-----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, OkLgQkLOaW63jh0dxkU7wuNL23/4qz4ORB6zWj5pjPuN94IK99zfsx74yqv3wWl3 Ox6/5iMYAtBMaZNuWv68fw== 0000318996-96-000017.txt : 19960930 0000318996-96-000017.hdr.sgml : 19960930 ACCESSION NUMBER: 0000318996-96-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEY ENERGY GROUP INC CENTRAL INDEX KEY: 0000318996 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 042648081 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08038 FILM NUMBER: 96635363 BUSINESS ADDRESS: STREET 1: 255 LIVINGSTON AVE CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901 BUSINESS PHONE: 9155705721 MAIL ADDRESS: STREET 1: P O BOX 10627 CITY: MIDLAND STATE: TX ZIP: 79702 FORMER COMPANY: FORMER CONFORMED NAME: YANKEE COMPANIES INC DATE OF NAME CHANGE: 19891012 FORMER COMPANY: FORMER CONFORMED NAME: YANKEE OIL & GAS INC DATE OF NAME CHANGE: 19841122 10-K 1 FORM 10-K FOR THE YEAR ENDED JUNE 30, 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8038 KEY ENERGY GROUP, INC. (Exact name of registrant as specified in its charter) Maryland 04-2648081 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Two Tower Center, Tenth Floor, East Brunswick, NJ 08816 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908)247-4822 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.10 par value American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.10 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Common Shares held by nonaffiliates of the Registrant as of August 1, 1996 was approximately $86,562,327. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No Common Shares outstanding at August 1, 1996: 10,413,513 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement with respect to the Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Key Energy Group, Inc. and Subsidiaries INDEX PART I. Item 1. Business. 3 Item 2. Properties. 8 Item 3. Legal Proceedings. 11 Item 4. Submission of Matters to a Vote of Security Holders. 11 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 11 Item 6. Selected Financial Data. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. 13 Item 8. Financial Statements and Supplementary Data. 20 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 46 PART III. Item 10. Directors and Executive Officers of the Registrant. 46 Item 11. Executive Compensation. 46 Item 12. Security Ownership of Certain Beneficial Owners and Management. 46 Item 13. Certain Relationships and Related Transactions. 46 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47 - 2 - Key Energy Group, Inc. and Subsidiaries PART I. ITEM 1. BUSINESS. The Company Key Energy Group, Inc. (the "Company" or "Key") operates 332 well service and workover rigs, which is the third largest fleet of well service and workover rigs in the United States. The Company operates in Texas, Oklahoma, Michigan, the Appalachian Basin and Argentina and is a leader in each of its domestic markets. The Company provides maintenance and workover rigs to service producing oil and gas wells. Although the range and extent of services provided varies from region to region, as part of its well service business, the Company generally provides a full range of maintenance and workover rig services. These services include the completion of newly drilled wells, the recompletion of existing wells (including horizontal recompletions) and the plugging and abandonment of wells at the end of their useful lives. Other services include hot oiling, oil field liquid transportation, fishing tools and services, storage and disposal services, vacuum truck services, frac tank rental and salt water injection. The Company also is engaged in the production of oil and natural gas and contract drilling in the Permian Basin of West Texas. The Company conducts operations through four wholly-owned subsidiaries: Yale E. Key, Inc. ("Yale E. Key"); WellTech Eastern, Inc. ("WellTech Eastern"); Odessa Exploration Incorporated ("Odessa Exploration"); and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt"). In addition, Key operates in Argentina through its 63% ownership in Servicios WellTech, S.A. ("Servicios"). WellTech Eastern operates through two divisions; WellTech Mid-Continent Division and WellTech Eastern Division. Yale E. Key, WellTech Eastern and Servicios provide oil and gas well services. Odessa Exploration is engaged in the production of oil and gas and Clint Hurt provides contract oil and gas well drilling services. In March 1996, the Company completed the merger of WellTech, Inc. ("WellTech Eastern"). WellTech Eastern was an established oil well services company providing a broad range of workover and production services for oil and gas wells. As a result of the WellTech merger, the Company's fleet of workover rigs more than doubled in number. In April 1996, Odessa