOLVING COMMITMENT PERCENTAGE" shall mean for each Bank the percentage derived by dividing its Revolving Commitment at the time of the determination by the Revolving Commitments of all Banks at the time of determination. The Revolving Commitment Percentage of each Bank hereunder shall be adjusted from time to time to reflect assignments made by such Bank pursuant to Section 28 hereof. "REVOLVING LOAN" shall mean loan or loans made under the Revolving Commitment pursuant to Section 2 hereof. "REVOLVING MATURITY DATE" shall mean May 14, 2001 or as such date may be extended from time to time with the consent of all Banks. "REVOLVING NOTES" shall mean the Revolving Notes described in Section 3 hereof. "RIGHT-OF-WAY PROPERTIES" shall mean and include all lands, easements, rights-of-way, leases, surface rights, servitudes, grants, permits, licenses, authorizations, privileges, franchises, consents, prescriptive rights and other title and interest now or hereafter owned by Borrower and now or hereafter necessary or useful for the construction and operation of the Pipeline. "SECURITY INSTRUMENTS" shall mean the term Security Instruments is used collectively herein to mean this Agreement, all Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing Statements, and other collateral documents covering the Oil and Gas Properties and related personal property, equipment, oil and gas inventory and proceeds of the foregoing, all such -11- documents to be in form and substance satisfactory to Agent. "SUBSIDIARY" shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by either Borrower or another subsidiary. "SUPPORT PARTIES" shall mean Harold Hamm. "SYSTEM" shall mean and include the Pipeline, the Plants, and the contracts and contract rights arising in connection therewith, together with all tangible or intangible property, personal or real, now or at any time arising out of, relating to, located in or upon, used in connection with or obtained directly or indirectly by virtue of the Pipeline, the Plant or the Contracts, whether now owned and existing or hereafter acquired or arising, including, but not by way of limitation, accounts receivable, contract rights, general intangibles, chattel paper, documents, instruments, business goodwill, records and books, tradenames, mineral interests, oil and gas leasehold interests, inventory (whether consisting of hydrocarbons or otherwise) supplies, materials and any other property. "TANGIBLE NET WORTH" shall mean an amount equal to the Borrowers' consolidated stockholders equity, as determined in accordance with GAAP, plus any subordinated debt owed by either Borrower to a Support Party less any Affiliate receivables. "TOTAL OUTSTANDINGS" shall mean as of any date, the sum of (i) the total principal balance outstanding on the Revolving Notes, plus (ii) the total face amount of all outstanding Letters of Credit, plus (iii) the total amount of all unpaid Reimbursement Obligations. "TRANCHE" shall mean a LIBOR Loan or a Prime Rate Loan. "UNSCHEDULED REDETERMINATIONS" shall mean a redetermination of the Borrowing Base made at any time other than on the dates set for the regular semi-annual redetermination of the Borrowing Base which are made (A) at the reasonable request of Borrowers, (B) at any time it appears to Agent or Majority Banks, in the exercise of their reasonable discretion, that either (i) there has been an unscheduled material decrease in the value of the Oil and Gas Properties, or (ii) an event has occurred which is reasonably expected to have a Material Adverse Effect. "UNUSED FEE RATE" shall mean the percentage used to calculate the Unused Commitment Fee (as such term is defined in Section 8(a) hereof), which percentage shall be: -12- (i) one-fourth of one percent (.25%) per annum whenever the Total Outstandings are ninety percent (90%) or greater of the Borrowing Base in effect at the time in question; (ii) nine-fortieth of one percent (.225%) per annum whenever Total Outstandings are greater than seventy-five percent (75%) but less than ninety percent (90%) of the Borrowing Base in effect at the time in question; (iii) three-sixteenths of one percent (.1875%) per annum whenever Total Outstandings are seventy-five percent (75%) or less of the Borrowing Base in effect at the time in question; "YEAR 2000 COMPLIANT" shall have the meaning assigned to such term in Section 10(w) hereof. "YEAR 2000 PROBLEM" shall have the meaning assigned to such term in Section 10(w) hereof. 2. COMMITMENTS OF THE BANK. (a) TERMS OF REVOLVING COMMITMENT. On the terms and conditions hereinafter set forth, each Bank agrees severally to make Advances to the Borrowers from time to time during the period beginning on the Effective Date and ending on the Revolving Maturity Date in such amounts as the Borrowers may request up to an amount not to exceed, in the aggregate principal amount outstanding at any time, the Revolving Commitment. The obligation of the Borrowers hereunder shall be evidenced by this Agreement and the Revolving Notes issued in connection herewith, said Revolving Notes to be as described in Section 3 hereof. Notwithstanding any other provision of this Agreement, no Advance shall be required to be made hereunder if any Event of Default (as hereinafter defined) has occurred and is continuing or if any event or condition has occurred or failed to occur which with the passage of time or service of notice, or both, would constitute an Event of Default. Each Advance under the Revolving Commitment shall be an aggregate amount of at least $100,000 or a whole number multiple thereof except an Advance of the entire remaining unborrowed Revolving Commitment. Irrespective of the face amount of the Revolving Note or Notes, the Banks shall never have the obligation to Advance any amount or amounts in excess of the Revolving Commitment or to increase the Revolving Commitment. The total number of Tranches under the Revolving Commitment which may be outstanding at any time hereunder shall never exceed five (5), whether such Tranches are Prime Rate Loans, LIBOR Loans, or a combination thereof. Within the limit of each Bank's Revolving Commitment, the Borrowers may borrow, repay and reborrow under this Section 2 prior to the Revolving Maturity Date. -13- (b) PROCEDURE FOR BORROWING. Whenever the Borrowers desire an Advance hereunder, they shall give Agent telegraphic, telex, facsimile or telephonic notice ("Notice of Borrowing") of such requested Advance, which in the case of telephonic notice, shall be promptly confirmed in writing. Each Notice of Borrowing shall be in the form of Exhibit "A" attached hereto and shall be received by Agent not later than 11:00 a.m. Oklahoma City, Oklahoma time, (i) one Business Day prior to the Borrowing Date in the case of the Prime Rate Loan, or (ii) two London Business Days prior to any proposed Borrowing Date in the case of LIBOR Loans. Each Notice of Borrowing shall specify (i) the Borrowing Date (which, if at Prime Rate Loan, shall be a Business Day and if a LIBOR Loan, a London Business Day), (ii) the principal amount to be borrowed, (iii) the portion of the Advance constituting Prime Rate Loans and/or LIBOR Loans and (iv) if any portion of the proposed Advance is to constitute LIBOR Loans, the initial Interest Period selected by Borrowers pursuant to Section 4 hereof to be applicable thereto. Upon receipt of such Notice, Agent shall advise each Bank thereof; provided, that if the Banks have received at least one (1) day's notice of such Advance prior to funding of a Prime Rate Loan, or at least two (2) days' notice of each Advance prior to funding in the case of a LIBOR Loan, each Bank shall provide Agent at its office at 100 North Broadway, Oklahoma City, Oklahoma 73125, not later than 1:00 p.m.,Oklahoma City, Oklahoma time, on the Borrowing Date, in immediately available funds, its pro rata share of the requested Advance, but the aggregate of all such fundings by each Bank shall never exceed such Bank's Revolving Commitment. Not later than 2:00 p.m., Oklahoma City, Oklahoma time, on the Borrowing Date, Agent shall make available to the Borrowers at the same office, in like funds, the aggregate amount of such requested Advance. Neither Agent nor any Bank shall incur any liability to the Borrowers in acting upon any Notice of Borrowing which Agent or such Bank believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrowers or for otherwise acting in good faith under this Section 2(b). Upon funding of Advances by Banks in accordance with this Agreement, pursuant to any such Notice, the Borrowers shall have effected Advances hereunder. (c) LETTERS OF CREDIT. On the terms and conditions hereinafter set forth, the Agent shall from time to time during the period beginning on the Effective Date and ending on the Revolving Maturity Date upon request of Borrowers issue standby and/or commercial Letters of Credit for the account of Borrowers (the "Letters of Credit") in such face amounts as Borrowers may request, but not to exceed in the aggregate face amount at any time outstanding the sum of Ten Million Dollars ($10,000,000.00). The face amount of all Letters of Credit issued and outstanding hereunder shall be considered as Advances for Borrowing Base purposes and all payments made by the Agent on such Letters of Credit shall be considered as Advances under the Revolving Notes. Each Letter of Credit issued -14- for the account of Borrowers hereunder shall (i) be in favor of such beneficiaries as specifically requested by Borrowers, (ii) have an expiration date not exceeding the earlier of (a) one year or (b) the Revolving Maturity Date, and (iii) contain such other terms and provisions as may be reasonably required by Bank. Each Bank (other than Agent) agrees that, upon issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in the Agent's liability under such Letter of Credit in an amount equal to such Bank's Revolving Commitment Percentage of such liability, and each Bank (other than Agent) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to Agent to pay and discharge when due, its Revolving Commitment Percentage of Agent's liability under such Letter of Credit. The Borrowers hereby unconditionally agree to pay and reimburse the Agent for the amount of each demand for payment under any Letter of Credit that is in substantial compliance with the provisions of any such Letter of Credit at or prior to the date on which payment is to be made by the Agent to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. Upon receipt from any beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the Agent shall promptly notify the Borrowers of the demand and the date upon which such payment is to be made by the Agent to such beneficiary in respect of such demand. Forthwith upon receipt of such notice from the Agent, Borrowers shall advise the Agent whether or not they intend to borrow hereunder to finance their obligations to reimburse the Agent, and if so, submit a Notice of Borrowing as provided in Section 2(b) hereof. If Borrowers fail to so advise Agent and thereafter fail to reimburse Agent, the Agent shall notify each Bank of the demand and the failure of the Borrowers to reimburse the Agent, and each Bank shall reimburse the Agent for its Revolving Commitment Percentage of each such draw paid by the Agent and unreimbursed by the Borrowers. All such amounts paid by Agent and/or reimbursed by the Banks shall be treated as an Advance or Advances under the Revolving Commitment, which Advances shall be immediately due and payable and shall bear interest at the Default Rate. (d) PROCEDURE FOR OBTAINING LETTERS OF CREDIT. The amount and date of issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the Banks' commitment above in Section 2(c) shall be designated by Borrowers' written request delivered to Agent at least three (3) Business Days prior to the date of such issuance, renewal, extension or reissuance. Concurrently with or promptly following the delivery of the request for a Letter of Credit, Borrowers shall execute and deliver to the Agent an application and agreement with respect to the Letters of Credit, said application and agreement to be in the form used by the Agent. The Agent shall not be obligated to issue, renew, extend or reissue such Letters of Credit if (A) the amount thereon when added to the face amount of all outstanding Letters of Credit plus any Reimbursement Obligations exceeds Ten Million Dollars ($10,000,000.00) or (B) the amount thereof when added to the Total Outstandings -15- would exceed the Revolving Commitment. Borrowers agree to pay the Agent for the benefit of the Banks commissions for issuing the Letters of Credit (calculated separately for each Letter of Credit) in an amount equal to the greater of (i) one percent (1%) per annum on the maximum face amount of the Letter of Credit or (ii) $500.00. Borrowers further agree to pay Agent an additional fronting fee equal to one-eighth of one percent (.125%) per annum on the maximum face amount of each Letter of Credit. Such commissions shall be payable prior to the issuance of each Letter of Credit and thereafter on each anniversary date of such issuance while such Letter of Credit is outstanding. (e) VOLUNTARY REDUCTION OF REVOLVING COMMITMENT. The Borrowers may at any time, or from time to time, upon not less than three (3) Business Days' prior written notice to Agent, reduce or terminate the Revolving Commitment; provided, however, that (i) each reduction in the Revolving Commitment must be in the amount of $500,000 or more, in increments of $100,000 and (ii) each reduction must be accompanied by a prepayment of the Revolving Notes in the amount by which the outstanding principal balance of the Revolving Notes exceeds the Revolving Commitment as reduced pursuant to this Section 2. (f) MANDATORY COMMITMENT REDUCTIONS - (i) MONTHLY COMMITMENT REDUCTION. The Borrowing Base and the Revolving Commitment shall be reduced as of the first day of each month by an amount determined by the Banks pursuant to Section 7(b) hereof (the "Monthly Commitment Reduction"). The Monthly Commitment Reduction shall be $0 beginning on June 1, 1998, with like reductions continuing on the first day of each month thereafter until redetermined pursuant to Section 7(b) hereof. If as a result of any such Monthly Commitment Reduction, the Total Outstandings ever exceed the Revolving Commitment then in effect, the Borrowers shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof. (ii) OTHER REDUCTIONS. The Borrowing Base shall be reduced from time to time by the amount of any prepayment required by Section 12(r) hereof upon the sale of Oil and Gas Properties. If, as a result of any such reduction in the Borrowing Base, the Total Outstandings ever exceed the Borrowing Base then in effect, the Borrowers shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof. (g) SEVERAL OBLIGATIONS. The obligations of the Banks under the Revolving Commitment are several and not joint. The failure of any Bank to make an Advance required to be made by it shall not relieve any other Bank of its obligation to make its Advance, and no Bank shall be responsible for the failure of -16- any other Bank to make the Advance to be made by such other Bank. 2. NOTES EVIDENCING LOANS. The loans described above in Section 2 shall be evidenced by promissory notes of Borrowers as follows: (a) FORM OF REVOLVING NOTES - The Revolving Loan shall be evidenced by a Note or Notes in the aggregate face amount of $175,000,000, and shall be in the form of Exhibit "B" hereto with appropriate insertions (each a "Revolving Note"). Notwithstanding the face amount of the Revolving Notes, the actual principal amount due from the Borrowers to Banks on account of the Revolving Notes, as of any date of computation, shall be the sum of Advances then and theretofore made on account thereof, less all principal payments actually received by Banks in collected funds with respect thereto. Although the Revolving Notes may be dated as of the Effective Date, interest in respect thereof shall be payable only for the period during which the loans evidenced thereby are outstanding and, although the stated amount of the Revolving Notes may be higher, the Revolving Notes shall be enforceable, with respect to Borrowers' obligation to pay the principal amount thereof, only to the extent of the unpaid principal amount of the loans. Irrespective of the face amount of the Revolving Notes, no Bank shall ever be obligated to advance on the Revolving Commitment any amount in excess of its Revolving Commitment then in effect. (b) ISSUANCE OF ADDITIONAL NOTES - At the Effective Date there shall be outstanding one Revolving Note in the aggregate face amount of $175,000,000 payable to the order of Bank One-Oklahoma. From time to time new Notes may be issued to other Banks as such Banks become parties to this Agreement. Upon request from Agent, the Borrowers shall execute and deliver to Agent any such new or additional Notes. From time to time as new Notes are issued the Agent shall require that each Bank exchange their Notes for newly issued Notes to better reflect the extent of each Bank's Revolving Commitment hereunder. The notes replaced shall be marked to indicate that they have been replaced and/or returned to the Borrowers. (c) INTEREST RATES - The unpaid principal balance of the Notes shall bear interest from time to time as set forth in Section 4 hereof. (d) PAYMENT OF INTEREST - Interest on the Notes shall be payable on each Interest Payment Date. (e) PAYMENT OF PRINCIPAL - Principal of the Revolving Note or Notes shall be due and payable to the Agent for the ratable benefit of the Banks on the Revolving Maturity Date unless earlier due in whole or in part as a result of an acceleration of the amount due or pursuant to the mandatory prepayment provisions -17- of Section 9(b) hereof. (f) PAYMENT TO BANKS - Each Bank's Pro Rata Part of each payment or prepayment of the Loans shall be directed by wire transfer to such Bank by the Agent at the address provided to the Agent for such Bank for payments no later than 2:00 p.m., Oklahoma City, Oklahoma, time on the Business Day such payments or prepayments are deemed hereunder to have been received by Agent; provided, however, in the event that any Bank shall have failed to make an Advance as contemplated under Section 2 hereof (a "Defaulting Bank") and the Agent or another Bank or Banks shall have made such Advance, payment received by Agent for the account of such Defaulting Bank or Banks shall not be distributed to such Defaulting Bank or Banks until such Advance or Advances shall have been repaid in full to the Bank or Banks who funded such Advance or Advances. Any payment or prepayment received by Agent at any time after 12:00 noon, Oklahoma City, Oklahoma, time on a Business Day shall be deemed to have been received on the next Business Day. Interest shall cease to accrue on any principal as of the end of the day preceding the Business Day on which any such payment or prepayment is deemed hereunder to have been received by Agent. If Agent fails to transfer any principal amount to any Bank as provided above, then Agent shall promptly direct such principal amount by wire transfer to such Bank. (g) SHARING OF PAYMENTS, ETC. - If any Bank shall obtain any payment (whether voluntary, involuntary, or otherwise) on account of the Loans, (including, without limitation, any set-off) which is in excess of its Pro Rata Part of payments on either of the Loans, as the case may be, obtained by all Banks, such Bank shall purchase from the other Banks such participation as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided that, if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, the purchase shall be rescinded and the purchase price restored to the extent of the recovery. The Borrowers agree that any Bank so purchasing a participation from another Bank pursuant to this Section may, to the fullest extent permitted by law, exercise all of its rights of payment (including the right of offset) with respect to such participation as fully as if such Bank were the direct creditor of the Borrowers in the amount of such participation. (h) NON-RECEIPT OF FUNDS BY THE AGENT - Unless the Agent shall have been notified by a Bank or the Borrowers (the "Payor") prior to the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or the Borrowers are to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such -18- assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, pay to the Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was made available by the Agent until the date the Agent recovers such amount at the rate applicable to such portion of the applicable Loan. (i) CAPITAL ADEQUACY - If either (i) the introduction or implementation of or the compliance with or any change in or in the interpretation of any law, rule or regulation or (ii) the introduction or implementation of or the compliance with any mandatory request, directive or guideline from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by any Bank or any corporation controlling any Bank as a result of maintaining its Pro Rata Part of the Revolving Commitment, then within fifteen (15) days after demand by such Bank, the Borrowers will pay to such Bank, from time to time as specified by such Bank, such additional amount or amounts which such Bank shall reasonably determine to be appropriate to compensate such Bank or any corporation controlling such Bank in light of such circumstances, to the extent that such Bank reasonably determines that the amount of any such capital would be increased, or the rate of return on any such capital would be reduced in whole or in part, based on the existence of the amount of the Loans or such Bank's Revolving Commitment under this Agreement; provided, however, that to the extent such notice is given by any such Bank more than 180 days after the occurrence of the event giving rise to the additional costs of the type described in this Section, such Bank shall not be entitled to compensation pursuant to this Section for any amounts incurred or accruing prior to the date 180 days before the giving of such notice, except to the extent such law, rule, regulation, request, directive or guideline shall have been given retroactive effective affecting a period beginning more than 180 days prior to such notice. -19- 4. INTEREST RATES. (a) OPTIONS. (i) PRIME RATE LOANS. On Prime Rate Loans the Borrowers agree to pay interest on the Notes calculated on the basis of the actual days elapsed in a year consisting of 360 days with respect to the unpaid principal amount of each Prime Rate Loan from the date the proceeds thereof are advanced to Borrowers until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate (defined herein), or (ii) the sum of the Prime Rate plus the Prime Rate Margin. Subject to the provisions of this Agreement as to prepayment, the principal of the Notes representing Prime Rate Loans shall be payable as specified in Section 3(e) hereof and the interest in respect of each Prime Rate Loan shall be payable on each Interest Payment Date. Past due principal and, to the extent permitted by law, past due interest in respect to each Prime Rate Loan, shall bear interest, payable on demand, at a rate per annum equal to the Default Rate. (ii) LIBOR LOANS. On LIBOR Loans the Borrowers agree to pay interest calculated on the basis of a year consisting of 360 days with respect to the unpaid principal amount of each LIBOR Loan from the date the proceeds thereof are advanced to Borrowers until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the LIBOR Rate plus the LIBOR Margin. Subject to the provisions of this Agreement with respect to prepayment, the principal of the Notes shall be payable as specified in Section 3(e) hereof and the interest with respect to each LIBOR Loan shall be payable on each Interest Payment Date. Past due principal and, to the extent permitted by law, past due interest shall bear interest, payable on demand, at a rate per annum equal to the Default Rate. Upon three (3) London Business Days' written notice prior to the making by the Banks of any LIBOR Loan (in the case of the initial Interest Period therefor) or the expiration date of each succeeding Interest Period (in the case of subsequent Interest Periods therefor), Borrowers shall have the option, subject to compliance by Borrowers with all of the provisions of this Agreement, as long as no Event of Default exists, to specify whether the Interest Period commencing on any such date shall be a one (1), two (2), three (3) or six (6) month period. If Agent shall not have received timely notice of a designation of such Interest Period as herein provided, Borrowers shall be deemed to have elected to convert all maturing LIBOR Loans to Prime Rate Loans. -20- (b) INTEREST RATE DETERMINATION. The Agent shall determine each interest rate applicable to the Loans hereunder in accordance with the provisions of this Agreement. The Agent shall give prompt notice to the Borrowers and the Banks of each rate of interest so determined and its determination thereof shall be conclusive absent error. (c) CONVERSION OPTION. Borrowers may elect from time to time (i) to convert all or any part of its LIBOR Loans to Prime Rate Loans by giving Agent irrevocable notice of such election in writing prior to 10:00 a.m. (Oklahoma City, Oklahoma time) on the conversion date and such conversion shall be made on the requested conversion date, provided that any such conversion of a LIBOR Loan shall only be made on the last day of the LIBOR Interest Period with respect thereof, (ii) to convert all or any part of its Prime Rate Loans to LIBOR Loans by giving the Agent irrevocable written notice of such election three (3) London Business Days prior to the proposed conversion and such conversion shall be made on the requested conversion date or, if such requested conversion date is not a London Business Day or a Business Day, as the case may be, on the next succeeding London Business Day or Business Day, as the case may be. Any such conversion shall not be deemed to be a prepayment of any of the loans for purposes of this Agreement or the Notes. (d) RECOUPMENT. If at any time the applicable rate of interest selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum Rate, thereby causing the interest on the Notes to be limited to the Maximum Rate, then any subsequent reduction in the interest rate so selected or subsequently selected shall not reduce the rate of interest on the Notes below the Maximum Rate until the total amount of interest accrued on the Note equals the amount of interest which would have accrued on the Notes if the rate or rates selected pursuant to Sections 4(a)(i) or (ii), as the case may be, had at all times been in effect. 5. CHANGE OF CIRCUMSTANCES. (a) UNAVAILABILITY OF FUNDS OR INADEQUACY OF PRICING. In the event that, in connection with any proposed LIBOR Loan, the Agent determines, which determination shall, absent manifest error, be final, conclusive and binding upon all parties, due to changes in circumstances since the date hereof, adequate and fair means do not exist for determining the LIBOR Rate or such rate will not accurately reflect the costs to the Banks of funding LIBOR Loans for such LIBOR Interest Period, the Agent shall give notice of such determination to the Borrowers and the Banks, whereupon, until the Agent notifies the Borrowers and the Banks that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make, continue or convert Loans into LIBOR Loans shall be suspended, and all loans to Borrowers shall be Prime Rate Loans during the period of -21- suspension. (b) CHANGE IN LAWS. If at any time any new law or any change in existing laws or in the interpretation of any new or existing laws shall make it unlawful for any Bank to make or continue to maintain or fund LIBOR Loans hereunder, then such Bank shall promptly notify Borrowers in writing and such Bank's obligation to make, continue or convert Loans into LIBOR Loans under this Agreement shall be suspended until it is no longer unlawful for such Bank to make or maintain LIBOR Loans. Upon receipt of such notice, Borrowers shall either repay the outstanding LIBOR Loans owed to the Banks, without penalty, on the last day of the current Interest Periods (or, if any Bank may not lawfully continue to maintain and fund such LIBOR Loans, immediately), or Borrowers may convert such LIBOR Loans at such appropriate time to Prime Rate Loans. (c) INCREASED COST OR REDUCED RETURN. (i) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency: (A) shall subject such Bank to any tax, duty, or other charge with respect to any LIBOR Loans, its Notes, or its obligation to make LIBOR Loans, or change the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any LIBOR Loans (other than franchise taxes and taxes imposed on the overall net income of such Bank); (B) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than reserve requirements, if any, taken into account in the determination of the LIBOR Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Bank, including the Revolving Commitment of such Bank hereunder; or (C) shall impose on such Bank or on the London interbank market any other condition affecting this Agreement or its Notes or any of such extensions of credit or liabilities or commitments; -22- and the result of any of the foregoing is to increase the cost to such Bank of making, converting into, continuing, or maintaining any LIBOR Loans or to reduce any sum received or receivable by such Bank under this Agreement or its Notes with respect to any LIBOR Loans, then Borrowers shall pay to such Bank on demand such amount or amounts as will compensate such Bank for such increased cost or reduction. If any Bank requests compensation by Borrowers under this Section 5(c), Borrowers may, by notice to such Bank (with a copy to Agent), suspend the obligation of such Bank to make or continue LIBOR Loans, or to convert all or part of the Prime Rate Loan owing to such Bank to LIBOR Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 5(c) shall be applicable); PROVIDED that such suspension shall not affect the right of such Bank to receive the compensation so requested. (ii) If, after the date hereof, any Bank shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Bank or any corporation controlling such Bank as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. (iii) Each Bank shall promptly notify Borrowers and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 5(c) will designate a separate lending office, if applicable, if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to it. Any Bank claiming compensation under this Section 5(c) shall furnish to Borrowers and Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. -23- (iv) Any Bank giving notice to the Borrowers through the Agent, pursuant to Section 5(c) shall give to the Borrowers a statement signed by an officer of such Bank setting forth in reasonable detail the basis for, and the calculation of such additional cost, reduced payments or capital requirements, as the case may be, and the additional amounts required to compensate such Bank therefor. (v) Within five (5) Business Days after receipt by the Borrowers of any notice referred to in Section 5(c), the Borrowers shall pay to the Agent for the account of the Bank issuing such notice such additional amounts as are required to compensate such Bank for the increased cost, reduce payments or increase capital requirements identified therein, as the case may be; provided, that the Borrowers shall not be obligated to compensate such Bank for any increased costs, reduced payments or increased capital requirements to the extent that such Bank incurs the same prior to a date six (6) months before such Bank gives the required notice. (d) DISCRETION OF BANK AS TO MANNER OF FUNDING. Notwithstanding any provisions of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Bank had actually funded and maintained each LIBOR Loan through the purchase of deposits having a maturity corresponding to the last day of the LIBOR Interest Period applicable to such LIBOR Loan and bearing an interest rate to the applicable interest rate for such LIBOR Period. (e) BREAKAGE FEES. Without duplication under any other provision hereof, if any Bank incurs any loss, cost or expense (including, without limitation, any loss of profit and loss, cost, expense or premium reasonably incurred by reason of the liquidation or re-employment of deposits or other funds acquired by such Bank to fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to the Banks) as a result of any of the following events other than any such occurrence as a result in the change of circumstances described in Sections 5(a) and (b): (i) any payment, prepayment or conversion of a LIBOR Loan on a date other than the last day of its LIBOR Interest Period (whether by acceleration, prepayment or otherwise); (ii) any failure to make a principal payment of a LIBOR Loan on the due date thereof; or -24- (iii) any failure by the Borrowers to borrow, continue, prepay or convert to a LIBOR Loan on the dates specified in a notice given pursuant to Section 2(b) or 4(c) hereof; then the Borrowers shall pay to such Bank such amount as will reimburse such Bank for such loss, cost or expense. If any Bank makes such a claim for compensation, it shall furnish to Borrowers and Agent a statement setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such statement shall be conclusive and binding absent manifest error. 6. COLLATERAL SECURITY. (a) PLEDGE OF COLLATERAL. To secure the performance by Borrowers of their obligations hereunder, and under the Notes and Security Instruments, whether now or hereafter incurred, matured or unmatured, direct or contingent, joint or several, or joint and several, including extensions, modifications, renewals and increases thereof, and substitutions therefore, Borrowers have heretofore granted and assigned to Bank One-Oklahoma a first and prior lien on certain of their Oil and Gas Properties, certain related equipment, oil and gas inventory and the proceeds of the foregoing. Contemporaneously with the execution of this Agreement and the Notes, the Borrowers shall grant and assign to Agent for the ratable benefit of the Banks a first and prior Lien on certain of its Oil and Gas Properties, certain related equipment, oil and gas inventory, certain bank accounts, the System, the Plant and proceeds of the foregoing. The Liens held by Bank One-Oklahoma on the Oil and Gas Properties shall be assigned, as of the Effective Date, to the Agent for the ratable benefit of the Banks. The Oil and Gas Properties heretofore and herewith mortgaged to the Agent shall represent not less than 90% of the Engineered Value (as hereinafter defined) of Borrowers' Oil and Gas Properties as of the Effective Date. All Oil and Gas Properties and other collateral in which Borrowers have heretofore granted to Bank One-Oklahoma, or herewith grant or hereafter grant to Agent for the ratable benefit of the Banks a first and prior Lien (to the satisfaction of the Agent) in accordance with this Section 6, as such properties and interests are from time to time constituted, are hereinafter collectively called the "Collateral". (b) DOCUMENTATION AND TITLE REVIEW. The granting and assigning of such security interests and Liens by Borrowers shall be pursuant to Security Instruments in form and substance reasonably satisfactory to the Agent. Concurrently with the delivery of each of the Security Instruments or within a reasonable time thereafter, Borrowers shall furnish to the Agent mortgage and title opinions and other title information satisfactory to Agent with respect to the title and Lien status of Borrowers' interests in not less than 80% of the Engineered Value of the Oil and Gas Properties covered by the Security Instruments as Agent shall -25- have designated. "Engineered Value" for this purpose shall mean future net revenues discounted at the discount rate being used by the Agent as of the date of any such determination utilizing the pricing parameters used in the engineering report furnished to the Agent for the ratable benefit of the Banks, pursuant to Sections 7 and 12 hereof. Borrowers will cause to be executed and delivered to the Agent, in the future, additional Security Instruments if the Agent reasonably deems such are necessary to insure perfection or maintenance of Banks' security interests and Liens in the Collateral or any part thereof. (c) LETTERS IN LIEU OF TRANSFER ORDERS. The Borrowers shall provide the Agent for the benefit of the Banks, undated letters in lieu of transfer orders, in form and substance satisfactory to Agent, from the Borrowers to each purchaser of hydrocarbons and disburser proceeds of hydrocarbons from and attributable to the Oil and Gas Properties, together with additional letters with addresses left blank authorizing and directing the addressees to make future payments attributable to hydrocarbons from the Oil and Gas Properties directly to the Agent for the benefit of the Banks. The Banks agree that none of the letters in lieu of transfer orders provided by the Borrowers pursuant to this Section 6(c) will be sent to the address prior to the occurrence of an Event of Default, at which time the Agent may, at its option and in addition to the exercise of any of its other rights and remedies, send any and all of such letters to such addressees; provided, however, that upon the occurrence of an Event of Default other than those specified in Sections 14(f) and (g), the Agent shall not send any or all of such letters until the applicable period to cure, if any, such Default has lapsed without such Default being cured. Borrowers hereby designate the Agent as its agent and attorney-in-fact, to act in its name, place and stead for the purpose of completing and delivering any and all letters in lieu of transfer orders delivered by the Borrowers to the Agent for the benefit of the Banks pursuant to Sections 6(c) and 11(a)(x) hereof, including, without limitation, completing any blanks contained in such letters and attaching exhibits thereto describing the relevant Collateral. Borrowers hereby ratify and confirm all that the Agent shall lawfully do or cause to be done by virtue of this power of attorney and the rights granted with respect to such power of attorney. This power of attorney is coupled with the interests of the Agent in the Collateral, shall commence and be in full force and effect as of the Effective Date and shall remain in full force and effect and shall be irrevocable until the obligations, if any, of the Agent hereunder have terminated and the full satisfaction of all obligations due hereunder or under the Notes. The powers conferred on Agent by this appointment may only be exercised by the Agent by execution by any Person who, at the time of exercise, is an officer of the Agent, and are solely to protect the interests of the Agent and the Banks under the Loan Documents and shall not impose any duty upon the Agent to exercise any such powers. The Agent shall be accountable only for amounts that it actually receives or has expressly directed that others receive as a result of the exercise of such powers and shall not be responsible to the Borrowers, or any other Person for -26- any act or failure to act with respect to such powers, except for gross negligence or willful misconduct. 7. BORROWING BASE. (a) INITIAL BORROWING BASE. At the Effective Date, the Borrowing Base shall be $175,000,000.00. (b) SUBSEQUENT DETERMINATIONS OF BORROWING BASE. Subsequent determinations of the Borrowing Base shall be made by the Banks at least semi-annually on May 1 and November 1 of each year beginning November 1, 1998 or as Unscheduled Redeterminations. In connection with, and as of, each determination of the Borrowing Base, the Banks shall also redetermine the Monthly Commitment Reduction. The Borrowers shall furnish to the Banks as soon as possible but in any event no later than April 1 of each year, beginning April 1, 1999, with an engineering report in form and substance satisfactory to the Agent prepared by an independent petroleum engineering acceptable to Agent covering the Oil and Gas Properties utilizing economic and pricing parameters used by Agent as established from time to time, together with such other information concerning the value of the Oil and Gas Properties as the Agent shall deem necessary to determine the value of the Oil and Gas Properties. By October 1 of each year, or within thirty (30) days after either (i) receipt of notice from Agent that the Banks require an Unscheduled Redetermination, or (ii) the Borrowers give notice to Agent of their desire to have an Unscheduled Redetermination performed, the Borrowers shall furnish to the Banks an engineering report in form and substance satisfactory to Agent prepared by Borrowers' in-house engineering staff valuing the Oil and Gas Properties utilizing economic and pricing parameters used by the Agent as established from time to time, together with such other information, reports and data concerning the value of the Oil and Gas Properties as Agent shall deem reasonably necessary to determine the value of such Oil and Gas Properties. Agent shall by notice to the Borrowers no later than May 1 and November 1 of each year, or within a reasonable time thereafter (herein called the "Determination Date"), notify the Borrowers of the designation by the Banks of the new Borrowing Base and Monthly Commitment Reduction for the period beginning on such Determination Date and continuing until, but not including, the next Determination Date. If an Unscheduled Redetermination is made by the Banks, the Agent shall notify the Borrowers within a reasonable time after receipt of all requested information of the new Borrowing Base and Monthly Commitment Reduction, and such new Borrowing Base and Monthly Commitment Reduction shall continue until the next Determination Date. If the Borrowers do not furnish all such information, reports and data by any date specified in this Section 7(b), the Banks may nonetheless designate the Borrowing Base and Monthly Commitment Reduction at any amounts which the Banks in their discretion determine and may redesignate the Borrowing Base and Monthly -27- Commitment Reduction from time to time thereafter until the Banks receive all such information, reports and data, whereupon the Banks shall designate a new Borrowing Base and Monthly Commitment Reduction as described above. Each Bank shall determine the amount of the Borrowing Base and Monthly Commitment Reduction based upon the loan collateral value which such Bank in its discretion (using such methodology, assumptions and discounts rates as such Bank customarily uses in assigning collateral value to oil and gas properties, oil and gas gathering systems, gas processing and plant operations) assigns to such Oil and Gas Properties and other Collateral of the Borrowers at the time in question and based upon such other credit factors consistently applied (including, without limitation, the assets, liabilities, cash flow, business, properties, prospects, management and ownership of the Borrowers and their affiliates) as such Bank customarily considers in evaluating similar oil and gas credits, but such Bank in its discretion shall not be required to give any additional positive value to any Oil and Gas Property over the current economic and pricing parameters used by such Bank for such Determination Date which additional value is derived directly from a hedging, forward sale or swap agreement covering such Oil and Gas Property as of the date of such determination. All determinations or Unscheduled Redeterminations of the Borrowing Base and the Monthly Commitment Reduction require the approval of Majority Banks; provided, however, that notwithstanding anything to the contrary herein, the amount of the Borrowing Base may not be increased, nor may the Monthly Commitment Reduction be reduced, without the approval of all Banks. If the Banks cannot otherwise agree on the Borrowing Base or the Monthly Commitment Reduction, each Bank shall submit in writing to the Agent its proposed Borrowing Base and Monthly Commitment Reduction and the Borrowing Base and Monthly Commitment Reduction shall be set on the basis of the weighted average of the Borrowing Bases and the weighted average of the Monthly Commitment Reductions proposed by the Banks. If at any time any of the Oil and Gas Properties are sold, the Borrowing Base then in effect shall automatically be reduced by a sum equal to the amount of prepayment required to be made pursuant to Section 12(r) hereof. The Borrowing Base shall be additionally reduced from time to time pursuant to the provisions of Sections 2(e) and 2(f) hereof. It is expressly understood that the Banks have no obligation to designate the Borrowing Base or the Monthly Commitment Reduction at any particular amounts, except in the exercise of their discretion, whether in relation to the Revolving Commitment or otherwise. Provided, however, that the Banks shall not have the obligation to designate a Borrowing Base in an amount in excess of the Revolving Commitment or its legal or internal lending limits. Upon the issuance of any public note issue permitted pursuant to Section 13(f)(iv) hereof, the Banks shall have the right to perform an Unscheduled Redetermination of the Borrowing Base. -28- 8. FEES. (a) UNUSED COMMITMENT FEE. The Borrowers shall pay to Agent for the ratable benefit of the Banks an unused commitment fee (the "Unused Commitment Fee") equivalent to the Unused Fee Rate times the unadvanced amount of the Revolving Commitment (calculated on a daily basis). The Unused Commitment Fee shall be payable in arrears on the last Business Day of each calendar quarter beginning June 30, 1998 with the final fee payment due on the Maturity Date for any period then ending for which the Unused Commitment Fee shall not have been theretofore paid. In the event the Revolving Commitment terminates on any date prior to the end of any such monthly period, the Borrowers shall pay to the Agent for the ratable benefit of the Banks, on the date of such termination, the total Unused Commitment Fee due for the period in which such termination occurs. (b) THE LETTER OF CREDIT FEE. Borrowers shall pay to the Agent the Letter of Credit fees required above in Section 2(d). (c) AGENCY FEES. The Borrowers shall pay to the Agent certain fees for acting as Agent hereunder in amounts to be negotiated between the Borrowers and the Agent. (d) OTHER FEES. The Borrowers shall pay on the Effective Date the additional fees provided for in the Engagement Letter dated April 20, 1998 by and among Resources, Bank One-Oklahoma and Bank One Capital Markets, Inc. 9. PREPAYMENTS. (a) VOLUNTARY PREPAYMENTS. Subject to the provisions of Section 5(e) hereof, the Borrowers may at any time and from time to time, without penalty or premium, prepay the Notes, in whole or in part. Each such prepayment shall be made on at least three (3) London Business Days' notice to Agent in the case of LIBOR Loan Tranches and without notice in the case of Prime Rate Loan Tranches and shall be in a minimum amount of $500,000 or any larger multiple thereof or the unpaid balance on the Notes, whichever is less, plus accrued interest thereon to the date of prepayment. (b) MANDATORY PREPAYMENT FOR BORROWING BASE DEFICIENCY. In the event the Total Outstandings ever exceed the Borrowing Base as determined by Banks pursuant to Section 7(b) hereof, the Borrowers shall, within thirty (30) days after notification from the Agent, either (A) by instruments reasonably satisfactory in form and substance to the Bank, provide the Agent with collateral with value and quality in amounts satisfactory to all of the Banks in their discretion in order to increase the Borrowing Base by an amount at least equal to such excess, or (B) -29- prepay, without premium or penalty, the principal amount of the Revolving Notes in an amount at least equal to such excess plus accrued interest thereon to the date of prepayment. If the Total Outstandings ever exceed the Revolving Commitment as a result of a Monthly Commitment Reduction or any other required reduction in the Revolving Commitment, then in such event, Borrowers shall immediately prepay the principal amount of the Revolving Notes in an amount at least equal to such excess plus accrued interest to the date of prepayment. 10. REPRESENTATIONS AND WARRANTIES. In order to induce the Banks to enter into this Agreement, the Borrowers hereby, jointly and severally, represent and warrant to the Banks (which representations and warranties will survive the delivery of the Notes) that: (a) CREATION AND EXISTENCE. Borrowers are each a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was formed and is duly qualified in all jurisdictions wherein failure to qualify may result in a Material Adverse Effect. Borrowers each have all power and authority to own its properties and assets and to transact the business in which it is engaged. (b) POWER AND AUTHORITY. Borrowers are each duly authorized and empowered to create and issue the Notes; and Borrowers are duly authorized and empowered to execute, deliver and perform their respective Loan Documents, including this Agreement; and all corporation action on each Borrower's part requisite for the due creation and issuance of the Notes and for the due execution, delivery and performance of the Loan Documents, including this Agreement, has been duly and effectively taken. Each Support Party is duly authorized and empowered to execute, deliver and perform the respective Loan Documents to which they are a party, including the Subordination Agreement; and all action on each Support Party's part requisite for the due execution, delivery and performance of such Loan Documents has been duly and effectively taken. (c) BINDING OBLIGATIONS. This Agreement does, and the Notes and other Loan Documents upon their creation, issuance, execution and delivery will, constitute valid and binding obligations of Borrowers, enforceable in accordance with their respective terms (except that enforcement may be subject to applicable principles of equity and the effect of any applicable bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect and relating to or affecting the enforcement of creditors' rights generally). The Subordination Agreement upon its creation, issuance, execution and delivery will constitute valid and binding obligations of each of the Support Parties, enforceable in accordance with their respective terms (except that enforcement may be subject to applicable principles of equity and the effect of any applicable bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect and relating to or affecting the enforcement of -30- creditors' rights generally). (d) NO LEGAL BAR OR RESULTANT LIEN. The Notes and the Loan Documents, including this Agreement, do not and will not, to the best of each Borrower's and each Support Party's knowledge violate any provisions of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which any Borrower or any Support Party is subject which could reasonable be expected to have a Material Adverse Effect, or result in the creation or imposition of any lien or other encumbrance upon any assets or properties of any Borrower or any Support Party, other than those contemplated by this Agreement. (e) NO CONSENT. The execution, delivery and performance by the Borrowers of the Notes and by the Borrowers and the Support Parties of their respective Loan Documents, including this Agreement, does not require the consent or approval of any other person or entity, including without limitation any regulatory authority or governmental body of the United States or any state thereof or any political subdivision of the United States or any state thereof except for (i) consents required for federal, state and, in some instances, private leases, right of ways and other conveyances or encumbrances of oil and gas leases, if any, all of which consents have been obtained by the Borrowers. (f) FINANCIAL CONDITION. The unaudited Financial Statements of Borrowers dated December 31, 1997, which have been delivered to Banks are complete and correct in all material respects, and fully and accurately reflect in all material respects the financial condition and results of the operations of the Borrowers on a consolidated basis as of the date or dates and for the period or periods stated. No change has since occurred in the condition, financial or otherwise, of the Borrowers which is reasonably expected to have a Material Adverse Effect, except as disclosed to the Banks in Schedule "2" attached hereto. (g) LIABILITIES. Neither Borrower has any material (individually or in the aggregate) liability, direct or contingent, except as disclosed to the Banks in the Financial Statements or on Schedule "3" attached hereto. No unusual or unduly burdensome restrictions, restraint, or hazard exists by contract, law or governmental regulation or otherwise relative to the business, assets or properties of Borrowers which is reasonably expected to have a Material Adverse Effect. (h) LITIGATION. Except as described in the Financial Statements, or as otherwise disclosed to the Banks in Schedule "4" attached hereto, there is no litigation, legal or administrative proceeding, investigation or other action of any nature pending or, to the knowledge of the officers of Borrowers threatened against or affecting Borrowers which involves the possibility of any judgment or liability not fully covered by insurance, and which is reasonably expected to have a Material -31- Adverse Effect. (i) TAXES; GOVERNMENTAL CHARGES. Borrowers have each filed all tax returns and reports required to be filed and has paid all taxes, assessments, fees and other governmental charges levied upon them or their assets, properties or income which are due and payable, including interest and penalties, the failure of which to pay could reasonably be expected to have a Material Adverse Effect, except such as are being contested in good faith by appropriate proceedings and for which adequate reserves for the payment thereof as required by GAAP has been provided and levy and execution thereon have been stayed and continue to be stayed. (j) TITLES, ETC. Borrowers each have defensible title to all of its respective assets, including without limitation, the Oil and Gas Properties, the Plants and the Systems, free and clear of all liens or other encumbrances except Permitted Liens, except such failure or failures of title which in the aggregate could not reasonably be expected to reduce the Borrowing Base by more than $500,000. (k) DEFAULTS. Neither Borrower is in default and no event or circumstance has occurred which, but for the passage of time or the giving of notice, or both, would constitute a default under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other agreement or instrument to which either Borrower is a party in any respect that would be reasonably expected to have a Material Adverse Effect. No Event of Default hereunder has occurred and is continuing. (l) CASUALTIES; TAKING OF PROPERTIES. Since the dates of the latest Financial Statements of the Borrowers delivered to Banks, neither the business nor the assets or properties of Borrowers have been affected (to the extent it is reasonably likely to cause a Material Adverse Effect), as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. (m) USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Revolving Commitment may be used by the Borrowers for the purposes of (i) refinancing existing debt owed to Bank One-Oklahoma, (ii) acquisition, exploration and development of oil and gas properties or entities owning oil and gas properties, (iii) Letters of Credit, and (iv) general corporate purposes. Neither Borrower is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or retiring any indebtedness which was -32- originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of said Regulation G or U. Neither Borrower nor any person or entity acting on behalf of Borrowers has taken or will take any action which might cause the loans hereunder or any of the Loan Documents, including this Agreement, to violate Regulation G or U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. (n) LOCATION OF BUSINESS AND OFFICES. The principal place of business and chief executive offices of the Borrowers are located at the address stated in Section 17 hereof. (o) COMPLIANCE WITH THE LAW. To the best of either Borrower's knowledge, neither Borrower: (i) is in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation to which either Borrower, or any of its assets or properties are subject; or (ii) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of its assets or properties or the conduct of its business; which violation or failure is reasonably expected to have a Material Adverse Effect. (p) NO MATERIAL MISSTATEMENTS. No information, exhibit or report furnished by Borrowers to the Banks in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading. (q) ERISA. Borrowers are each in compliance in all material respects with the applicable provisions of ERISA, and no "reportable event", as such term is defined in Section 403 of ERISA, has occurred with respect to any Plan of Borrowers. (r) PUBLIC UTILITY HOLDING COMPANY ACT. Neither Borrower is a "holding company", or "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a"subsidiary company" of a "holding company", or a "public utility" within the meaning of the Public Utility Holding -33- Company Act of 1935, as amended. (s) SUBSIDIARIES. All of the Borrowers' Subsidiaries are listed on Schedule "5" hereto. (t) ENVIRONMENTAL MATTERS. Except as disclosed on Schedule "6", neither Borrower (i) has received notice or otherwise learned of any Environmental Liability which would be reasonably likely to individually or in the aggregate have a Material Adverse Effect arising in connection with (A) any non-compliance with or violation of the requirements of any Environmental Law or (B) the release or threatened release of any toxic or hazardous waste into the environment, (ii) has received notice of any threatened or actual liability in connection with the release or notice of any threatened release of any toxic or hazardous waste into the environment which would be reasonably likely to individually or in the aggregate have a Material Adverse Effect or (iii) has received notice or otherwise learned of any federal or state investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any toxic or hazardous waste into the environment for which either Borrower is or may be liable which may reasonably be expected to result in a Material Adverse Effect. (u) LIENS. Except (i) as disclosed on Schedule "1" hereto and (ii) for Permitted Liens, the assets and properties of the Borrowers are free and clear of all liens and encumbrances. (v) GAS CONTRACTS. Except as described on Schedule "7" hereto, the Borrowers (a) are not obligated in any material respect by virtue of any prepayment made under any contract containing a "take-or-pay,", "recoupment," or "prepayment" provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any of the Oil and Gas Properties at some future date without receiving full payment therefor at the time of delivery, and (b) has not produced gas, in any material amount, subject to, and is not, nor are any of the Oil and Gas Properties, subject to balancing rights of third parties or subject to balancing duties under governmental requirements, except as to such matters for which the Borrowers have established monetary reserves adequate in an amount to satisfy such obligations and has segregated such reserves from other accounts or the Borrowers' balancing obligations in the aggregate would not reasonably be expected to have a Material Adverse Effect. (w) YEAR 2000 COMPLIANCE. The Borrowers have (i) initiated a review and assessment of all areas within each of theirs and their Subsidiaries' business and operations that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Borrowers or any of their Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving -34- certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Borrowers reasonably believe that all computer applications that are material to their or any of their Subsidiaries' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have Material Adverse Effect. (x) DELHI OAKDALE LATERAL SYSTEM. A portion of the Aline Gathering System is not owned by either Borrower, rather, it is leased pursuant to the Delhi Lease. The primary term of the Delhi Lease has expired, however, the Borrowers' right to use the Delhi Oakdale Lateral System is renewed on a month-to-month basis. The Delhi Oakdale Lateral System is not a critical portion of the Aline Gathering System. The Delhi Oakdale Lateral System accounts for no more than two percent (2%) of the volume of hydrocarbons flowing through the Aline Gathering System. (y) ALINE GATHERING SYSTEM. At lease ninety percent (90%) of the hydrocarbons flowing through the Aline Gathering System originate from wells directly connected to the Aline Gathering System or flows through the Aline Gathering System prior to delivery to the Oklahoma Natural Gas Company's or other purchaser's system. 11. CONDITIONS OF LENDING. (a) The effectiveness of this Agreement, and the obligation to make the initial Advance or issue any initial Letter of Credit under the Revolving Commitment shall be subject to satisfaction of the following conditions precedent: (i) EXECUTION AND DELIVERY. The Borrowers shall each have executed and delivered the Agreement, the Notes and other required Loan Documents, and the other Security Instruments, all in form and substance satisfactory to the Agent; (ii) SUBORDINATION AGREEMENTS. The Agent shall have received executed Subordination Agreements in the form of Exhibit "F" hereto covering all amounts now owed by the Borrowers to any of the Support Parties; (iii) LEGAL OPINION. The Agent shall have received from Borrowers' and Support Party's legal counsel a favorable legal opinion in form and substance satisfactory to it (i) as to the matters set forth in -35- Subsections 10(a), (b), (c), (d), (e) and (h) hereof and (ii) as to such other matters as Agent or its counsel may reasonably request; (iv) CORPORATE RESOLUTIONS. The Agent shall have received appropriate certified corporate resolutions of Borrowers; (v) GOOD STANDING. The Agent shall have received evidence of existence and good standing for Borrowers; (vi) INCUMBENCY. The Agent shall have received a signed certificate of Borrowers, certifying the names of the officers of Borrowers authorized to sign loan documents on behalf of Borrowers, together with the true signatures of each such officer. The Agent may conclusively rely on such certificate until the Agent receives a further certificate of Borrowers canceling or amending the prior certificate and submitting signatures of the officers named in such further certificate; (vii) CERTIFICATE OF INCORPORATION AND BYLAWS. The Agent shall have received copies of the Certificate of Incorporation of Borrowers and all amendments thereto, certified by the Secretary of State of the State of its incorporation, and a copy of the bylaws of Borrowers and all amendments thereto, certified by Borrowers as being true, correct and complete; (viii) PRIORITY OF LIENS. The Agent shall have received satisfactory evidence of the first lien status of the Liens granted by Borrowers to the Banks; (ix) LETTERS IN LIEU. The Agent shall have received undated letters in lieu of transfer orders, in form and substance satisfactory to the Agent, from the Borrowers to each purchaser of hydrocarbons and disburser of proceeds of hydrocarbons from and attributable to the Oil and Gas Properties, together with additional letters with the addresses left blank, authorizing and directing the addressees to make future payments attributable to the hydrocarbons from the Oil and Gas Properties directly to the Agent for the benefit of the Banks, all as required by Section 6 hereof; (x) CLOSING OF BASS TRANSACTION. The Agent shall have received satisfactory evidence of the closing of the transaction described in that certain Purchase and Sale Agreement between Bass Enterprises Production Co., et al. and Resources dated as of March 28, 1998; (xi) PAYMENT OF FEES. The Agent shall have received payment of all fees due from Borrowers as of the Effective Date. -36- (xii) REPRESENTATION AND WARRANTIES. The representations and warranties of Borrowers under this Agreement are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); (xiii) NO EVENT OF DEFAULT. No Event of Default shall have occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default; (xiv) OTHER DOCUMENTS. Agent shall have received such other instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to the Agent; and (xv) LEGAL MATTERS SATISFACTORY. All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of the Borrowers. (b) The obligation of the Banks to make any Advance or issue any Letter of Credit under the Revolving Commitment (including the initial Advance) shall be subject to the following additional conditions precedent that, at the date of making each such Advance and after giving effect thereto: (i) REPRESENTATION AND WARRANTIES. The representations and warranties of Borrowers under this Agreement are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); (ii) NO EVENT OF DEFAULT. No Event of Default shall have occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default; (iii) OTHER DOCUMENTS. Agent shall have received such other instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to the Agent; and -37- (iv) LEGAL MATTERS SATISFACTORY. All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of Borrowers. 12. Affirmative Covenants. A deviation from the provisions of this Section 12 shall not constitute a Default or Event of Default under this Agreement if such deviation is consented to in writing by the required percentage of the Banks prior to the date of deviation. The Borrowers will at all times comply with the covenants contained in this Section 12 from the date hereof and for so long as the Revolving Commitment is in existence or any amount is owed to the Agent or the Banks under this Agreement or the other Loan Documents. (a) FINANCIAL STATEMENTS AND REPORTS. Borrowers shall promptly furnish to the Agent from time to time upon request such information regarding the business and affairs and financial condition of Borrowers, as the Agent may reasonably request, and will furnish to the Agent: (i) ANNUAL AUDITED FINANCIAL STATEMENTS. As soon as available, and in any event within one hundred and twenty (120) days after the close of each fiscal year beginning with the fiscal year ended December 31, 1998, the annual audited consolidated Financial Statements of Borrowers, prepared in accordance with GAAP accompanied by an unqualified opinion rendered by an independent accounting firm reasonably acceptable to the Agent; (ii) QUARTERLY FINANCIAL STATEMENTS. As soon as available, and in any event within forty-five (45) days after the end of each calendar quarter of each year, the quarterly unaudited consolidated and consolidating Financial Statements of Borrowers prepared in accordance with GAAP; (iii) REPORT ON PROPERTIES. As soon as available and in any event on or before April 1 and October 1 of each calendar year, and at such other times as any Bank, in accordance with Section 7 hereof, may request, the engineering reports required to be furnished to the Agent under such Section 7 on the Oil and Gas Properties; (iv) MONTHLY PRODUCTION REPORTS. Within forty-five (45) days after the end of each month, a monthly report, in form and substance satisfactory to the Agent, indicating the immediately preceding month's sales volume, sales revenues, production taxes, operating expense and net operating income from or attributable to the Oil and Gas Properties, and any material gas balance liabilities of either Borrower, with detailed calculations and worksheets, and, in the case of take or pay or prepayment agreements during such month, provide copies of the same, all in form and substance -38- satisfactory to Agent; (v) ADDITIONAL INFORMATION. Promptly upon request of the Agent from time to time any additional financial information or other information that the Agent may reasonably request. All such reports, information, balance sheets and Financial Statements referred to in Subsection 12(a) above shall be in such detail as the Agent may reasonably request and shall be prepared in a manner consistent with the Financial Statements. (b) CERTIFICATES OF COMPLIANCE. Concurrently with the furnishing of the annual audited Financial Statements pursuant to Subsection 12(a)(i) hereof and the quarterly unaudited Financial Statements pursuant to Subsection 12(a)(ii) hereof for the months coinciding with the end of each calendar quarter, Borrowers will furnish or cause to be furnished to the Agent a certificate in the form of Exhibit "C" attached hereto, signed by the President or Chief Financial Officer of each Borrower, (i) stating that each Borrower has fulfilled in all material respects its obligations under the Notes and the Loan Documents, including this Agreement, and that all representations and warranties made herein and therein continue (except to the extent they relate solely to an earlier date) to be true and correct in all material respects (or specifying the nature of any change), or if a Default has occurred, specifying the Default and the nature and status thereof; (ii) to the extent requested from time to time by the Agent, specifically affirming compliance of each Borrower in all material respects with any of its representations (except to the extent they relate solely to an earlier date) or obligations under said instruments; (iii) setting forth the computation, in reasonable detail as of the end of each period covered by such certificate, of compliance with Sections 13(b), (c) and (d); and (iv) containing or accompanied by such financial or other details, information and material as the Agent may reasonably request to evidence such compliance. (c) ACCOUNTANTS' CERTIFICATE. Concurrently with the furnishing of the annual audited Financial Statement pursuant to Section 12(a)(i) hereof, Borrowers will furnish a statement from the firm of independent public accountants which prepared such Financial Statement to the effect that nothing has come to their attention to cause them to believe that there existed on the date of such statements any Event of Default and specifically calculating Borrowers' compliance with Sections 13(b), (c) and (d) of this Agreement. (d) TAXES AND OTHER LIENS. The Borrowers will pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Borrowers, or upon the income or any assets or property of Borrowers, as well as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien or other encumbrance upon any or all of the -39- assets or property of Borrowers and which could reasonably be expected to result in a Material Adverse Effect; provided, however, that neither Borrower shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted, levy and execution thereon have been stayed and continue to be stayed and if Borrowers shall have set up adequate reserves therefor, if required, under GAAP. (e) COMPLIANCE WITH LAWS. Borrowers will observe and comply, in all material respects, with all applicable laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, orders and restrictions relating to environmental standards or controls or to energy regulations of all federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign. (f) FURTHER ASSURANCES. Upon Agent's request, the Borrowers will cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Notes and the Loan Documents, including this Agreement. The Borrowers at their sole expense will promptly execute and deliver to Agent upon its reasonable request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements in this Agreement, or to correct any omissions in the Notes or more fully to state the obligations set out herein. (g) PERFORMANCE OF OBLIGATIONS. The Borrowers will pay the Notes and other obligations incurred by it hereunder according to the reading, tenor and effect thereof and hereof; and Borrowers will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Borrowers under the Loan Documents, including this Agreement, at the time or times and in the manner specified. (h) INSURANCE. The Borrowers now maintain and will continue to maintain insurance with financially sound and reputable insurers with respect to its assets against such liabilities, fires, casualties, risks and contingencies and in such types and amounts as is customary in the case of persons engaged in the same or similar businesses and similarly situated. Upon request of the Agent, the Borrowers will furnish or cause to be furnished to the Agent from time to time a summary of the respective insurance coverage of Borrowers in form and substance satisfactory to the Agent, and, if requested, will furnish the Agent copies of the applicable policies. Upon demand by Agent any insurance policies covering any such property shall be endorsed (i) to provide that such policies may not be canceled, reduced or affected in any manner for any reason without fifteen (15) days prior notice to Agent, (ii) to provide for insurance against fire, casualty and other hazards normally -40- insured against, in the amount of the full value (less a reasonable deductible not to exceed amounts customary in the industry for similarly situated business and properties) of the property insured, and (iii) to provide for such other matters as the Agent may reasonably require. Additionally, the Borrowers shall at all times maintain adequate insurance with respect to all of its other assets and wells in accordance with prudent business practices. (i) ACCOUNTS AND RECORDS. Borrowers will keep books, records and accounts in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities, prepared in a manner consistent with prior years, subject to changes suggested by such Borrowers' auditors. (j) RIGHT OF INSPECTION. Borrowers will permit any officer, employee or agent of the Banks to examine Borrowers' books, records and accounts, and take copies and extracts therefrom, all at such reasonable times during normal business hours and as often as the Banks may reasonably request. The Banks will use best efforts to keep all Confidential Information (as herein defined) confidential and will not disclose or reveal the Confidential Information or any part thereof other than (i) as required by law, and (ii) to the Banks', and the Banks' subsidiaries', Affiliates, officers, employees, legal counsel and regulatory authorities or advisors to whom it is necessary to reveal such information for the purpose of effectuating the agreements and undertakings specified herein or as otherwise required in connection with the enforcement of the Banks' and the Agent's rights and remedies under the Notes, this Agreement and the other Loan Documents. As used herein, "Confidential Information" means information about the Borrowers furnished by the Borrowers to the Banks, but does not include information (i) which was publicly known, or otherwise known to the Banks, at the time of the disclosure, (ii) which subsequently becomes publicly known through no act or omission by the Banks, or (iii) which otherwise becomes known to the Banks, other than through disclosure by the Borrowers. (k) NOTICE OF CERTAIN EVENTS. The Borrowers shall promptly notify the Agent if Borrowers learn of the occurrence of (i) any event which constitutes a Default or Event of Default together with a detailed statement by Borrowers of the steps being taken to cure such Event of Default; (ii) any legal, judicial or regulatory proceedings affecting Borrowers, or any of the assets or properties of Borrowers which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; (iii) any dispute between Borrowers and any governmental or regulatory body or any other Person or entity which, if adversely determined, might reasonably be expected to cause a Material Adverse Effect; (iv) any event or circumstance which requires the prepayment, purchase or redemption of any outstanding public note issue, whether issued prior or subsequent to the Effective Date, with a detailed statement of steps being taken to cure such Default or Event of -41- Default, or (v) any other matter which in Borrowers' reasonable opinion could have a Material Adverse Effect. (l) ERISA INFORMATION AND COMPLIANCE. The Borrowers will promptly furnish to the Agent immediately upon becoming aware of the occurrence of any "reportable event", as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended, in connection with any Plan or any trust created thereunder, a written notice signed by the chief financial officer of Borrowers specifying the nature thereof, what action Borrowers are taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto. (m) ENVIRONMENTAL REPORTS AND NOTICES. The Borrowers will deliver to the Agent (i) promptly upon its becoming available, one copy of each report sent by Borrowers to any court, governmental agency or instrumentality pursuant to any Environmental Law, (ii) notice, in writing, promptly upon Borrowers' receipt of notice or otherwise learning of any claim, demand, action, event, condition, report or investigation indicating any potential or actual liability arising in connection with (x) the non-compliance with or violation of the requirements of any Environmental Law which reasonably could be expected to have a Material Adverse Effect; (y) the release or threatened release of any toxic or hazardous waste into the environment which reasonably could be expected to have a Material Adverse Effect or which release Borrower would have a duty to report to any court or government agency or instrumentality, or (iii) the existence of any Environmental Lien on any properties or assets of Borrowers, and Borrowers shall immediately deliver a copy of any such notice to Agent. (n) COMPLIANCE AND MAINTENANCE. The Borrowers will (i) observe and comply in all material respects with all Environmental Laws; (ii) except as provided in Subsections 12(o) and 12(p) below, maintain the Oil and Gas Properties and other assets and properties in good and workable condition at all times and make all repairs, replacements, additions, betterments and improvements to the Oil and Gas Properties and other assets and properties as are needed and proper so that the business carried on in connection therewith may be conducted properly and efficiently at all times in the opinion of the Borrowers exercised in good faith; (iii) take or cause to be taken whatever actions are necessary or desirable to prevent an event or condition of default by Borrowers under the provisions of any gas purchase or sales contract or any other contract, agreement or lease comprising a part of the Oil and Gas Properties or other collateral security hereunder which default could reasonably be expected to result in a Material Adverse Effect; and (iv) furnish Agent upon request evidence satisfactory to Agent that there are no Liens, claims or encumbrances on the Oil and Gas Properties, except laborers', vendors', repairmen's, -42- mechanics', worker's, or materialmen's liens arising by operation of law or incident to the construction or improvement of property if the obligations secured thereby are not yet due or are being contested in good faith by appropriate legal proceedings or Permitted Liens. (o) OPERATION OF PROPERTIES. Except as provided in Subsection 12(p) and (q) below, the Borrowers will operate, or use reasonable efforts to cause to be operated, all Oil and Gas Properties in a careful and efficient manner in accordance with the practice of the industry and in compliance in all material respects with all applicable laws, rules, and regulations, and in compliance in all material respects with all applicable proration and conservation laws of the jurisdiction in which the properties are situated, and all applicable laws, rules, and regulations, of every other agency and authority from time to time constituted to regulate the development and operation of the properties and the production and sale of hydrocarbons and other minerals therefrom; provided, however, that the Borrowers shall have the right to contest in good faith by appropriate proceedings, the applicability or lawfulness of any such law, rule or regulation and pending such contest may defer compliance therewith, as long as such deferment shall not subject the properties or any part thereof to foreclosure or loss. (p) COMPLIANCE WITH LEASES AND OTHER INSTRUMENTS. The Borrowers will pay or cause to be paid and discharge all rentals, delay rentals, royalties, production payment, and indebtedness required to be paid by Borrowers (or required to keep unimpaired in all material respects the rights of Borrowers in the Oil and Gas Properties) accruing under, and perform or cause to be performed in all material respects each and every act, matter, or thing required of Borrowers by each and all of the assignments, deeds, leases, subleases, contracts, and agreements in any way relating to Borrowers or any of the Oil and Gas Properties and do all other things necessary of Borrowers to keep unimpaired in all material respects the rights of Borrowers thereunder and to prevent the forfeiture thereof or default thereunder; provided, however, that nothing in this Agreement shall be deemed to require Borrowers to perpetuate or renew any oil and gas lease or other lease by payment of rental or delay rental or by commencement or continuation of operations nor to prevent Borrowers from abandoning or releasing any oil and gas lease or other lease or well thereon when, in any of such events, in the opinion of Borrowers exercised in good faith, it is not in the best interest of the Borrowers to perpetuate the same. (q) CERTAIN ADDITIONAL ASSURANCES REGARDING MAINTENANCE AND OPERATIONS OF PROPERTIES. With respect to those Oil and Gas Properties which are being operated by operators other than the Borrowers, the Borrowers shall not be obligated to perform any undertakings contemplated by the covenants and agreement contained in Subsections 12(o) or 12(p) hereof which are performable only by such operators and are beyond the control of the Borrowers; however, the -43- Borrowers agree to promptly take all reasonable actions available under any operating agreements or otherwise to bring about the performance of any such material undertakings required to be performed thereunder. (r) SALE OF CERTAIN ASSETS/PREPAYMENT OF PROCEEDS. Except with respect to sales permitted under Section 13(a)(ii)(C) hereof, the Borrowers will immediately pay over to the Agent for the ratable benefit of the Banks as a prepayment of principal on the Revolving Notes, an amount equal to 100% of the Release Price received by Borrowers from the sale of the Oil and Gas Properties, which sale has been approved in advance by the Majority Banks. The term "Release Price" as used herein shall mean a price determined by the Majority Banks in their discretion based upon the loan collateral value which such Banks in their discretion (using such methodology, assumptions and discounts rates as such Banks customarily use in assigning collateral value to oil and gas properties, oil and gas gathering systems, gas processing and plant operations) assign to such Oil and Gas Properties at the time in question. Any such prepayment of principal on the Revolving Notes required by this Section 12(r), shall not be in lieu of, but shall be in addition to, any Monthly Commitment Reduction or any mandatory prepayment of principal required to be paid pursuant to Section 9(b) hereof. (s) TITLE MATTERS. Within thirty (30) days after the Effective Date with respect to the Oil and Gas Properties listed on Schedule "8" hereto, furnish Agent with title opinions and/or title information reasonably satisfactory to Agent showing defensible title of the applicable Borrower to such Oil and Gas Properties subject only to the Permitted Liens. As to any Oil and Gas Properties hereafter mortgaged to Agent, Borrowers will promptly (but in no event more than thirty (30) days following such mortgaging), furnish Agent with title opinions and/or title information reasonably satisfactory to Agent covering a sufficient value of such Oil and Gas Properties to maintain the required level of title coverage at 72% of the Engineered Value of the total Oil and Gas Properties. Said title information shall show defensible title of the applicable Borrower to such Oil and Gas Properties subject only to Permitted Liens. (t) CURATIVE MATTERS. Within sixty (60) days after the Effective Date with respect to matters listed on Schedule "9" and, thereafter, within sixty (60) days after receipt by Borrowers from Agent or its counsel of written notice of title defects the Agent reasonably requires to be cured, Borrowers shall either (i) provide such curative information, in form and substance satisfactory to Agent, or (ii) substitute Oil and Gas Properties of value and quality satisfactory to the Agent for all of Oil and Gas Properties for which such title curative was requested but upon which Borrowers elected not to provide such title curative information, and, within sixty (60) days of such substitution, provide title opinions or title information satisfactory to the Agent covering the Oil and Gas Properties so substituted. -44- (u) CHANGE OF PRINCIPAL PLACE OF BUSINESS. Borrowers shall give Agent at least thirty (30) days prior written notice of its intention to move its principal place of business from the address set forth in Section 17 hereof. (v) OPERATING ACCOUNTS. Borrowers shall establish and maintain with Agent one or more operating accounts (the "Operating Accounts"), the maintenance of each of which shall be subject to such rules and regulations as the Agent shall from time to time specify. Such Operating Accounts shall be the primary oil and gas operating account of the Borrowers and such accounts shall be maintained with the Agent until all amounts due hereunder and under the Notes have been paid in full. The Borrowers hereby grant a security interest to Banks in and to the Operating Accounts and all checks, drafts and other items ever received by any Bank for deposit therein. If any Event of Default shall occur and be continuing, Agent shall have the immediate right, without prior notice or demand, to take and apply against the Borrowers' obligations hereunder any and all funds legally and beneficially owned by the Borrowers then or thereafter on deposit in the Operating Accounts for the ratable benefit of the Banks. (w) YEAR 2000 COMPLIANCE. Borrowers will promptly notify the Agent in the event the Borrowers discover or determine that any computer application that is material to either of them or to any of their Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. (x) ADDITIONAL PROPERTY. Borrowers shall, within five (5) days after receiving a written request thereof from Agent, execute and deliver, or cause to be executed and delivered, such mortgages, deeds of trust, instruments, security agreements, assignments, financing statements, and other documents, as may be reasonably necessary in the opinion of Agent and Agent's counsel, to grant Agent valid first mortgage liens and first, prior and perfected security interests in and to additional oil and gas properties of such value as Agent shall deem necessary to provide additional security for full and prompt payment of all amounts owed hereunder and under the Notes. At Agent's option and on request therefor, Borrowers will furnish Agent title opinions covering such additional oil and gas properties prepared by counsel not employed by Borrowers (or such other evidence to Borrowers' ownership thereof and their revenue interest therein or attributable thereto as Agent may reasonably require), in form and substance satisfactory to Agent, subject only to title defects approved by Agent. (y) ALINE GATHERING SYSTEM. Substantially maintain the current levels of throughput from wells directly connected to the Aline Gathering System. -45- (z) LETTERS IN LIEU OF TRANSFER ORDERS. The Borrowers shall promptly upon the reasonable request of the Agent, at any time and from time to time and without limitation on the rights of Agent in accordance with Section 6(c) hereof, execute such letters in lieu of transfer orders, in addition to the letters signed by the Borrowers and delivered to the Agent in satisfaction of the conditions set forth in Sections 6(c) and 11(a)(x) hereof, as are necessary or appropriate to transfer and deliver to the Agent for the benefit of the Banks proceeds from or attributable to any Oil and Gas Property or other Collateral; provided, however, that such letters shall only be delivered to the addressees thereof in accordance with the provision of Section 6(c) hereof. (aa) DIVISION ORDERS. The Borrowers shall promptly upon request by the Agent at any time and from time to time following the occurrence of any Event of Default and without limitations on the rights of the Agent in accordance with Section 6(c) hereof, execute such division and/or transfer orders as are necessary or appropriate to transfer and deliver to the Agent for the ratable benefit of the Banks proceeds from the sale of hydrocarbon production from or attributable to any Oil and Gas Property; provided, however, that the Banks shall only send or deliver such division orders and/or transfer orders in accordance with Section 6(c) hereof. (bb) TAKE OR PAY AGREEMENT. The Borrowers shall, in connection with their delivery of the engineering reports required by Sections 7 and 12 hereof, deliver to Agent copies of contracts or other agreements concerning "take or pay" and "prepayment", and provide notice of all gas balance liabilities of the Borrowers. 13. Negative Covenants. A deviation from the provisions of this Section 13 shall not constitute a Default or an Event of Default under this Agreement if such deviation is consented to in writing by the required percentage of the Banks prior to the date of deviation. The Borrowers will at all times comply with the covenants contained in this Section 13 from the date hereof and for so long as the Revolving Commitment is in existence or any amount is owed to the Agent or the Banks under this Agreement or the other Loan Documents. (a) NEGATIVE PLEDGE. Neither Borrower shall without the prior written consent of the Banks: (i) create, incur, assume or permit to exist any Lien, security interest or other encumbrance on any of its assets or properties except Permitted Liens; or (ii) sell, lease, transfer or otherwise dispose of, in any fiscal year, any of its assets except for (A) sales, leases, transfers or other dispositions made in the ordinary course of Borrowers' oil and gas businesses, (B) sales made with the consent of Majority Banks which are made pursuant to, and -46- in full compliance with, Section 12(r) hereof; and (C) sales, leases or transfers or other dispositions made by Borrowers during any fiscal year, one or any series of transactions, the aggregate value of which does not exceed $5,000,000.00 in any such year if, and only if, such sale, lease, transfer or other disposition does not result in the occurrence of a Default or Event of Default; (b) CURRENT RATIO. Borrowers shall not allow their ratio of consolidated Current Assets to consolidated Current Liabilities to be less than 1.0 to 1.0 as of the end of any fiscal quarter. (c) RATIO OF DEBT TO MINIMUM TANGIBLE NET WORTH. The Borrowers will not allow their ratio of consolidated Debt to consolidated Tangible Net Worth to ever be greater than 3.25 to 1.0 as of the end of any fiscal quarter. (d) MINIMUM DEBT SERVICE COVERAGE RATIO. Beginning with the calendar quarter ending September 30, 1998, the Borrowers will not allow their consolidated Debt Service Coverage Ratio to ever be less than 1.20 to 1.0. (e) CONSOLIDATIONS AND MERGERS. Neither Borrower will consolidate or merge with or into any other Person, except that either Borrower may merge with another Person if such Borrower is the surviving entity in such merger and if, after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. (f) DEBTS, GUARANTIES AND OTHER OBLIGATIONS. Without the consent of Majority Banks, neither Borrower will incur, create, assume or in any manner become or be liable in respect of any indebtedness, nor will either Borrower guarantee or otherwise in any manner become or be liable in respect of any indebtedness, liabilities or other obligations of any other person or entity, whether by agreement to purchase the indebtedness of any other person or entity or agreement for the furnishing of funds to any other person or entity through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the indebtedness of any other person or entity, or otherwise, except that the foregoing restrictions shall not apply to: (i) the Notes and any renewal or increase thereof, or other indebtedness of the Borrowers heretofore disclosed to Banks in the Borrowers' Financial Statements or on Schedule "3" hereto; or (ii) taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action -47- promptly initiated and diligently conducted, if such reserve as shall be required by GAAP shall have been made therefor and levy and execution thereon have been stayed and continue to be stayed; or (iii) indebtedness (other than in connection with a loan or lending transaction) incurred in the ordinary course of business, including, but not limited to indebtedness for drilling, completing, leasing and reworking oil and gas wells or the treatment, distribution, transportation of sale of production therefrom and loans or lending transactions in which the outstanding principal balance does not exceed $500,000 at any time and which does not result in the imposition of a Lien other than a Permitted Lien; or; or (iv) indebtedness issued pursuant to an indenture providing for the sale of notes to the public not exceeding the face amount of $200,000,000, which indebtedness (A) is expressly subordinated (to the satisfaction of Majority Banks) to all obligations owed the Banks hereunder and under the Notes, (B) is issued by the Borrowers or an Affiliate of the Borrowers, within one hundred eighty (180) days of the Effective Date, and (C) the net proceeds of which are used in part to repay or reduce the outstanding balance on the Notes, said indebtedness to be approved in advance by Majority Banks, which approval will not be unreasonably withheld; or (v) other indebtedness owed to Affiliates of Borrowers which is expressly made subordinate to the indebtedness owed hereunder and under the Notes, which subordination is approved in advance by Majority Banks, which approval will not be unreasonably withheld; or (vi) any renewals or extensions of (but not increases in) any of the foregoing. (g) DIVIDENDS OR DISTRIBUTIONS. Neither Borrower will declare, pay or make, whether in cash or property (excluding stock dividends), or set aside or apply any money or assets to pay or make any dividend or distribution during any fiscal year except the foregoing restriction shall not apply to (i) cash dividends paid by Resources to its shareholders in amounts equal to each such shareholders' allocable share of federal or state income taxes attributable to Resources taxable net income and (ii) dividends made by Gas to Resources. Provided, however, that no dividend shall be made by either Borrower if an Event of Default has occurred and is continuing or would occur as a result of the making of such dividends. Resources shall provide the Agent at least annually with sufficient information from which Agent can verify all shareholders' allocable share of such income taxes. -48- (h) LOANS AND ADVANCES. Neither Borrower shall make or permit to remain outstanding any loans or advances made by either Borrower to or in any person or entity, except that the foregoing restriction shall not apply to: (i) loans or advances to any person, the material details of which have been set forth in the Financial Statements of the Borrowers heretofore furnished to Banks; or (ii) advances made in the ordinary course of Borrowers' oil and gas business; or (iii) loans or advances among Borrowers; or (iv) loans or advances not to exceed $2,000,000 in the aggregate to Affiliates of the Borrowers. (i) SALE OR DISCOUNT OF RECEIVABLES. Neither Borrower will discount or sell with recourse, or sell for less than the greater of the face or market value thereof, any of its notes receivable or accounts receivable except for such discounts or sales not exceeding $250,000 in any fiscal year. (j) NATURE OF BUSINESS. Neither Borrower will permit any material change to be made in the character of its business as carried on at the date hereof. (k) TRANSACTIONS WITH AFFILIATES. Neither Borrower will enter into any transaction with any Affiliate (other than Borrower), except transactions upon terms that are no less favorable to it than would be obtained in a transaction negotiated at arm's length with an unrelated third party. (l) HEDGING TRANSACTIONS. Neither Borrower will enter into any transaction providing (i) for the hedging, forward sale, swap or any deviation thereof of crude oil or natural gas or other commodities, or (ii) for a swap, collar, floor, cap, option, corridor, or other contract which is intended to reduce or eliminate the risk of fluctuation in interest rates, as such terms are referred to in the capital markets, except the foregoing prohibitions shall not apply to (x) transactions consented to in writing by the Banks which are on terms acceptable to the Banks, or (y) Pre-Approved Contracts. The term "Pre-Approved Contracts" as used herein shall mean any contract or agreement (i) to hedge, forward, sell or swap crude oil or natural gas or otherwise sell up to 50% of the Borrowers' monthly production forecast for all of Borrowers', proved and producing oil and gas properties for the period covered by the proposed hedging transaction, and (ii) with a maturity of twelve (12) months or less. -49- (m) INVESTMENTS. Neither Borrower shall make any investments in any person or entity, except such restriction shall not apply to: (i) investments and direct obligations of the United States of America or any agency thereof; (ii) investments in certificates of deposit issued by the Banks or certificates of deposit with maturities of less than one year, issued by other commercial banks in the United States having capital and surplus in excess of $500,000,000 and which have a rating of (A) 50 or above by Sheshunoff and (B) "B" or above by Keef-Bruett; or (iii) investments in insured money market funds, LIBOR investment accounts and other similar accounts at Agent or such investment with maturities of less than ninety (90) days at other commercial banks having capital and surplus in excess of $500,000,000 and which have a rating of (A) 50 or above by Sheshunoff and (B) "B" or above by Keef-Bruett; or (iv) investments in oil and gas properties; or (v) and acquisitions of controlling interests in entities engaged primarily in owning and/or operating oil and gas properties not exceeding in the aggregate the sum of $5,000,000.00 inclusive of any amount invested pursuant to Section 13(m)(vi) above; or (vi) investments by Borrowers and their Subsidiaries made in third-party entities by way of capital contributions, loans or advances which do not exceed $250,000 in the aggregate outstanding at any time. (n) AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS. Neither Borrower will permit any amendment to, or any alteration of, its Articles of Incorporation or Bylaws, which amendment or alteration could reasonably be expected to have a Material Adverse Effect. (o) LEASES. With the exception of the lease agreement, as it currently exists, with Harold Hamm regarding The Continental Center North Building located in Enid, Oklahoma, the Borrowers will not enter into or agree to enter into, any rental or lease agreement resulting or which would result in aggregate rental or lease payments of the Borrowers exceeding $250,000 in the aggregate in any fiscal year of the Borrowers under all rental or lease agreement under which either Borrower is a lessee of the property or assets covered thereby; PROVIDED, HOWEVER, that the -50- foregoing restriction shall not apply to oil, gas and mineral leases or permits or similar agreements entered into in the ordinary course of business or orders of any governmental authority adjudicating the rights or pooling the interests of the owners of oil and gas properties or lease agreements in effect as of the date hereof. 