Exploration acquired approximately $6.9 million of oil and gas producing properties from an unrelated third party. Subsequent Event In July 1996, the Company completed the offering of $52,000,000 7% convertible subordinated debentures due 2003 (the "Offering"). The Offering was a private offering pursuant to Rule 144A under the Securities Act. Net proceeds from the Offering were used to substantially repay existing long-term debt (approximately $35.2 million). The remaining proceeds, together with proceeds of borrowings under existing credit arrangements, are intended to fund the expansion of the Company's services through acquisitions of businesses and assets and for working capital and general corporate purposes. See Note 5 to the Financial Statements for a more detailed description of the Offering. Oil Field Services The Company provides a full range of workover rig services, oil field liquid services and other production services necessary to maintain and workover producing oil and gas wells through its wholly-owned subsidiaries, Yale E. Key and WellTech Eastern. These services include the completion of newly drilled wells, the recompletion of existing wells (including horizontal recompletions) and the plugging and abandonment of wells at the end of their useful lives. Other services provided include oil field liquid transportation, storage and - 3 - disposal services, vacuum truck services, frac tank rental and salt water injection. The Company has more than 750 customers which are either major oil and gas companies or independent producers seeking to optimize performance of oil and gas wells. Although the mix of oil and gas wells serviced varies by particular markets, approximately two-thirds of the Company's overall business is attributable to oil wells. Of the Company's 332 well service and workover rigs, 135 operate in West Texas, 111 in Oklahoma and East Texas, 76 in Michigan and the Appalachian Basin, and ten in Argentina. Workover Rig Services. The Company operates a fleet of 332 well service and workover rigs providing maintenance, workover, completion and plugging and abandonment services. Maintenance Services. Maintenance services are required on producing oil and gas wells to ensure efficient and continuous operation. These services consist of routine mechanical repairs necessary to maintain production from the well, such as repairing parted sucker rods or defective downhole pumps in an oil well, or replacing defective tubing in an oil or gas well. The Company provides the workover rigs, equipment and crews for these maintenance services. Many of these workover rigs also have pumps and tanks that can be used for circulating fluids into and out of the well. Maintenance jobs are often performed on a series of wells in proximity to each other and typically take less than 48 hours per well. Maintenance services are generally required throughout the life of a well. The need for these services does not depend on the level of drilling activity and is generally independent of short-term fluctuations in oil and gas prices. Accordingly, maintenance services are generally the most stable type of well service rig activity. The general level of maintenance, however, is affected by changes in the total number of producing oil and gas wells in the Company's geographic service areas. Workover Services. In addition to periodic maintenance, producing oil and gas wells occasionally require major repairs or modifications, called "workovers." Workover services include extensions of existing wells to drain new formations either through deepening well bores or through drilling or horizontal laterals. In less extensive workovers, the Company's rigs are used to drill out plugs and packers in existing well bores to access previously bypassed productive zones. The Company's workover rigs are also used to convert producing wells to injection wells during enhanced recovery operations. Workover services include major subsurface repairs such as casing repair or replacement, recovery of tubing and removal of foreign objects in the well bore. These extensive workover operations are normally performed by a workover rig with additional specialized auxiliary equipment, which may include rotary drilling equipment, mud pumps, mud tanks and blowout preventers depending upon the particular type of workover operation. Most of the Company's workover rigs are designed and equipped to perform complex workover operations. A workover may last from a few days to several weeks. The demand for workover services is more sensitive to expectations relating to and changes in oil and gas prices than the demand for maintenance services, but not as sensitive as the demand for completion services. When oil and gas prices are low, there is little incentive to perform workovers on wells to