14. EVENTS OF DEFAULT. Any one or more of the following events shall be considered an "Event of Default" as that term is used herein: (a) The Borrowers shall fail to pay when due or declared due the principal of, and the interest on, the Notes, or any fee or any other indebtedness of the Borrowers incurred pursuant to this Agreement or any other Loan Document; or (b) Any representation or warranty made by Borrowers under this Agreement, or in any certificate or statement furnished or made to the Banks pursuant hereto, or in connection herewith, or in connection with any document furnished hereunder, shall prove to be untrue in any material respect as of the date on which such representation or warranty is made (or deemed made), or any representation, statement (including financial statements), certificate, report or other data furnished or to be furnished or made by Borrowers under any Loan Document, including this Agreement, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified; or (c) Default shall be made in the due observance or performance of any of the covenants or agreements of the Borrowers contained in the Loan Documents, including this Agreement (excluding covenants contained in Section 13 of the Agreement for which there is no cure period), and such default shall continue for more than thirty (30) days after notice thereof from Agent to Borrowers; or (d) Default shall be made in the due observance or performance of the covenants of Borrowers contained in Section 13 of this Agreement; or (e) Default shall be made in respect of any obligation for borrowed money in excess of $250,000, other than the Notes, for which Borrowers are liable (directly, by assumption, as guarantor or otherwise), or any obligations secured by any mortgage, pledge or other security interest, lien, charge or encumbrance with respect thereto, on any asset or property of Borrowers in respect of any agreement relating to any such obligations unless Borrowers are not liable for same (i.e., unless remedies or recourse for failure to pay such obligations is limited to foreclosure of the collateral security therefor), and if such default shall continue beyond the applicable grace period, if any; or (f) Borrowers shall commence a voluntary case or other proceedings seeking liquidation, reorganization or other relief with respect to itself or its debts -51- under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking an appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action authorizing the foregoing; or (g) An involuntary case or other proceeding, shall be commenced against Borrowers seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against Borrowers under the federal bankruptcy laws as now or hereinafter in effect; or (h) A final judgment or order for the payment of money in excess of $1,500,000 (or judgments or orders aggregating in excess of $1,500,000) shall be rendered against Borrowers and such judgments or orders shall continue unsatisfied and unstayed for a period of thirty (30) days; or (i) In the event the Total Outstandings shall at any time exceed the Borrowing Base established for the Revolving Notes, and the Borrowers shall fail to comply with the provisions of Section 9(b) hereof; or (j) A Change of Management shall occur; or (k) Any Security Instrument shall for any reason not, or cease to, create valid and perfected first-priority Liens against the Collateral purportedly covered thereby and such occurrence would have a Material Adverse Effect; or (l) The good faith determination by the Agent that a Material Adverse Effect has occurred or will occur or that the value of the Collateral has, or will be, materially decreased. Upon occurrence of any Event of Default specified in Subsections 14(f) and (g) hereof, the entire principal amount due under the Notes and all interest then accrued thereon, and any other liabilities of the Borrowers hereunder, shall become immediately due and payable all without notice and without presentment, demand, protest, notice of protest or dishonor or any other notice of default of any kind, all of which are hereby expressly waived by the Borrowers. In any other Event of Default, the Agent, upon request of Majority Banks, shall by notice to the -52- Borrowers declare the principal of, and all interest then accrued on, the Notes and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which the Borrowers hereby expressly waive, anything contained herein or in the Note to the contrary notwithstanding. Nothing contained in this Section 14 shall be construed to limit or amend in any way the Events of Default enumerated in the Note, or any other document executed in connection with the transaction contemplated herein. Upon the occurrence and during the continuance of any Event of Default, the Banks are hereby authorized at any time and from time to time, without notice to the Borrowers (any such notice being expressly waived by the Borrowers), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by any of the Banks to or for the credit or the account of the Borrowers against any and all of the indebtedness of the Borrowers under the Notes and the Loan Documents, including this Agreement, irrespective of whether or not the Banks shall have made any demand under the Loan Documents, including this Agreement or the Notes and although such indebtedness may be unmatured. Any amount set-off by any of the Banks shall be applied against the indebtedness owed the Banks by the Borrowers pursuant to this Agreement and the Notes. The Banks agree promptly to notify the Borrowers after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Banks may have. 15. THE AGENT AND THE BANKS. (a) APPOINTMENT AND AUTHORIZATION. Each Bank hereby appoints Agent as its nominee and agent, in its name and on its behalf: (i) to act as nominee for and on behalf of such Bank in and under all Loan Documents; (ii) to arrange the means whereby the funds of Banks are to be made available to the Borrowers under the Loan Documents; (iii) to take such action as may be requested by any Bank under the Loan Documents (when such Bank is entitled to make such request under the Loan Documents); (iv) to receive all documents and items to be furnished to Banks under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, and similar party in respect of, and to receive, as the case may be, any collateral for the benefit of Banks; (vi) to promptly distribute to each Bank all material information, requests, documents and items received from the Borrowers under the Loan Documents; (vii) to promptly distribute to each Bank such Bank's Pro Rata Part of each payment or prepayment (whether voluntary, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents and (viii) to -53- deliver to the appropriate Persons requests, demands, approvals and consents received from Banks. Each Bank hereby authorizes Agent to take all actions and to exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms hereof or thereof, together with all other powers reasonably incidental thereto. With respect to its commitments hereunder and the Notes issued to it, Agent and any successor Agent shall have the same rights under the Loan Documents as any other Bank and may exercise the same as though it were not the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include Agent and any successor Agent in its capacity as a Bank. Agent and any successor Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with the Borrowers, and any person which may do business with the Borrowers, all as if Agent and any successor Agent was not Agent hereunder and without any duty to account therefor to the Banks; provided that, if any payments in respect of any property (or the proceeds thereof) now or hereafter in the possession or control of Agent which may be or become security for the obligations of the Borrowers arising under the Loan Documents by reason of the general description of indebtedness secured or of property contained in any other agreements, documents or instruments related to any such other business shall be applied to reduction of the obligations of the Borrowers arising under the Loan Documents, then each Bank shall be entitled to share in such application according to its pro rata part thereof. Each Bank, upon request of any other Bank, shall disclose to all other Banks all indebtedness and liabilities, direct and contingent, of the Borrowers to such Bank as of the time of such request. (b) NOTE HOLDERS. From time to time as other Banks become a party to this Agreement, Agent shall obtain execution by the Borrowers of additional Notes in amounts representing the Commitment of each such new Bank, up to an aggregate face amount of all Revolving Notes not exceeding $175,000,000. The obligation of such Bank shall be governed by the provisions of this Agreement, including but not limited to, the obligations specified in Section 2 hereof. From time to time, Agent may require that the Banks exchange their Notes for newly issued Notes to better reflect the Commitments of the Banks. Agent may treat the payee of any Note as the holder thereof until written notice of transfer has been filed with it, signed by such payee and in form satisfactory to Agent. (c) CONSULTATION WITH COUNSEL. Banks agree that Agent may consult with legal counsel selected by Agent and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. (d) DOCUMENTS. Agent shall not be under a duty to examine or pass upon the validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto or -54- in connection therewith, and Agent shall be entitled to assume that the same are valid, effective, enforceable and genuine and what they purport to be. (e) RESIGNATION OR REMOVAL OF AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving written notice thereof to Banks and the Borrowers, and Agent may be removed at any time with or without cause by all Banks. If no successor Agent has been so appointed by all Banks (and approved by the Borrowers) and has accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or removal of the retiring Agent, then the retiring Agent may, on behalf of Banks, appoint a successor Agent. Any successor Agent must be approved by Borrowers, which approval will not be unreasonably withheld. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent, shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 15 shall continue in effect for its benefit in respect to any actions taken or omitted to be taken by it while it was acting as Agent. To be eligible to be an Agent hereunder the party serving, or to serve, in such capacity must own a Pro Rata Part of the Commitments equal to the level of Commitment required to be held by any Bank pursuant to Section 28 hereof. (f) RESPONSIBILITY OF AGENT. It is expressly understood and agreed that the obligations of Agent under the Loan Documents are only those expressly set forth in the Loan Documents as to each and that Agent, shall be entitled to assume that no Default or Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact or has received notice from a Bank or the Borrowers that such Bank or the Borrowers considers that a Default or an Event of Default has occurred and is continuing and specifying the nature thereof. Neither Agent nor any of its directors, officers, attorneys or employees shall be liable for any action taken or omitted to be taken by them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Agent shall not incur liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable. Agent shall not be responsible to Banks for any of the Borrowers' recitals, statements, representations or warranties contained in any of the Loan Documents, or in any certificate or other document referred to or provided for in, or received by any Bank under, the Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of or any of the Loan Documents or for -55- any failure by the Borrowers to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The relationship between Agent and each Bank is only that of agent and principal and has no fiduciary aspects. Nothing in the Loan Documents or elsewhere shall be construed to impose on Agent any duties or responsibilities other than those for which express provision is therein made. In performing its duties and functions hereunder, Agent does not assume and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or responsibility toward or any relationship of agency or trust with or for the Borrower or any of its beneficiaries or other creditors. As to any matters not expressly provided for by the Loan Documents, Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of all Banks and such instructions shall be binding upon all Banks and all holders of the Notes; provided, however, that Agent shall not be required to take any action which is contrary to the Loan Documents or applicable law. Agent shall have the right to exercise or refrain from exercising, without notice or liability to the Banks, any and all rights afforded to Agent by the Loan Documents or which Agent may have as a matter of law; provided, however, Agent shall not (i) except as provided in Section 7(b) hereof, without the consent of Majority Banks designate the amount of the Borrowing Base or the Monthly Commitment Reduction or (ii) without the consent of all Majority Banks, take any other action with regard to amending the Loan Documents, waiving any default under the Loan Documents or taking any other action with respect to the Loan Documents which requires consent of all Banks. Provided further, however, that no amendment, waiver, or other action shall be effected pursuant to the preceding clause (ii) without the consent of all Banks which: (i) would increase the Borrowing Base or decrease the Monthly Commitment Reduction, (ii) would reduce any fees hereunder, or the principal of, or the interest on, any Bank's Note or Notes, (iii) would postpone any date fixed for any payment of any fees hereunder, or any principal or interest of any Bank's Note or Notes, (iv) would materially increase any Bank's obligations hereunder or would materially alter Agent's obligations to any Bank hereunder, (v) would release Borrowers from their obligation to pay any Bank's Note or Notes, (vi) release any of the Collateral, (vii) would change the definition of all Banks, (viii) would amend, modify or change any provision of this Agreement requiring the consent of all the Banks, (ix) would waive any of the conditions precedent to the Effective Date or the making of any Loan or issuance of any Letter of Credit or (x) would extend the Revolving Maturity Date or (xi) would -56- amend this sentence or the previous sentence. Agent shall not have liability to Banks for failure or delay in exercising any right or power possessed by Agent pursuant to the Loan Documents or otherwise unless such failure or delay is caused by the gross negligence of the Agent, in which case only the Agent responsible for such gross negligence shall have liability therefor to the Banks. (g) INDEPENDENT INVESTIGATION. Each Bank severally represents and warrants to Agent that it has made its own independent investigation and assessment of the financial condition and affairs of the Borrowers in connection with the making and continuation of its participation hereunder and has not relied exclusively on any information provided to such Bank by Agent in connection herewith, and each Bank represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the credit worthiness of the Borrowers while the Notes are outstanding or its commitments hereunder are in force. Agent shall not be required to keep itself informed as to the performance or observance by the Borrowers of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Borrowers. Other than as provided in this Agreement, Agent shall not have any duty, responsibility or liability to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrowers which may come into the possession of Agent. (h) INDEMNIFICATION. Banks agree to indemnify Agent, ratably according to their respective Commitments on a Pro Rata basis, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any proper and reasonable kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by Agent under the Loan Documents, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. Each Bank shall be entitled to be reimbursed by the Agent for any amount such Bank paid to Agent under this Section 15(h) to the extent the Agent has been reimbursed for such payments by the Borrowers or any other Person. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT THE AGENT FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY SUCH LIABILITY. (i) BENEFIT OF SECTION 15. The agreements contained in this Section 15 are solely for the benefit of Agent and the Banks and are not for the benefit of, or to be relied upon by, the Borrowers, any affiliate of the Borrowers or any other person. -57- (j) PRO RATA TREATMENT. Subject to the provisions of this Agreement, each payment (including each prepayment) by the Borrowers and collection by Banks (including offsets) on account of the principal of and interest on the Notes and fees provided for in this Agreement, payable by the Borrowers shall be made Pro Rata; provided, however, in the event that any Defaulting Bank shall have failed to make an Advance as contemplated under Section 3 hereof and Agent or another Bank or Banks shall have made such Advance, payment received by Agent for the account of such Defaulting Bank or Banks shall not be distributed to such Defaulting Bank or Banks until such Advance or Advances shall have been repaid in full to the Bank or Banks who funded such Advance or Advances. (k) ASSUMPTION AS TO PAYMENTS. Except as specifically provided herein, unless Agent shall have received notice from the Borrowers prior to the date on which any payment is due to Banks hereunder that the Borrowers will not make such payment in full, Agent may, but shall not be required to, assume that the Borrowers have made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Borrowers shall not have so made such payment in full to Agent, each Bank shall repay to Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to Agent, at the interest rate applicable to such portion of the Revolving Loan. (l) OTHER FINANCINGS. Without limiting the rights to which any Bank otherwise is or may become entitled, such Bank shall have no interest, by virtue of this Agreement or the Loan Documents, in (a) any present or future loans from, letters of credit issued by, or leasing or other financial transactions by, any other Bank to, on behalf of, or with the Borrowers (collectively referred to herein as "Other Financings") other than the obligations hereunder; (b) any present or future guarantees by or for the account of the Borrowers which are not contemplated by the Loan Documents; (c) any present or future property taken as security for any such Other Financings; or (d) any property now or hereafter in the possession or control of any other Bank which may be or become security for the obligations of the Borrowers arising under any loan document by reason of the general description of indebtedness secured or property contained in any other agreements, documents or instruments relating to any such Other Financings. (m) INTERESTS OF BANKS. Nothing in this Agreement shall be construed to create a partnership or joint venture between Banks for any purpose. Agent, Banks and the Borrowers recognize that the respective obligations of Banks under the Revolving Commitment shall be several and not joint and that neither Agent nor -58- any of Banks shall be responsible or liable to perform any of the obligations of the other under this Agreement. Each Bank is deemed to be the owner of an undivided interest in and to all rights, titles, benefits and interests belonging and accruing to Agent under the Security Instruments, including, without limitation, liens and security interests in any collateral, fees and payments of principal and interest by the Borrowers under the Revolving Commitment on a Pro Rata basis. Each Bank shall perform all duties and obligations of Banks under this Agreement in the same proportion as its ownership interest in the Loans outstanding at the date of determination thereof. (n) INVESTMENTS. Whenever Agent in good faith determines that it is uncertain about how to distribute to Banks any funds which it has received, or whenever Agent in good faith determines that there is any dispute among the Banks about how such funds should be distributed, Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, or if Agent is otherwise required to invest funds pending distribution to the Banks, Agent may invest such funds pending distribution (at the risk of the Borrowers). All interest on any such investment shall be distributed upon the distribution of such investment and in the same proportions and to the same Persons as such investment. All monies received by Agent for distribution to the Banks (other than to the Person who is Agent in its separate capacity as a Bank) shall be held by the Agent pending such distribution solely as Agent for such Banks, and Agent shall have no equitable title to any portion thereof. 16. EXERCISE OF RIGHTS. No failure to exercise, and no delay in exercising, on the part of the Agent or the Banks, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of the Agent and the Banks hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of the Loan Documents, including this Agreement, or the Note nor consent to departure therefrom, shall be effective unless in writing, and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other circumstances without such notice or demand. 17. NOTICES. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be given in writing (which may be by facsimile transmission) and must be personally delivered or mailed by prepaid certified or registered mail to the party to whom such notice or communication is directed at the address of such party as follows: (a) BORROWERS: c/o CONTINENTAL RESOURCES, INC., P.O. Box 1032, Enid, Oklahoma 73702, Facsimile No.: 580/548-5281, Attention: Harold Hamm and Roger Clement; (b) AGENT: BANK ONE, OKLAHOMA, N.A., P.O. Box 25848, 100 North Broadway, Oklahoma City, Oklahoma 73125, Facsimile No.405/231-6661, Attention: John -59- K. Slay, Jr., Senior Vice President. Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered or delivered by facsimile as aforesaid or, if mailed, on the third day after it is mailed as aforesaid. Any party may change its address for purposes of this Agreement by giving notice of such change to the other party pursuant to this Section 17. Any notice required to be given to the Banks shall be given to the Agent and distributed to all Banks by the Agent. 18. EXPENSES. The Borrowers shall pay (i) all reasonable and necessary out-of-pocket expenses of the Banks, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any default or Event of Default or alleged default or Event of Default hereunder, (ii) all reasonable and necessary out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent in connection with the preparation of any participation agreement for a participant or participants requested by the Borrowers or any amendment thereof and (iii) if a default or an Event of Default occurs, all reasonable and necessary out-of-pocket expenses incurred by the Banks, including reasonable fees and disbursements of counsel, in connection with such default and Event of Default and collection and other enforcement proceedings resulting therefrom. The Borrowers shall indemnify the Banks against any transfer taxes, document taxes, assessments or charges made by any governmental authority by reason of the execution, delivery and filing of the Loan Documents. The obligations of this Section 18 shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of the Borrowers to the Banks hereunder and under the Notes. 19. INDEMNITY. The Borrowers agree to indemnify and hold harmless the Banks and their respective officers, employees, agents, attorneys and representatives (singularly, an "Indemnified Party", and collectively, the "Indemnified Parties") from and against any loss, cost, liability, damage or expense (including the reasonable fees and out-of-pocket expenses of counsel to the Banks, including all local counsel hired by such counsel) ("Claim") incurred by the Banks in investigating or preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law, federal or state environmental law, or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon any acts, practices or omissions or alleged acts, practices or omissions of the Borrowers or their agents or arises in connection with the duties, obligations or performance of the Indemnified Parties in negotiating, preparing, executing, accepting, keeping, completing, countersigning, issuing, selling, delivering, releasing, assigning, handling, certifying, processing or receiving or taking any other action with respect to the Loan Documents and all documents, items and materials contemplated thereby even if any of the foregoing arises out of an Indemnified Party's ordinary negligence. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrowers to the Banks hereunder or at common law or otherwise, and shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of the Borrowers to the Banks hereunder and under the Notes, provided that the Borrowers shall have no obligation under this Section to the Bank with respect to -60- any of the foregoing arising out of the gross negligence or willful misconduct of the Bank. If any Claim is asserted against any Indemnified Party, the Indemnified Party shall endeavor to notify the Borrowers of such Claim (but failure to do so shall not affect the indemnification herein made except to the extent of the actual harm caused by such failure). The Indemnified Party shall have the right to employ, at the Borrowers' expense, counsel of the Indemnified Parties' choosing and to control the defense of the Claim. The Borrowers may at their own expense also participate in the defense of any Claim. Each Indemnified Party may employ separate counsel in connection with any Claim to the extent such Indemnified Party believes it reasonably prudent to protect such Indemnified Party. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF ANY CLAIM. 20. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN OKLAHOMA, OKLAHOMA COUNTY, OKLAHOMA, AND THE SUBSTANTIVE LAWS OF OKLAHOMA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN. 21. INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provisions shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of the Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. 22. MAXIMUM INTEREST RATE. It is the intention of the parties hereto to comply strictly with any applicable usury laws as in effect from time to time and, in this regard, there shall never be taken, received, contracted for, collected, charged or received on any sums advanced hereunder interest in excess of that which would accrue at the Maximum Rate. If, under any circumstances, the aggregate amounts paid on the Notes or under this Agreement or any other Loan Document include amounts which by law are deemed interest and which would exceed the amount permitted if the Maximum Rate were in effect, the Borrowers stipulate that such payment and collection will have been and will be deemed to have been, to the fullest extent permitted by applicable laws of the State of Oklahoma or the United States of America, the result of mathematical error on the part of the Borrowers and the Agent; and the Agent shall promptly credit the amount of such excess to the principal amount due on the Notes, or if the principal amount due on the Notes shall have been paid in full, refund the amount of such excess to the Borrowers (to the extent only of such interest payments in excess of that which would have accrued and been payable on the basis of the Maximum Rate) upon discovery of such error by -61- the Agent or notice thereof from the Borrowers. If the maturity of the Notes is accelerated by reason of an election of the Agent resulting from any Event of Default or otherwise in accordance with this Agreement, or in the event any prepayment, then such consideration that constitutes interest under applicable laws may never include amounts which are more than the Maximum Rate, and the amount of such excess, if any, provided for in this Agreement or otherwise shall be canceled automatically by the Agent as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by the Agent on the principal amount due on the Notes, or if the principal amount due on the Notes shall have been paid in full, refunded by the Agent to the Borrowers. All sums paid, or agreed to be paid, to the Agent for the use, forbearance and detention of the proceeds of any Advance hereunder shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term hereof until paid in full so that the actual rate of interest is uniform but does not exceed the Maximum Rate throughout the full term hereof. 23. AMENDMENTS. This Agreement may be amended only by an instrument in writing executed by an authorized officer of the party against whom such amendment is sought to be enforced. 24. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of identical separate counterparts, each of which for all purposes is to be deemed an original, but all of which shall constitute, collectively, one agreement. No party to this Agreement shall be bound hereby until a counterpart of this Agreement has been executed by all parties hereto. 25. CONFLICT. In the event any term or provision hereof is inconsistent with or conflicts with any provision of the Loan Documents, the terms or provisions contained in this Agreement shall be controlling. 26. SURVIVAL. All covenants, agreements, undertakings, representations and warranties made in the Loan Documents, including this Agreement, the Notes or other documents and instruments referred to herein shall survive all closings hereunder and shall not be affected by any investigation made by any party. 27. PARTIES BOUND. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, legal representatives and estates, provided, however, that the Borrowers may not, without the prior written consent of all of the Banks, assign any rights, powers, duties or obligations hereunder. 28. ASSIGNMENTS AND PARTICIPATIONS. (a) Each Bank shall have the right to sell, assign or transfer all or any -62- part of its Note or Notes, its Commitments and its rights and obligations hereunder to one or more Affiliates, Banks, financial institutions, pension plans, insurance companies, investment funds, or similar Persons who are Eligible Assignees or to a Federal Reserve Bank; PROVIDED, that in connection with each sale, assignment or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank), the applicable Bank will consider the opinion and recommendation of Borrowers, which opinion and recommendation shall in no way be binding upon such Bank, and each such sale, assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank), shall require the consent of Agent, which consent will not be unreasonably withheld, and the assignee, transferee or recipient shall have, to the extent of such sale, assignment, or transfer, the same rights, benefits and obligations as it would if it were such Bank and a holder of such Note, Commitments and rights and obligations, including, without limitation, the right to vote on decisions requiring consent or approval of all Banks or Majority Banks and the obligation to fund its Commitments; provided, further, that (1) each such sale, assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank) shall be in an aggregate principal amount not less than $5,000,000, (2) each remaining Bank shall at all times maintain Commitments then outstanding in an aggregate principal amount at least equal to $5,000,000; (3) each such sale, assignment or transfer shall be of a Pro Rata portion of such Bank's Revolving Commitment and its Bridge Loan Commitment, (4) no Bank may offer to sell its Note or Notes, Commitments, rights and obligations or interests therein in violation of any securities laws; and (5) no such assignments (other than to a Federal Reserve Bank) shall become effective until the assigning Bank and its assignee delivers to Agent and Borrowers an Assignment and Acceptance and the Note or Notes subject to such assignment and other documents evidencing any such assignment. An assignment fee in the amount of $5,000 for each such assignment (other than to an Affiliate, a Bank or the Federal Reserve Bank) will be payable to Agent by assignor or assignee. Within five (5) Business Days after its receipt of copies of the Assignment and Acceptance and the other documents relating thereto and the Note or Notes, the Borrowers shall execute and deliver to Agent (for delivery to the relevant assignee) a new Note or Notes evidencing such assignee's assigned Commitments and if the assignor Bank has retained a portion of its Commitments, a replacement Note in the principal amount of the Commitments retained by the assignor (except as provided in the last sentence of this paragraph (a) such Note or Notes to be in exchange for, but not in payment of, the Note or Notes held by such Bank). On and after the effective date of an assignment hereunder, the assignee shall for all purposes be a Bank, party to this Agreement and any other Loan Document executed by the Banks and shall have all the rights and obligations of a Bank under the Loan Documents, to the same extent as if it were an original party thereto, and no further consent or action by Borrowers, Banks or the Agent shall be required to release the transferor Bank with respect to its Commitments assigned to such assignee and the transferor Bank shall henceforth be so released. -63- (b) Each Bank shall have the right to grant participations in all or any part of such Bank's Notes and Commitments hereunder to one or more pension plans, investment funds, insurance companies, financial institutions or other Persons, provided, that: (i) each Bank granting a participation shall retain the right to vote hereunder, and no participant shall be entitled to vote hereunder on decisions requiring consent or approval of Bank or Majority Banks (except as set forth in (iii) below); (ii) in the event any Bank grants a participation hereunder, such Bank's obligations under the Loan Documents shall remain unchanged, such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, such Bank shall remain the holder of any such Note or Notes for all purposes under the Loan Documents, and Agent, each Bank and Borrowers shall be entitled to deal with the Bank granting a participation in the same manner as if no participation had been granted; and (iii) no participant shall ever have any right by reason of its participation to exercise any of the rights of Banks hereunder, except that any Bank may agree with any participant that such Bank will not, without the consent of such participant (which consent may not be unreasonably withheld) consent to any amendment or waiver requiring approval of all Banks. (c) It is understood and agreed that any Bank may provide to assignees and participants and prospective assignees and participants financial information and reports and data concerning Borrowers' properties and operations which was provided to such Bank pursuant to this Agreement. (d) Upon the reasonable request of either Agent or Borrowers, each Bank will identify those to whom it has assigned or participated any part of its Notes and Commitment, and provide the amounts so assigned or participated. 29. CHOICE OF FORUM: CONSENT TO SERVICE OF PROCESS AND JURISDICTION. THE OBLIGATIONS OF BORROWERS UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN OKLAHOMA COUNTY, OKLAHOMA. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWERS WITH RESPECT TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF, MAY BE BROUGHT IN THE COURTS OF THE STATE OF OKLAHOMA, COUNTY OF OKLAHOMA, OR IN THE UNITED STATES COURTS LOCATED IN OKLAHOMA COUNTY, OKLAHOMA AND THE BORROWERS HEREBY SUBMIT TO THE NON- -64- EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE BORROWERS HEREBY IRREVOCABLY CONSENT TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE MAILING THEREOF BY BANK BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWERS, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17. THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF OKLAHOMA, COUNTY OF OKLAHOMA, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 30. WAIVER OF JURY TRIAL. THE BORROWERS, THE AGENT AND THE BANKS (BY THEIR ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE BORROWERS, THE AGENT AND THE BANKS, ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN THE AGENT, THE BANKS AND THE BORROWERS. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE AGENT AND THE BANKS TO PROVIDE THE FINANCING DESCRIBED HEREIN. 31. OTHER AGREEMENTS. THIS WRITTEN CREDIT AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 32. FINANCIAL TERMS. All accounting terms used in this Agreement which are not specifically defined herein shall be defined in accordance with GAAP. -65- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWERS: CONTINENTAL RESOURCES, INC. an Oklahoma corporation Attest: By: /s/ HAROLD HAMM /s/ RANDY MOEDER ---------------------------------- Harold Hamm, President CONTINENTAL GAS, INC. an Oklahoma corporation Attest: By: /s/ RANDY MOEDER /s/ ROGER CLEMENT ---------------------------------- Randy Moeder, President BANKS: BANK ONE, OKLAHOMA, N.A., a national banking association By: /s/ JOHN K. SLAY ---------------------------------- John K. Slay, Jr., Senior Vice President AGENT: BANK ONE, OKLAHOMA, N.A., a national banking association By: /s/ JOHN K. SLAY ---------------------------------- John K. Slay, Jr., Senior Vice President -66- EX-4.2 5 EXHIBIT 4.2 FORM OF REVOLVING NOTE $________________ Oklahoma City, Oklahoma __________, 19__ FOR VALUE RECEIVED, the undersigned CONTINENTAL RESOURCES, INC., an Oklahoma corporation and CONTINENTAL GAS, INC., an Oklahoma corporation (hereinafter referred to as the "Borrowers") hereby unconditionally, jointly and severally, promise to pay to the order of ________________________ (the "Bank") at the offices of BANK ONE, OKLAHOMA, N.A. (the "Agent") in Oklahoma City, Oklahoma, the principal sum of ______________________ ($________________) or so much thereof as shall be advanced under the provisions of the Credit Agreement (as defined herein), in lawful money of the United States of America together with interest from the date hereof until paid at the rates specified in the Credit Agreement. All payments of principal and interest due hereunder are payable at the offices of Agent at 100 North Broadway, Oklahoma City, Oklahoma 73125, or at such other address as Bank shall designate in writing to Borrowers. The principal and all accrued interest on this Note shall be due and payable in accordance with the terms and provisions of the Credit Agreement. This Note is executed pursuant to that certain Restated Credit Agreement dated May 14, 1998 between Borrowers, the Agent and Banks (the "Credit Agreement"), and is one of the Notes referred to therein. Reference is made to the Credit Agreement and the Loan Documents (as that term is defined in the Credit Agreement) for a statement of prepayment, rights and obligations of Borrowers, for a statement of the terms and conditions under which the due date of this Note may be accelerated and for statements regarding other matters affecting this Note (including without limitation the obligations of the holder hereof to advance funds hereunder, principal and interest payment due dates, voluntary and mandatory prepayments, exercise of rights and remedies, payment of attorneys' fees, court costs and other costs of collection and certain waivers by Borrowers and others now or hereafter obligated for payment of any sums due hereunder). Upon the occurrence of an Event of Default, as that term is defined in the Credit Agreement and Loan Documents, the holder hereof (i) may declare forthwith to be entirely and immediately due and payable the principal balance hereof and the interest accrued hereon, and (ii) shall have all rights and remedies of the Bank under the Credit Agreement and Loan Documents. This Note may be prepaid in accordance with the terms and provisions of the Credit Agreement. Regardless of any provision contained in this Note, the holder hereof shall never be entitled to receive, collect or apply, as interest on this Note, any amount in excess of the Maximum Rate (as such term is defined in the Credit Agreement), and, if the holder hereof ever receives, collects, or applies as interest, any such amount which would be excessive interest, it shall be deemed a partial prepayment of principal and treated hereunder as such; and, if the indebtedness evidenced hereby is paid in full, any remaining excess shall forthwith be paid to Borrowers. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, Borrowers and the holder hereof shall, to the maximum extent permitted under applicable law (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of the obligations evidenced by this Note and/or referred to in the Credit Agreement so that the interest rate is uniform throughout the entire term of this Note; provided that, if this Note is paid and performed in full prior to the end of the full contemplated term thereof; and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, the holder hereof shall refund to Borrowers the amount of such excess or credit the amount of such excess against the indebtedness evidenced hereby, and, in such event, the holder hereof shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Rate. If any payment of principal or interest on this Note shall become due on a day other than a Business Day (as such term is defined in the Credit Agreement), such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity or in bankruptcy, receivership or other court proceedings, Borrowers agree to pay all costs of collection, including, but not limited to, court costs and reasonable attorneys' fees. Borrowers and each surety, endorser, guarantor and other party ever liable for payment of any sums of money payable on this Note, jointly and severally waive presentment and demand for payment, notice of intention to accelerate the maturity, protest, notice of protest and nonpayment, as to this Note and as to each and all installments hereof, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, or by any release or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases or changes. This Note shall be governed by and construed in accordance with the applicable laws of the United States of America and the laws of the State of Oklahoma. THIS WRITTEN NOTE, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Note is one of a series of notes given in renewal, extension and increase of (but not in extinguishment of) that certain Promissory Note dated as of December 31, 1997, in the face amount of $75,000,000 executed by Borrowers and payable to the order of Bank One, Oklahoma, N.A. -2- EXECUTED as of the date and year first above written. BORROWERS: CONTINENTAL RESOURCES, INC. an Oklahoma corporation By: ------------------------------------ Harold Hamm, President CONTINENTAL GAS, INC. an Oklahoma corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- -3- EX-4.3 6 EXHIBIT 4.3 101 Section 10.15. NO WAIVER OF SUBORDINATION PROVISIONS. Without in any way limiting the generality of Section 10.9 of this Indenture, the holders of Senior Debt or Guarantor Senior Debt, as the case may be, may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders, without incurring responsibility to the Holders and without impairing or releasing the subordination provided in this Article Ten or the obligations hereunder of the Holders to the holders of Senior Debt or Guarantor Senior Debt, as the case may be, do any one or more of the following: (a) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt or Guarantor Senior Debt, as the case may be, or any instrument evidencing the same or any agreement under which Senior Debt or Guarantor Senior Debt, as the case may be, is outstanding or secured; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt or Guarantor Senior Debt, as the case may be; (c) release any Person liable in any manner for the collection of Senior Debt or Guarantor Senior Debt, as the case may be; and (d) exercise or refrain from exercising any rights against the Company and each Subsidiary Guarantor and any other Person. 102 ARTICLE 11 THE SUBSIDIARY GUARANTEES Section 11.1. THE SUBSIDIARY GUARANTEES. 103 Each of the Subsidiary Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Securities or the obligations of the Company hereunder or thereunder, that: (a) the principal of and premium and interest, on the Securities shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on premium and interest, on the Securities, if any, if lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors shall be jointly and severally obligated to pay the same immediately. The Subsidiary Guarantors hereby agree that their obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each of the Subsidiary Guarantors hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, ay right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenant that this Subsidiary Guarantee shall not be discharged except by complete performance of the obligations contained in the Securities and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company or the Subsidiary Guarantors, or any Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each of the Subsidiary Guarantors agrees that it shall not be entitled to any right of subrogation in relation to the Holders of Securities in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each of the Subsidiary Guarantors further agrees that, as between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby and (y) in the event of any declaration of 104 acceleration of such obligations as provided in Article 6, such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of this Subsidiary Guarantee. The Subsidiary Guarantors shall have the right to seek contribution from any Subsidiary Guarantor not paying so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantees. Section 11.2. SUBORDINATION OF SUBSIDIARY GUARANTEES. The obligations of each of the Subsidiary Guarantors under its Subsidiary Guarantee pursuant to this Article 11 shall be junior and subordinated to the Guarantor Senior Debt of the Subsidiary Guarantor pursuant to Article 10 hereof. For the purposes of the foregoing sentence, the Trustee and the Holders shall have the right to receive and/or retain payments or distributions by or on behalf of any of the Subsidiary Guarantors only at such times as they may receive and/or retain payments in respect of the Securities pursuant to this Indenture, including Article 10 hereof. Section 11.3. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. No Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the Surviving Person), another Person other than the Company or another Subsidiary Guarantor, whether or not affiliated with such Subsidiary Guarantor, unless: (a) subject to the provisions of Section 11.4 hereof, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in form reasonably satisfactory to the Trustee in respect of the Securities, this Indenture and such Subsidiary Guarantor's Guarantee; (b) immediately after giving effect to such transaction, no Default or Event of Default exists; and (c) such transaction does not violate any of Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16, 4.17, 4.18 and 4.19. Notwithstanding the foregoing, none of the Subsidiary Guarantors shall be permitted to consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity pursuant to the preceding sentence if such consolidation or merger would not be permitted by Section 5.1 hereof. In case of any such consolidation or merger and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory 105 in form to the Trustee, of the Subsidiary Guarantee endorsed upon the Securities and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by such Subsidiary Guarantor, such successor corporation shall succeed to and be substituted for such Subsidiary Guarantor with the same effect as if it had been named herein as a Subsidiary Guarantor. Such successor corporation thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. Except as set forth in Articles 4 and 5 hereof, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of any Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor, or shall prevent any sale or conveyance of the property of any Subsidiary Guarantor as an entirety or substantially as an entirety to the Company or any Subsidiary Guarantor. Section 11.4. RELEASES OF SUBSIDIARY GUARANTEES. In the event of a sale or other disposition of all or substantially all of the assets of any Subsidiary Guarantor or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, to any corporation or other Person (including an Unrestricted Subsidiary) by way of merger, consolidation, or otherwise, in a transaction that does not violate any of the covenants of this Indenture, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such merger, consolidation or otherwise, of all the capital stock of such Subsidiary Guarantor) shall be released and relieved of any obligations under its Subsidiary Guarantee and such acquiring corporation or other Person (in the event of a sale or other disposition of all or substantially all of the assets of such Subsidiary Guarantor), if other than a Subsidiary Guarantor, shall have no obligation to assume or otherwise become liable under such Subsidiary Guarantee; PROVIDED that the Net Proceeds of such sale or other disposition are applied in accordance with Section 4.10 hereof. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture, including without limitation Section 4.10, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor from its obligations under its Subsidiary Guarantee. Any Subsidiary Guarantor not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the 106 Securities and for the other obligations of such Subsidiary Guarantor under this Indenture as provided in this Article 11. Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in accordance with the terms of this Indenture shall, upon such designation, be released from and relieved of its obligations under its Subsidiary Guarantee and any Unrestricted Subsidiary whose obligation as such is revoked and any newly created or newly acquired Subsidiary that is or becomes a Restricted Subsidiary shall be required to execute a Subsidiary Guarantee in accordance with the terms of this Indenture. Section 11.5. LIMITATION ON SUBSIDIARY GUARANTOR LIABILITY. For purposes hereof, each Subsidiary Guarantor's liability shall be that amount from time to time equal to the aggregate liability of such Subsidiary Guarantor thereunder, but shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Securities and this Indenture and (ii) the amount, if any, which would not have (A) rendered such Subsidiary Guarantor "INSOLVENT" (as such term is defined in the federal Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or (B) left it with unreasonably small capital at the time its Subsidiary Guarantee of the Securities was entered into, after giving effect to the incurrence of existing Indebtedness immediately prior to such time; PROVIDED that, it shall be a presumption in any lawsuit or other proceeding in which such Subsidiary Guarantor is a party that the amount guaranteed pursuant to its Subsidiary Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of such Subsidiary Guarantor, or debtor in possession or trustee in bankruptcy of such Subsidiary Guarantor, otherwise proves in such a lawsuit that the aggregate liability of such Subsidiary Guarantor is limited to the amount set forth in clause (ii). In making any determination as to the solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with the previous sentence, the right of such Subsidiary Guarantor to contribution from other Subsidiary Guarantors and any other rights such Subsidiary Guarantor may have, contractual or otherwise, shall be taken into account. Section 11.6. "TRUSTEE" TO INCLUDE PAYING AGENT. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "TRUSTEE" as used in Article 10 and this Article 11 shall in such case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully and for all intents and purposes as if such Paying Agent were named in Article 10 and this Article 11 in place of the Trustee. 107 ARTICLE 12 MISCELLANEOUS Section 12.1. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. If any provisions of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. Section 12.2. NOTICES. Any notice or communication by the Company or the Subsidiary Guarantors or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company or any Subsidiary Guarantor: Continental Resources, Inc. 302 North Independence, 3rd Floor P.O. Box 1032 Enid, OK 73702 Telecopier No.: (580) 548-5281 Attention: Harold Hamm and Roger Clement With a copies to: McAfee & Taft A Professional Corporation Tenth Floor, Two Leadership Square 211 North Robinson Oklahoma City, Oklahoma 73102-7103 Telecopier No.: (405) 235-0439 Attention: Theodore Elam If to the Trustee: United States Trust Company of New York 114 West 47th Street, 25th Floor New York, NY 10036 Telecopier No.: (212) 852-1626 Attention: Corporate Trust Administration Ref: Continental Resources, Inc. The Company or any Subsidiary Guarantor or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time 108 delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if by telecopy; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery (except that a notice of change of address and any notice to the Trustee shall not be deemed to have been given until actually received by the addressee). Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company or any Subsidiary Guarantor mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. Section 12.3. COMMUNICATION BY HOLDERS OF SECURITIES WITH OTHER HOLDERS OF SECURITIES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Subsidiary Guarantors, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 12.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company or any Subsidiary Guarantor to the Trustee to take any action under this Indenture, the Company or such Subsidiary Guarantor, as the case may be, shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.5 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.5 hereof) stating that, in the opinion of such counsel, all such conditions 109 precedent have been complied with. Section 12.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with; PROVIDED, that with respect to matters of fact an Opinion of Counsel may rely on an Officer's Certificate and/or certificates of public officials. Section 12.6. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 12.7. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of the Company or any Subsidiary, as such, shall have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Securities, by accepting a Security, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 110 Section 12.8. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE SECURITIES AND THE SUBSIDIARY GUARANTEES. Section 12.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or their respective Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture and the Subsidiary Guarantees. Section 12.10. SUCCESSORS. All agreements of the Company and each Subsidiary Guarantor in this Indenture, the Securities and the Subsidiary Guarantees shall bind its respective successors. All agreements of the Trustee in this Indenture shall bind its successors. Section 12.11. SEVERABILITY. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 12.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Section 12.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] SIGNATURES Dated as of July 24, 1998 CONTINENTAL RESOURCES, INC. Attest: By: /s/ RANDY MOEDER Name: Randy Moeder /s/ CHRISTINE ROBERTS Title: Senior Vice President, General Counsel and Secretary CONTINENTAL CRUDE CO. Attest: By: /s/ JEFF WHITE Name: Jeff White /s/ RANDY MOEDER Title: President CONTINENTAL GAS, INC. Attest: By: /s/ RANDY MOEDER Name: Randy Moeder /s/ CHRISTINE ROBERTS Title: President UNITED STATES TRUST COMPANY OF NEW YORK Attest: By: /s/ LOUIS P. YOUNG Name: Louis P. Young /s/ M. CIESMELEWSKI Title: Vice President EXHIBIT A [FORM OF FACE OF INITIAL SECURITY] SERIES A NOTE [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS SECURITY IS SUBORDINATED TO SENIOR INDEBTEDNESS, AS DEFINED IN THE INDENTURE (AS DEFINED HEREIN), AND THE OBLIGATIONS OF EACH SUBSIDIARY GUARANTOR UNDER THE SUBSIDIARY GUARANTEE CONTAINED IN THE INDENTURE ARE SUBORDINATED TO GUARANTOR SENIOR INDEBTEDNESS, AS DEFINED IN THE INDENTURE, OF SUCH SUBSIDIARY GUARANTOR. [Restricted Securities Legend] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL A-1 BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. [Regulation S Legend] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE A-2 SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. A-3 CONTINENTAL RESOURCES, INC. 10 1/4% Senior Subordinated Notes due 2008 No. 1 $150,000,000 CUSIP Number: 212013AA4 Continental Resources, Inc., an Oklahoma corporation, promises to pay to Cede & Co., or registered assigns, the principal sum of One Hundred Fifty Million Dollars on August 1, 2008. Interest Payment Dates: February 1 and August 1. Record Dates: January 15 and July 15. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto and imprinted hereon. Dated: ____________, 1998 CONTINENTAL RESOURCES, INC. By ______________________________________ Name: Title: By ______________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture: By _____________________________________ Authorized Signatory Dated: ____________, 1998 A-4 (Back of Security) 10 1/4% Senior Subordinated Notes due 2008 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Continental Resources, Inc., an Oklahoma corporation (the "COMPANY"), promises to pay interest on the principal amount of this Security at the rate of 10 1/4% per annum, which interest shall be payable in cash semiannually in arrears on each February 1 and August 1, or if any such day is not a Business Day, on the next succeeding Business Day (each an "INTEREST PAYMENT DATE"); PROVIDED that the first Interest Payment Date shall be February 1, 1999. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. METHOD OF PAYMENT. On each Interest Payment Date the Company will pay interest to the Person who is the Holder of record of this Security as of the close of business on the January 15 or July 15 immediately preceding such Interest Payment Date, even if this Security is cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. Principal, premium, if any, and interest on this Security will be payable at the office or agency of the Company maintained for such purpose within The City and State of New York or, in the event the Securities do not remain in book-entry form, at the option of the Company, payment of interest may be made by check mailed to the Holder of this Security at its address set forth in the register of Holders of Securities; PROVIDED that all payments with respect to the Global Securities and Definitive Securities having an aggregate principal amount of $5.0 million or more the Holders of which have given wire transfer instructions to the Company at least 10 Business Days prior to the applicable payment date will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, United States Trust Company of New York, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any Subsidiary Guarantor or any other of the Company's Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Securities under an Indenture dated as of July 24, 1998 ("INDENTURE") among A-5 the Company, the Subsidiary Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are general unsecured obligations of the Company equal in an aggregate principal amount to $150,000,000 and will mature on August 1, 2008. The Securities are general unsecured senior subordinated obligations of the Company limited to $150,000,000 million aggregate principal amount (subject to Section 2.7 of the Indenture). The aggregate principal amount of notes which may be authenticated and delivered under the Indenture, including the Securities, is limited to $300.0 million (subject to Section 2.7 of the Indenture). This Security is one of the Initial Securities referred to in the Indenture. The Securities include the Initial Securities and any Exchange Securities issued in exchange for the Initial Securities pursuant to the Indenture and the Registration Rights Agreement. The Initial Securities and the Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends and other distributions on the Capital Stock of the Company and its Restricted Subsidiaries, the purchase or redemption of Capital Stock of the Company and Capital Stock of such Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, the issuance or sale of Capital Stock of Restricted Subsidiaries, the Investments of the Company and its Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Restricted Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors have unconditionally guaranteed (and future Subsidiary Guarantors, together with the Subsidiary Guarantors, will unconditionally guarantee), jointly and severally, such obligations on a senior subordinated basis pursuant to the terms of the Indenture. A-6 5. OPTIONAL REDEMPTION. (a) The Securities are not redeemable at the Company's option prior to August 1, 2003. From and after August 1, 2003, the Securities will be subject to redemption at the option of the Company, in whole or in part, 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 to the applicable redemption date, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:
Percentage of Year Principal Amount ---- ---------------- 2003....................................105.125% 2004....................................103.417% 2005....................................101.708% 2006 and thereafter.....................100.000%
(b) Notwithstanding the provisions of clause (a) of this Paragraph 5, prior to August 1, 2001 the Company may, at its option, on any one or more occasions, redeem up to 35% of the original aggregate principal amount of Securities at a redemption price equal to 110.250% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net proceeds of sales of public common stock of the Company; PROVIDED that at least 65% of the original aggregate principal amount of Securities must remain outstanding immediately after the occurrence of such redemption; and PROVIDED, further, that any such redemption shall occur within 60 days after the date of the closing of the related sale of such common stock. (c) Notwithstanding the provisions of clause (a) of this Paragraph 5, upon the occurrence of a Change of Control at any time on or prior to August 1, 2003, the Company may, at its option, redeem in whole but not in part, the Securities at a redemption price equal to 100% of the principal amount thereof, plus the Applicable Premium as of, and accrued but unpaid interest, if any, to, the date of redemption (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) provided that such redemption shall be made no more than 90 days after the occurrence of a Change of Control. The Company shall notify the Trustee and, by mail, the Holders of the Securities of its decision to redeem the Securities pursuant to this Paragraph 5(c) within 30 days of the occurrence of a Change of Control. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Securities. A-7 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, if the Company does not redeem the Securities pursuant to paragraph 5(c), each Holder of Securities shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Payment"). The right of the Holders of the Securities to require the Company to repurchase such Securities upon a Change of Control may not be waived by the Trustee without the approval of the Holders of the Securities required by Section 9.2 of the Indenture. Within 30 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 Securities pursuant to the procedures required by the Indenture and described in such notice. The Change of Control Payment shall be made on a business day not less than 30 days nor more than 60 days after such notice is mailed. The Company and each Subsidiary Guarantor will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Securities as a result of a Change of Control. (b) If the Company or a Restricted Subsidiary consummates any Asset Sales permitted by the Indenture, when the aggregate amount of Excess Proceeds exceeds $15 million, the Company shall make an Asset Sale Offer to purchase the maximum principal amount of Securities and any other Pari Passu Indebtedness to which the Asset Sale Offer applies that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to, in the case of the Securities, 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase or, in the case of any Pari Passu Indebtedness, 100% of the principal amount thereof (or with respect to discount Pari Passu Indebtedness, the accreted value thereof) on the date of purchase, in each case, in accordance with the procedures set forth in Section 3.9 of the Indenture or the agreements governing the Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount (or accreted value, as the case may be) of Securities, and Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the sum of (i) the aggregate principal amount of Securities surrendered by Holders thereof and (ii) the aggregate principal amount or accreted value, as the case may be, of Pari Passu Indebtedness surrendered by holders or lenders thereof exceeds the amount of Excess Proceeds, the Trustee and the trustee or other lender representative for the Pari Passu Indebtedness shall select the Securities and the other Pari Passu Indebtedness to be purchased on a pro rata basis, based on the aggregate principal amount (or accreted value, as applicable) thereof surrendered in such Asset A-8 Sale Offer. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Securities are to be redeemed at its registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000, unless all of the Securities held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on the aggregate principal amount of the Securities called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities may be issued initially in the form of one or more fully registered Global Securities. The Securities may also be issued in registered form without coupons in minimum denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in 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 need not exchange or register the transfer of any Security or portion of a Security selected for redemption, except for the unredeemed portion of any Security being redeemed in part. Also, it need not exchange or register the transfer of any Security for a period of 15 days before a selection of Securities to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Security may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding (including, without limitation, consents obtained in connection with a purchase of, or the tender offer or exchange offer for, such Securities), and any existing Default or Event of Default under, or compliance with any provision of the Indenture or the Securities may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities. Without the consent of any Holder of a Security, the Indenture or the Securities may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Securities in addition to or in place of certificated Securities, to provide for the assumption of the Company's obligations to Holders of the Securities in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Securities or that does not adversely affect the legal rights under the Indenture of any such Holder, to add guarantees with respect to the Securities or to secure the Securities or to comply with the requirements of the Commission in order to effect A-9 or maintain the qualification of the Indenture under the Trust Indenture Act. 12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 consecutive days in the payment when due of interest on the Securities (whether or not prohibited by the provisions of Article 10 of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Securities (whether or not prohibited by the provisions of Article 10 of the Indenture); (iii) failure by the Company or any Subsidiary Guarantor to comply with the provisions of Article 5 of the Indenture; (iv) failure by the Company for 30 consecutive days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding to comply with the provisions of Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16, 4.17, 4.18 and 4.19 of the Indenture; (v) failure by the Company for 60 consecutive days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding to comply with any of its other agreements or covenants in, or provisions of, this Security or in the Indenture; (vi) 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 a Subsidiary Guarantor or any Person acting on behalf of a Subsidiary Guarantor, shall deny or disaffirm such Subsidiary Guarantor's obligations under its Subsidiary Guarantee; (vii) 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 Restricted Subsidiary whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prio 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 is then existing a Payment Default or the maturity of which has been so accelerated, aggregates $10 million or more; (viii) a final non-appealable judgment or order or final non-appealable judgments or orders are rendered against the Company or any Restricted Subsidiary that remain unpaid or discharged for a period of 60 days and that require the payment in money, either individually or in an aggregate amount, that is more than $10 million; and (ix) certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary. If any Event of Default (other than an Event of Default described in clause (ix) above) occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary, all outstanding Securities will become due and payable without further action or notice. Holders of the A-10 Securities may not enforce the Indenture or the Securities except as provided in the Indenture. Subject to certain limitations, Holders of a majority in aggregate principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Securities 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 Securities then outstanding by notice to the Trustee may on behalf of the Holders of all of the Securities 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 or premium on, or the principal of, the Securities. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, within 5 Business days after becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 13. SUBORDINATION. The Securities are subordinated to Senior Debt of the Company and the Subsidiary Guarantees are subordinated to Guarantor Senior Debt of the Subsidiary Guarantors. To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid and Guarantor Senior Debt of a Subsidiary Guarantor must be paid before a Subsidiary Guarantor may pay under its Subsidiary Guarantee. The Company agrees, and each Holder by accepting a Security agrees, that the Indebtedness evidenced by the Securities, including, but not limited to, the payment of principal of, premium, if any, and interest on the Securities, and any other payment Obligation of the Company in respect of the Securities and the obligations of each Subsidiary Guarantor under its Subsidiary Guarantee are subordinated in right of payment, to the extent and in the manner provided in the Indenture, to the prior payment in full in cash of all Senior Debt of the Company and, in the case of a Subsidiary Guarantee, all Guarantor Senior Debt of such Subsidiary Guarantor (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed) and authorizes the Trustee to give effect and appoints the Trustee as attorney-in-fact for such purpose. 14. TRUSTEE DEALINGS WITH COMPANY. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of 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. 15. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in A-11 respect of, or by reason of, such obligations or their creation. Each Holder of Securities, by accepting a Security, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 16. AUTHENTICATION. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Continental Resources, Inc. 302 North Independence, 3rd Floor P.O. Box 1032 Enid, OK 73702 Telecopier No.: (580) 548-5281 Attention: Roger Clement A-12 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. - ------------------------------------------------------------------------------- Date: ______________________ Your Signature: ___________________________ Signature Guarantee:* ______________________________ (Signature must be guaranteed) - ------------------------------------------------------------------------------- Sign exactly as your name appears on the other side of this Security. In connection with any transfer or exchange of any of the Securities evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Securities are being: CHECK ONE BOX BELOW: 1/ /1 acquired for the undersigned's own account, without transfer (in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A) of the Indenture); or 2/ /2 transferred to the Company; or 3/ /3 transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4/ /4 transferred pursuant to an effective registration statement under the Securities Act; or 5/ /5 transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933, with transferee furnishing to the Trustee a signed letter containing certain representations and - ------------------------ */ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-13 agreements (the form of which letter substantially appears in Section 2.14 of the Indenture); or 6/ /6 transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears in Section 2.13 of the Indenture); or 7/ /7 transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; PROVIDED, HOWEVER, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Securities, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. --------------------------------------- Signature Signature Guarantee:(*) - --------------------------------- --------------------------------------- (Signature must be guaranteed) Signature - ------------------------------------------------------------------------------ - ---------------------- */ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-14 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below: / /8 Section 4.10 / /9 Section 4.13 If you want to elect to have only part of the Security purchased by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state the principal amount you elect to have purchased: $______________ Date: Your Signature: -------- ------------------------------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee:(*) ----------------------------------------- - -------------------- */ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-15 SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Amount of decrease in Amount of increase in Principal Amount of Signature of Date of Principal Amount of Principal Amount of this Global Security authorized officer of Exchange this Global Security this Global Security following such Trustee or Note decrease or increase Custodian
A-16 EXHIBIT B (Form of Face of Exchange Security) SERIES B NOTE [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL Security SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS SECURITY IS SUBORDINATED TO SENIOR DEBT, AS DEFINED IN THE INDENTURE (AS DEFINED HEREIN), AND THE OBLIGATIONS OF EACH SUBSIDIARY GUARANTOR UNDER THE SUBSIDIARY GUARANTEE CONTAINED IN THE INDENTURE ARE SUBORDINATED TO GUARANTOR SENIOR INDEBTEDNESS, AS DEFINED IN THE INDENTURE, OF SUCH SUBSIDIARY GUARANTOR. B-1 CONTINENTAL RESOURCES, INC. 10 1/4% Senior Subordinated Notes due 2008 No. 1 $150,000,000 CUSIP Number: _____________ Continental Resources, Inc., an Oklahoma corporation, promises to pay to Cede & Co., or registered assigns, the principal sum of One Hundred Fifty Million Dollars on August 1, 2008. Interest Payment Dates: February 1 and August 1. Record Dates: January 15 and July 15. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto and imprinted hereon. Dated: ________, 1998 CONTINENTAL RESOURCES, INC. By ------------------------------------- Name: Title: By ------------------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture: By ---------------------------------- Authorized Signatory Dated: , 1998 ------------ B-2 (Back of Note) 10 1/4% Senior Subordinated Notes due 2008 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Continental Resources, Inc., an Oklahoma corporation (the "COMPANY"), promises to pay interest on the principal amount of this Security at the rate of 10 1/4% per annum, which interest shall be payable in cash semiannually in arrears on each February 1 and August 1, or if any such day is not a Business Day, on the next succeeding Business Day (each an "INTEREST PAYMENT DATE"); PROVIDED that the first Interest Payment Date shall be February 1, 1999. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. METHOD OF PAYMENT. On each Interest Payment Date the Company will pay interest to the Person who is the Holder of record of this Security as of the close of business on the January 15 or July 15 immediately preceding such Interest Payment Date, even if this Security is cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. Principal, premium, if any, and interest on this Security will be payable at the office or agency of the Company maintained for such purpose within The City and State of New York or, in the event the Securities do not remain in book-entry form, at the option of the Company, payment of interest may be made by check mailed to the Holder of this Security at its address set forth in the register of Holders of Securities; PROVIDED that all payments with respect to the Global Securities and Definitive Securities having an aggregate principal amount of $5.0 million or more the Holders of which have given wire transfer instructions to the Company at least 10 Business Days prior to the applicable payment date will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, United States Trust Company of New York, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any Subsidiary Guarantor or any other of the Company's Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Securities under an Indenture dated as of July 24, 1998 ("INDENTURE") among the Company, the Subsidiary Guarantors and the Trustee. The B-3 terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are general unsecured obligations of the Company equal in an aggregate principal amount to $150,000,000 and will mature on August 1, 2008. The Securities are general unsecured senior subordinated obligations of the Company limited to $150,000,000 million aggregate principal amount (subject to Section 2.7 of the Indenture). The aggregate principal amount of notes which may be authenticated and delivered under the Indenture, including the Securities, is limited to $300.0 million (subject to Section 2.7 of the Indenture). This Security is one of the Exchange Securities referred to in the Indenture. The Securities include the Initial Securities and any Exchange Securities issued in exchange for the Initial Securities pursuant to the Indenture and the Registration Rights Agreement. The Initial Securities and the Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends and other distributions on the Capital Stock of the Company and its Restricted Subsidiaries, the purchase or redemption of Capital Stock of the Company and Capital Stock of such Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, the issuance or sale of Capital Stock of Restricted Subsidiaries, the Investments of the Company and its Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Restricted Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors have unconditionally guaranteed (and future Subsidiary Guarantors, together with the Subsidiary Guarantors, will unconditionally guarantee), jointly and severally, such obligations on a senior subordinated basis pursuant to the terms of the Indenture. B-4 5. OPTIONAL REDEMPTION. (a) The Securities are not redeemable at the Company's option prior to August 1, 2003. From and after August 1, 2003, the Securities will be subject to redemption at the option of the Company, in whole or in part, 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 to the applicable redemption date, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:
PERCENTAGE OF YEAR PRINCIPAL AMOUNT ---- ---------------- 2003..........................................105.125% 2004..........................................103.417% 2005..........................................101.708% 2006 and thereafter...........................100.000%
(b) Notwithstanding the provisions of clause (a) of this Paragraph 5, prior to August 1, 2001 the Company may, at its option, on any one or more occasions, redeem up to 35% of the original aggregate principal amount of Securities at a redemption price equal to 110.250% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net proceeds of sales of public common stock of the Company; PROVIDED that at least 65% of the original aggregate principal amount of Securities must remain outstanding immediately after the occurrence of such redemption; and PROVIDED, further, that any such redemption shall occur within 60 days after the date of the closing of the related sale of such common stock. (c) Notwithstanding the provisions of clause (a) of this Paragraph 5, upon the occurrence of a Change of Control at any time on or prior to August 1, 2003, the Company may, at its option, redeem in whole but not in part, the Securities at a redemption price equal to 100% of the principal amount thereof, plus the Applicable Premium as of, and accrued but unpaid interest, if any, to, the date of redemption (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) provided that such redemption shall be made no more than 90 days after the occurrence of a Change of Control. The Company shall notify the Trustee and, by mail, the Holders of the Securities of its decision to redeem the Securities pursuant to this Paragraph 5(c) within 30 days of the occurrence of a Change of Control. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Securities. B-5 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, if the Company does not redeem the Securities pursuant to paragraph 5(c), each Holder of Securities shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Payment"). The right of the Holders of the Securities to require the Company to repurchase such Securities upon a Change of Control may not be waived by the Trustee without the approval of the Holders of the Securities required by Section 9.2 of the Indenture. Within 30 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 Securities pursuant to the procedures required by the Indenture and described in such notice. The Change of Control Payment shall be made on a business day not less than 30 days nor more than 60 days after such notice is mailed. The Company and each Subsidiary Guarantor will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Securities as a result of a Change of Control. (b) If the Company or a Restricted Subsidiary consummates any Asset Sales permitted by the Indenture, when the aggregate amount of Excess Proceeds exceeds $15 million, the Company shall make an Asset Sale Offer to purchase the maximum principal amount of Securities and any other Pari Passu Indebtedness to which the Asset Sale Offer applies that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to, in the case of the Securities, 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase or, in the case of any Pari Passu Indebtedness, 100% of the principal amount thereof (or with respect to discount Pari Passu Indebtedness, the accreted value thereof) on the date of purchase, in each case, in accordance with the procedures set forth in Section 3.9 of the Indenture or the agreements governing the Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount (or accreted value, as the case may be) of Securities, and Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the sum of (i) the aggregate principal amount of Securities surrendered by Holders thereof and (ii) the aggregate principal amount or accreted value, as the case may be, of Pari Passu Indebtedness surrendered by holders or lenders thereof exceeds the amount of Excess Proceeds, the Trustee and the trustee or other lender representative for the Pari Passu Indebtedness shall select the Securities and the other Pari Passu Indebtedness to be purchased on a pro rata basis, based on the aggregate principal amount (or accreted value, as applicable) thereof surrendered in such Asset B-6 Sale Offer. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Securities are to be redeemed at its registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000, unless all of the Securities held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on the aggregate principal amount of the Securities called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities may be issued initially in the form of one or more fully registered Global Securities. The Securities may also be issued in registered form without coupons in minimum denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in 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 need not exchange or register the transfer of any Security or portion of a Security selected for redemption, except for the unredeemed portion of any Security being redeemed in part. Also, it need not exchange or register the transfer of any Security for a period of 15 days before a selection of Securities to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Security may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding (including, without limitation, consents obtained in connection with a purchase of, or the tender offer or exchange offer for, such Securities), and any existing Default or Event of Default under, or compliance with any provision of the Indenture or the Securities may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities. Without the consent of any Holder of a Security, the Indenture or the Securities may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Securities in addition to or in place of certificated Securities, to provide for the assumption of the Company's obligations to Holders of the Securities in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Securities or that does not adversely affect the legal rights under the Indenture of any such Holder, to add guarantees with respect to the Securities or to secure the Securities or to comply with the requirements of the Commission in order to effect B-7 or maintain the qualification of the Indenture under the Trust Indenture Act. 12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 consecutive days in the payment when due of interest on the Securities (whether or not prohibited by the provisions of Article 10 of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Securities (whether or not prohibited by the provisions of Article 10 of the Indenture); (iii) failure by the Company or any Subsidiary Guarantor to comply with the provisions of Article 5 of the Indenture; (iv) failure by the Company for 30 consecutive days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding to comply with the provisions of Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16, 4.17, 4.18 and 4.19 of the Indenture; (v) failure by the Company for 60 consecutive days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding to comply with any of its other agreements or covenants in, or provisions of, this Security or in the Indenture; (vi) 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 a Subsidiary Guarantor or any Person acting on behalf of a Subsidiary Guarantor, shall deny or disaffirm such Subsidiary Guarantor's obligations under its Subsidiary Guarantee; (vii) 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 Restricted Subsidiary whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (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 is then existing a Payment Default or the maturity of which has been so accelerated, aggregates $10 million or more; (viii) a final non-appealable judgment or order or final non-appealable judgments or orders are rendered against the Company or any Restricted Subsidiary that remain unpaid or discharged for a period of 60 days and that require the payment in money, either individually or in an aggregate amount, that is more than $10 million; and (ix) certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary. If any Event of Default (other than an Event of Default described in clause (ix) above) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary, all outstanding Securities will become due and payable without further action or notice. Holders of the Securities may not B-8 enforce the Indenture or the Securities except as provided in the Indenture. Subject to certain limitations, Holders of a majority in aggregate principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Securities 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 Securities then outstanding by notice to the Trustee may on behalf of the Holders of all of the Securities 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 or premium on, or the principal of, the Securities. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, within 5 Business days after becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 13. SUBORDINATION. The Securities are subordinated to Senior Debt of the Company and the Subsidiary Guarantees are subordinated to Guarantor Senior Debt of the Subsidiary Guarantors. To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid and Guarantor Senior Debt of a Subsidiary Guarantor must be paid before a Subsidiary Guarantor may pay under its Subsidiary Guarantee. The Company agrees, and each Holder by accepting a Security agrees, that the Indebtedness evidenced by the Securities, including, but not limited to, the payment of principal of, premium, if any, and interest on the Securities, and any other payment Obligation of the Company in respect of the Securities and the obligations of each Subsidiary Guarantor under its Subsidiary Guarantee are subordinated in right of payment, to the extent and in the manner provided in the Indenture, to the prior payment in full in cash of all Senior Debt of the Company and, in the case of a Subsidiary Guarantor, all Guarantor Senior Debt of such Subsidiary Guarantor (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed) and authorizes the Trustee to give effect and appoints the Trustee as attorney-in-fact for such purpose. 14. TRUSTEE DEALINGS WITH COMPANY. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of 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. 15. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in B-9 respect of, or by reason of, such obligations or their creation. Each Holder of Securities, by accepting a Security, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 16. AUTHENTICATION. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Continental Resources, Inc. 302 North Independence, 3rd Floor P.O. Box 1032 Enid, OK 73702 Telecopier No.: (580) 548-5281 Attention: Roger Clement B-10 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. - ------------------------------------------------------------------------------ Date: Your Signature: ----------------------- ----------------------------- Signature Guarantee:(*) ---------------------------------------- (Signature must be guaranteed) - ------------------------------------------------------------------------------ Sign exactly as your name appears on the other side of this Security. In connection with any transfer or exchange of any of the Securities evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Securities are being: CHECK ONE BOX BELOW: 1/ /10 acquired for the undersigned's own account, without transfer (in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A) of the Indenture); or 2/ /11 transferred to the Company; or 3/ /12 transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4/ /13 transferred pursuant to an effective registration statement under the Securities Act; or 5/ /14 transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933, with transferee furnishing to the Trustee a signed - -------------------- (*)/ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). B-11 letter containing certain representations and agreements (the form of which letter substantially appears in Section 2.14 of the Indenture); or 6/ /15 transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears in Section 2.13 of the Indenture); or 7/ /16 transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any Person other than the registered holder thereof; PROVIDED, HOWEVER, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Securities, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. --------------------------------------- Signature Signature Guarantee:(*) - -------------------------------- --------------------------------------- (Signature must be guaranteed) Signature - ------------------------------------------------------------------------------ - --------------- (*)/ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). B-12 SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Amount of decrease in Amount of increase in Principal Amount of Signature of Date of Principal Amount of Principal Amount of this Global Security authorized officer of Exchange this Global Security this Global Security following such Trustee or Note decrease or increase Custodian
B-13 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below: / /17 Section 4.10 / /18 Section 4.13 If you want to elect to have only part of the Security purchased by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state the principal amount you elect to have purchased: $______________ Date: Your Signature: -------------------- --------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee:(*) ------------------- ________________ * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). B-14 EXHIBIT C FORM OF SUBSIDIARY GUARANTEE This Supplemental Indenture, dated as of [__________] (this "Supplemental Indenture" or "Guarantee"), among [name of future Subsidiary Guarantor] (the "Guarantor"), Continental Resources, Inc. (together with its successors and assigns, the "Company"), each other then existing Subsidiary Guarantor under the Indenture referred to below, and United States Trust Company of New York as Trustee under the Indenture referred to below. W I T N E S S E T H: WHEREAS, the Company and the Trustee have heretofore executed and delivered an Indenture, dated as of July 24, 1998 (as amended, supplemented, waived or otherwise modified, the "INDENTURE"), providing for the issuance of an aggregate principal amount of $150.0 million of 10 1/4% Senior Subordinated Notes due 2008 of the Company (the "Securities"; WHEREAS, Section 4.14 of the Indenture provides that the Company is required to cause each Restricted Subsidiary acquired or created by the Company or any Restricted Subsidiary to execute and deliver to the Trustee a Subsidiary Guarantee pursuant to which such Subsidiary Guarantor will unconditionally guarantee, jointly and severally with the other Subsidiary Guarantors, the full and prompt payment of the Securities pursuant to Article 11 of the Indenture subject to the subordination provisions of Article 10 of the Indenture; and WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee and the Company are authorized to execute and deliver this Supplemental Indenture to amend the Indenture, without the consent of any Securityholder; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guarantor, the Company, the other Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Securities as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINED TERMS. As used in this Subsidiary Guarantee, terms defined in the Indenture or in the preamble or recital hereto are used herein as therein defined, except that the term "Holders" in this Guarantee shall refer to the term "Holders" as defined in the Indenture and the Trustee acting on behalf or for the benefit of such holders. The words "herein," "hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture C-1 as a whole and not to any particular section hereof. ARTICLE 2 AGREEMENT TO BE BOUND; GUARANTEE SECTION 2.1 AGREEMENT TO BE BOUND. The Guarantor hereby becomes a party to the Indenture as a Subsidiary Guarantor and as such will have all of the rights and be subject to all of the obligations and agreements of a Subsidiary Guarantor under the Indenture. The Guarantor agrees to be bound by all of the provisions of the Indenture applicable to a Subsidiary Guarantor and to perform all of the obligations and agreements of a Subsidiary Guarantor under the Indenture. SECTION 2.2 GUARANTEE. (a) The Guarantor hereby jointly and severally, unconditionally guarantees to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Securities or the obligations of the Company thereunder, that: (a) the principal of and premium and interest, on the Securities shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on premium and interest, on the Securities, if any, if lawful, and all other obligations of the Company to the Holders or the Trustee thereunder shall be promptly paid in full or performed, all in accordance with the terms thereof; and (b) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise in accordance with the provisions of Article 11 of the Indenture. (b) The Guarantor agrees that the Indebtedness evidenced by its Subsidiary Guarantee shall be subordinated in right of payment, to the extent and in the manner provided in Article 10 of the Indenture, to the prior payment when due in cash or Cash Equivalents of all Guarantor Senior Debt of the Guarantor and that the subordination is for the benefit of and enforceable by the holders of Guarantor Senior Debt of the Guarantor. ARTICLE 3 MISCELLANEOUS SECTION 3.1 NOTICES. All notices and other communications to the Guarantor shall be given as provided in the Indenture to the Guarantor, at its address set forth below, with a copy to the Company as provided in the Indenture for notices to the Company. SECTION 3.2 PARTIES. Nothing expressed or mentioned herein is intended or shall be construed to give any Person, firm or corporation, other than the Holders and the Trustee and the C-2 holders of any Guarantor Senior Indebtedness, any legal or equitable right, remedy or claim under or in respect of this Supplemental Indenture or the Indenture or any provision herein or therein contained. SECTION 3.3 GOVERNING LAW. This Supplemental Indenture shall be governed by the laws of the State of New York. SECTION 3.4 SEVERABILITY CLAUSE. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability. SECTION 3.5 RATIFICATION OF INDENTURE; SUPPLEMENTAL INDENTURES PART OF INDENTURE. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. The Trustee makes no representation or warranty as to the validity or sufficiency of this Supplemental Indenture. SECTION 3.6 COUNTERPARTS. The parties hereto may sign one or more copies of this Supplemental Indenture in counterparts, all of which together shall constitute one and the same agreement. SECTION 3.7 HEADINGS. The headings of the Articles and the sections in this Guarantee are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. [NAME OF GUARANTOR], as a Subsidiary Guarantor By: ------------------------------------ Name: Title: C-3 CONTINENTAL RESOURCES, INC. By: ------------------------------------ Name: Title: CONTINENTAL GAS as a Subsidiary Guarantor By: ------------------------------------ Name: Title: CONTINENTAL CRUDE CO. as a Subsidiary Guarantor By: ------------------------------------ Name: Title: [Add signature block for any other existing Subsidiary Guarantors] UNITED STATES TRUST COMPANY OF NEW YORK By: ------------------------------------ Name: Title: C-4 EXECUTION COPY - -------------------------------------------------------------------------------- CONTINENTAL RESOURCES, INC. As Issuer CONTINENTAL GAS, INC. CONTINENTAL CRUDE CO. As Subsidiary Guarantors 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 ------------------- INDENTURE Dated as of July 24, 1998 ------------------- UNITED STATES TRUST COMPANY OF NEW YORK As Trustee ------------------- - -------------------------------------------------------------------------------- C-5 CROSS-REFERENCE TABLE*
Trust Indenture Indenture Act Section Section - --------------- --------- 310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 313 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 12.2 (d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 314 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3; 12.2 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3-10.5 (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 (f). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5; 12.2 (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 (d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316 (a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . 2.9 (a)(1)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (a)(1)(B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12 317 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 318 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1