increase production and well operators tend to defer workover services. As oil and gas prices increase, the level of workover activity tends to increase as operators seek to increase production by enhancing the efficiency of their wells. Completion Services. Completion services prepare a newly drilled well for production. The completion process may involve selectively perforating the well casing to access producing zones, stimulating and testing these zones and installing downhole equipment. The Company provides a workover rig to assist in this - 4 - completion process. Newly drilled wells are frequently completed by a well service rig so that an operator can minimize the use of a higher cost drilling rig. The completion process typically requires a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment which the Company provides for an additional fee. The demand for well completion services is directly related to drilling activity levels, which are highly sensitive to expectations relating to and changes in oil and gas prices. During periods of weak drilling demand, drilling contractors frequently price well completion work competitively compared to a workover rig so that the drilling rig stays on the job. Thus, excess drilling capacity will serve to reduce the amount of completion work available to the well servicing industry. Plugging and Abandonment Services. Workover rigs are also used in the plugging and abandonment of oil and gas wells no longer capable of producing in economic quantities. The demand for oil and gas does not significantly affect the demand for well plugging services. Liquid Services. The Company provides vacuum truck services, frac tank rentals and salt water injection services which together provide an integrated mix of liquid services to well site customers. Other Production Services. The Company provides production services, which include hot oiler unit services, pipeline installation and testing services in Oklahoma, Michigan and the Appalachian Basin, slick-line wire-line services in Michigan and fishing and rental tool services. Production The Company is engaged in the production of oil and natural gas in the Permian Basin area of West Texas through its wholly-owned subsidiary, Odessa Exploration. Odessa Exploration acquires and manages interests in producing oil and gas properties for its own account and for drilling partnerships it sponsors. Odessa Exploration acquires producing oil and gas wells and related properties from major and independent producers and, subsequently, either reworks the acquired wells to increase production or forms drilling ventures for additional development wells. Odessa Exploration operates oil and gas wells on behalf of over 150 working interest owners as well as for its own account. Contract Drilling Services The Company, through its wholly-owned subsidiary, Clint Hurt, provides contract drilling services for major and independent oil companies, primarily in West Texas. Clint Hurt owns and operates six drilling rigs for this purpose. The Company entered the land drilling business in March 1995 with the acquisition of four drilling rigs from an independent third party and, as the result of the WellTech merger, acquired two additional land drilling rigs. The rigs are capable of drilling up to 10,000 feet. Foreign Operations The Company provides oil field services in Argentina through its ownership of 63% of the stock of Servicios. Currently, Servicios owns and operates ten well servicing rigs in Argentina. In addition, Servicios operates trucks to transport its oil field equipment and, subject to availability, rents the trucks to other operators to move their oil field equipment. Servicios' principal customer is Yacimientos Petroliferos Fiscales, the Argentine national oil company. - 5 - COMPETITION AND OTHER EXTERNAL FACTORS The workover rig and production service industry is highly fragmented and includes a large number of small companies that are capable of competing effectively on a local basis and two larger companies which possess greater financial and other resources than those of the Company. In addition to those two larger companies, both of which provide workover rig services and liquids handling services in all or part of the Company's domestic well servicing markets, the Company has numerous regional competitors for each of the services which it provides. The Company believes that it is competitive in terms of pricing, performance, equipment, safety, availability of equipment to meet customer needs and availability of experienced, skilled personnel in those regions in which it operates. Excess capacity in the well servicing industry has resulted in severe price competition throughout much of the past decade. Management expects competitive pricing pressures to continue in the