_____________ N.A. means not applicable. * This Cross-Reference Table is not part of the Indenture. TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE. . . . . . . . . . . . . . . . 1 Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Other Definitions . . . . . . . . . . . . . . . . . . . 23 Section 1.3. Incorporation By Reference of Trust Indenture Act . . . 24 Section 1.4. Rules of Construction . . . . . . . . . . . . . . . . . 25 ARTICLE 2 THE SECURITIES. . . . . . . . . . . . . . . . 26 Section 2.1. Form, Dating and Terms. . . . . . . . . . . . . . . . . 26 Section 2.2. Execution and Authentication. . . . . . . . . . . . . . 32 Section 2.3. Registrar and Paying Agent. . . . . . . . . . . . . . . 33 Section 2.4. Paying Agent to Hold Money in Trust . . . . . . . . . . 34 Section 2.5. Holder Lists. . . . . . . . . . . . . . . . . . . . . . 34 Section 2.6. Transfer and Exchange . . . . . . . . . . . . . . . . . 35 Section 2.7. Replacement Securities. . . . . . . . . . . . . . . . . 38 Section 2.8. Outstanding Securities. . . . . . . . . . . . . . . . . 39 Section 2.9. Temporary Securities. . . . . . . . . . . . . . . . . . 39 Section 2.10. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . 39 Section 2.11. Cancellation. . . . . . . . . . . . . . . . . . . . . . 40 Section 2.12. Defaulted Interest. . . . . . . . . . . . . . . . . . . 40 SECTION 2.13. Form of Certificate to be Delivered in Connection with Transfers to Institutional Accredited Investors. . 41 SECTION 2.14. Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulations. . . . . . . . . 42 SECTION 2.15. Computation of Interest . . . . . . . . . . . . . . . . 43 ARTICLE 3 REDEMPTION AND PREPAYMENT . . . . . . . . . . . . . . 44 Section 3.1. Notices to Trustee. . . . . . . . . . . . . . . . . . . . 44 Section 3.2. Selection of Securities to Be Redeemed. . . . . . . . . . 44 Section 3.3. Notice of Redemption. . . . . . . . . . . . . . . . . . . 45 Section 3.4. Effect of Notice of Redemption. . . . . . . . . . . . . . 46 Section 3.5. Deposit of Redemption Price . . . . . . . . . . . . . . . 46 Section 3.6. Securities Redeemed in Part . . . . . . . . . . . . . . . 46 Section 3.7. Optional Redemption . . . . . . . . . . . . . . . . . . . 46 Section 3.8. Mandatory Redemption. . . . . . . . . . . . . . . . . . . 48 Section 3.9. Offer to Purchase By Application of Excess Proceeds . . . 48 ARTICLE 4 COVENANTS . . . . . . . . . . . . . . . . . . 50 Section 4.1. Payment of Securities. . . . . . . . . . . . . . . . . . . 50 Section 4.2. Maintenance of Office or Agency. . . . . . . . . . . . . . 51 Section 4.3. Commission Reports . . . . . . . . . . . . . . . . . . . . 51 Section 4.4. Compliance Certificate . . . . . . . . . . . . . . . . . . 52 Section 4.5. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.6. Stay, Extension and Usury Laws . . . . . . . . . . . . . . 53 Section 4.7. Restricted Payments. . . . . . . . . . . . . . . . . . . . 53 Section 4.8. Dividend and Other Payment Restrictions Affecting -i- Page ---- Restricted Subsidiaries. . . . . . . . . . . . . . . . . . 56 Section 4.9. Incurrence of Indebtedness and Issuance of Disqualified Stock . . . . . . . . . . . . . . . . . . . . 57 Section 4.10. Asset Sales. . . . . . . . . . . . . . . . . . . . . . . . 59 Section 4.11. Transactions with Affiliates . . . . . . . . . . . . . . . 61 Section 4.12. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 4.13. Offer to Repurchase Upon Change of Control . . . . . . . . 62 Section 4.14. Additional Subsidiary Guarantees . . . . . . . . . . . . . 64 Section 4.15. Corporate Existence. . . . . . . . . . . . . . . . . . . . 64 Section 4.16. No Layering. . . . . . . . . . . . . . . . . . . . . . . . 64 Section 4.17. Business Activities. . . . . . . . . . . . . . . . . . . . 65 Section 4.18. Sale and Leaseback Transactions . . . . . . . . . . . . . 65 Section 4.19. Designation of Unrestricted Subsidiaries . . . . . . . . . 65 ARTICLE 5 SUCCESSORS. . . . . . . . . . . . . . . . . . 66 Section 5.1. Merger, Consolidation, or Sale of Substantially All Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 5.2. Successor Corporation Substituted; Subsidiary Guarantors Confirmed . . . . . . . . . . . . . . . . . . . 67 ARTICLE 6 DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . 67 Section 6.1. Events of Default. . . . . . . . . . . . . . . . . . . . . 67 Section 6.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . . 70 Section 6.3. Other Remedies . . . . . . . . . . . . . . . . . . . . . . 70 Section 6.4. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . 71 Section 6.5. Control by Majority. . . . . . . . . . . . . . . . . . . . 71 Section 6.6. Limitation on Suits. . . . . . . . . . . . . . . . . . . . 71 Section 6.7. Rights of Holders of Securities to Receive Payment . . . . 72 Section 6.8. Collection Suit by Trustee . . . . . . . . . . . . . . . . 72 Section 6.9. Trustee May File Proofs of Claim . . . . . . . . . . . . . 72 Section 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 6.11. Undertaking for Costs. . . . . . . . . . . . . . . . . . . 74 Section 6.12. Restoration of Rights and Remedies . . . . . . . . . . . . 74 ARTICLE 7 TRUSTEE. . . . . . . . . . . . . . . . . . . 74 Section 7.1. Duties of Trustee. . . . . . . . . . . . . . . . . . . . . 74 Section 7.2. Rights of Trustee. . . . . . . . . . . . . . . . . . . . . 76 Section 7.3. Individual Rights of Trustee . . . . . . . . . . . . . . . 77 Section 7.4. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . 77 Section 7.5. Notice of Defaults . . . . . . . . . . . . . . . . . . . . 77 Section 7.6. Reports by Trustee to Holders of the Securities. . . . . . 78 Section 7.7. Compensation and Indemnity . . . . . . . . . . . . . . . . 78 Section 7.8. Replacement of Trustee . . . . . . . . . . . . . . . . . . 79 Section 7.9. Successor Trustee by Merger, etc . . . . . . . . . . . . . 80 Section 7.10. Eligibility; Disqualification. . . . . . . . . . . . . . . 81 Section 7.11. Preferential Collection of Claims Against Company. . . . . 81 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE. . . . . . . . . . 81 Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance. . 81 Section 8.2. Legal Defeasance and Discharge. . . . . . . . . . . . . . . 81 -ii- Page ---- Section 8.3. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . 82 Section 8.4. Conditions to Legal or Covenant Defeasance. . . . . . . . . 83 Section 8.5. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions . . . . . . . . . . . 84 Section 8.6. Repayment to Company. . . . . . . . . . . . . . . . . . . . 85 Section 8.7. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . 85 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER. . . . . . . . . . . . . . 86 Section 9.1. Without Consent of Holders of Securities. . . . . . . . . . 86 Section 9.2. With Consent of Holders of Securities . . . . . . . . . . . 87 Section 9.3. Compliance with Trust Indenture Act . . . . . . . . . . . . 89 Section 9.4. Revocation and Effect of Consents . . . . . . . . . . . . . 89 Section 9.5. Notation on or Exchange of Securities . . . . . . . . . . . 89 Section 9.6. Trustee to Sign Amendment, etc. . . . . . . . . . . . . . . 89 ARTICLE 10 SUBORDINATION. . . . . . . . . . . . . . . . . . 90 Section 10.1. Agreement to Subordinate. . . . . . . . . . . . . . . . . . 90 Section 10.2. Certain Definitions . . . . . . . . . . . . . . . . . . . . 90 Section 10.3. Liquidation; Dissolution; Bankruptcy. . . . . . . . . . . . 91 Section 10.4. Default on Designated Senior Debt . . . . . . . . . . . . . 94 Section 10.5. Acceleration of Securities. . . . . . . . . . . . . . . . . 95 Section 10.6. When Distribution Must Be Paid Over . . . . . . . . . . . . 95 Section 10.7. Notice by Company . . . . . . . . . . . . . . . . . . . . . 96 Section 10.8. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 10.9. Relative Rights . . . . . . . . . . . . . . . . . . . . . . 96 Section 10.10. Subordination May Not Be Impaired by Company or the Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . 97 Section 10.11. Payment, Distribution or Notice to Representative . . . . . 97 Section 10.12. Rights of Trustee and Paying Agent. . . . . . . . . . . . . 98 Section 10.13. Authorization to Effect Subordination . . . . . . . . . . . 98 Section 10.14. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . 99 Section 10.15. No Waiver of Subordination Provisions . . . . . . . . . . . 99 ARTICLE 11 THE SUBSIDIARY GUARANTEES. . . . . . . . . . . . . . . 99 Section 11.1. The Subsidiary Guarantees . . . . . . . . . . . . . . . . . 99 Section 11.2. Subordination of Subsidiary Guarantees. . . . . . . . . . . 101 Section 11.3. Subsidiary Guarantors May Consolidate, etc., on Certain Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Section 11.4. Releases of Subsidiary Guarantees . . . . . . . . . . . . . 102 Section 11.5. Limitation on Subsidiary Guarantor Liability. . . . . . . . 103 Section 11.6. "Trustee" to Include Paying Agent . . . . . . . . . . . . . 103 ARTICLE 12 MISCELLANEOUS. . . . . . . . . . . . . . . . . . 104 Section 12.1. Trust Indenture Act Controls. . . . . . . . . . . . . . . . 104 Section 12.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 12.3. Communication by Holders of Securities with Other Holders of Securities. . . . . . . . . . . . . . . . . . . . . . . 105 Section 12.4. Certificate and Opinion as to Conditions Precedent. . . . . 105 Section 12.5. Statements Required in Certificate or Opinion . . . . . . . 106 Section 12.6. Rules by Trustee and Agents . . . . . . . . . . . . . . . . 106 Section 12.7. No Personal Liability of Directors, Officers, -iii- Page ---- Employees and Stockholders. . . . . . . . . . . . . . . . . 106 Section 12.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 107 Section 12.9. No Adverse Interpretation of Other Agreements . . . . . . . 107 Section 12.10. Successors. . . . . . . . . . . . . . . . . . . . . . . . . 107 Section 12.11. Severability. . . . . . . . . . . . . . . . . . . . . . . . 107 Section 12.12. Counterpart Originals . . . . . . . . . . . . . . . . . . . 107 Section 12.13. Table of Contents, Headings, Etc. . . . . . . . . . . . . . 107
EXHIBITS Exhibit A FORM OF INITIAL SECURITY Exhibit B FORM OF EXCHANGE SECURITY EXHIBIT C FORM OF SUBSIDIARY GUARANTEE -iv- EX-4.4 7 EXHIBIT 4.4 EXECUTION COPY CONTINENTAL RESOURCES, INC. $150,000,000 10 1/4% Senior Subordinated Notes due 2008 EXCHANGE AND REGISTRATION RIGHTS AGREEMENT July 24, 1998 CHASE SECURITIES INC. 270 Park Avenue, 4th floor New York, New York 10017 Ladies and Gentlemen: Continental Resources, Inc., an Oklahoma corporation (the "COMPANY"), proposes to issue and sell, Continental Gas, Inc., an Oklahoma corporation and Continental Crude Co., an Oklahoma corporation (the "SUBSIDIARY GUARANTORS"), propose to guarantee and Chase Securities Inc. (the "INITIAL PURCHASER"), proposes to buy, upon the terms and subject to the conditions set forth in a purchase agreement dated July 21, 1998 (the "PURCHASE AGREEMENT"), $150,000,000 aggregate principal amount of the Company's 10 1/4% Senior Subordinated Notes due 2008 (the "NOTES"), which Notes shall be unconditionally guaranteed on a senior subordinated basis (the "SUBSIDIARY GUARANTEES" and, together with the Notes, the "SECURITIES"), by the Subsidiary Guarantors. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Purchase Agreement. As an inducement to the Initial Purchaser to enter into the Purchase Agreement, and in satisfaction of a condition to the obligations of the Initial Purchaser to purchase the Securities under the Purchase Agreement, each of the Company and the Subsidiary Guarantors agrees with the Initial Purchaser, for the benefit of the holders (including the Initial Purchaser) of the Transfer Restricted Securities (as defined herein), the Exchange Securities (as defined herein) and the Private Exchange Securities (as defined herein) (collectively, the "HOLDERS"), as follows: 1. REGISTERED EXCHANGE OFFER. The Company and the Subsidiary Guarantors shall (i) prepare and, not later than 60 days following the date of original issuance of the Securities (the "ISSUE DATE"), file with the Securities and Exchange Commission (the "COMMISSION") a registration statement (the "EXCHANGE OFFER REGISTRATION STATEMENT") on an appropriate form under the Securities Act of 1933, as amended (the "SECURITIES ACT") with respect to a proposed offer to the Holders of the 2 Transfer Restricted Securities (the "REGISTERED EXCHANGE OFFER") to issue and deliver to such Holders, in exchange for the Transfer Restricted Securities, a like aggregate principal amount of debt securities of the Company (the "EXCHANGE NOTES") unconditionally guaranteed on a senior subordinated basis by the Subsidiary Guarantors (the "EXCHANGE GUARANTEE" and, together with the Exchange Notes, the "EXCHANGE SECURITIES") that are identical in all material respects to the Transfer Restricted Securities, except for the transfer restrictions relating to the Securities, (ii) use their respective reasonable best efforts to cause the Exchange Offer Registration Statement to become effective under the Securities Act no later than 150 days after the Issue Date and the Registered Exchange Offer to be consummated no later than 180 days after the Issue Date and (iii) keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer, if required by applicable law) after the date on which notice of the Registered Exchange Offer is first mailed to the Holders (such period being called the "EXCHANGE OFFER REGISTRATION PERIOD"). The Exchange Securities and the Private Exchange Securities (as defined below, if any) will be issued under the Indenture or an indenture (the "EXCHANGE SECURITIES INDENTURE") among the Company, the Subsidiary Guarantors and the Trustee or such other bank or trust company that is reasonably satisfactory to the Initial Purchaser, as trustee (the "EXCHANGE SECURITIES TRUSTEE"), such indenture to be identical in all material respects to the Indenture, except for the transfer restrictions relating to the Transfer Restricted Securities. References herein to Securities, Exchange Securities, Transfer Restricted Securities and Private Exchange Securities (as defined herein) will be deemed to include the guarantees relating thereto. Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Subsidiary Guarantors shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Transfer Restricted Securities for Exchange Securities (assuming that such Holder (a) is not an affiliate of the Company or the Subsidiary Guarantors or an Exchanging Dealer (as defined herein) not complying with the requirements of the next sentence, (b) is not the Initial Purchaser with Securities that have the status of an unsold allotment in an initial distribution, (c) acquires the Exchange Securities in the ordinary course of such Holder's business and (d) has no arrangements or understandings with any person to participate in the distribution of the Exchange Securities) and to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. The Company, the Subsidiary Guarantors, the Initial Purchaser and each Exchanging Dealer acknowledge that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, (i) each Holder that is a broker-dealer electing to exchange Securities, acquired for its own account as a result of market- 3 making activities or other trading activities, for Exchange Securities (an "EXCHANGING DEALER"), is required to deliver a prospectus containing substantially the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer and (ii) if the Initial Purchaser elects to sell Private Exchange Securities acquired in exchange for Securities constituting any portion of an unsold allotment, it is required to deliver a prospectus containing the information required by Items 507 or 508 of Regulation S-K under the Securities Act and the Exchange Act ("REGULATION S-K"). If, prior to the consummation of the Registered Exchange Offer, any Holder holds any Securities acquired by it that have, or that are reasonably likely to be determined to have, the status of an unsold allotment in the initial distribution of the Securities, or any Holder is not entitled to participate in the Registered Exchange Offer, the Company and the Subsidiary Guarantors shall, upon the request of any such Holder, simultaneously with the delivery of the Exchange Securities in the Registered Exchange Offer, issue and deliver to any such Holder, in exchange for the Securities held by such Holder (the "PRIVATE EXCHANGE"), a like aggregate principal amount of debt securities of the Company (the "PRIVATE EXCHANGE NOTES") unconditionally guaranteed on a senior subordinated basis by the Subsidiary Guarantors (the "PRIVATE EXCHANGE GUARANTEES" and, together with the Private Exchange Notes, the "PRIVATE EXCHANGE SECURITIES") that are identical in all material respects to the Exchange Securities, except for the transfer restrictions relating to such Private Exchange Securities. The Private Exchange Securities will be issued under the same indenture as the Exchange Securities, and the Company shall use its reasonable best efforts to cause the Private Exchange Securities to bear the same CUSIP number as the Exchange Securities. In connection with the Registered Exchange Offer, the Company and the Subsidiary Guarantors shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 days (or longer, if required by applicable law) after the date on which notice of the Registered Exchange Offer is first mailed to the Holders; (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; 4 (d) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York City time, on the last business day on which the Registered Exchange Offer shall remain open; and (e) otherwise comply in all respects with all laws that are applicable to the Registered Exchange Offer. As soon as practicable after the close of the Registered Exchange Offer and any Private Exchange, as the case may be, the Company and the Subsidiary Guarantors shall: (a) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer and the Private Exchange; (b) deliver to the Trustee for cancellation all Securities so accepted for exchange; and (c) cause the Trustee or the Exchange Securities Trustee, as the case may be, promptly to authenticate and deliver to each Holder, Exchange Securities or Private Exchange Securities, as the case may be, equal in principal amount to the Securities of such Holder so accepted for exchange. The Company and the Subsidiary Guarantors shall use their respective reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein in order to permit such prospectus to be used by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; PROVIDED that the Company and the Subsidiary Guarantors shall make such prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any resale of any Exchange Securities for a period of not less than 90 days after the consummation of the Registered Exchange Offer. The Indenture or the Exchange Securities Indenture, as the case may be, shall provide that the Transfer Restricted Securities, the Exchange Securities and the Private Exchange Securities shall vote and consent together on all matters as one class and that none of the Transfer Restricted Securities or the Exchange Securities will have the right to vote or consent as a separate class on any matter. Interest on each Exchange Security and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Securities surrendered in exchange therefor or, if no interest has been paid on the Securities, from the Issue Date. 5 Each Holder participating in the Registered Exchange Offer shall be required to represent to the Company and the Subsidiary Guarantors that at the time of the consummation of the Registered Exchange Offer (i) any Exchange Securities to be received pursuant to the Registered Exchange Offer are being acquired in the ordinary course of the business of the person receiving such Exchange Securities, whether or not such person is the Holder, (ii) neither the Holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of the Securities or the Exchange Securities within the meaning of the Securities Act, (iii) neither the Holder nor any such other person is an affiliate of the Company or of the Subsidiary Guarantors or, if it is such an affiliate, such Holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if the Holder is not a broker-dealer, it is not engaged in, and does not intend to engage in, the distribution of the Exchange Securities and (v) if such person is an Exchanging Dealer, such person shall comply with the prospectus delivery requirements of the Securities Act. Notwithstanding any other provisions hereof, the Company and the Subsidiary Guarantors will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not, as of the consummation of the Registered Exchange Offer, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2. SHELF REGISTRATION. If (i) because of any change in law or applicable interpretations thereof by the Commission's staff the Company and the Subsidiary Guarantors are not permitted to effect the Registered Exchange Offer as contemplated by Section 1 hereof, or (ii) any Securities validly tendered pursuant to the Registered Exchange Offer are not exchanged for Exchange Securities within 150 days after the Issue Date, or (iii) the Initial Purchaser so requests with respect to Securities or Private Exchange Securities not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer and held by it following the consummation of the Registered Exchange Offer, or (iv) any applicable law or interpretations do not permit any Holder to participate in the Registered Exchange Offer, or (v) any Holder that participates in the Registered Exchange Offer does not receive freely transferable Exchange Securities in exchange for tendered Securities (the obligation to 6 comply with a prospectus delivery requirement being understood not to constitute a restriction on transferability), then the following provisions shall apply: (a) The Company and the Subsidiary Guarantors shall use their respective reasonable best efforts to file as promptly as practicable (but in no event more than 45 days after so required or requested pursuant to this Section 2) with the Commission, and thereafter shall use their respective reasonable best efforts to cause to be declared effective, a shelf registration statement on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities by the Holders thereof from time to time in accordance with the methods of distribution set forth in such registration statement (hereafter, a "SHELF REGISTRATION STATEMENT" and, together with any Exchange Offer Registration Statement, a "REGISTRATION STATEMENT"); PROVIDED, HOWEVER, that no Holder of Transfer Restricted Securities (other than the Initial Purchaser) shall be entitled to have Transfer Restricted Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) The Company and the Subsidiary Guarantors shall use their respective reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus forming part thereof to be used by Holders of Transfer Restricted Securities for a period ending on the earlier of (i) two years from the Issue Date or such shorter period that will terminate when all the Transfer Restricted Securities covered by the Shelf Registration Statement have been sold pursuant thereto and (ii) the date all of the Transfer Restricted Securities become eligible for resale without volume restrictions pursuant to Rule 144 under the Securities Act (in any such case, such period being called the "SHELF REGISTRATION PERIOD"). The Company and the Subsidiary Guarantors shall be deemed not to have used their respective reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if they voluntarily take any action that would result in Holders of Transfer Restricted Securities covered thereby not being able to offer and sell such Transfer Restricted Securities during that period, unless such action is required by applicable law; PROVIDED HOWEVER, that the foregoing shall not apply to actions taken by the Company and the Subsidiary Guarantors in good faith and for valid business reasons (not including avoidance of their obligations hereunder), including, without limitation, the acquisition or divestiture of assets, so long as the Company and the Subsidiary Guarantors within 30 days thereafter comply with the requirements of Section 4(j) hereof. Any such period during which the Company and the Subsidiary Guarantors fail to keep the Shelf Registration Statement effective and usable for offers and sales of Transfer Restricted Securities is referred to as a "Suspension Period." A Suspension Period shall commence on and include the date that the Company and the Subsidiary Guarantors give notice that the Shelf Registration Statement is no longer 7 effective or the prospectus included therein is no longer usable for offers and sales of Transfer Restricted Securities and shall end on the date when each Holder of Transfer Restricted Securities covered by such registration statement either receives the copies of the supplemented or amended prospectus contemplated by Section 4(j) hereof or is advised in writing by the Company and the Subsidiary Guarantors that use of the prospectus may be resumed. If one or more Suspension Periods occur, the two-year time period referenced above shall be extended by the aggregate of the number of days included in each such Suspension Period. (c) Notwithstanding any other provisions hereof, the Company and the Subsidiary Guarantors will ensure that (i) any Shelf Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) any Shelf Registration Statement and any amendment thereto (in either case, other than with respect to information included therein in reliance upon or in conformity with written information furnished to the Company and the Subsidiary Guarantors by or on behalf of any Holder specifically for use therein (the "HOLDERS' INFORMATION")) does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Shelf Registration Statement, and any supplement to such prospectus (in either case, other than with respect to Holders' Information), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 3. LIQUIDATED DAMAGES. (a) The parties hereto agree that the Holders of Transfer Restricted Securities will suffer damages if the Company or the Subsidiary Guarantors fail to fulfill their obligations under Section 1 or Section 2, as applicable, and that it would not be feasible to ascertain the extent of such damages. Accordingly, if (i) the applicable Registration Statement is not filed with the Commission on or prior to 60 days after the Issue Date, (ii) the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is not declared effective within 150 days after the Issue Date, (iii) the Registered Exchange Offer is not consummated on or prior to 180 days after the Issue Date, or (iv) the Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company and the Subsidiary Guarantors are obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"), the Company will be obligated to pay liquidated damages to each Holder of Transfer Restricted Securities, during the period of one or more such Registration Defaults, in an 8 amount equal to $0.192 per week per $1,000 principal amount of Transfer Restricted Securities held by such Holder until (i) the applicable Registration Statement is filed, (ii) the Exchange Offer Registration Statement is declared effective and the Registered Exchange Offer is consummated, (iii) the Shelf Registration Statement is declared effective or (iv) the Shelf Registration Statement again becomes effective, as the case may be. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. As used herein, the term "TRANSFER RESTRICTED SECURITIES" means (i) each Security until the date on which such Security has been exchanged for a freely transferable Exchange Security (the obligation to comply with a prospectus delivery requirement being understood not to constitute a restriction on transferability) in the Registered Exchange Offer, (ii) each Security or Private Exchange Security until the date on which it has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iii) each Security or Private Exchange Security until the date on which it is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. Notwithstanding anything to the contrary in this Section 3(a), the Company shall not be required to pay liquidated damages to a Holder of Transfer Restricted Securities if such Holder failed to comply with its obligations to make the representations set forth in the penultimate paragraph of Section 1 or failed to provide the information required to be provided by it, if any, pursuant to Section 4(n). (b) The Company shall notify the Trustee and the Paying Agent under the Indenture immediately upon the happening of each and every Registration Default. The Company shall pay the liquidated damages due on the Transfer Restricted Securities by depositing with the Paying Agent (which may not be the Company for these purposes), in trust, for the benefit of the Holders thereof, prior to 10:00 a.m., New York City time, on the next interest payment date specified by the Indenture and the Securities, sums sufficient to pay the liquidated damages then due. The liquidated damages due shall be payable on each interest payment date specified by the Indenture and the Securities to the record holder of the Transfer Restricted Securities entitled to receive the interest payment to be made on such date. Each obligation to pay liquidated damages shall be deemed to accrue from and including the date of the applicable Registration Default. (c) The parties hereto agree that the liquidated damages provided for in this Section 3 constitute a reasonable estimate of and are intended to constitute the sole damages that will be suffered by Holders of Transfer Restricted Securities by reason of the failure of (i) the Shelf Registration Statement or the Exchange Offer Registration Statement to be filed, (ii) the Shelf Registration Statement to remain effective or (iii) the Exchange Offer Registration Statement to be declared effective and the Registered Exchange Offer to be consummated, in each 9 case, to the extent required by this Agreement. 4. REGISTRATION PROCEDURES. In connection with any Registration Statement, the following provisions shall apply: (a) The Company and the Subsidiary Guarantors shall (i) furnish to the Initial Purchaser, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as the Initial Purchaser may reasonably propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (iii) if requested by the Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement. (b) Each of the Company and the Subsidiary Guarantors shall advise the Initial Purchaser, each Exchanging Dealer and the Holders (if applicable) and, if requested by any such person, confirm such advice in writing (which advice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when any Registration Statement and any amendment thereto has been filed with the Commission and when such Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to any Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company or the Subsidiary Guarantors of any notification with respect to the suspension of the qualification of the Securities or the Exchange Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the making of any changes in any Registration Statement or the 10 prospectus included therein in order that the statements therein (in light of the circumstances in which made, in the case of the prospectus) are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) The Company and the Subsidiary Guarantors will make every reasonable effort to obtain the withdrawal at the earliest possible time of any order suspending the effectiveness of any Registration Statement. (d) The Company and the Subsidiary Guarantors will furnish to each Holder of Transfer Restricted Securities included within the coverage of any Shelf Registration Statement, upon request by such Holder, without charge, at least one conformed copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company and the Subsidiary Guarantors will, during the Shelf Registration Period, promptly deliver to each Holder of Transfer Restricted Securities included within the coverage of any Shelf Registration Statement, upon request by such Holder, without charge, as many copies of the prospectus (including each preliminary prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company and the Subsidiary Guarantors consent to the use of such prospectus or any amendment or supplement thereto by each of the selling Holders of Transfer Restricted Securities in connection with the offer and sale of the Transfer Restricted Securities covered by such prospectus or any amendment or supplement thereto. (f) The Company and the Subsidiary Guarantors will furnish to the Initial Purchaser and each Exchanging Dealer, and to any other Holder who so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if the Initial Purchaser or Exchanging Dealer or any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (g) The Company and the Subsidiary Guarantors will, during the Exchange Offer Registration Period or the Shelf Registration Period, as applicable, promptly deliver to the Initial Purchaser, each Exchanging Dealer and any such other persons that are required to deliver a prospectus following the Registered Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement or the Shelf Registration Statement and any amendment or supplement thereto as the Initial Purchaser, Exchanging Dealer or other persons may reasonably request; and the Company and the Subsidiary Guarantors consent to the use of such prospectus or 11 any amendment or supplement thereto by the Initial Purchaser, Exchanging Dealer or other persons, as applicable, as aforesaid. (h) Prior to the effective date of any Registration Statement, the Company and the Subsidiary Guarantors will use their respective reasonable best efforts to register or qualify, or cooperate with the Holders of Securities, Exchange Securities or Private Exchange Securities included therein and their respective counsel in connection with the registration or qualification of, such Securities, Exchange Securities or Private Exchange Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities, Exchange Securities or Private Exchange Securities covered by such Registration Statement; PROVIDED that the Company and the Subsidiary Guarantors will not be required to qualify generally to do business in any jurisdiction where they are not then so qualified or to take any action which would subject them to general service of process or to taxation in any such jurisdiction where it is not then so subject. (i) The Company and the Subsidiary Guarantors will cooperate with the Holders of Securities, Exchange Securities or Private Exchange Securities to facilitate the timely preparation and delivery of appropriate certificates representing Securities, Exchange Securities or Private Exchange Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such authorized denominations and registered in such names as the Holders thereof may request in writing prior to sales of Securities, Exchange Securities or Private Exchange Securities pursuant to such Registration Statement. (j) If (i) any event contemplated by Section 4(b)(ii) through (v) occurs during the period for which the Company and the Subsidiary Guarantors are required to maintain an effective Registration Statement or (ii) any Suspension Period remains in effect more than 30 days after the occurrence thereof, the Company and the Subsidiary Guarantors will promptly prepare and file with the Commission a post-effective amendment to the Registration Statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to purchasers of the Securities, Exchange Securities or Private Exchange Securities from a Holder, the prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (k) Not later than the effective date of the applicable Registration Statement, the Company and the Subsidiary Guarantors will provide a CUSIP number for the Securities, Exchange Securities and Private Exchange Securities, as the case may be, and provide the applicable trustee with certificates for 12 the Securities, Exchange Securities or Private Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) The Company and the Subsidiary Guarantors will comply with all applicable rules and regulations of the Commission and will make generally available to their security holders as soon as practicable after the effective date of the applicable Registration Statement an earning statement satisfying the provisions of Section 11(a) of the Securities Act; PROVIDED that in no event shall such earning statement be made generally available to their security holders later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's or the Subsidiary Guarantors' first fiscal quarter commencing after the effective date of the applicable Registration Statement, which statement shall cover such 12-month period. (m) The Company and the Subsidiary Guarantors will cause the Indenture or the Exchange Securities Indenture, as the case may be, to be qualified under the Trust Indenture Act as required by applicable law in a timely manner. (n) The Company and the Subsidiary Guarantors may require each Holder of Transfer Restricted Securities to be registered pursuant to any Shelf Registration Statement to furnish to the Company and the Subsidiary Guarantors such information concerning the Holder and the distribution of such Transfer Restricted Securities as the Company and the Subsidiary Guarantors may from time to time reasonably require for inclusion in such Shelf Registration Statement, and the Company and the Subsidiary Guarantors may exclude from such registration the Transfer Restricted Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (o) In the case of a Shelf Registration Statement, each Holder of Transfer Restricted Securities to be registered pursuant thereto agrees by acquisition of such Transfer Restricted Securities that, upon receipt of any notice from the Company and the Subsidiary Guarantors pursuant to Section 4(b)(ii) through (v), such Holder will discontinue disposition of such Transfer Restricted Securities until such Holder's receipt of copies of the supplemental or amended prospectus contemplated by Section 4(j) or until advised in writing (the "ADVICE") by the Company and the Subsidiary Guarantors that the use of the applicable prospectus may be resumed. If the Company and the Subsidiary Guarantors shall give any notice under Section 4(b)(ii) through (v) during the period that the Company and the Subsidiary Guarantors are required to maintain an effective Registration Statement (the "EFFECTIVENESS PERIOD"), such Effectiveness Period shall be extended by the number of days during such period from and including the date of the giving of such notice to and including the date when each seller of Transfer Restricted Securities covered by such Registration 13 Statement shall have received (x) the copies of the supplemental or amended prospectus contemplated by Section 4(j) (if an amended or supplemental prospectus is required) or (y) the Advice (if no amended or supplemental prospectus is required). (p) In the case of a Shelf Registration Statement, the Company and the Subsidiary Guarantors shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold or the managing underwriters (if any) shall reasonably request in order to facilitate any disposition of such Securities, Exchange Securities or Private Exchange Securities pursuant to such Shelf Registration Statement. (q) In the case of a Shelf Registration Statement, the Company and the Subsidiary Guarantors shall (i) make reasonably available for inspection by a representative of, and Special Counsel (as defined herein) acting for, Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold and any underwriter participating in any disposition of Securities, Exchange Securities or Private Exchange Securities pursuant to such Shelf Registration Statement, at the offices where normally kept, during reasonable business hours, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries and the Subsidiary Guarantors and (ii) use their respective reasonable best efforts to have their officers, directors, employees, accountants and counsel supply all relevant information reasonably requested by such representative, Special Counsel or any such underwriter in connection with such Shelf Registration Statement; PROVIDED, HOWEVER, that such persons shall first agree in writing with the Company and the Subsidiary Guarantors that any information that is in good faith designated by the Company and the Subsidiary Guarantors in writing as confidential at the time of delivery of such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to federal securities laws in connection with the filing of such Shelf Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such person or (iv) such information becomes available to such person from a source other than the Company and its subsidiaries and the Subsidiary Guarantors and such source is not bound by a confidentiality agreement; and PROVIDED FURTHER each such person will also be required to further agree in writing that (i) it will, upon learning that disclosure of such information is sought in a court of competent jurisdiction, if legally permitted, give notice to the Company and the Subsidiary Guarantors and allow the Company and the Subsidiary Guarantors at 14 their expense to undertake appropriate action to prevent disclosure of such information deemed confidential and (ii) it will not use such information in violation of any securities laws. (r) In the case of a Shelf Registration Statement, the Company and the Subsidiary Guarantors shall, if requested by Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold, their Special Counsel or the managing underwriters (if any) in connection with such Shelf Registration Statement, use their respective reasonable best efforts to cause (i) their counsel to deliver an opinion relating to the Shelf Registration Statement and the Securities, Exchange Securities or Private Exchange Securities, as applicable, in customary form, (ii) their officers to execute and deliver all customary documents and certificates requested by such Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold, their Special Counsel or the managing underwriters (if any) and (iii) their respective independent public accountants to provide a comfort letter or letters in customary form, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. 5. REGISTRATION EXPENSES. The Company and the Subsidiary Guarantors will bear all expenses incurred in connection with the performance of their respective obligations under Sections 1, 2, 3 and 4 and the Company and the Subsidiary Guarantors will reimburse the Initial Purchaser and the Holders for the reasonable fees and disbursements of one firm of attorneys or counsel, reasonably satisfactory to the Company and the Subsidiary Guarantors (in addition to not more than one local counsel) chosen by the Holders of a majority in aggregate principal amount of the Securities and the Exchange Securities to be sold pursuant to each Registration Statement (the "SPECIAL COUNSEL") acting for the Initial Purchaser or Holders in connection therewith. 6. INDEMNIFICATION. (a) In the event of a Shelf Registration Statement or in connection with any prospectus delivery pursuant to an Exchange Offer Registration Statement by the Initial Purchaser or an Exchanging Dealer, as applicable, the Company and the Subsidiary Guarantors shall, jointly and severally, indemnify and hold harmless each Holder (including, without limitation, the Initial Purchaser or any such Exchanging Dealer), its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls such Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively referred to for purposes of this Section 6 and Section 7 as a Holder) from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of Securities, Exchange 15 Securities or Private Exchange Securities), to which that Holder may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and shall reimburse each Holder promptly upon demand for any legal or other expenses reasonably incurred by that Holder in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER, that the Company and the Subsidiary Guarantors shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Holders' Information; and PROVIDED, FURTHER, that with respect to any such untrue statement in or omission from any related preliminary prospectus, the indemnity agreement contained in this Section 6(a) shall not inure to the benefit of any Holder from whom the person asserting any such loss, claim, damage, liability or action received Securities, Exchange Securities or Private Exchange Securities to the extent that such loss, claim, damage, liability or action of or with respect to such Holder results from the fact that both (A) a copy of the final prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such Securities, Exchange Securities or Private Exchange Securities to such person and (B) the untrue statement in or omission from the related preliminary prospectus was corrected in the final prospectus unless, in either case, such failure to deliver the final prospectus was a result of non-compliance by the Company or the Subsidiary Guarantors with Section 4(d), 4(e), 4(f) or 4(g). (b) In the event of a Shelf Registration Statement, each Holder, severally and not jointly, shall indemnify and hold harmless the Company, the Subsidiary Guarantors, their affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company and the Subsidiary Guarantors within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively referred to for purposes of this Section 6(b) and Section 7 as the Company and the Subsidiary Guarantors), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company and the Subsidiary Guarantors may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at 16 common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case, only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with any Holders' Information, and shall reimburse the Company and the Subsidiary Guarantors for any legal or other expenses reasonably incurred by the Company and the Subsidiary Guarantors in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER, that no such Holder shall be liable for any indemnity claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Securities, Exchange Securities or Private Exchange Securities pursuant to such Shelf Registration Statement. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying party in writing of the claim or the commencement of that action; PROVIDED, HOWEVER, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 6 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and PROVIDED, FURTHER, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 6. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than the reasonable costs of investigation; PROVIDED, HOWEVER, that an indemnified party shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the 17 indemnified party has reasonably concluded (based upon advice of counsel to the indemnified party) that there may be legal defenses to it or to other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based upon advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 6(a) and 6(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement (i) does not contain an admission of fault or wrongdoing and (ii) includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 7. CONTRIBUTION. If the indemnification provided for in Section 6 is unavailable or insufficient to hold harmless an indemnified party under Section 6(a) or 6(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Subsidiary Guarantors from the offering and sale of the Securities, on the one hand, and a Holder with respect to the sale by such Holder of Securities, Exchange Securities or Private Exchange Securities, on the other, or (ii) if the allocation provided by clause (i) above is not 18 permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Subsidiary Guarantors on the one hand and such Holder on the other with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Subsidiary Guarantors on the one hand and a Holder on the other with respect to such offering and such sale shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) received by or on behalf of the Company and the Subsidiary Guarantors as set forth in the table on the cover of the Offering Memorandum, on the one hand, bear to the total proceeds received by such Holder with respect to its sale of Securities, Exchange Securities or Private Exchange Securities, on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company and the Subsidiary Guarantors or information supplied by the Company and the Subsidiary Guarantors on the one hand or to any Holders' Information on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 7 were to be determined by PRO RATA allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7 shall be deemed to include, for purposes of this Section 7, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, an indemnifying party that is a Holder of Securities, Exchange Securities or Private Exchange Securities shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities, Exchange Securities or Private Exchange Securities sold by such indemnifying party to any purchaser exceeds the amount of any damages which such indemnifying party has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute as provided in this Section 7 are several in proportion to their respective obligations and not joint. 8. RULES 144 AND 144A. The Company and the Subsidiary Guarantors shall use their respective reasonable best 19 efforts to file the reports required to be filed by them under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company and the Subsidiary Guarantors are not required to file such reports, they will, upon the written request of any Holder of Transfer Restricted Securities, make publicly available other information so long as necessary to permit sales of such Holder's securities pursuant to Rules 144 and 144A. The Company and the Subsidiary Guarantors covenant that they will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including, without limitation, the requirements of Rule 144A(d)(4)). Upon the written request of any Holder of Transfer Restricted Securities, the Company and the Subsidiary Guarantors shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 8 shall be deemed to require the Company and the Subsidiary Guarantors to register any of their securities pursuant to the Exchange Act. 9. UNDERWRITTEN REGISTRATIONS. If any of the Transfer Restricted Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities included in such offering, subject to the consent of the Company (which shall not be unreasonably withheld or delayed), and such Holders shall be responsible for all underwriting commissions and discounts in connection therewith. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 10. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities, taken as a single class. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Securities, Exchange Securities or Private Exchange Securities are being sold pursuant to a Registration Statement and that does not directly or 20 indirectly affect the rights of other Holders may be given by Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and the Private Exchange Securities being sold by such Holders pursuant to such Registration Statement. (b) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telecopier or air courier guaranteeing next-day delivery: (1) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 10(b), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to Chase Securities Inc.; (2) if to the Initial Purchaser, initially at its address set forth in the Purchase Agreement; and (3) if to the Company or the Subsidiary Guarantors, initially at the address of the Company and the Subsidiary Guarantors set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being delivered to a next-day air courier; five business days after being deposited in the mail; and when receipt is acknowledged by the recipient's telecopier machine, if sent by telecopier. The Initial Purchaser, the Company and the Subsidiary Guarantors, by notice to the other, may designate additional or different addresses or telecopy numbers for subsequent notices or communications. (c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company or the Subsidiary Guarantors thereto, subsequent Holders of Securities, Exchange Securities or Private Exchange Securities. (d) COUNTERPARTS. This Agreement may be executed in any number of counterparts (which may be delivered in original form or by telecopier) and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) DEFINITION OF TERMS. For purposes of this Agreement, (a) the term "business day" means any day on which the New York Stock Exchange, Inc. is open for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405 under the 21 Securities Act and (c) except where otherwise expressly provided, the term "affiliate" has the meaning set forth in Rule 405 under the Securities Act. (f) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (h) REMEDIES. In the event of a breach by the Company, and/or the Subsidiary Guarantors, on the one hand, or by any Holder of Transfer Restricted Securities, on the other hand, of any of their obligations under this Agreement, each Holder of Transfer Restricted Securities or the Company or the Subsidiary Guarantors, as the case may be, in addition to being entitled to exercise all rights granted by law, including recovery of damages (other than the recovery of damages for a breach by the Company and/or the Subsidiary Guarantors of their obligations under Sections 1 or 2 hereof for which liquidated damages have been paid pursuant to Section 3 hereof), will be entitled to specific performance of its rights under this Agreement. The Company, the Subsidiary Guarantors and each Holder agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agree that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (i) NO INCONSISTENT AGREEMENTS. The Company and each of the Subsidiary Guarantors represents, warrants and agrees that (i) it has not entered into, shall not, on or after the date of this Agreement, enter into any agreement that is inconsistent with the rights granted to the Holders of Transfer Restricted Securities in this Agreement or otherwise conflicts with the provisions hereof, (ii) it has not previously entered into any agreement which remains in effect granting any registration rights with respect to any of its debt securities to any person and (iii) without limiting the generality of the foregoing, without the written consent of the Holders of a majority in aggregate principal amount of the then outstanding Transfer Restricted Securities, it shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are not in conflict or inconsistent with the provisions of this Agreement. (j) NO PIGGYBACK ON REGISTRATIONS. Neither the Company, the Subsidiary Guarantors nor any of their security holders (other than the Holders of Transfer Restricted Securities in such capacity) shall have the right to include any securities of the Company and the Subsidiary Guarantors in any Shelf Registration or Registered Exchange Offer other than Transfer Restricted Securities. 22 (k) SEVERABILITY. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (l) JOINT AND SEVERAL LIABILITY. Each Subsidiary Guarantor, by its execution and delivery of a counterpart to this Agreement, agrees that it shall be jointly and severally liable for all obligations and liabilities of the Company hereunder. 23 Please confirm that the foregoing correctly sets forth the agreement among the Company, each Subsidiary Guarantor and the Initial Purchaser. Very truly yours, CONTINENTAL RESOURCES, INC. By /s/ RANDY MOEDER Name: Randy Moeder Title: Senior Vice President, General Counsel and Secretary CONTINENTAL GAS, INC. By /s/ RANDY MOEDER Name: Randy Moeder Title: President CONTINENTAL CRUDE CO. By /s/ JEFF WHITE Name: Jeff White Title: President Accepted: CHASE SECURITIES INC. By /s/ L.S. Landry -------------------------- Authorized Signatory ANNEX A Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities pursuant to the Registered Exchange Offer, where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and the Subsidiary Guarantors have agreed that, for a period of 90 days after the Expiration Date (as defined herein), it will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities, where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities pursuant to the Registered Exchange Offer, where such Securities were acquired by such broker-dealer as a result of market making activities other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Securities were acquired as a result of market-making activities or other trading activities. The Company and the Subsidiary Guarantors have agreed that, for a period of 90 days after the Expiration Date, they will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until _______________, 1998, all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus. // Neither the Company nor the Subsidiary Guarantors will receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Registered Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Registered Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Securities and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 90 days after the Expiration Date the Company and the Subsidiary Guarantors will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests - -------------------------- //In addition, the legend required by Item 502(e) of Regulation S-K will appear on the back cover page of the Registered Exchange Offer prospectus. 27 such documents in the Letter of Transmittal. The Company and the Subsidiary Guarantors have agreed to pay all expenses incident to the Registered Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any broker-dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. ANNEX D / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: Address: If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account, in exchange for Securities that it represents and warrants were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-5 8 EXHIBIT 5 EXHIBIT 5 [LETTERHEAD] August 14, 1998 Continental Resources, Inc. 302 North Independence, Suite 300 Enid, OK 73701 Re: 10 1/4% Senior Subordinated Notes due 2008 Ladies and Gentlemen: We have acted as special counsel to Continental Resources, Inc. (the "Company") in connection with the issuance and sale of $150,000,000 aggregate principal amount of the Company's 10 1/4% Senior Subordinated Notes due 2008 (which are referred to herein as the "Old Notes") and the registration under the Securities Act of 1933 of $150,000,000 aggregate principal amount of the Company's 10 1/4% Senior Subordinated Notes due 2008 (the "New Notes"). The New Notes are to be offered in exchange for all outstanding Old Notes (the "Exchange Offer") as more fully set forth in the prospectus which forms are a part of the Company's Registration Statement on Form S-4 (the "Registration Statement") with which this opinion is being filed. In this connection we have examined the Company's Certificate of Incorporation and Bylaws, minutes of certain meetings of the Company's Board of Directors and the Indenture dated as of July 24, 1998 between the Company and United States Trust Company of New York, as Trustee, governing the Old Notes and the New Notes, and have made such other investigations of fact and law as we deem necessary to render the opinions set forth herein. Based on the foregoing, we are of the opinion that the New Notes to be exchanged for the Old Notes in the Exchange Offer, when issued in accordance therewith, will be legally issued, fully paid and non-assessable and will be binding obligations of the Company. The opinion expressed herein as to the New Notes constituting binding obligations of the Company is subject to the exceptions that (1) enforcement may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors rights generally, and (2) enforcement is subject to general principles of equity (regardless of whether enforcement is considered a proceeding in equity or at law). We hereby consent to the reference to our firm in the Prospectus under the caption "Legal Matters". Very truly yours, /s/ MCAFEE & TAFT A Professional Corporation EX-10.1 9 EXHIBIT 10.1 PURCHASE AND SALE AGREEMENT BY AND BETWEEN BASS ENTERPRISES PRODUCTION CO., ET AL AS SELLERS AND CONTINENTAL RESOURCES, INC. AS BUYER DATED MARCH 28, 1998 TABLE OF CONTENTS PAGE 1. Property to be Sold and Purchased . . . . . . . . . . . . 1 2. Purchase Price. . . . . . . . . . . . . . . . . . . . . . 2 3. Deposit . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Allocation of Base Purchase Price . . . . . . . . . . . . 2 5. Seller's Representations . . . . . . . . . . . . . . . . 2 6. Buyer's Representations . . . . . . . . . . . . . . . . . 3 7. Covenants of Seller and Buyer Pending Closing . . . . . . 4 8. Due Diligence Reviews . . . . . . . . . . . . . . . . . . 6 9. Adverse Environmental Conditions. . . . . . . . . . . . . 8 10. Disposal of Materials, Substances, and Wastes; Compliance with Law . . . . . . . . . . . . . . . . . . 10 11. Certain Price Adjustments to the Base Purchase Price . . 11 12. Conditions Precedent to Buyer's Obligations . . . . . . . 12 13. Conditions Precedent to Seller's Obligations . . . . . . 13 14. The Closing . . . . . . . . . . . . . . . . . . . . . . . 13 15. After Closing . . . . . . . . . . . . . . . . . . . . . . 15 16. Certain Accounting Adjustments to the Purchase Price . . 16 17. Assumption and Indemnification. . . . . . . . . . . . . . 18 18. Environmental Assessment and Indemnification by Buyer . . 19 19. Disclaimer of Warranties. . . . . . . . . . . . . . . . . 19 20. Buyer's Covenant Not to Sue Seller Group . . . . . . . . 20 21. Commissions . . . . . . . . . . . . . . . . . . . . . . . 20 22. Casualty Loss . . . . . . . . . . . . . . . . . . . . . . 20 23. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 20 24. Survival of Provisions. . . . . . . . . . . . . . . . . . 20 25. Miscellaneous Matters . . . . . . . . . . . . . . . . . . 21
Exhibit A - Oil and Gas Leases Exhibit B - Wells Exhibit C - Assignment and Bill of Sale Exhibit D - Suits, Actions, or other Legal Proceedings Pending Exhibit E - Allocation of Values PURCHASE AND SALE AGREEMENT This Agreement, dated March 28, 1998, is made by and between the signatory parties shown below under "Sellers" whose address is 201 Main Street, Fort Worth, Texas 76102 (hereinafter collectively called "Seller") and Continental Resources, Inc., whose address is P.O. Box 1032, Enid, Oklahoma 73702 (hereinafter called Buyer"); W I T N E S S E T H: WHEREAS, Buyer desires to purchase the Properties, as defined below, from Seller, and Seller desires to sell the same Properties to Buyer, subject to the terms and conditions of this Agreement. WHEREAS, It is the parties' intent that Buyer assume all responsibility and liability as provided herein for all matters relating to the Properties to be assigned. NOW, THEREFORE, In consideration of the mutual promises made herein and the benefits to be derived hereunder, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, Seller and Buyer agree as follows: 1. PROPERTY TO BE SOLD AND PURCHASED. Seller agrees to sell, and Buyer agrees to purchase, for the consideration herein set forth, and subject to the terms and provisions herein contained, the following described Properties, rights, and interests: (a) All rights, titles, and interests of Seller in and to: 1) the oil, gas, and mineral leases described in Exhibit A hereto; and 2) the wells described in Exhibit B hereto; (b) All rights, titles, and interests of Seller in and to, or otherwise derived from, all presently existing and valid oil, gas, and mineral unitization, pooling, and communitization agreements, declarations, and orders (including, without limitation, all units formed under orders, rules, regulations, or other official acts of any federal, state, or other authority having jurisdiction, and voluntary unitization agreements, designations, and declarations) relating to the properties described in subsection 1.(a) to the extent such rights, titles, and interests are attributable to the properties described in subsection 1.(a); (c) All rights, titles, and interests of Seller in and to all presently existing and valid production sales contracts, operating agreements, and other agreements and contracts that relate to any of the properties described in subsections 1.a. and 1.b., to the extent such rights, titles, and interests are assignable and attributable to the properties described in subsections 1.(a) and 1.(b); (d) All rights, titles, and interests of Seller in and to all rights-of-way, easements, surface leases, permits, and licenses appurtenant to the properties described in subsections 1.(a) and 1.(b); and (e) All rights, titles, and interests of Seller in and to all materials, supplies, machinery, equipment, improvements, and other personal property and fixtures (including, but not limited to, wellhead equipment, pumping units, flowlines, tanks, buildings, injection facilities, saltwater disposal facilities, compression facilities, gathering systems, and other equipment) located on the properties described in subsections 1.(a) and 1.(b) and used in connection with the exploration, development, operation, or maintenance thereof. The properties and interests specified in subsections 1.(a), 1.(b), 1.(c), 1.(d) and 1.(e) are herein sometimes collectively called the "Properties". The defined term "Properties" shall include seismic data, geological or geophysical data, including interpretations, environmental studies, or other similar data, or any interpretations thereof or other data or records related thereto. Seller shall provide Buyer with such data Seller has in its files, excluding any interpretations, engineering 1 reports and evaluations, Seller financial information and all data which Seller considers proprietary or confidential or that Seller cannot provide to Buyer without breaching, or risking a breach of, an agreement with a third party. 2. PURCHASE PRICE. The unadjusted purchase price for the Properties shall be Eighty Six Million Five Hundred Thousand Dollars ($86,500,000.00), payable in United States dollars, (herein called the "Base Purchase Price"). The Base Purchase Price may be adjusted, as provided in Sections 7.(c), 11. and 16. hereof. The Base Purchase Price, as so adjusted and as otherwise adjusted by mutual agreement of the parties herein, shall be called the "Purchase Price." 3. DEPOSIT. Upon entering into this Agreement, as evidence of good faith, Buyer shall pay to Seller Eight Million Six Hundred Fifty Thousand Dollars ($8,650,000.00) hereinafter called the "Deposit". If Buyer and Seller consummate the transaction contemplated hereby in accordance with the terms hereof, the Deposit shall be applied to the Base Purchase Price. If Buyer and Seller do not consummate the transaction contemplated hereby because of a material default by Seller, in the absence of a default by Buyer, Seller shall return the Deposit to Buyer and shall, in addition, pay to Buyer the sum of Two Million Five Hundred Thousand Dollars ($2,500,000.00) as liquidated damages and not as a penalty. Except as provided in Section 12., if Buyer fails or refuses to consummate the transaction contemplated hereby, Seller shall retain the Deposit as liquidated damages and not as a penalty. Buyer stipulates that Seller's damages in the event of Buyer's wrongful failure to close would be uncertain and that the amount of liquidated damages provided herein is reasonable. Forfeiture of the Deposit as liquidated damages as provided herein shall be Seller's sole remedy at law or in equity for Buyer's failure to close as provided in this Agreement. In no event shall the Deposit accrue interest. 4. ALLOCATION OF BASE PURCHASE PRICE. Buyer has allocated the Base Purchase Price to the Properties by various categories. These categories and the allocations thereto are shown on Exhibit E and have been made in good faith by Buyer and may be relied upon by Seller for all purposes of this Agreement. 5. SELLER'S REPRESENTATIONS. Each of the individuals and entities comprising Seller represent to Buyer that: (a) Each (other than natural persons) is a legal entity duly organized and legally existing under the laws of the State of Texas. Each corporation and limited partnership is qualified to do business in Wyoming and is in good standing, or will be at Closing. (b) Each has full power to enter into this Agreement and perform its obligations hereunder and has taken all necessary action to enter into this Agreement and perform its obligations hereunder. (c) Execution and delivery of this Agreement, the consummation of the transaction contemplated hereby, and compliance with the terms hereof, will not result in any default under any agreement or instrument to which Seller, or any individual party thereof, is a party or by which the Properties are bound that would be material to this transaction. Execution and delivery of this Agreement will not violate any contractual provision, order, writ, injunction, decree, statute, rule, or regulation applicable to Seller, or any individual party thereof, or to the Properties that would be material to this transaction, except the following: (i) Any waivers of preferential rights to purchase that must be obtained from third parties; (ii) Compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"); and, 2 (iii) Any approvals that must be obtained from governmental entities who are lessors under leases included in the Properties (or who administer such leases for such lessors) and that are customarily obtained post-closing. (d) This Agreement and the Assignment and Bill of Sale provided for in Section 14.(a)(i) hereof and any other documentation provided for herein to be executed by Seller, will, when executed and delivered, constitute the legal, valid, and binding obligations of Seller, enforceable according to their terms, except as limited by bankruptcy or other laws applicable generally to creditor's rights and as limited by general, equitable principles. (e) Except as disclosed on Exhibit D, there are no pending suits, actions, or other proceedings in which Seller is a party that materially affect the Properties (including, without limitation, any actions challenging or pertaining to Seller's title to any of the Properties) or affect the execution and delivery of this Agreement or the consummation of the transaction contemplated hereby. 6. BUYER'S REPRESENTATIONS. Buyer represents to Seller that: (a) Buyer is a corporation duly organized and legally existing under the laws of its state of organization. Buyer is qualified to do business in Wyoming and is in good standing, or will be at Closing. (b) Buyer has full power and ability to enter into and perform its obligations under this Agreement (including, but not limited to the payment of the Purchase Price at Closing) and has taken all necessary action to enter into this Agreement and perform its obligations hereunder. (c) Buyer's execution and delivery of this Agreement, the consummation of the transaction contemplated hereby, and Buyer's compliance with the terms hereof, will not result in any default under any agreement or instrument to which Buyer is a party or by which the Properties are bound that would be material to this transaction. Buyer's execution and delivery of this Agreement will not violate any contractual provision, order, writ, injunction, decree, statute, rule, or regulation applicable to Buyer or to the Properties that would be material to this transaction, except the following: (i) Any waivers of preferential rights to purchase that must be obtained from third parties; (ii) Compliance with the "HSR Act;" and, (iii) Any approvals that must be obtained from governmental entities who are lessors under leases included in the Properties (or who administer such leases for such lessors) and that are customarily obtained post-closing. (d) This Agreement and the Assignment and Bill of Sale provided for in Section 14.(a)(i) hereof and any other documentation provided for herein to be executed by Buyer, will, when executed and delivered, constitute, the legal, valid, and binding obligations of Buyer, enforceable according to their terms, except as limited by bankruptcy or other laws applicable generally to creditor's rights and as limited by general, equitable principles. (e) There are no pending suits, actions, or other proceedings in which Buyer is a party that materially affect the execution and delivery of this Agreement or the consummation of the transaction contemplated hereby. (f) Buyer is a knowledgeable purchaser, owner, and operator of oil and gas 3 properties, has the ability to evaluate, and has evaluated, the Properties for purchase, and is acquiring the Properties for its own account and not with the intent to make a distribution within the meaning of the Securities Act of 1933, as amended (and the rules and regulations pertaining thereto), or a distribution thereof in violation of any other applicable securities laws, rules, or regulations. (g) Buyer wishes to replace Seller as operator in every well described on Exhibit B which Seller presently operates. Accordingly, Buyer is, or will become, qualified to operate such Properties under the applicable laws, rules, and regulations of the jurisdiction in which such Properties are located. 7. COVENANTS OF SELLER AND BUYER PENDING CLOSING. Between the date of this Agreement and the Closing Date: (a) Seller shall permit Buyer access as follows: (i) Seller shall give Buyer and its attorneys and other representatives, who have a legitimate need to know, access at all reasonable times during normal business hours to the Properties and, at Seller's office, to Seller's records (including, without limitation, title files, division order files, well files, production records, equipment inventories, and production severance, and ad valorem tax records) pertaining to the ownership and operation of the Properties, to conduct due diligence reviews as contemplated by Section 8. below. Buyer may make copies of such records at its expense but shall, if Seller so requests, return all copies so made if the Closing does not occur. Seller shall not be obligated to provide Buyer with access to any records or data that Seller considers to be proprietary or confidential or that Seller cannot provide to Buyer without breaching, or risking a breach of, confidentiality agreements with other parties. Until Closing, all records and data provided shall be subject to the previously executed Confidentiality Agreement between Buyer and Seller. SELLER MAKES NO WARRANTY, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, AS TO THE ACCURACY OR COMPLETENESS OF THE FILES AND OTHER INFORMATION THAT IT MAY PROVIDE TO BUYER OR THAT MAY BE PROVIDED BY OTHERS. (ii) Seller shall make a good faith effort to give Buyer, or Buyer's authorized representatives, who have a legitimate need to know, at reasonable times and upon adequate notice to Seller, physical access to the Properties for the purpose of inspecting same. Buyer recognizes that some of the Properties are operated by third parties and that Seller's ability to obtain access to such Properties, and the manner and extent of such access, is subject to the consent of such third parties. Buyer agrees to comply fully with the rules, regulations, and any instructions issued by Seller or third party (where a Property is operated by such third party) regarding the actions of Buyer while upon, entering, or leaving the Properties. (iii) If Buyer exercises rights of access under this Section or otherwise, or conducts examinations or inspections under this Section or otherwise, then (a) Buyer will be accompanied by Seller's representative at all times; (b) such access, examination, and inspection shall be at Buyer's sole risk, cost, and expense, and Buyer waives and releases all claims against Seller (its affiliates and their respective directors, officers, employees,attorneys, contractors, and agents) arising in any way therefrom or in any way connected therewith or arising in connection with the conduct of its directors, officers, employees, attorneys, contractors, and agents in connection therewith; and (c) BUYER SHALL RELEASE, INDEMNIFY, DEFEND, AND HOLD HARMLESS SELLER (AND 4 ITS PARENT, SUBSIDIARY COMPANIES, AND OTHER AFFILIATES AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, CONTRACTORS, AND AGENTS) (HEREINAFTER COLLECTIVELY REFERRED TO AS "SELLER GROUP") FROM ANY AND ALL CLAIMS, ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES,COSTS, OR EXPENSES (INCLUDING, WITHOUT LIMITATION, COURT COSTS AND ATTORNEYS' FEES), OR LIENS OR ENCUMBRANCES FOR LABOR OR MATERIALS, ARISING OUT OF OR IN ANY WAY CONNECTED WITH SUCH ACCESS, EXAMINATION, AND INSPECTION. THE FOREGOING RELEASE AND INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH CLAIMS, ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS, OR EXPENSES ARISE OUT OF (i) NEGLIGENCE (INCLUDING SOLE NEGLIGENCE, SIMPLE NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE OR PASSIVE NEGLIGENCE, OR OTHERWISE, BUT EXPRESSLY NOT INCLUDING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) OF SELLER OR ANY OTHER INDEMNIFIED PARTY, OR (ii) STRICT LIABILITY. (b) Seller shall continue to conduct its business in its ordinary course, and in accordance with all applicable ordinances, statutes, rules, and regulations of all local, state, and federal governments. Seller shall not enter into or assume any contract or commitment which is not in the ordinary course of business as heretofore conducted in association with the Properties and shall carry on its business and operate the Properties as a reasonably prudent operator. Subject to existing contractual obligations, Seller shall not conduct, or commit to participate in, on behalf of Buyer, any operation on the Properties, or lands pooled or unitized therewith and shall not enter into a contract for the sale of crude oil from the Properties continuing in effect past the Effective Date without Buyer's prior written consent. However, Seller may take such steps and incur such expenses as it deems necessary in its sole opinion to deal with an emergency to safeguard any part of the Property without first consulting with Buyer. As soon as possible after the emergency, Seller shall advise Buyer of such emergency action. Except as set forth in this Agreement, Seller shall not sell, assign, transfer, mortgage, farmout, or otherwise dispose of, abandon, or encumber any material portion of the Properties. (c) Seller shall use reasonable efforts, consistent with industry practices in transactions of this type, to identify, with respect to each material portion of the Properties, (i) all preferential rights to purchase that would apply to the transaction contemplated hereby and (ii) the parties holding such rights. In attempting to identify the same, Seller shall not be obligated to go beyond its own records. Seller shall request from the parties so identified, and in accordance with the documents creating such rights, waivers of the preferential rights to purchase. Seller shall have no obligation hereunder other than to attempt to identify such preferential rights and to request such waivers. Seller shall not be obligated to assure that such waivers are obtained. Seller may tender to any party refusing to waive such a preferential right the interest covered by such right at a value as mutually agreed to by Buyer and Seller which shall be made in good faith, but in no event shall the value of a well exceed the value assigned to it by Ryder-Scott Company, an independent petroleum reservoir engineering company, in its recent Reserve Report dated January 14, 1998, prepared on behalf of Seller (hereinafter referred to as the "Ryder-Scott Report") using the present value (future net income before income taxes discounted at ten percent (10%)) of the total proved reserves. If Buyer and Seller are unable to agree on a value, the value for a well shall be determined as provided in Section 11.(a)(ii) using the V/T = PVW/PVC equation for Properties falling in Categories A and B as shown on Exhibit E. This value shall be used in determining the value of any 5 interest in a well covered by a preferential right to purchase. The value shall be determined using the formula as provided in Section 11.(a)(iii) for Properties falling in Category C where F=Seller's net acres subject to a preferential right to purchase. To the extent that such an interest is actually sold to a party exercising such a preferential right, it shall be excluded from the transaction contemplated hereby, and the Base Purchase Price shall be reduced by the amount such party paid to Seller for such interest unless the parties hereto agree otherwise. (d) If applicable, as soon as practicable after the execution hereof, Buyer shall prepare and submit any necessary filings in connection with the transaction contemplated by this Agreement under the HSR Act. Buyer shall pay all filing fees in connection with such filing, shall request expedited treatment of such filing by the Federal Trade Commission ("FTC"), shall promptly make any appropriate or necessary subsequent or supplemental filings, and shall furnish to Seller copies of all filings made under the HSR Act at the same time they are filed with the FTC. Seller shall cooperate with Buyer as to all filings required by the HSR Act. (e) After both parties have executed this Agreement, Seller shall deliver to Buyer a copy of its "pay list" for each well listed on Exhibit B (which pay list shall include the name, address, social security number, and applicable share of proceeds of production, to the extent such information is contained in Seller's records, for each party to whom Seller is disbursing proceeds of production with respect to such property); and, a list of all parties for whom it is holding in suspense proceeds of production. Seller does not represent or warrant to Buyer the accuracy of the "pay lists" so delivered. (f) At such time that all Asserted Defects (as hereinafter defined) have been fully resolved to the satisfaction of both Parties or if no Defects have been asserted by Buyer as of the Defect Notice Date (as hereinafter defined)upon Seller's receipt of Buyer's written confirmation and assurance that all Defects, if any, have been resolved and Buyer is prepared to close the transaction subject only to Seller's performance of its closing obligations as set forth in Section 14(a), Seller shall give Buyer and its accountants access to any and all accounting information in Seller's possession reasonably requested by Buyer for the preparation by Buyer, at its sole expense and risk, of pro-forma financial statements reflecting the financial performance of the Properties for the most recent three (3) calendar year(s). Buyer agrees that none of the information compiled for the purpose of this limited audit shall be used for the purpose of due diligence by Buyer or otherwise to assert any claim against Seller. Seller shall have no responsibility whatever for the financial statements so prepared by Buyer. 8. DUE DILIGENCE REVIEWS. (a) The term "Defect" as used in this Section shall mean any of the following: (i) As of the Effective Date, Seller's ownership of a well listed on Exhibit B hereto either, (A) entitles Seller to receive a share of the oil, gas, and other hydrocarbons produced from, or allocated to, such well that is less than the share set forth on Exhibit B for such well in the columns headed "Net Revenue Interest (NRI)" and "Overriding Royalty Interest (ORI)", excepting any decreases caused by an increase in the landowner's royalty payable to the Federal and State Governments or pursuant to contractual obligations, including, without limitation, sliding scale overriding royalties, which are tied to amount of production, or as mandated by Federal and State statutes or as promulgated in the respective Federal and State Rules and Regulations; or, (B) causes Seller to bear a share of the cost of operating such well greater than the share set forth on Exhibit B for such well in the column headed "Working Interest (WI)" (without a proportionate increase in the share of 6 production to which Seller is entitled from such well); (ii) Seller's ownership of a Property is subject to a lien other than (A) a lien that will be released at or before Closing, (B) a lien for taxes not yet delinquent, or (C) a lien under an operating agreement or similar agreement, to the extent the same relates to expenses incurred that are not yet due; (iii) Seller's ownership of a Property is subject to a preferential right to purchase, unless a waiver of such right has been obtained with respect to the transaction contemplated hereby or an appropriate tender of the applicable interest has been made to the party holding such right and the period of time required for such party to exercise such right has expired without such party exercising such right; (iv) Seller's ownership of a Property is subject to an imperfection in title that, if asserted, would cause a Defect, as defined in clause (i) above, to exist, and such imperfection in title normally would not be waived by reasonable and prudent persons engaged in the oil and gas business with knowledge of all the facts and their legal bearing and would materially impair or prevent Buyer from receiving payment from the purchasers of production, and would prevent the economic benefit Buyer could reasonably expect by acquiring the Properties; (v) Seller's ownership of a non-producing Property is subject to an imperfection in title that, if asserted, would cause Seller's ownership as shown on Exhibit A to be less; and such imperfection in title normally would not be waived by reasonable and prudent persons engaged in the oil and gas business with knowledge of all the facts and their legal bearing and would materially prevent the economic benefit Buyer could reasonably expect by acquiring such Property. (b) Buyer may conduct, to the extent it deems appropriate and at its sole risk and cost, such examinations and investigations as it may choose with respect to the Properties in order to determine whether "Defects" exist. Unless waived, Buyer shall notify Seller in writing of such Defects as soon as they are identified, but no later than ten (10) days prior to the date upon which Closing is scheduled to occur pursuant to Section 14. [and not as extended pursuant to 14.(i) or 14.(ii)] (hereinafter "Defect Notice Date"). Those Defects identified in such notice to Seller are herein called "Asserted Defects". Such notification shall include a description of the Asserted Defect, the lease(s) described on Exhibit A affected by such Asserted Defect, the well(s) listed on Exhibit B to which the Asserted Defect relates, and all supporting documentation reasonably necessary fully to describe in detail the basis for the Asserted Defect; and, for each property, lease and applicable well, the size of any variance from "Net Revenue Interest (NRI)", "Overriding Royalty Interest (ORI)", or "Working Interest (WI)" set forth in Exhibit B that does or could result from such Asserted Defect. Buyer hereby waives all Defects that it fails to identify to Seller as Asserted Defects on or before the Defect Notice Date. If Buyer timely notifies Seller of Asserted Defects, Seller (i) shall have the right (but not the obligation) to attempt to cure such Asserted Defects prior to Closing, and (ii) shall also have the right (which may be exercised at any time before the Closing Date) to postpone the Closing by designating a new Closing Date not later than thirty (30) days after the Closing Date then existing, if Seller desires additional time to attempt to cure (including determining if it will attempt to cure) one or more Asserted Defects. In lieu of curing or attempting to cure an Asserted Defect, Seller may elect, at any time prior to Closing with respect to any Asserted Defect, to indemnify and hold Buyer harmless from and against any actual damages or loss (but specifically excluding consequential damages, special damages, or similar damages) Buyer may suffer as a result of a third party claim based on such Asserted Defect; provided, 7 unless Buyer consents, Seller may not so elect to indemnify Buyer in lieu of curing such Asserted Defect(s) if the amount attributable to such Asserted Defect(s) exceeds One Million Dollars($1,000,000.00). If Seller elects to indemnify Buyer as to an Asserted Defect, such Asserted Defect will be treated under this Agreement as cured and, as to such indemnified Asserted Defect, SELLER SHALL RELEASE, INDEMNIFY, DEFEND, AND HOLD HARMLESS BUYER FROM AND AGAINST ANY AND ALL LOSS, COST, DAMAGE, EXPENSE, OR LIABILITY WHATSOEVER, INCLUDING ATTORNEYS' FEES, ARISING OUT OF THE ASSERTED DEFECT SELLER HAS ELECTED TO INDEMNIFY (EXCEPT ANY CAUSED SOLELY BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF BUYER). (c) Buyer shall have the right to make an environmental assessment of the Properties during the period beginning on the date of execution of this Agreement and ending on the Defect Notice Date. Subject to the provisions regarding Buyer's rights to access under Section 7 hereof, Buyer and its agents shall have the right to enter upon the Properties and all buildings and improvements thereon, inspect the same, conduct soil and water tests and borings, and generally conduct such tests, examinations, investigations, and studies as Buyer may deem necessary or appropriate for the preparation of appropriate engineering and other reports in relation to the Properties and their physical and environmental condition. If Buyer proposes to undertake an environmental assessment, Buyer's proposed plan, the consultants to be used, and testing protocol must be approved by Seller before the work may begin. Buyer agrees promptly to provide to Seller a copy of the environmental assessment, including any reports, data, and conclusions. Buyer shall keep all data and information acquired by such examinations and the results of all analyses of such data and information strictly confidential and shall not disclose same to any person or agency without the prior written approval of Seller. BUYER SHALL RELEASE, INDEMNIFY, DEFEND, AND HOLD HARMLESS THE SELLER GROUP FROM AND AGAINST ANY AND ALL LOSS, COST, DAMAGE, EXPENSE, OR LIABILITY WHATSOEVER, INCLUDING ATTORNEYS' FEES, ARISING OUT OF ANY ENVIRONMENTAL ASSESSMENT INCLUDING, BUT NOT LIMITED TO, INJURY TO OR DEATH OF PERSONS OR DAMAGE TO PROPERTY OCCURRING IN, ON, OR ABOUT THE PROPERTIES AS A RESULT OF SUCH ACTIVITIES (EXCEPT ANY SUCH INJURIES OR DAMAGES CAUSED SOLELY BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP). (d) After the Defect Notice Date, Buyer shall be deemed to have inspected the Properties or waived its right to inspect the Properties for all purposes and satisfied itself as to their physical and environmental condition, both surface and subsurface. 9. ADVERSE ENVIRONMENTAL CONDITIONS. Seller represents to Buyer that to the best of its knowledge there are no environmental conditions, as hereinafter defined, existing as of the date hereof which Seller has not disclosed to Buyer. Seller will advise Buyer of any Condition that Seller becomes aware of from the date hereof to the Closing Date. (a) Buyer shall have until the Defect Notice Date to notify Seller of any material adverse environmental condition of the Properties which Buyer deems unacceptable and provide evidence of the condition to Seller. An environmental condition is a material adverse environmental condition ("Condition") only if the following criteria are met: (i) The environmental condition would have been required to be remediated on the Effective Date under the Environmental Laws; and, 8 (ii) The total cost to remediate all environmental conditions identified by Buyer affecting the Properties to the state required by the Environmental Laws is reasonably estimated to be at least $100,000.00. (b) "Environmental Law" shall mean any federal, state, or local law, rule, regulation, order, or ordinance in effect as of the Effective Date of this Agreement pertaining to protecting the public health, welfare, and the environment. (c) At Closing, Seller may elect any of the following provided a Condition exists: (i) Decrease the Purchase Price by a mutually acceptable amount reflecting Seller's proportionate share, based on its working interest, of the cost reasonably estimated to remediate a Condition affecting the Properties to such a state as required by the Environmental Laws; (ii) Remove the affected Properties from this Agreement and adjust the Base Purchase Price by an amount mutually agreed to by Seller and Buyer. If Buyer and Seller are unable to agree on an amount, the value of Properties falling in Categories A and B shall be determined as provided in Section 11.(a)(ii) using the V/T = PVW/PVC equation and an appropriate adjustment will be made using this value. The value of all affected Properties falling in Category C shall be determined using the formula in Section 11.(a)(iii) where F=Seller's net acres affected by the Condition. (iii) Remedy, or, if applicable, agree to indemnify, Buyer in accordance with Section 8(b); the Condition, as provided below. (d) If option (c)(i) above is chosen, Buyer shall be responsible for any remediation and if the actual cost to remediate a Condition exceeds the amount of the estimate, Buyer shall pay the additional costs to remediate the Condition as required by applicable law. (e) If option (c.)(iii). above is chosen, the following shall govern the remediation: (i) Seller shall be responsible for all negotiations and contacts with federal, state, and local agencies and authorities with regard to the Condition or remediation. Buyer shall not make any independent contacts with any agency, authority, or other third party with respect to the Condition or remediation and will keep all information regarding the Condition and remediation confidential, except in each instance to the extent required by applicable law. (ii) Seller shall remediate the Condition to the state agreed upon by Seller and Buyer, but in no event will Seller be required to remediate the Condition beyond the state required by the Environmental Laws. (iii) Buyer will grant and warrant access to the affected Properties after Closing to Seller and third parties conducting assessments or remediation, to the extent and as long as necessary to conduct and complete the assessment or remediation work, to remove equipment and facilities, and to perform any other activities reasonably necessary in connection with assessment or remediation. (iv) Buyer will use its best efforts not to interfere with Seller's ingress and egress or assessment or remediation activities. Seller shall make reasonable 9 efforts to perform the work so as to minimize disruption to Buyer's business activities and to the Properties. (v) Seller shall continue remediation of the Condition until the first of the following occurs: (1) The appropriate governmental authorities provide written notice to Seller or Buyer that no further remediation of the Condition is required; (2) The parties agree that the Condition has been remediated to the state required by the Environmental Laws or as agreed by the parties. Upon the occurrence of either (1) or (2) above, Seller shall notify Buyer that remediation of the Condition is complete and provide a copy of the notification described in (1) above, if applicable. Upon delivery of Seller's notice, Seller shall be released from all liability and have no further obligations under any provisions of this Agreement in connection with a Condition. (vi) Until Seller completes remediation of a Condition, Seller and Buyer will each notify the other of any pending or threatened claim, action, or proceeding by any authority or private party that relates to or would affect the environmental condition, the assessment, or the remediation of the affected Properties. (vii) After Buyer takes over as operator, and before Seller has completed remediation of a Condition, if a leak, spill, or discharge of any material or substance ("Occurrence") occurs on the affected Properties, or any part of them, Buyer will promptly notify Seller and act promptly to minimize the effects of the Occurrence. If a spill, leak, or discharge occurs and Seller determines that it may affect the area where Seller is conducting remediation or assessment, Buyer will hire a consultant (who must be acceptable to Seller) to assess the effect of the Occurrence on the environmental condition of the affected Properties, and the cost of Seller's remediation work and the cost of the additional work required as the result of the Occurrence. Unless the Occurrence was caused solely by Seller, Buyer will be responsible for the incremental cost of remediating the impact of the Occurrence. If Seller's remediation is expanded to incorporate remediation of the Occurrence, Buyer will promptly pay its share of costs and expenses to Seller as the work is performed, within thirty (30) days of receipt of invoices for the work (with supporting documentation). Payments not made timely will bear interest at a rate of twelve percent (12%) per annum or the maximum lawful rate, whichever is less, compounded daily from the date of Buyer's receipt of the invoice until paid. If the cost of the additional work equals or exceeds the cost to complete the remediation which would have been incurred but for the Occurrence, Seller will pay Buyer the cost that would have been incurred by Seller to complete the remediation but for the Occurrence. As consideration for this payment, Buyer will accept the environmental condition of the affected Properties as they exist on the date of the payment, assume full responsibility for remediating the affected Properties and related off-site contamination in accordance with this Agreement, and agrees to release, not to sue, indemnify, hold harmless, and defend Seller as to claims and liabilities arising from the Occurrence to the same extent as described in Sections 17., 18., and 20. 10 (viii) If Seller undertakes remediation as to any Properties in which Seller's ownership was less than 100%, and provided that the expense(s) incurred by Seller in such remediation are fair and reasonable, Buyer will bill the other working interest owners for their share of the remediation expenses. Regardless of whether Buyer recoups any amount from the other working interest owners, Buyer will refund to Seller, within sixty (60) days of each Seller invoice, with documentation, any amounts expended by Seller over the amount attributable to Seller's former working interest share. (ix) If Seller will assess or remediate the affected Properties after Closing, the Assignment and Bill of Sale or other recordable instrument will restate the rights and obligations of this section. 10. DISPOSAL OF MATERIALS, SUBSTANCES, AND WASTES; COMPLIANCE WITH LAW. Buyer will store, handle, transport, and dispose of or discharge all materials, substances, and wastes from the Properties (including produced water, drilling fluids, NORM, and other wastes), whether present before or after the Effective Date, in accordance with applicable local, state, and federal laws and regulations. Buyer will keep records of the types, amounts, and location of materials, substances, and wastes that are stored, transported, handled, discharged, released, or disposed of onsite and offsite. When any lease terminates, an interest in which has been assigned under this Agreement, Buyer will undertake additional testing, assessment, closure, reporting, or remedial action with respect to the Properties affected by the termination as is necessary to satisfy all local, state, or federal requirements in effect at that time and necessary to restore the Properties. Buyer shall assume full responsibility for the operations conducted pursuant to this Section 10. and agrees to release, not to sue, indemnify, hold harmless, and defend Seller as to all claims and liabilities arising therefrom to the same extent as described in Sections 17., 18., and 20. 