foreseeable future. In the well servicing market, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well-trained work force. In recent years, many of the Company's larger customers have placed emphasis not only on pricing, but also on safety records and quality management systems. The Company believes that such factors will be of increased importance in the future. The Company has directed substantial resources toward employee safety and training programs, as well as its employee review process. While the Company's efforts in these areas are not unique, many competitors, particularly small contractors, have not undertaken similar training programs for their employees. Management believes that the Company's safety record and reputation for quality equipment and service are among the best in the industry. The Company acquires oil and gas properties from independent and major oil companies and competes with other independent and integrated oil companies for the acquisition of these properties. The Company also competes with other local oil and gas drilling contractors, as well as national oil and gas drilling companies. As with oil field services, the need for drilling oil and gas wells fluctuates, in part, based on the price of, and demand for, oil and natural gas. The Company serves over 750 customers in West Texas, East Texas, Oklahoma, Michigan, the Appalachian Basin and Argentina with its two largest customers providing 20% and 11%, of total Company revenue during fiscal 1996. The need for oilfield services fluctuates, in part, in relation to the demand for oil and natural gas. As demand for those commodities increases, service and maintenance requirements increase as oil and natural gas producers attempt to maximize the producing efficiency of their wells in a higher priced environment. EMPLOYEES As of June 30, 1996, the Company employed 2,030 persons (1,925 in well service operations, 12 in oil and gas production, 85 in contract drilling operations and 8 in corporate). None of the Company's employees are represented by a labor union or collective bargaining agent. The Company has experienced no work stoppages associated with labor disputes or grievances and considers its relations with its employees to be satisfactory. - 6 - REGULATIONS The oilfield service operations and the oil and gas production and drilling activities of the Company are subject to various local, state and federal laws and regulations intended to protect the environment. The Company's operations routinely involve the handling of waste materials, some of which are classified as hazardous substances. Consequently, the regulations applicable to the Company's operations include those with respect to containment, disposal and controlling the discharge of any hazardous oil field waste and other non-hazardous waste material into the environment, requiring removal and cleanup under certain circumstances, or otherwise relating to the protection of the environment. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a party liable for environmental damage without regard to negligence or fault on the part of such party. Such laws and regulations may expose the Company to liability for the conduct of, or conditions caused by, others, or for acts of the Company which were in compliance with all applicable laws at the times such acts were performed. Management of the Company believes that it is in substantial compliance with all material federal, state and local regulations as they relate to the environment. Although the Company has incurred certain costs in complying with environmental laws and regulations, such amounts have not been material to the Company's financial condition during the three past fiscal years. Management believes that the Company is in substantial compliance with all known material local, state and federal safety guidelines and regulations. In order to comply with such safety guidelines and regulations and increase employee awareness of on-the-job safety, the Company employs eight safety officers. The Company also has a safety training and education center which is used by it for continued safety training and awareness. EXECUTIVE OFFICERS Listed below are the names, ages and positions of the Company's executive officers. Each officer of the Company holds office until the first meeting of the Board of Directors following the annual meeting of stockholders and until his successor shall have been duly elected and qualified, or until he shall have resigned or been removed as provided by the By-Laws. No family relationship exists between any of the listed executive officers or between any such executive officer and any Director of the Company. Name Age Positions Francis D. John 42 Chairman of the Company since August 1996, President and Chief Executive Officer since