11. CERTAIN PRICE ADJUSTMENTS TO THE BASE PURCHASE PRICE. (a) If Buyer presents Asserted Defects to Seller as a part of the due diligence reviews provided for in Section 8. above, and if Seller is unable or unwilling to cure such Asserted Defects prior to Closing, or if Buyer has elected to treat a Property affected by a casualty loss pursuant to Section 22. as if it were a Property affected by an Asserted Defect, then an appropriate adjustment to the Base Purchase Price to account for such Asserted Defects shall be made as follows: (i) Buyer and Seller shall attempt to agree upon an appropriate adjustment to the Base Purchase Price to account for an Asserted Defect which Seller either is unable or unwilling to cure prior to Closing, and those Properties, or any part thereof, associated with the Asserted Defect shall be excluded from this Agreement and any rights of Buyer hereunder to such Properties shall terminate. (ii) If Buyer and Seller are unable to agree upon an appropriate adjustment with respect to an Asserted Defect which affects Seller's interest in any Property falling in either Category A or B as shown on Exhibit E, adjustments shall be made as follows: Determine the value of all wells contained in the Unit in which the Property affected by the Asserted Defect falls by using the following equation and solve for V. "Unit" as used herein shall mean a drilling and spacing unit as determined by order or rule of the Wyoming Oil & Gas Conservation Commission or as otherwise permitted by law, or the Participating Area affected by the Asserted Defect. V/T = PVW/PVC T = Total amount ($) allocated to category containing Unit as shown 11 on Exhibit E. PVW = BFIT PV @ 10% (Future net income before income taxes discounted at ten percent (10%)) of total proved reserves in all wells in Unit as contained in the Ryder-Scott Report. PVC = BFIT PV @ 10% (Future net income before income taxes discounted at ten percent (10%)) of total proved reserves in all wells in Category as contained in the Ryder-Scott Report. The Base Purchase Price shall be adjusted by the absolute value of an amount using the following formula: Adjustment = V X (1-[B/C]) V = Value of wells as determined above. B = Correct net revenue interest for all wells in Unit including any overriding royalty interest. C = Net revenue interest, including any overriding royalty interest, as shown on Exhibit B in all wells in Unit. (iii) If an Asserted Defect affects Seller's interest in any Property falling in Category C and Buyer and Seller cannot mutually agree on an appropriate adjustment to the Base Purchase Price, adjustments shall be made using the following formula: Adjustment = T X F/25,000 T = Total amount ($) allocated to Category C as shown on Exhibit E. F = Seller's net acres affected by uncured Asserted Defect. (b) If it is determined that Seller's interest in a well listed on Exhibit B is greater or lesser than the interest shown for such well under the columns headed "Net Revenue Interest (NRI)" and "Overriding Royalty Interest (ORI)" on Exhibit B, then Seller or Buyer may propose an increase or decrease, as applicable, in the Base Purchase Price, in which case such increase or decrease shall be handled in the same manner as provided above with respect to adjustments for Asserted Defects; provided that the party making such determination shall notify the other party of such adjustment on or before the Defect Notice Date. Buyer shall have an affirmative obligation to disclose to Seller circumstances discovered by Buyer in its due diligence review that could result in an increase in the Base Purchase Price hereunder. No increase in the Base Purchase Price will result from any royalty reduction resulting under the Federal Royalty Reduction Program. (c) Notwithstanding the adjustments to be made pursuant to subsections 11.(a) and 11.(b) above, if such adjustments do not exceed $250,000 in the aggregate, no such adjustments shall be made and none of the Properties that would otherwise have been excluded pursuant to subsection 11.(a) above shall be excluded. If the adjustments to be made pursuant to subsections 11.(a) and 11.(b) above, do exceed $250,000.00, the Base Purchase Price shall be adjusted according thereto. 12. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. Buyer's obligations at Closing under this Agreement are subject to each of the following conditions: (a) Seller's representations under this Agreement shall be true and accurate in all 12 material respects as of the date when made and at Closing, except as to changes specifically contemplated by this Agreement or consented to by Buyer in writing. (b) Seller shall have performed and complied in all material respects with every covenant, agreement, and condition required by it under this Agreement prior to or at the Closing unless performance or compliance therewith shall have been waived by Buyer in writing. (c) If applicable, Buyer and Seller shall have received approval from the FTC under the HSR Act of the transaction contemplated by this Agreement, or shall have received notification that the waiting period under such act has been terminated, or the waiting period under such act shall have expired. (d) The Base Purchase Price increase or decrease resulting from the adjustments to be made pursuant to subsections 11.(a) and 11.(b) does not exceed twenty percent (20%) of the Base Purchase Price. (e) On the Closing Date, no material suit, action, or other proceeding against Buyer shall be pending before any court or governmental agency seeking to restrain, prohibit, or obtain damages or other relief in connection with the consummation of the transaction contemplated by this Agreement. If any such condition precedent to the obligations of Buyer under this Agreement is not met as of the Closing Date, and if Buyer is not in material breach of its obligations hereunder, this Agreement may be terminated at the option of Buyer. If Buyer thus terminates this Agreement, the Deposit shall be returned to Buyer and the parties shall have no further obligations to one another hereunder (other than the indemnifications contained in Sections 7.(a)(iii), 8.(c), and 21. hereof, which shall survive such termination). Notwithstanding the foregoing, if a condition set forth above, other than condition 12.(c) or 12.(d), is not met (and is asserted by Buyer as a failure of one of its conditions of Closing), and if the reasons such condition is not met relate only to some, but not all, of the Properties, failure of such condition to be met may, at the option of either Buyer or Seller, be treated as an uncured Asserted Defect and handled in accordance with the process set forth in Section 11. above. 13. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. Seller's obligations at Closing under this Agreement are subject to each of the following conditions: (a) Buyer's representations under this Agreement shall be true and accurate in all material respects as of the date when made and at Closing, except as to changes specifically contemplated by this Agreement or consented to by Seller. (b) Buyer shall have performed and complied in all material respects with every covenant, agreement, and condition required by it under this Agreement prior to or at the Closing unless compliance therewith shall have been waived by Seller. (c) If applicable, Buyer and Seller shall have received approval from the FTC under the HSR Act of the transaction contemplated by this Agreement, or shall have received notification that the waiting period under such act has been terminated, or the waiting period under such act shall have expired. (d) The Base Purchase Price reduction or increase resulting from the adjustments to be made pursuant to subsections 11.(a) and 11.(b) does not exceed twenty percent (20%) of the Base Purchase Price. (e) On the Closing Date, no material suit, action, or other proceeding against Seller shall be pending before any court or governmental agency seeking to restrain, prohibit, or obtain damages or other relief in connection with the consummation of the transaction contemplated by this Agreement. 13 If any such condition precedent to the obligations of Seller under this Agreement is not met as of the Closing Date, this Agreement may be terminated at the option of Seller. If Seller terminates this Agreement because of Buyer's failure to fulfill condition 13.(a) or 13.(b), the Deposit shall not be returned to Buyer. If Seller terminates this Agreement because of conditions 13.(c), 13.(d), or 13.(e), and Buyer is not in material default under this Agreement, the Deposit shall be returned to Buyer. Thereafter, Seller and Buyer shall have no further obligations to one another hereunder (other than the indemnifications contained in Section 7.(a)(iii), 8.(c), and 21. hereof, which shall survive such termination). 14. THE CLOSING. If the conditions referred to in Section 12. of this Agreement (the "Conditions Precedent to Buyer's Obligations") and Section 13. of this Agreement (the "Conditions Precedent to Sellers Obligations") have been satisfied or waived, the consummation of the transaction contemplated hereby ("Closing") shall take place in the offices of Seller, at 201 Main Street, Fort Worth, Texas 76102, on May 14, 1998, at 10:00 a.m. Central Standard Time, or at such other date and time (i) as the Buyer and Seller may agree or, (ii) to which Seller may postpone the Closing pursuant to Section 8.(b) hereof (such date and time herein called the "Closing Date"). It is provided however, that Seller shall not be permitted to extend the Closing Date pursuant to Section 8(b) beyond July 14, 1998, unless Buyer consents. At the Closing: (a) Seller shall: (i) Execute, acknowledge, and deliver to Buyer a conveyance of the Properties (the "Assignment and Bill of Sale"), which shall include a warranty of title as against claims arising by through or under Seller, and not otherwise, and in the form attached hereto as Exhibit C (with Exhibits A and B attached thereto), effective as of seven o'clock a.m., (7:00 a.m.) Mountain Standard Time on June 1, 1998, (herein called the "Effective Date"); (ii) Execute (and, where required, acknowledge) and deliver to Buyer forms of conveyance or assignment as required by the applicable authorities for transfers of interests in state or federal leases included in the Properties; (iii) Execute and deliver to Buyer letters in lieu of transfer orders (or similar documentation), in form acceptable to both parties; (iv) If Buyer requests, deliver to Buyer an affidavit or other certification (as permitted by the Internal Revenue Code of 1986, as amended) that Seller is not a "foreign person" within the meaning of Section 1445 (or similar provisions) of such code (i.e., Seller is not a non-resident alien, foreign corporation, foreign partnership, foreign trust, or foreign estate, as those terms are defined in such code and regulations promulgated thereunder); (v) With respect to Properties operated by Seller and to the extent available, deliver to Buyer all requisite consents of non-operators under any operating agreement naming Buyer as successor operator; and copies of such requests for consent which were sent but not obtained prior to Closing; (vi) Deliver to Buyer resignations of operator and/or Changes of Operator/Owner Forms properly executed on behalf of Seller for all Seller-operated wells acquired by Buyer; and, any other forms required by governmental authorities having jurisdiction which must be initiated by Seller to change the operator from Seller to Buyer as of the Effective Date; and, (vii) Certificates in form and substance satisfactory to Seller, effective as of the Closing Date and executed by Seller's duly authorized officer, partner, or owner, as appropriate, to the effect that (1) Seller has all requisite corporate, 14 partnership, or other power and authority to sell the Properties on the terms of this Agreement and to perform its other obligations under this Agreement and has fulfilled all corporate, partnership, or other prerequisites to closing this transaction, and (2) each individual executing the closing documents has the authority to act on behalf of Seller. (viii) Deliver possession of the Properties to Buyer as of the Effective Date. (b) Buyer shall: (i) Deliver to Seller, by wire transfer to an account designated by Seller in a bank located in the United States, an amount payable in United States dollars equal to the amount as set forth on the Closing Settlement Statement as provided for in Section 16.(c) below; (ii) Deliver to Seller, except to the extent waived by Seller: (A) Evidence of compliance with the requirements of all laws, rules, and regulations relating to the transfer of operatorship from Seller to Buyer; (B) Evidence of Buyer's bond coverage as required by all laws, rules, and regulations, or that a cash deposit, certificate of deposit, letter of credit, or some other permitted financial security has been accepted by the proper regulatory agency for each well requiring such coverage; (C) Evidence of compliance with the requirements of all laws, rules, and regulations that Buyer is qualified to succeed to Seller's interest in the Properties; and, (D) Certificates in form and substance satisfactory to Seller, effective as of the Closing Date and executed by Buyer's duly authorized officer, partner, or owner, as appropriate, to the effect that (1) Buyer has all requisite corporate, partnership, or other power and authority to purchase the Properties on the terms of this Agreement and to perform its other obligations under this Agreement and has fulfilled all corporate, partnership, or other prerequisites to closing this transaction, and (2) each individual executing the closing documents has the authority to act on behalf of Buyer. (iii) Execute such forms and take such other steps as Seller may reasonably require to (A) succeed Seller with respect to the Properties under the rules and regulations of applicable authorities and (B) assume any and all liabilities of Seller with respect to the wells described on Exhibit B; and, (iv) Take possession of the Properties. 15. AFTER CLOSING. Within thirty (30) days after Closing, Seller shall make available for delivery to Buyer at Seller's offices all of Seller's lease files, abstracts and title opinions, division order files, production records, well files, copies of accounting records (but not including general financial accounting or tax accounting records), and other similar files and records that directly relate to the Properties. Notwithstanding the foregoing, Seller shall not be required to deliver to Buyer materials that Seller considers proprietary or confidential or that Seller legally cannot provide to Buyer without breaching, or risking a breach of, confidentiality agreements with other parties. It is expressly understood that Buyer is not entitled to acquire any records except as expressly provided in Section 1. hereof. Seller may retain such files, or copies thereof, or such information as it deems necessary for all purposes, including but not limited to, preparing a Final Settlement Statement as provided in Section 16., or for purposes of filing tax returns covering the Properties. Any files or materials retained by Seller after Closing pursuant hereto, shall be sent to Buyer as soon as reasonably practicable after final payment is made in accordance with the Final 15 Settlement Statement. Seller may, at its own expense, have access to and make copies of all, or any part thereof, of the files and records provided Buyer hereunder at reasonable times and upon reasonable notice during regular business hours for as long as the Properties remain in effect. As to those wells which Seller is disbursing proceeds of production, Seller shall continue to collect proceeds of production as long as it remains operator and shall be responsible for making disbursements, in accordance with its normal procedures (and at normal times), of such proceeds of production so collected to the parties entitled to same, with any proceeds of production thereafter collected by Seller to be forwarded promptly to its successor as operator. Provided Buyer succeeds Seller as operator, Buyer shall become responsible for all disbursements of proceeds of production and such disbursement activities shall be included in the matters that Buyer assumes and with respect to which Buyer indemnifies Seller under Section 17 below. SELLER GIVES NO ASSURANCE HEREUNDER THAT BUYER SHALL SUCCEED SELLER AS OPERATOR OF ANY PROPERTY WHERE PARTIES OTHER THAN SELLER OWN INTERESTS IN SUCH PROPERTY. It is understood that in most (if not all) of the operating agreements affecting the Properties, Seller does not have the right to transfer operations of the leasehold interests subject thereto to Buyer. However, Seller shall use its best efforts to secure consent from all non-operators naming Buyer as Operator under such operating agreements prior to Closing, to be effective on the Closing Date and provided Closing takes place. After Closing, Buyer shall use its best efforts to comply with the terms of any operating agreements to name a successor operator thereunder for which Seller was unable to obtain prior to Closing. Upon obtaining consent from non-operators naming Buyer as successor operator, Seller and Buyer promptly shall file all forms required by any governmental agency having authority, to change the operator from Seller to Buyer. Seller shall operate the Seller-operated Properties until the Effective Date and thereafter, if necessary, until such time as provided under the applicable operating agreement, plan of unitization, or law requires. As soon as practicable thereafter, operations shall be turned over to, and become the responsibility of, Seller's successor as Operator To the extent Seller so operates any Property after the Effective Date, its obligations to Buyer with respect to such operations shall be no greater than those that it would have to a non-operator under the applicable operating agreement. In the absence of an operating agreement, those terms and provisions contained in the AAPL 610 (1382 Revision) form Operating Agreement shall apply. THE PARTIES RECOGNIZE THAT, UNDER SUCH AGREEMENTS AND SUCH FORM OF AGREEMENT, THE OPERATOR IS NOT RESPONSIBLE TO THE OTHER PARTIES THERETO FOR ITS OWN NEGLIGENCE AND HAS NO RESPONSIBILITY TO SUCH OTHER PARTIES OTHER THAN FOR GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. As to all wells acquired by Buyer hereunder which Seller continues to operate on behalf of Buyer and for Buyer's account after the Effective Date because a successor operator has not been approved by the requisite governmental authority, or consent of non-operators has not been obtained, by mutual agreement or otherwise, Seller will be paid the producing well overhead rates shown in the operating agreement applicable to such wells and if there is no such established rate, Buyer shall pay Seller for its proportionate share thereof based upon the rate of five hundred dollars ($500.00) per month, or any part thereof, for each well. 16. CERTAIN ACCOUNTING ADJUSTMENTS TO THE PURCHASE PRICE. (a) Appropriate adjustments to the Purchase Price shall be made between Buyer and Seller to reflect the following: (i) All rights to proceeds, receipts, reimbursements, credits, and income attributable to the Properties and accruing before the Effective Time, as defined below, shall be the property of Seller. All proceeds, receipts, credits, income, and charges attributable to the Properties acquired by Buyer hereunder and accruing on and after the Effective Time shall be the property 16 of Buyer. As to Properties operated by Seller and purchased by Buyer hereunder and concerning accounts held in suspense, Seller will pay in full the royalty accounts that were suspended because the amount due is less than the statutory or contractual minimum for payment. As to all other suspended accounts, if any, Seller shall transfer to its successor as operator all monies held in a suspended account which were received for production produced from or allocated to the Properties on and after the Effective Time. As to proceeds received for production produced from or allocated to the Properties before the Effective Time and held in a suspense account at Buyer's option, Seller may either: 1) Retain the suspended amounts after Closing and, upon proof satisfactory to Seller, release the money to the proper party; or, 2) Transfer the suspended amounts to Buyer for future disbursement. Once suspended amounts have been transferred to Buyer for future disbursement, Buyer agrees to be responsible for disbursing the suspended monies to the proper parties and shall release, indemnify, defend, and hold harmless the Seller Group from any and all claims, actions, causes of action, liabilities, damages, losses, costs, or expenses (including, without limitation, court costs and attorneys' fees), arising out of or in any way connected with making such disbursements, or failure to make a disbursement. (ii) Seller shall be responsible for and pay (A) all charges and invoices for costs and expenses (including, without limitation, lease maintenance payments, drilling and operating expenses, capital expenditures, and overhead charges) accruing before the Effective Time and attributable to the Properties and (B) necessary royalty disbursements of proceeds realized from the sale of production produced from and allocated to the Properties before the Effective Time. Buyer shall be responsible for payment of (C) all charges and invoices for costs and expenses (including, without limitation, lease maintenance payments, drilling and operating expenses, capital expenditures, and overhead charges) accruing on and after the Effective Time and attributable to the Properties acquired hereunder and (D) necessary royalty disbursements of proceeds realized from the sale of production produced from and allocated to the Properties acquired hereunder on and after the Effective Time. All payments made by Seller for items under (C) above for which Buyer is responsible shall be reimbursed by Buyer. Seller shall reimburse Buyer for all monies received by Seller from non-operators as payment of Seller's invoices for the operations of the wells described on Exhibit B for periods on and after the Effective Time. (iii) Seller will be credited with an amount equal to the simple interest accrued on the Adjusted Purchase Price for the period beginning with the Closing Date and continuing through the Effective Date at seven percent (7%) simple annual interest calculated as follows: INTEREST = Adjusted Purchase Price x number of days from closing to Effective Date x 7% divided by 365; The amount of interest credited to the Buyer will not exceed $250,000.00 regardless of the above calculation, and further such credit shall be only be applied if Closing occurs before the Effective Date. (b) In making such adjustments, the Parties agree that: (i) Seller will cause such oil storage facilities which store oil produced from the Properties to be gauged or strapped as of 7:00 a.m. Mountain Standard Time on the Effective Date, herein also referred to as the Effective Time. Seller also has caused the gas production meter charts (or if such do not exist, the sales meter charts) on the pipelines transporting gas production 17 from the Properties to be read as of the Effective Time. The results of such gauging, strapping, or chart reading are conclusive and shall be made available to Buyer. The production in such storage facilities or through such meters on the gas pipelines as of the Effective Time shall be owned by Seller; and, thereafter, production placed in such oil storage facilities and gas production passing through the aforesaid meters on the pipelines shall be owned by Buyer, insofar as to the interests subject hereto as of Closing. (ii) All ad valorem, severance, production and similar taxes applicable to the Properties shall be prorated between Seller and Buyer as of the Effective Date. Therefore, all such taxes for 1997 and prior years and for the portion of 1998 prior to the Effective Date levied against the Properties shall be borne and paid by Seller; and, all ad valorem and similar taxes for the remainder of 1998 and thereafter levied against the Properties shall be borne and paid by Buyer, irrespective if the amount levied is based on the previous year's production or any other basis. (iii) Where Seller owns one-hundred percent (100%) of the working interest under a well and there is no overhead charge for determining the overhead expense to be charged to Buyer on and after the Effective Date, the overhead charge shall be deemed to be five hundred dollars ($500.00) per month, or any part thereof, per well. (iv) Each party shall be responsible for its own income taxes. (c) With respect to matters that can be determined as of Closing, Seller shall prepare, in accordance with the provisions of this Agreement and with generally accepted accounting principles, a statement (the "Closing Settlement Statement") setting forth each adjustment to the Base Purchase Price to the best of Seller's knowledge, whether upward or downward, as may be required in accordance herewith. Seller shall submit to Buyer the Closing Settlement Statement no later than five (5) days prior to the Closing Date and shall afford Buyer access to Seller's records pertaining to the computation of the Closing Settlement Statement. Prior to the Closing, Buyer and Seller will agree upon the adjustments stated therein to be made to the Purchase Price, or will specify the adjustments to which there are differences and the adjustments to be omitted therefrom. Only the agreed upon adjustments shall be taken into account in computing the adjustments to be made to the Purchase Price at Closing. Final adjustments to the Purchase Price to be made hereunder shall be made within one hundred-twenty (120) days after the Closing Date for all matters other than Asserted Defects according to (d) hereinbelow as follows: (d) As soon as practicable after the Closing, and in no event later than sixty (60) days following the Closing Date, Seller shall deliver to Buyer, in accordance with the provisions of this Agreement and with generally accepted accounting principles, a statement ("Final Settlement Statement") setting forth each adjustment under this Agreement which was not determined as of the Closing. Within sixty (60) days after Buyer's receiving the Final Settlement Statement, the Parties shall agree upon the adjustments and payments stated in such Final Settlement Statement, and the net of such adjustments and payments shall be paid in cash to the appropriate Party by the other Party within five (5) days following agreement as to the Final Settlement Statement. If the Parties fail to reach agreement as to all adjustment within said sixty (60) day period, the net amount of all undisputed adjustments shall be paid and any remaining disputed items shall be submitted for determination by a nationally recognized firm of public accountants selected by the parties, whose decision shall be final and binding. The parties shall share equally the costs of such determination. 17. ASSUMPTION AND INDEMNIFICATION. UPON DELIVERY TO AND 18 ACCEPTANCE BY BUYER OF THE ASSIGNMENT AND BILL OF SALE, BUYER SHALL BE DEEMED TO HAVE ASSUMED, TO PAY AND PERFORM TIMELY, ALL DUTIES, EXPENSES, OBLIGATIONS, LOSSES, HAZARDS AND LIABILITIES RELATING TO THE OWNERSHIP OR OPERATION OF THE PROPERTIES ARISING ON AND AFTER THE EFFECTIVE DATE (INCLUDING, WITHOUT LIMITATION, THOSE ARISING UNDER OR BY VIRTUE OF ANY LEASE, CONTRACT, AGREEMENTS, DOCUMENT, PERMIT OR RULE, OR DELAY IN OBTAINING APPROVAL OF FEDERAL OR STATE ASSIGNMENTS); AND, TO RELEASE, INDEMNIFY, DEFEND, AND HOLD HARMLESS THE SELLER GROUP FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, LIABILITIES, LOSSES, DAMAGES, COSTS, OR EXPENSES (INCLUDING COURT COSTS AND ATTORNEYS' FEES) OF ANY KIND OR CHARACTER ARISING OUT OF OR OTHERWISE RELATING TO THE OWNERSHIP OR OPERATION OF THE PROPERTIES ON AND AFTER THE EFFECTIVE DATE. IN CONNECTION WITH (BUT NOT IN LIMITATION OF) THE FOREGOING, IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT MATTERS ARISING OUT OF OR OTHERWISE RELATING TO THE OWNERSHIP OR OPERATION OF THE PROPERTIES ON AND AFTER THE EFFECTIVE DATE SHALL BE DEEMED TO INCLUDE ALL MATTERS ARISING OUT OF THE STATUS AND THE CONDITION OF THE PROPERTIES ON THE EFFECTIVE DATE INCLUDING, WITHOUT LIMITATION, ALL OBLIGATIONS TO PROPERLY PLUG AND ABANDON WELLS LOCATED ON THE PROPERTIES, TO RESTORE THE SURFACE OF THE PROPERTIES TO AS NEAR ITS ORIGINAL CONDITION AS PRACTICABLE AND TO COMPLY WITH, OR BRING THE PROPERTIES INTO COMPLIANCE WITH, APPLICABLE ENVIRONMENTAL LAWS AND REGULATIONS, INCLUDING ALL LIABILITY AND EXPENSE FOR ANY RESTORATION, REMEDIATION, CLEAN-UP, DISPOSAL OF WASTE, OR REMOVAL THAT MAY BE INCURRED AS A RESULT OF THE EXISTENCE OR DISCOVERY OF NATURALLY OCCURRING RADIOACTIVE MATERIALS, OR OTHER HAZARDOUS OR DELETERIOUS SUBSTANCES IN, ON, UNDER OR ASSOCIATED WITH THE PROPERTIES, REGARDLESS OF WHEN THE EVENTS OCCURRED THAT GIVE RISE TO SUCH CONDITION, AND THE ABOVE PROVIDED FOR ASSUMPTIONS AND INDEMNIFICATIONS BY BUYER SHALL EXPRESSLY COVER AND INCLUDE SUCH MATTERS. THE FOREGOING ASSUMPTIONS AND INDEMNIFICATIONS SHALL APPLY WHETHER OR NOT SUCH DUTIES, OBLIGATIONS, OR LIABILITIES, OR SUCH CLAIMS, ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS, OR EXPENSES ARISE OUT OF (i) NEGLIGENCE (INCLUDING SOLE NEGLIGENCE, SIMPLE NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE OR PASSIVE NEGLIGENCE, OR OTHERWISE, BUT EXPRESSLY NOT INCLUDING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) OF SELLER GROUP OR ANY OTHER INDEMNIFIED PARTY, OR (ii) STRICT LIABILITY. 18. ENVIRONMENTAL ASSESSMENT AND INDEMNIFICATION BY BUYER. BUYER EXPRESSLY ACKNOWLEDGES THAT IT HAS MADE AN ENVIRONMENTAL ASSESSMENT OF THE PROPERTIES, OR WILL BE GIVEN THE OPPORTUNITY TO DO SO SUBJECT TO THE TERMS OF THIS AGREEMENT. BUYER HEREBY AGREES TO ASSUME THE RISKS THAT THE PROPERTIES MAY CONTAIN WASTE MATERIALS OR HAZARDOUS SUBSTANCES, AND THAT ADVERSE PHYSICAL CONDITIONS, INCLUDING BUT NOT LIMITED TO THE PRESENCE OF WASTE MATERIALS OR HAZARDOUS SUBSTANCES OR THE PRESENCE OF UNKNOWN ABANDONED OIL AND GAS WELLS, WATER WELLS, SUMPS AND PIPELINES, MAY EXIST IN, ON, OR UNDER THE PROPERTIES AS OF THE EFFECTIVE DATE, ALL RESPONSIBILITY AND LIABILITY RELATED TO ALL SUCH CONDITIONS, WHETHER KNOWN OR UNKNOWN, WILL BE TRANSFERRED FROM SELLER TO BUYER. BUYER ASSUMES FULL RESPONSIBILITY FOR, AND AGREES TO INDEMNIFY, HOLD HARMLESS AND DEFEND SELLER FROM AND AGAINST ALL LOSS, LIABILITY, CLAIMS, FINES, EXPENSES, COSTS (INCLUDING ATTORNEYS' FEES AND EXPENSES) AND CAUSES OF ACTION CAUSED BY OR ARISING OUT OF ANY FEDERAL, STATE OR LOCAL LAWS, RULES, ORDERS AND REGULATIONS 19 APPLICABLE TO ANY NATURALLY OCCURRING RADIOACTIVE MATERIALS, WASTE MATERIAL OR HAZARDOUS SUBSTANCES ON OR ASSOCIATED WITH THE PROPERTIES OR THE PRESENCE, DISPOSAL, RELEASE OR THREATENED RELEASE OF ALL NATURALLY OCCURRING RADIOACTIVE MATERIALS, WASTE MATERIAL OR HAZARDOUS SUBSTANCES FROM THE PROPERTIES INTO THE ATMOSPHERE OR INTO OR UPON LAND OR ANY WATER COURSE OR BODY OF WATER, INCLUDING GROUND WATER, WHETHER OR NOT ATTRIBUTABLE TO SELLER'S ACTIVITIES OR THE ACTIVITIES OF THIRD PARTIES (REGARDLESS OF WHETHER OR NOT SELLER WAS OR IS AWARE OF SUCH ACTIVITIES) PRIOR TO, DURING OR AFTER THE PERIOD OF SELLER'S OWNERSHIP OF THE PROPERTIES. THIS INDEMNIFICATION AND ASSUMPTION SHALL ALSO APPLY TO LIABILITY FOR VOLUNTARY ENVIRONMENTAL RESPONSE ACTIONS UNDERTAKEN PURSUANT TO THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT (CERCLA) OR ANY OTHER FEDERAL, STATE OR LOCAL LAW. 19. DISCLAIMER OF WARRANTIES. THE PROPERTIES SHALL BE CONVEYED PURSUANT HERETO WITHOUT ANY WARRANTY OR REPRESENTATION WHATSOEVER, WHETHER EXPRESS, IMPLIED OR STATUTORY AS TO, DESCRIPTION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO THE MODELS OR SAMPLES OF MATERIALS, OR MERCHANTABILITY OF ANY EQUIPMENT OR ITS FITNESS FOR ANY PURPOSE, OR OTHERWISE. BUYER SHALL HAVE INSPECTED, OR WAIVED (AND AS OF THE DEFECT NOTICE DATE SHALL BE DEEMED TO HAVE WAIVED) ITS RIGHT TO INSPECT, THE PROPERTIES FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, INCLUDING, BUT NOT LIMITED TO, CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE, OR DISPOSAL OF HAZARDOUS SUBSTANCES, SOLID WASTES, ASBESTOS, OR OTHER MANMADE FIBERS OR NATURALLY OCCURRING RADIOACTIVE MATERIALS ("NORM") IN, ON, OR UNDER THE PROPERTIES. BUYER IS RELYING SOLELY UPON ITS OWN INSPECTION OF THE PROPERTIES, AND BUYER SHALL, EXCEPT AS PROVIDED OTHERWISE HEREIN, ACCEPT ALL OF THE SAME "AS IS, WHERE IS". WITHOUT LIMITATION OF THE FOREGOING, SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION, OR MATERIALS NOW, HERETOFORE, OR HEREAFTER FURNISHED OR MADE AVAILABLE TO BUYER IN CONNECTION WITH THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, PRICING ASSUMPTIONS OR QUALITY OR QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTIES OR THE ABILITY OR POTENTIAL OF THE PROPERTIES TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION OF THE PROPERTIES OR ANY OTHER MATTERS CONTAINED IN THE PROPRIETARY DATA OR ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO BUYER BY SELLER OR BY SELLER'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS, REPORTS, PROJECTIONS, INFORMATION, AND OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED BY SELLER OR OTHERWISE MADE AVAILABLE OR DISCLOSED TO BUYER ARE PROVIDED TO BUYER AS A CONVENIENCE AND SHALL NOT CREATE NOR GIVE RISE TO ANY LIABILITY OF OR AGAINST SELLER, AND ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT BUYER'S SOLE RISK TO THE MAXIMUM EXTENT PERMITTED BY LAW. 20. BUYER'S COVENANT NOT TO SUE SELLER GROUP. Except to enforce the provisions of this Agreement or the responsibilities and liabilities of Seller for claims, costs and expenses with respect to the Properties prior to the Effective Date according to Section 17., Buyer covenants not to sue Seller Group with regard to any claim or liability relating to the Properties, or this transaction, regardless of when or how the claim or liability arose or arises or whether the claim or liability was 20 foreseeable or unforeseeable. BUYER'S COVENANT NOT TO SUE SELLER GROUP INCLUDES CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF SELLER GROUP, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE. 21. COMMISSIONS. Seller agrees to indemnify and hold harmless Buyer, its parent and subsidiary companies and other affiliates, and their directors, officers, employees, and agents from and against any and all claims, obligations, actions, liabilities, losses, damages, costs, or expenses (including court costs and attorneys' fees) of any kind or character arising out of or resulting from any agreement, arrangement, or understanding by, or on behalf of, Seller with any broker or finder in connection with this Agreement or the transaction contemplated hereby. Buyer agrees to indemnify and hold harmless Seller Group from and against any and all claims, obligations, actions, liabilities, losses, damages, costs, or expenses (including court costs and attorneys' fees) of any kind or character arising out of or resulting from any agreement, arrangement, or understanding by, or on behalf of, Buyer with any broker or finder in connection with this Agreement or the transaction contemplated hereby. 22. CASUALTY LOSS. If the Properties are damaged by fire or other casualty prior to the Closing, this Agreement shall remain in full force and effect, and (unless Buyer and Seller shall otherwise agree) in such event as to each such damaged Property that Seller, in its sole discretion, elects not to repair, Buyer either may treat such Property as if it had an Asserted Defect or elect not to adjust the Purchase Price therefor. If Buyer elects hereunder to treat the damaged Property as if it had an Asserted Defect, the procedure provided for in Section 11. shall apply to such Property, and all rights to insurance proceeds and claims against third parties related thereto shall belong to Seller. If Buyer elects hereunder not to adjust the Purchase Price for such damaged Property, and if Seller is entitled to any claims under an insurance policy with respect to such damage, Seller shall either collect and pay over, or assign, such insurance claims to Buyer. Buyer shall then take title to such Property without reduction of the Purchase Price. If Seller elects to repair a damaged Property, all rights to insurance proceeds and claims against third parties related thereto shall belong to Seller. 23. NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing, unless otherwise specifically provided herein, and shall be delivered by recognized commercial courier or delivery service (which provides a receipt), by facsimile (with receipt acknowledged), or by registered or certified mail (postage prepaid), at the following addresses: If to Buyer: Continental Resources, Inc. P.O. Box 1032 Enid, Oklahoma 73702 Attn: Land Manager Fax No. (405) 548-5182 If to Seller: Bass Enterprises Production Co. 210 Main Street Fort Worth, Texas 76102 Attn: W. Frank McCreight Fax No. (817) 390-8893 All such notices and communications shall be considered delivered on the date of receipt. Buyer or Seller may specify as its proper address any other address within the continental United States by giving notice to the other party, in the manner provided in this Section. 24. SURVIVAL OF PROVISIONS. All representations, warranties, and indemnifications made herein, except as to any warranty of title by Seller, shall survive the Closing and the delivery of the Assignment and Bill of Sale. All obligations hereunder not satisfied at Closing shall survive Closing and delivery of the Assignment and Bill of Sale to the extent the Parties intend for such 21 obligations to be satisfied after Closing. Buyer shall have until the Defect Notice Date in which to satisfy itself as! to the quantity and quality of Seller's title to the Properties. 25. MISCELLANEOUS MATTERS. (a) FURTHER ASSURANCES. After the Closing, Seller and Buyer shall execute and deliver, and shall otherwise cause to be executed and delivered, from time to time, such further instruments, notices, division orders, transfer orders, and other documents, and do such other and further acts and things as may be reasonably necessary more fully and effectively to grant, convey, and assign the Properties to Buyer. (b) ASSIGNABILITY. Except as provided below, neither party shall have the right to assign its rights under this Agreement without the prior written consent of the other party, and any such assignment in violation of this provision shall be void. (c) GAS BALANCES. Seller represents that there are no gas imbalances or make-up obligations affecting or relating to any of the properties. (d) WAIVER AND REPRESENTATION: TO THE EXTENT APPLICABLE TO THE TRANSACTION CONTEMPLATED HEREBY, OR ANY PORTION THEREOF, BUYER WAIVES THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION 17.555 WHICH IS NOT WAIVED), TEXAS BUSINESS AND COMMERCE CODE. In connection with such waiver, Buyer hereby represents and warrants to Seller that Buyer (a) is in the business of seeking or acquiring by purchase or lease, goods or services for commercial or business use, (b) has assets of Twenty Five Million Dollars ($25,000,000.00) or more according to its most recent financial statement, (c) has knowledge and experience in financial and business matters that enable it to evaluate the merits and risks of the transaction contemplated hereby, and (d) is not in a significantly disparate bargaining position. (e) CONFIDENTIALITY AGREEMENT. Until Closing, any Confidentiality Agreement executed by Buyer and Seller in connection with the transaction contemplated hereby remains in full force and effect and is not superseded or modified by this Agreement. (f) PRIOR ENTIRE UNDERSTANDING/HEADINGS/GENDER. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, understandings, negotiations, and discussions among the parties with respect to such subject matter, except as provided above with respect to any Confidentiality Agreement. The headings contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Within this Agreement, words of any gender shall be held and construed to cover any other gender, and words in the singular shall be held and construed to cover the plural, unless the context otherwise requires. Time is of the essence in this Agreement. (g) AMENDMENTS. This Agreement may be amended, modified, supplemented, restated, or discharged (and provisions hereof may be waived) only by an instrument executed by both Parties. (h) ASSOCIATED EXPENSES. Each party shall bear and pay all expenses it incurred and that are associated with the transaction contemplated by this Agreement. Payment of recording fees, filing fees, documentary stamp taxes, all sales taxes (if any, plus penalty and interest) and any other fees and taxes imposed on the Properties on and after the Effective Date, excluding Seller's income taxes, shall be 22 paid by Buyer. (i) SUCCESSORS AND ASSIGNS. This Agreement shall be binding on the parties hereto and their respective heirs, successors, representatives, and assigns. (j) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one (1) and the same instrument. It shall not be necessary for both parties to sign the same counterpart. (k) ENFORCEABILITY. WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE AND BY THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT THAT, TO THE EXTENT THE LAW OF A STATE IN WHICH THE PROPERTIES ARE LOCATED NECESSARILY GOVERNS, THE LAW OF SUCH STATE SHALL, TO SUCH EXTENT, APPLY TO THE PROPERTIES. (l) PUBLICITY. Prior to Closing, Buyer shall not issue any publicity or press release concerning this Agreement or the transaction contemplated hereby without the prior written consent of Seller unless, in the written opinion of legal counsel acceptable to Seller, such disclosure is required by applicable law or other applicable rules or regulations of any governmental authority or stock exchange and such publicity or press release contains no more than the minimum information necessary to comply therewith. (m) USE OF SELLER'S NAME. Buyer agrees that, as soon as practicable after the Closing, it shall remove or cause to be removed the names and signs used by Seller, and all variations and derivatives thereof and logos relating thereto from the Properties and shall not thereafter make any use whatsoever of such names, signs, and logos. After Closing and as to those Properties Buyer has taken over as operator, Seller reserves the right of access to confirm that Buyer has removed Seller's name, signs, and logos. If Seller is forced to remove its name, signs, and logos because Buyer has failed to do so, Seller shall charge its costs to Buyer and Buyer shall pay Seller's invoice within fifteen (15) days of receipt. (n) SEVERABILITY. If any term or provision of this Agreement is determined to be invalid, illegal, or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any material fashion to either Buyer or Seller. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, Buyer and Seller shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. (o) RESERVATION OF CLAIMS. Seller reserves all rights to claims, demands, cause of action, and lawsuits concerning the Properties against third parties that accrued before the Effective Date, whether discovered before or after the Effective Date, excluding any rights or claims associated with gas imbalances. (p) DUTY TO DEFEND. Where a party ("indemnitor") has agreed to indemnify, defend, and hold the other party ("indemnitee") harmless under this Agreement the indemnitee, at its sole option if it is the sole defendant, may elect to (a) manage its 23 own defense, in which event the indemnitor will reimburse the indemnitee for all attorney's fees, court, and other costs reasonably incurred in defending a claim, upon delivery to the indemnitor of invoices for such expenses; or (b) allow the indemnitor to be responsible for all aspects of defense. If both parties are defendants in a claim, they shall reasonably endeavor to arrange for joint defense to minimize defense costs, but failure to reach such agreement shall in no event eliminate or limit any indemnity obligations hereunder. (q) EXHIBITS. All exhibits referenced herein and attached hereto are by reference incorporated into this Agreement. IN WITNESS WHEREOF, this Agreement is executed by the parties hereto on the date set forth above, but effective as of the Effective Date. SELLERS BASS ENTERPRISES PRODUCTION CO. By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President PERRY R. BASS, INC., SID R. BASS, INC., LEE M. BASS, INC., KEYSTONE, INC., THRU LINE INC. By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President of all named corporations GOLIAD PARTNERS, L.P. By its Managing Partners PRB-GP, Inc. LMB-GP, Inc. WPH-GP, Inc. By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President of all named corporations THE BASS MANAGEMENT TRUST By: /s/ PERRY R. BASS ----------------------------------- Perry R. Bass, Trustee SID R. BASS, MANAGEMENT TRUST By: /s/ SID R. BASS ----------------------------------- Sid R. Bass, Trustee 24 By: /s/ LEE M. BASS ----------------------------------- Lee M. Bass D W GENPAR, INC. By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President W D. PARTNERS, L. P. By DW Genpar, Inc., General Partner By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President WPH-GP, INC. By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President WORLAND ASSOCIATES, Texas General Partnership By: Sid R. Bass, Inc. Managing Partner By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President WORLAND ASSOCIATES II By: Sid R. Bass, Inc. Managing Partner By: /s/ W. FRANK MCCREIGHT ----------------------------------- W. Frank McCreight Vice President BUYER CONTINENTAL RESOURCES, INC. By: /s/ HAROLD HAMM ----------------------------------- Harold Hamm President 25 EX-10.2 10 EXHIBIT 10.2 WORLAND AREA PURCHASE AND SALE AGREEMENT This Worland Area Purchase and Sale Agreement ("Agreement") is made and entered into on this 25th day of June, 1998 by and between Continental Resources, lnc., ("Seller") and Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 ("Buyer"). WHEREAS, pursuant to that certain Purchase and Sale Agreement dated March 28, 1998, a copy of which is attached hereto as Exhibit "A", and subsequent Assignment and Bill of Sale documents, which are described on the Exhibit "B" attached hereto, Seller did acquire certain oil and gas wells, leases and other rights from several parties. Such documents are collectively referred to herein as the "BEPCO documents". The conveyance of interest effected by such documents is herein referred to as the "BEPCO Acquisition". AND WHEREAS, the Buyer desires to purchase, and Seller desires to sell, an undivided fifty percent (50%) of all right, title and interest of whatsoever nature which Seller acquired in the BEPCO Acquisition. NOW THEREFORE, in consideration of the mutual benefit to accrue to the parties hereto and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer do hereby agree as follows: 1. PURCHASE PRICE AND PROPERTY BEING SOLD AND PURCHASED: In and for a total purchase price of $42,550,000.00, Seller shall sell, assign, transfer and convey unto Buyer an undivided fifty (50%) of all Seller's right, title and interest in and to the following: A. All oil & gas leases, overriding royalty interests, mineral and royalty interests, easements and rights-of-way, contractual rights and interests, together with all rights and interests appurtenant thereto or used or obtained in connection therewith which were acquired by Seller in connection with the BEPCO Acquisition and by virtue of the BEPCO Documents, and; B. All oil and gas wells and interests therein, together with all materials, supplies, machinery, equipment, improvements and other personal property and fixtures located thereon, associated therewith or appurtenant thereto that were acquired by Seller in connection with the BEPCO Acquisition and by virtue of the BEPCO Documents. Such wells are described on Exhibit "C" hereto 2. EFFECTIVE DATE: The Effective Time of the conveyance contemplated by this Agreement shall be 7:00 a.m., Mountain Standard Time on June 1, 1998. It is the intent of the parties that the interest is conveyed from Seller to Buyer effective as of the same time which Seller received the interests pursuant to the BEPCO Documents, same as if Buyer had been a party thereto. 3. COVENANTS AND REPRESENTATIONS OF SELLER AND BUYER: To the extent applicable, Seller and Buyer do hereby adopt and make the same covenants and representations to one another as were made by the Seller and Buyer in the Purchase and Sale Agreement attached hereto as Exhibit "A". 4. DESIGNATION OF OPERATOR: Buyer agrees that Seller shall remain and be Operator of all jointly owned existing or hereafter drilled, created or acquired units, wells and leases. Buyer agrees to execute any required Operating Agreements, Unit Agreements or other documents that are now or hereafter may become necessary to effectuate and/or support Seller being designated as Operator of such jointly owned units, wells or leases. 5. AREA OF MUTUAL INTEREST: An Area of Mutual Interest ("AMI") is hereby created which covers the lands outlined on the plat attached hereto as Exhibit "D". During the term of the AMI, which is ten (10) years from the date hereof, should either party acquire an interest of whatsoever nature in the AMI, it shall immediately offer the other party it's proportionate part of such acquired interest. The non-acquiring party shall have thirty (30) days from receipt of notice within which to advise the acquiring party whether it wants to acquire it's proportionate part of such interest for the actual acquisition cost thereof. The parties proportionate interests in the AMI is 50% each. 6. CLOSING: On or before July 1, 1998 Buyer shall deliver to Seller the full purchase price. Immediately upon receipt thereof, Seller shall deliver to Buyer a fully executed Assignment and Bill of Sale which conveys interests to the properties, rights and interests being purchased. Such Assignment and Bill of Sale shall be in the form attached hereto as Exhibit "E". IN WITNESS WHEREOF, this Agreement is made and entered into on this 25th day of June, 1998. CONTINENTAL RESOURCES, INC. By: /s/ TOM LUTTRELL Tom Luttrell Vice President - Land HAROLD G. HAMM REVOCABLE INTERVIVOS TRUST DATED APRIL 23, 1984 By: /s/ HAROLD HAMM Harold G. Hamm, Trustee CONTINENTAL RESOURCES, INC. July 13, 1998 Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust P.O. Box 1032 Enid, OK 73702 RE: Worland Area Purchase and Sale Agreement dated June 25, 1998 Dear Harold, Reference is hereby made to that certain Worland Area Purchase and Sale Agreement dated June 25, 1998 between Continental Resources, Inc., as Seller and The Harold G. Hamm Revocable Intervivos Trust, as Buyer. This letter is to set forth in writing the agreement of both parties to change the Closing date provided for the referenced Agreement by amending Article 6, thereof to read as follows: "On or before July 17, 1998 Buyer shall deliver to Seller the full purchase price. Immediately upon receipt ...". All other provisions shall remain as originally written. If the foregoing is acceptable with you, please indicate your agreement by signing in the space provided below and returning one (1) executed copy of this letter to the undersigned. Thank you. Sincerely, /s/ TOM LUTTRELL Tom Luttrell Vice President - Land Agreed to and accepted this 13th day of July, 1998 The Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 By: /s/ HAROLD HAMM Harold G. Hamm, Trustee 302 N. Independence P.O. Box 1032 Enid, Oklahoma 73702 (580) 233-8955 EX-12.1 11 EXHIBIT 12.1 EXHIBIT 12.1 - COMPUTATION OF RATIO OF DEBT TO EBITDA CONTINENTAL RESOURCES, INC.