September 1989 and President and Chief Financial Officer of the Company since June 1988; Director of the Company since 1988. Kenneth V. Huseman 43 Executive Vice President and Chief Operating Officer of well service operations since August 1996, Vice President of WellTech Eastern and Chief Executive Officer of its Mid-Continent Division since March 1996. Mid-Continent Regional President of WellTech from August 1994 to March 1996. Vice President and Mid-Continent Regional Manager of WellTech from April 1993 to August 1994. Danny R. Evatt 37 Vice President, Chief Accounting Officer and Treasurer of the Company since July 1990; Treasurer, Secretary and Chief Financial Officer of Yale E. Key from 1984 to 1996. - 7 - C. Ron Laidley 50 Vice-President of the Company since June 1996; President and Chief Executive Officer of Yale E. Key since April 1995. Vice President of Yale E. Key from 1982 until April 1995. Kenneth C. Hill 52 Vice President of the Company since March 1996; Vice President of WellTech Eastern and Chief Executive Officer of its Welltech Eastern Division since March 1996. Northeast Regional President of WellTech from August 1994 to March 1996, and Vice President and Northeast Regional Manager of WellTech from April 1990 to August 1994. D. Kirk Edwards 36 Executive Vice President of the Company since March 1996, Vice President of the Company from July 1993 until March 1996, President and Chief Executive Officer of Odessa Exploration since July 1993. Owner and President of Odessa Exploration Inc. from 1987 until 1993. ITEM 2. PROPERTIES. The Company's corporate offices are located in East Brunswick, New Jersey where the Company leases office space from an independent third party. Oil Field Services The following table sets forth the type, number and location of the major equipment owned and operated by the Company's oil field service subsidiaries as of June 30, 1996: Slick-line Well Service/ Hot Oil Vacuum Wire-line Company Workover Rigs Trucks Trucks Frac Tanks Units Domestic: Yale E. Key (West Texas) 135 21 6 65 - Mid-Continent Division of WellTech Eastern (Texas and Oklahoma) 111 2 9 - - Eastern Division of WellTech Eastern (Michigan and Appalachian Basin) 76 11 12 16 4 International: Servicios (Argentina) 10 - - - - ___ ___ ___ ___ ___ TOTAL 332 34 27 81 4 === === === === === Yale E. Key owns ten and leases six office and yard locations. The Mid-Continent Division of WellTech Eastern owns seven and leases five office and yard locations. The Eastern Division of Welltech Eastern owns two and leases six office and yard locations. In Argentina, Servicios owns one and leases one office and yard locations. All operating facilities are metal or brick one story office and/or shop buildings. All buildings are occupied and considered in satisfactory condition. - 8 - All of the Company's owned oil field service operation's properties are encumbered by security interests in favor of The CIT Group/Credit Finance, Inc. the Company's senior lender ("CIT"). Production Odessa Exploration's properties consist primarily of oil and gas leases. Odessa Exploration's major proved producing properties are located primarily in the Permian Basin area of West Texas. Odessa Exploration leases office space in Odessa, Texas. Producing Wells and Acreage All wells owned and/or operated by Odessa Exploration are located in the continental onshore United States, primarily in West Texas. The following table sets forth the total gross and net producing oil and gas wells and its total gross and net developed and undeveloped acreage as of June 30, 1996. "Gross" as it applies to wells or acreage refers to the number of wells or acres in which a working interest is owned by Odessa Exploration. "Net" as it applies to wells or acreage refers to the sum of the fractional working interests owned by Odessa Exploration in gross wells or gross acres. Producing Wells Developed Oil Gas Acreage Undeveloped State Gross Net Gross Net Gross Net Gross Net -------------- ------------- ---------------- -------------- Texas 287 206 30 10 55,240 37,277 - - As operator, Odessa Exploration receives fees from other working interest owners as reimbursement for the general and administrative expenses attendant to the operation of the wells. Odessa Exploration's oil and gas properties are subject to royalty, overriding royalty and other outstanding interests that are customary in the industry. The properties are also subject to burdens such as liens incident to operating agreements, current taxes, development obligations under oil and gas leases and other encumbrances, easements and restrictions. Odessa Exploration believes that the existence of any such burdens does not materially detract from the value of its leasehold interests. In addition, certain Odessa Exploration properties are subject to liens