PRO FORMA PRO FORMA YEAR ENDED THREE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, DECEMBER 31 ENDED MARCH 31, ENDED MARCH 31 ----------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------ ------ ------ ------ ------ ------- ------ ------ ------ NET INCOME 5,772 2,875 3,869 13,325 26,197 20,007 4,114 1,715 (82) INCOME TAXES 2,974 1,596 2,252 8,238 (8,941) (8,941) 2,521 0 0 INTEREST EXPENSE 314 670 2,396 4,550 4,804 15,684 1,117 2,005 3,919 AMORTIZATION OF OFFERING COSTS 460 115 DD&A 4,816 6,068 9,614 22,876 33,354 34,931 8,844 5,408 5,797 EXPLORATION EXPENSE 1,996 6,338 6,184 4,513 6,807 6,806 973 1,548 1,548 LITIGATION SETTLEMENT (4,000) (7,500) (7,500) ----------------------------------------------------------------------------------------- EBITDA(1) 11,872 17,547 24,315 53,502 54,721 61,447 17,569 10,676 11,297 TOTAL DEBT 7,514 6,272 44,265 54,759 79,632 153,957 TOTAL DEBT TO EBITDA 0.6 0.4 1.8 1 1.5 2.5 N/A N/A N/A
(1) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion, amortization and exploration expense, excluding proceeds from the litigation settlements. EBITDA is not a measure of cash flow as determined by generally accepted accounting principles ("GAAP"). EBITDA should not be considered as an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP or as an indicator of a company's operating performance or liquidity. Certain items excluded from EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of EBITDA. The Company's computations of EBITDA may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA is a widely followed measure of operating performance and may also be used by investors to measure the Company's ability to meet future debt service requirements, if any. EX-12.2 12 EXHIBIT 12.2 EXHIBIT 12.2 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES CONTINENTAL RESOURCES, INC. PRO FORMA PRO FORMA YEAR ENDED THREE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31, ENDED MARCH 31, ----------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1997 1997 1998 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- EARNINGS(1) 8,746 4,471 6,121 21,563 17,256 11,066 6,635 1,715 (82) FIXED CHARGES(2) 314 670 2,396 4,550 4,804 16,144 1,117 2,005 4,034 ----------------------------------------------------------------------------------- TOTAL EARNINGS AND FIXED CHARGES 9,060 5,141 8,517 26,113 22,060 27,210 7,752 3,720 3,952 RATIO 28.9 7.7 3.6 5.7 4.6 1.7 6.9 1.9 1.0
(1) "Earnings" represents income (loss) before provision for federal and state income taxes or income tax benefits. "Fixed charges" consists of interest expense and amortization of costs incurred in connection with the Offering. (2) Pro forma to give effect to the issuance of $150 million of Senior Subordinated Notes due 2008 with an interest rate of 10.25%. For purposes of computing the Ratio of Earnings to Fixed Charges, interest expense includes interest on the Senior Subordinated notes together with amortization of the underwriting discounts and expenses of the Offering; for the period ended December 31, 1997, amortization expense was $460,000 and for the period ended March 31, 1998 amortization expense was $115,000. EX-12.3 13 EXHIBIT 12.3 EXHIBIT 12.3 - COMPUTATION OF RATIO OF EBITDA TO INTEREST EXPENSE CONTINENTAL RESOURCES, INC. PRO FORMA PRO FORMA YEAR ENDED THREE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31, ENDED MARCH 31, -------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1997 1997 1998 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- NET INCOME 5,772 2,875 3,869 13,325 26,197 20,007 4,114 1,715 (82) INCOME TAXES 2,974 1,596 2,252 8,238 (8,941) (8,941) 2,521 0 0 INTEREST EXPENSE 314 670 2,396 4,550 4,804 15,684 1,117 2,005 3,919 AMORTIZATION OF OFFERING COSTS 460 115 DD&A 4,816 6,068 9,614 22,876 33,354 34,931 8,844 5,408 5,797 EXPLORATION EXPENSE 1,996 6,338 6,184 4,513 6,807 6,806 973 1,548 1,548 LITIGATION SETTLEMENT (4,000) (7,500) (7,500) ----------------------------------------------------------------------------------- EBITDA(1) 11,872 17,547 24,315 53,502 54,721 61,447 17,569 10,676 11,297 TOTAL EBITDA TO INTEREST 37.8 26.2 10.1 11.8 11.4 3.9 15.7 5.3 2.9
(1) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion, amortization and exploration expense, excluding proceeds from litigation settlements. EBITDA is not a measure of cash flow as determined by generally accepted accounting principles ("GAAP"). EBITDA should not be considered as an alternative to, or more meaningful than net income or cash flow as determined in accordance with GAAP or as an indicator of a company's operating performance or liquidity. Certain items excluded from EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of EBITDA. The Company's computations of EBITDA may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA is a widely followed measure of operating performance and may also be used by investors to measure the Company's ability to meet future debt service requirements, if any. EX-21 14 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF CONTINENTAL RESOURCES, INC. 1. CONTINENTAL GAS, INC., an Oklahoma corporation 2. CONTINENTAL CRUDE CO., an Oklahoma corporation EX-23.2 15 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated April 22, 1998, on the consolidated financial statements of Continental Resources, Inc. and subsidiary and our report dated June 4, 1998, on the Statements of Revenues and Direct Operating Expenses of Oil and Gas Properties Included in the Purchase Agreement Between Continental Resources, Inc. and Bass Enterprises Production Co. and to all references to our Firm included in this registration statement. ARTHUR ANDERSEN LLP Oklahoma City, Oklahoma August 10, 1998 EX-25 16 EXHIBIT 25 FORM T-1 ============================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ------------------ CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) _______ ------------------ UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-3818954 (Jurisdiction of incorporation (I.R.S. employer if not a U.S. national bank) identification No.) 114 West 47th Street 10036-1532 New York, NY (Zip Code) (Address of principal executive offices) ------------------ CONTINENTAL RESOURCES, INC. (Exact name of obligor as specified in its charter) Oklahoma 73-0767549 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 302 North Independence Suite 300 Enid, Oklahoma 73702 (Address of principal executive offices) (Zip Code) ------------------ 10 1/4% Senior Subordinated Notes due 2008 (Title of the indenture securities) ============================================== GENERAL 1. GENERAL INFORMATION Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of New York (2nd District), New York, New York (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Washington, D.C. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH THE OBLIGOR If the obligor is an affiliate of the trustee, describe each such affiliation. None 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15: Continental Resources, Inc. currently is not in default under any of its outstanding securities for which United States Trust Company of New York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General Instruction B. 16. LIST OF EXHIBITS T-1.1 -- Organization Certificate, as amended, issued by the State of New York Banking Department to transact business as a Trust Company, is incorporated by reference to Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.2 -- Included in Exhibit T-1.1. T-1.3 -- Included in Exhibit T-1.1. 2 16. LIST OF EXHIBITS (CONT'D) T-1.4 -- The By-Laws of United States Trust Company of New York, as amended, is incorporated by reference to Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.6 -- The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. T-1.7 -- A copy of the latest report of condition of the trustee pursuant to law or the requirements of its supervising or examining authority. NOTE As of August 11, 1998 the trustee had 2,999,020 shares of Common Stock outstanding, all of which are owned by its parent company, U.S. Trust Corporation. The term "trustee" in Item 2, refers to each of United States Trust Company of New York and its parent company, U. S. Trust Corporation. In answering Item 2 in this statement of eligibility as to matters peculiarly within the knowledge of the obligor or its directors, the trustee has relied upon information furnished to it by the obligor and will rely on information to be furnished by the obligor and the trustee disclaims responsibility for the accuracy or completeness of such information. --------------- Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, United States Trust Company of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 11th day of August, 1998. UNITED STATES TRUST COMPANY OF NEW YORK, Trustee By: /s/ Margaret Ciesmelewski ---------------------------- Margaret Ciesmelewski Assistant Vice President CCC/pg(rev:kk) 3 EXHIBIT T-1.6 The consent of the trustee required by Section 321(b) of the Act. United States Trust Company of New York 114 West 47th Street New York, NY 10036 September 1, 1995 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the limitations set forth therein, United States Trust Company of New York ("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. Very truly yours, UNITED STATES TRUST COMPANY OF NEW YORK By: /s/ Gerard F. Ganey -------------------------- Gerard F. Ganey Senior Vice President 4 EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION JUNE 30, 1998 ($ IN THOUSANDS) ASSETS Cash and Due from Banks $ 99,322 Short-Term Investments 171,315 Securities, Available for Sale 626,426 Loans 1,857,795 Less: Allowance for Credit Losses 16,708 ---------- Net Loans 1,841,087 Premises and Equipment 59,304 Other Assets 122,476 ---------- TOTAL ASSETS $2,919,930 ---------- ---------- LIABILITIES Deposits: Non-Interest Bearing $ 648,072 Interest Bearing 1,646,049 ---------- Total Deposits 2,294,121 Short-Term Credit Facilities 306,807 Accounts Payable and Accrued Liabilities 144,419 ---------- TOTAL LIABILITIES $2,745,347 ---------- ---------- STOCKHOLDER'S EQUITY Common Stock 14,995 Capital Surplus 49,541 Retained Earnings 107,703 Unrealized Gains on Securities Available for Sale (Net of Taxes) 2,344 ---------- TOTAL STOCKHOLDER'S EQUITY 174,583 ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,919,930 ---------- ----------
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. Richard E. Brinkmann, SVP & Controller July 31, 1998 5 EX-27 17 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AT DECEMBER 31, 1996 AND 1997, AND THE UNAUDITED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND CONSOLIDATED STATEMENT OF OPERATIONS AT MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000732834 CONTINENTAL RESOURCES INC YEAR 3-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 MAR-31-1998 1,301,115 1,287,389 0 0 25,143,543 17,714,484 0 0 3,548,547 3,833,592 30,435,471 23,435,934 246,476,351 262,507,304 (88,559,352) (94,068,917) 188,386,166 200,801,222 30,590,927 20,229,297 0 0 0 0 0 0 49,045 49,041 78,215,404 79,930,289 188,386,166 200,801,222 103,619,839 22,721,828 110,025,226 24,188,612 43,463,750 10,663,726 96,267,932 20,718,003 (8,060,863) (6,368) 0 0 4,803,837 2,005,019 17,255,776 1,714,881 17,255,776 1,714,881 0 0 0 0 0 0 0 0 26,197,226 1,714,881 0 0 0 0
EX-99.1 18 EXHIBIT 99.1 LETTER OF TRANSMITTAL FOR TENDER OF ALL OUTSTANDING 10-1/4% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 10-1/4% SENIOR SUBORDINATED NOTES DUE 2008 OF CONTINENTAL RESOURCES, INC. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________________, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY CONTINENTAL RESOURCES, INC. THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS: UNITED STATES TRUST COMPANY OF NEW YORK BY MAIL: BY OVERNIGHT COURIER: BY HAND: BY FACSIMILE: United States Trust United States Trust United States Trust (212) 420-6152 Company of New York Company of New York Company of New York (For Eligible Institutions P.O. Box 844 Corporate Trust Operations 111 Broadway Only) Cooper Station Department Lower Level New York, NY 10276-0844 770 Broadway-13th Floor New York, NY 10006 CONFIRM BY TELEPHONE: Attention: Corporate New York, NY 10003 Attention: Corporate (800) 548-6565 Trust Services Trust Services (registered or certified mail recommended)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. The undersigned acknowledges receipt of the Prospectus dated ______________, 1998 (the "Prospectus") of Continental Resources, Inc. ("Continental") which, together with this Letter of Transmittal (the "Letter of Transmittal"), constitutes Continental's offer (the "Exchange Offer") to exchange $1,000 principal amount of 10-1/4% Senior Subordinated Notes due 2008 (the "New Notes") of Continental for each $1,000 principal amount of outstanding 10-1/4% Senior Subordinated Notes due 2008 (the "Old Notes") of Continental. The terms of the New Notes are identical in all material respects (including, with respect to interest and upon redemption) to the terms of the Old Notes for which they may be exchanged pursuant to the Exchange Offer, except that the New Notes have been registered under the Securities Act of 1933, as amended, and, therefore, will not bear legends restricting the transfer thereof. The Exchange Offer is being made pursuant to the Registration Rights Agreement dated as of June 21, 1998 (the "Registration Rights Agreement"), and all Old Notes validly tendered will be accepted for exchange. Any Old Notes not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under the Registration Rights Agreement. Holders electing to have Old Notes exchanged pursuant to the Exchange Offer will be required to surrender such Old Notes, together with the Letter of Transmittal, to the Exchange Agent at the address specified herein prior to the close of business on the Expiration Date. Holders will be entitled to withdraw their election, at any time prior to 5:00 p.m., New York City time on the Expiration Date, by sending to the Exchange Agent at the address specified herein a facsimile transmission or letter setting forth the name of such Holder, the principal amount of Old Notes delivered for exchange and a statement that such Holder is withdrawing this election to have such Old Notes exchanged. The undersigned has checked the appropriate boxes below and signed this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY BEFORE CHECKING ANY BOX BELOW. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT. List below the Old Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, the Certificate Numbers should be listed on a separate signed schedule affixed hereto. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES TENDERED HEREWITH - -------------------------------------------------------------------------------- Name(s) and Address(es) of Certificate Aggregate Amount Registered Holder(s) Number(s) Principal Amount Tendered* (Please fill in) Represented by Notes Total - -------------------------------------------------------------------------------- * Unless otherwise indicated, the holder will be deemed to have tendered all Old Notes included. See Instruction 2. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
This Letter of Transmittal is to be used if certificates for Old Notes are to be forwarded herewith. Unless the context requires otherwise, the term "Holder" for purposes of this Letter of Transmittal means any person in whose name Old Notes are registered or any other person who has obtained a properly completed bond power from the registered holder. Holders whose Old Notes are not immediately available or who cannot deliver their Old Notes and -2- all other documents required hereby to the Exchange Agent on or prior to the Expiration Date may tender their Old Notes according to the guaranteed delivery procedure set forth in the Prospectus under the captions "The Exchange Offer -- Terms of the Exchange Offer -- Procedures for Tendering Old Notes" and "The Exchange Offer -- Terms of the Exchange Offer -- Guaranteed Delivery Procedures." / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING: Name of Registered Holder(s):___________________________________ Name of Eligible Institution that Guaranteed Delivery:____________________ / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name:__________________________________________________ Address:_______________________________________________ -3- PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to Continental the above-described aggregate principal amount of Old Notes. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered herewith, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, Continental all right, title and interest in and to such Old Notes. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that said Exchange Agent acts as the agent of the undersigned in connection with the Exchange Offer) to cause the Old Notes to be assigned, transferred and exchanged. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Old Notes and to acquire New Notes issuable upon the exchange of such tendered Old Notes, and that, when the same are accepted for exchange, Continental will acquire good and unencumbered title to the tendered Old Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned also warrants that it will, upon request, execute and deliver any additional documents deemed by Continental to be necessary or desirable to complete the exchange, assignment and transfer of tendered Old Notes or to transfer ownership of such Old Notes on the account books maintained by The Depository Trust Company. The Exchange Offer is subject to certain conditions as set forth in the Prospectus under the caption "The Exchange Offer -- Conditions of the Exchange Offer." The undersigned recognizes that as a result of these conditions (which may be waived, in whole or in part, by Continental) as more particularly set forth in the Prospectus, Continental may not be required to exchange any of the Old Notes tendered hereby and, in such event, the Old Notes not exchanged will be returned to the undersigned at the address shown below the signature of the undersigned. By tendering, each Holder of Old Notes represents to Continental that (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is such Holder, (ii) neither the Holder of Old Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes, (iii) if the Holder is not a broker-dealer or is a broker-dealer but will not receive New Notes for its own account in exchange for Old Notes, neither the Holder nor any such other person is engaged in or intends to participate in a distribution of the New Notes and (iv) neither the Holder nor any such other person is an "affiliate" of Continental within the meaning of Rule 405 under the Securities Act of 1933, as amended (the "Securities Act") or, if such Holder is an "affiliate," that such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the tendering Holder is a broker-dealer (whether or not it is also an "affiliate" of Continental within the meaning of Rule 405 under the Securities Act) that will receive New Notes for its own account in exchange for Old Notes, it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes, the undersigned is not deemed to admit that it is an "underwriter" within the meaning of the Securities Act. All authority herein conferred or agreed to be conferred shall survive the death, bankruptcy or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the -4- heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. Tendered Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City Time on the Expiration Date. Certificates for all New Notes delivered in exchange for tendered Old Notes and any Old Notes delivered herewith but not exchanged, in each case registered in the name of the undersigned, shall be delivered to the undersigned at the address shown below the signature of the undersigned. TENDERING HOLDER(S) SIGN HERE - --------------------------------------------------- - --------------------------------------------------- Signature(s) of Holder(s) Date: ____________________, 1998 (Must be signed by registered Holder(s) exactly as name(s) appear(s) on certificate(s) for Old Notes or by any person(s) authorized to become registered Holder(s) by endorsements and documents transmitted herewith. If signature by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please set forth the full title of such person.) See Instruction 3. Name(s): --------------------------------------------------------- - ----------------------------------------------------------------- (Please Print) Capacity (full title): ------------------------------------------- Address: --------------------------------------------------------- - --------------------------------------------------------- (Including Zip Code) Area Code and Telephone No.: --------------------------------------------------- Tax Identification No.: --------------------------------------------------------- -5- GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTION 3) Authorized Signature: --------------------------------------------------------- Name: -------------------------------------------------------------------------- Title: ------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- Name of Firm: ------------------------------------------------------------------ Area Code and Telephone No.: --------------------------------------------------- Dated:_________________, 1998 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- PAYOR'S NAME: CONTINENTAL RESOURCES, INC. - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- SUBSTITUTE Name (If joint names, list first and circle the name of FORM W-9 the person or entity whose number you enter in Part I below.) Department of the Treasury Internal Revenue Service Payor's Request for Taxpayer Identification Number ("TIN") and Certification ---------------------------------------------------------------------------------- Address ---------------------------------------------------------------------------------- City, state and Zip Code ---------------------------------------------------------------------------------- Part I - PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION Social Security number NUMBER ("TIN") IN THE BOX AT RIGHT AND CERTIFY BY or Employer Identification SIGNING AND DATING BELOW Number ---------------------------------------------------------------------------------- / / Part II - If exempt from backup withholding, check the box to the right. Also provide your TIN in Part I and sign and date this form in Part III. ---------------------------------------------------------------------------------- Part III - Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), AND 2. I am not subject to backup withholding: (a) I am exempt from backup withholding; or (b) I have not been notified by the Internal Revenue Service that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS. You must cross out item 2 above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. Signature _________________________________ Date ___________________ - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
Note: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP -6- WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. -7- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates for all physically delivered Old Notes, as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile thereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at any of its addresses set forth herein on or prior to the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. Holders whose Old Notes are not immediately available or who cannot deliver their Old Notes and all other required documents to the Exchange Agent on or prior to the Expiration Date may tender their Old Notes pursuant to the guaranteed delivery procedure set forth in the Prospectus under "The Exchange Offer -- Terms of the Exchange Offer -- Guaranteed Delivery Procedures." Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution (as defined in the Prospectus); (ii) on or prior to the Expiration Date, the Exchange Agent must have received from such Eligible Institution a letter, telegram or facsimile transmission setting forth the name and address of the tendering Holder, the name(s) in which such Old Notes are registered, and the certificate number(s) of the Old Notes to be tendered; and (iii) all tendered Old Notes as well as this Letter of Transmittal and all other documents required by this Letter of Transmittal must be received by the Exchange Agent within three New York Stock Exchange trading days after the date of execution of such letter, telex, telegram or facsimile transmission, all as provided in the Prospectus under the caption "The Exchange Offer -- Terms of the Exchange Offer -- Guaranteed Delivery Procedures." No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile thereof), shall waive any right to receive notice of the acceptance of the Old Notes for exchange. 2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire number of Old Notes evidenced by a submitted certificate is tendered, the tendering Holder must fill in the number of shares tendered in the column entitled "Amount Tendered." A newly issued certificate for the number of Old Notes submitted but not tendered will be sent to such Holder as soon as practicable after the Expiration Date. All Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. To withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or number of such Old Notes), (iii) contain a statement that such Holder is withdrawing its election to have such Old Notes exchanged, (iv) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer -8- sufficient to have the Trustee with respect to the Old Notes register the transfer of such Old Notes in the name of the person withdrawing the tender and (v) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. If Old Notes have been tendered pursuant to the procedure for book-entry transfer, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by Continental, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described herein at any time prior to the business day prior to the Expiration Date. 3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered Holder(s) of the Old Notes tendered hereby, the signature must correspond with the name(s) as written on the face of certificates without alteration, enlargement or any change whatsoever. If tendered Old Notes are registered in the name of the signer of the Letter of Transmittal and the New Notes to be issued in exchange therefor are to be issued (and any untendered Old Notes are to be reissued) in the name of the registered Holder (including any participant in The Depository Trust Company (also referred to as a book-entry facility) whose name appears on a security listing as the owner of Old Notes), the signature of such signer need not be guaranteed. In any other case, the tendered Old Notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to Continental and duly executed by the registered Holder and the signature on the endorsement or instrument of transfer must be guaranteed by an eligible guarantor institution which is a member of one of the following recognized signature guarantee programs (an "Eligible Institution"): (i) The Securities Transfer Agents Medallion Program (STAMP), (ii) The New York Stock Exchange Medallion Signature Program (MSF), or (iii) The Stock Exchange Medallion Program (SEMP). If the New Notes or Old Notes not exchanged are to be delivered to an address other than that of the registered Holder appearing on the note register for the Old Notes, the signature in the Letter of Transmittal must be guaranteed by an Eligible Institution. Endorsements on certificates or signatures on separate written instruments of transfer or exchange required by this Instruction 3 must be guaranteed by an Eligible Institution. If any of the Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If a number of Old Notes registered in different names are tendered, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of Old Notes. -9- When this Letter of Transmittal is signed by the registered Holder or Holders of Old Notes listed and tendered hereby, no endorsements of certificates or separate written instruments of transfer or exchange are required. If this Letter of Transmittal is signed by a person other than the registered Holder or Holders of the Old Notes listed, such Old Notes must be endorsed or accompanied by separate written instruments of transfer or exchange in form satisfactory to Continental and duly executed by the registered Holder or Holders, in either case signed exactly as the name or names of the registered Holder or Holders appear(s) on the Old Notes. If this Letter of Transmittal, any certificates or separate written instruments of transfer or exchange are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by Continental, proper evidence satisfactory to Continental of their authority so to act must be submitted. 4. TRANSFER TAXES. Continental shall pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes, or Old Notes for principal amounts not tendered or accepted for exchange, are to be delivered to, or are to be issued in the name of, any person other than the registered Holder of the Old Notes tendered hereby, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 4, it will not be necessary for transfer tax stamps to be affixed to the Old Notes listed in this Letter of Transmittal. 5. WAIVER OF CONDITIONS. Continental reserves the absolute right to waive, in whole or in part, any of the conditions to the Exchange Offer set forth in the Prospectus. 6. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering and other questions relating to the Exchange Offer, as well as requests for assistance or additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent at the address and telephone number set forth above and in the Prospectus. 8. IRREGULARITIES. All questions as to the validity, form, eligibility (including time of receipt), and acceptance of Letters of Transmittal or Old Notes will be resolved by Continental, whose determination will be final and binding. Continental reserves the absolute right to reject any or all Letters of Transmittal or tenders that are not in proper form or the acceptance of which would, in the opinion of Continental's counsel, be unlawful. Continental also reserves the right to waive any irregularities or conditions of tender as to the particular Old Notes covered by any Letter of Transmittal or tendered pursuant to such Letter of Transmittal. -10- None of Continental, the Exchange Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. Continental's interpretation of the terms and conditions of the Exchange Offer shall be final and binding. 9. DEFINITIONS. Capitalized terms used in this Letter of Transmittal and not otherwise defined have the meanings given in the Prospectus. 10. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a Holder of any Old Notes which are accepted for exchange must provide Continental (as payor) with its correct taxpayer identification number ("TIN"), which, in the case of a Holder who is an individual, is his or her social security number. If Continental is not provided with the correct TIN, the Holder may be subject to a $50 penalty imposed by the Internal Revenue Service. (If withholding results in an over-payment of taxes, a refund may be obtained.) Certain Holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements; however, these Holders still must submit the Substitute Form W-9. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional instructions. To prevent backup withholding, each tendering Holder must provide such Holder's correct TIN by completing the Substitute Form W-9 set forth herein, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN), and that (i) the Holder has not been notified by the Internal Revenue Service that such Holder is subject to backup withholding as a result of failure to report all interest or dividends or (ii) the Internal Revenue Service has notified the Holder that such Holder is no longer subject to backup withholding. The Form must be signed, even if the Holder is exempt from backup withholding. If the Old Notes are registered in more than one name or are not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for information on which TIN to report. Continental reserves the right in its sole discretion to take whatever steps are necessary to comply with its obligation regarding backup withholding. IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH CERTIFICATES FOR OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE. -11- EX-99.2 19 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF ALL OUTSTANDING 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 OF CONTINENTAL RESOURCES, INC. Registered holders of outstanding 10 1/4% Senior Subordinated Notes due 2008 (the "Old Notes") of Continental Resources, Inc. ("Continental") who wish to tender their Old Notes in exchange for a like number of 10 1/4% Senior Subordinated Notes due 2008 (the "New Notes") of Continental and, in each case, whose Old Notes are not immediately available or who cannot deliver their Old Notes and Letter of Transmittal (and any other documents required by the Letter of Transmittal) to United States Trust Company of New York (the "Exchange Agent") prior to the Expiration Date may use this Notice of Guaranteed Delivery or one substantially equivalent hereto. This Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile transmission (receipt confirmed by telephone and an original delivered by guaranteed overnight delivery) or mail to the Exchange Agent. See "The Exchange Offer -- Terms of the Exchange Offer -- Guaranteed Delivery Procedures" in the Prospectus. THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS: UNITED STATES TRUST COMPANY OF NEW YORK BY MAIL: BY OVERNIGHT COURIER: BY HAND: BY FACSIMILE: United States Trust United States Trust United States Trust (212) 420-6152 Company of New York Company of New York Company of New York (For Eligible P.O. Box 844 Corporate Trust 111 Broadway Institutions Only) Cooper Station Operations Department Lower Level New York, NY 10276-0844 770 Broadway-13th Floor New York, NY 10006 CONFIRM BY TELEPHONE: Attention: Corporate New York, NY 10003 Attention: Corporate (800) 548-6565 Trust Services Trust Services (registered or certified mail recommended)
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an Eligible Institution, such signature guarantee must appear in the applicable space provided on the Letter of Transmittal for Guarantee of Signatures. Ladies & Gentlemen: The undersigned hereby tender(s) to Continental upon the terms and subject to the conditions set forth in the Exchange Offer and the Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate principal amount of Old Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus. The undersigned understands that tenders of Old Notes pursuant to the Exchange Offer may not be withdrawn after 5:00 p.m., New York City time on the Expiration Date. Tenders of Old Notes may also be withdrawn if the Exchange Offer is terminated without any such Old Notes being exchanged thereunder or as otherwise provided in the Prospectus. All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death, bankruptcy or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. PLEASE SIGN AND COMPLETE Signature(s) of Registered Owner(s) Name(s) of Registered Holder(s): or Authorized Signatory: ----------------------------------- - ----------------------------------- ----------------------------------- - ----------------------------------- ----------------------------------- Principal Amount of Old Notes Address: Tendered: --------------------------- - ----------------------------------- ----------------------------------- Certificate No(s). of Old Notes (if Area Code and Telephone No.: available): - ----------------------------------- ---------------------------------- - ----------------------------------- Date: ----------------------------- -2- - ------------------------------------------------------------------------------- This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Old Notes exactly as its (their) name(s) appear on certificates for Old Notes or on a security position listing the owners of Old Notes, or by person(s) authorized to become registered Holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information. PLEASE PRINT NAME(s) AND ADDRESS(es) Name(s): ----------------------------------------------------- ----------------------------------------------------- Capacity: ----------------------------------------------------- Address(es): ------------------------------------------------- - ------------------------------------------------------------- DO NOT SEND OLD NOTES WITH THIS FORM. OLD NOTES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL. - ------------------------------------------------------------------------------- GUARANTEE (Not to be used for signature guarantee) The undersigned, an eligible guarantor institution which is a member of one of the following signature guarantee programs (an "Eligible Institution"): (i) The Securities Transfer Agents Medallion Program (STAMP), (ii) The New York Stock Exchange Medallion Signature Program (MSF), or (iii) The Stock Exchange Medallion Program (SEMP), hereby (a) represents that each holder of Old Notes on whose behalf this tender is being made "own(s)" the Old Notes covered hereby within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) represents that such tender of Old Notes complies with such Rule 14e-4, and (c) guarantees that, within three New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with certificates representing the Old Notes covered hereby in proper form for transfer and required documents will be deposited by the undersigned with the Exchange Agent. THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND OLD NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED. Name of Firm: Address: Authorized Signature: --------------- - -------------------------------- - -------------------------------- Name: ----------------------- Area Code and Telephone No.: Title: ------- ---------------------- Date: - -------------------------------- ----------------------- -2- EX-99.3 20 EXHIBIT 99.3 CONTINENTAL RESOURCES, INC. OFFER TO EXCHANGE ITS 10-1/4% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 10-1/4% SENIOR SUBORDINATED NOTES DUE 2008 TO: BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER NOMINEES: Continental Resources, Inc. (the "Company") is offering to exchange the "Exchange Offer"), upon and subject to the terms and conditions set forth in the Prospectus, dated _______________, 1998 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), its registered 10-1/4% Senior Subordinated Notes due 2008 (the "New Notes") for any and all of its outstanding 10-1/4% Senior Subordinated Notes due 2008 (the "Old Notes"). The Exchange Offer is being made in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement dated as of June 21, 1998, between the Company and the other signatories thereto. We are requesting that you contact your clients for whom you hold Old Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Old Notes registered in your name or in the name of your nominee, or who hold Old Notes registered in their own names, we are enclosing the following documents: 1. Prospectus dated _________________, 1998; 2. The Letter of Transmittal for your use and for the information of your clients; 3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer if certificates for Old Notes are not immediately available or time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date (as defined below) or if the procedure for book-entry transfer cannot be completed on a timely basis; 4. A form of letter which may be sent to your clients for whose account you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer; 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 6. Return envelopes addressed to United States Trust Company Of New York, the Exchange Agent for the Old Notes. YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON __________________, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE COMPANY. THE Old NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. To participate in the Exchange Offer, a duly executed and properly completed Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, should be sent to the Exchange Agent and certificates representing the Old Notes should be delivered to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and Prospectus. If holders of Old Notes wish to tender, but it is impracticable for them to forward their certificates for Old Notes prior to the expiration of the Exchange Offer or to comply with the book-entry transfer procedures on a timely basis, a tender may be effected by following the guaranteed delivery procedures described in the Prospectus under "The Exchange Offer - Terms of the Exchange Offer -Guaranteed Delivery Procedures." The Company will, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable and necessary costs and expenses incurred by them in forwarding the Prospectus and the related documents to the beneficial owners of Old Notes held by them as nominee or in a fiduciary capacity. The Company will pay or cause to be paid all stock transfer taxes applicable to the exchange of Old Notes pursuant to the Exchange Offer, except as set forth in Instruction 4 of the Letter of Transmittal. Any inquiries you may have with respect to the Exchange Offer, or requests for additional copies of the enclosed materials, should be directed to the Exchange Agent for the Old Notes, at its address and telephone number set forth on the front of the Letter of Transmittal. Very truly yours, CONTINENTAL RESOURCES, INC. By__________________________________________ NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL. Enclosures -2- EX-99.4 21 EXHIBIT 99.4 CONTINENTAL RESOURCES, INC. OFFER TO EXCHANGE ITS 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 To Our Clients: Enclosed for your consideration are the Prospectus, dated _______________, 1998 (the "Prospectus"), and the related Letter of Transmittal (which together with the Prospectus constitute the "Exchange Offer") in connection with the offer by Continental Resources, Inc., an Oklahoma corporation (the "Company"), to exchange its 10 1/4% Senior Subordinated Notes due 2008 (the "New Notes") for any and all of its outstanding 10 1/4% Senior Subordinated Notes due 2008 (the "Old Notes"), upon the terms and subject to the conditions set forth in the Exchange Offer. We are the Registered Holder of Old Notes held for your account. An exchange of the Old Notes can be made only by us as the Registered Holder and pursuant to your instructions. The Letter of Transmittal is furnished to you for your information only and cannot be used by you to exchange the Old Notes held by us for your account. The Exchange Offer provides a procedure for holders to tender by means of guaranteed delivery. We request information as to whether you wish us to exchange any or all of the Old Notes held by us for your account upon the terms and subject to the conditions of the Exchange Offer. Your attention is directed to the following: 1. The New Notes will be exchanged for the Old Notes at the rate of one-for-one. The New Notes will accrue interest (as do the Old Notes) at a rate equal to 10 1/4% per annum from their date of issuance. Holders of Old Notes that are accepted for exchange will not receive accrued but unpaid interest thereon on the date of issuance of the New Notes. Such interest will be paid with the first interest payment on the New Notes. Interest on the Old Notes accepted for exchange will cease to accrue on the day prior to the issuance of the New Notes. The form and terms of the New Notes are the same in all material respects as the form and terms of the Old Notes (which they replace) except that the New Notes have been registered under the Securities Act of 1933, as amended (the "Securities Act"). 2. Based on the interpretation by the staff of the Securities and Exchange Commission (the "SEC"), New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or a "broker" or "dealer" registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. 3. The Exchange Offer is not conditioned on any minimum number of Old Notes being tendered. 4. Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or exchange New Notes for, any Old Notes not theretofore accepted for exchange, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Notes, if any of the conditions described in the Prospectus under "The Exchange Offer - Conditions of the Exchange Offer" exist. 5. Tendered Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on _______________, 1998, if such Old Notes have not previously been accepted for exchange pursuant to the Exchange Offer. 6. Any transfer taxes applicable to the exchange of the Old Notes pursuant to the Exchange Offer will be paid by the Company, except as otherwise provided in Instruction 4 of the Letter of Transmittal. If you wish to have us tender any or all of your Old Notes, please so instruct us by completing, detaching and returning to us the instruction form attached hereto. An envelope to return your instructions is enclosed. If you authorize a tender of your Old Notes, the entire principal amount of Old Notes held for your account will be tendered unless otherwise specified on the instruction form. Your instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf by the Expiration Date. The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of the Old Notes in any jurisdiction in which the making of the Exchange Offer or acceptance thereof would not be in compliance with the laws of such jurisdiction or would otherwise not be in compliance with any provision of any applicable securities law. -2- CONTINENTAL RESOURCES, INC. OFFER TO EXCHANGE ITS 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 10 1/4% SENIOR SUBORDINATED NOTES DUE 2008 INSTRUCTION TO REGISTERED HOLDER FROM BENEFICIAL OWNER The undersigned acknowledge(s) receipt of your letter and the enclosed Prospectus and the related Letter of Transmittal, in connection with the Exchange Offer by the Company to exchange New Notes for Old Notes. This will instruct you to tender the principal amount of Old Notes indicated below held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal. The undersigned represents that (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of its business, (ii) it is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of such New Notes, and (iii) it is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or, if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the undersigned is a "broker" or "dealer" registered under the Exchange Act that acquired Old Notes for its own account pursuant to its market-making or other trading activities (other than Old Notes acquired directly from the Company), the undersigned understands and acknowledges that it may be deemed to be an "underwriter" within the meaning of the Securities Act and, therefore, must deliver a prospectus relating to the New Notes meeting the requirements of the Securities Act in connection with any resales by it of New Notes acquired for its own account in the Exchange Offer. Notwithstanding the foregoing, the undersigned does not thereby admit that it is an "underwriter" within the meaning of the Securities Act. You are hereby instructed to tender all Old Notes held for the account of the undersigned unless otherwise indicated below: / / Do not tender any Old Notes / / Tender Old Notes in the principal amount of $_______________ SIGNATURE: ---------------------------------------- Name of Beneficial Owner (please print) By -------------------------------------- Signature ---------------------------------------- Address ---------------------------------------- Zip Code ---------------------------------------- Area Code and Telephone Number Dated: _________________, 1998 EX-99.5 22 EXHIBIT 99.5 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer.
- ---------------------------------------------------------------------------------------------------------------------------------- Give the Give the EMPLOYER For this type of account: SOCIAL SECURITY For this type of account: IDENTIFICATION number of -- number of-- - ----------------------------------------------------------------------------------------------------------------------------------- 1. An individual's account The individual 9. A valid trust, estate, The legal entity (Do not or pension trust furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 2. Two or more individuals The actual owner of the 10. Corporate account The corporation (joint account) account or, if (combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner of the 11. Religious, charitable, or The organization account) account or, if joint funds, educational organization either person(1) account 4. Custodian account of a The minor(2) 12. Partnership account held in The partnership minor (Uniform Gift to the name of the business Minors Act) 5. Adult and minor (joint The adult or, if the minor 13. Association, club or other The organization account) is the only contributor, tax-exempt organization the minor(1) 6. Account in the name of The ward, minor, or incompetent 14. A broker or registered The broker or nominee guardian or committee person(3) nominee for a designated ward, minor, or incompetent person 7. a. The usual revocable The grantor-trustee(1) 15. Account with the Department The public entity savings trust account of Agriculture in the (grantor is also name of a public entity (such trustee) as a State or local government, school district, or prison) that b. So-called trust The xxxx owner(1) receives agricultural program account that is payments not a legal or valid trust under State law 8. Sole proprietorship The owner(4) accounts
- ------------------------------------------------------------------------------ (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate or pension trust. Note: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for A Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - - A corporation. - - A financial institution. - - An organization exempt from tax under section 501(a), or an individual retirement plan. - - The United States or any agency or instrumentality thereof. - - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - - An international organization or any agency or instrumentality thereof. - - A dealer in securities or commodities required to register in the U.S. or a possession of the U.S. - - A real estate investment trust. - - A common trust fund operated by a bank under section 584(a). - - An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). - - An entity registered at all times under the Investment Company Act of 1940. - - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - - Payments to nonresident aliens subject to withholding under section 1441. - - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - - Payments of patronage dividends where the amount reviewed is not paid in money. - - Payments made by certain foreign organizations. - - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: - - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this intrest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - - Payments of tax-emempt interest (including exempt-interest dividends under section 852). - - Payments described in section 6049(b)(5) to non-resident aliens. - - Payments on tax-free covenant bonds under section 1451. - - Payments made by certain foreign organizations. - - Payments made to a nominee. Exempt payees described above must still complete the Substitute Form W-9 enclosed herewith to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER. WRITE EXEMPT ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments, other than interest, dividends and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A and 6050N. PRIVACY ACT NOTICE--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes and to help verify the accuracy of the recipient's tax return. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure which is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. -2- -----END PRIVACY-ENHANCED MESSAGE-----