securing debt (more fully described in Note 5 of the notes to consolidated financial statements). Exploration and Development Activities The following table shows gross and net wells drilled in which Odessa Exploration had a working interest during the years ended June 30, 1996, 1995 and 1994: 1996 1995 1994 Gross Net Gross Net Gross Net ------------ ------------ ------------ Exploratory: Productive - - - - - - Dry - - - - - - Development: Productive 10.0 10.0 8.0 6.2 1.0 0.1 Dry 3.0 1.0 - - - - Total Productive 10.0 10.0 8.0 6.2 1.0 0.1 Dry 3.0 1.0 - - - - - 9 - During fiscal 1997, Odessa Exploration expects to participate in or drill 15 wells on its operated properties. Oil and Gas Reserve Information Estimates of Odessa Exploration's proved oil and gas reserves as of June 30, 1996, 1995 and 1994 were prepared by the Company and reviewed by independent petroleum reservoir engineering firms. All estimates were made in accordance with guidelines established by the Securities and Exchange Commission. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions, i.e. prices and costs as of the date the estimate is made. Prices utilized reflect consideration of changes in existing prices provided by contractual arrangements if any, but not of escalations based upon future conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing equipment and operating methods. Proved undeveloped oil and gas reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion or secondary or tertiary recovery. Reserves assigned to undrilled acreage are limited to those drilling units that offset productive units reasonably certain of production when drilled. The following table summarizes oil and gas reserve data with respect to Odessa Exploration's proved oil and gas reserves: June 30, 1996 1995 1994 ---------- ---------- ----------- Proved developed reserves Oil (bbls) 2,727,967 750,604 114,908 Gas (mcf) 24,517,362 11,203,232 6,785,661 Proved undeveloped reserves Oil (bbls) 2,457,361 931,613 - Gas (mcf) 11,224,232 2,794,828 - Additional information concerning Odessa Exploration's estimated proved oil and gas reserves is included in Item 8, "Financial Statements and Supplementary Data". No major discovery or other favorable or adverse event has occurred since July 1, 1996 which is believed to have caused a significant change in the estimated proved oil and gas reserves of Odessa Exploration. Odessa Exploration's estimate of reserves has not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission. Production The following table summarizes the net oil and gas production, average sales prices, and average production (lifting) costs per equivalent barrel of oil for the years ended June 30, 1996, 1995 and 1994. 1996 1995 1994 ------------------------------------------------------------------- Oil: Production (bbls) 97,130 40,330 14,383 Average sales price per bbls $17.74 $15.02 $13.54 Natural Gas: Production (mcf) 1,026,577 770,197 552,791 Average sales price per mcf $ 1.79 $ 1.54 $ 2.33 Production Costs: Production (lifting) costs per equivalent barrel of oil (boe) $ 5.03 $ 4.48 $ 5.38 - 10 - ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS. See Item 8, Note 4 to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the American Stock Exchange, under the symbol "KEG". As of June 30, 1996, there were 544 holders of record of 10,413,513 shares of common stock. The following table sets forth for the periods indicated the high and low closing prices of the Company's common stock on the American Stock Exchange, as derived from published sources. Low High Fiscal Year Ending 1996: First Quarter $ 4 3/4 $ 5 1/2 Second Quarter 4 15/16 6 7/16 Third Quarter 5 7/8 7 9/16 Fourth Quarter 7 1/16 8 1/2 Fiscal Year Ending 1995: First Quarter 5 5 1/2 Second Quarter 4 3/4 5 1/2 Third Quarter 4 1/4 4 5/8 Fourth Quarter 4 3/4 5 1/2 Fiscal Year Ending 1994: First Quarter 5 5 1/2 Second Quarter 4 3/4 5 1/2 Third Quarter 4 7/8 5 5/8 Fourth Quarter 4 7/8 5 1/2 There were no dividends paid on the Company's common stock during the fiscal years ended June 30, 1996, 1995 or 1994. The Company does not intend, for the foreseeable future, to pay dividends on its common stock. The agreements with CIT and Norwest (see Note 5 of notes to consolidated financial statements), include certain restrictive covenants, the most restrictive of which, prohibits the Company and Odessa Exploration from declaring or paying dividends on the Company's and Odessa Exploration's Common Stock in any circumstances. - 11 - Item 6. Selected Financial Data. Five Seven Fiscal Year Months (1) Months Ended Ended Ended Fiscal Year June 30, November 30, June 30, Ended June 30, (in thousands) 1992 1992 1993 1994 1995 1996(3) - ------------------------------------------------------------------------------- OPERATING DATA: Revenues $21,535 $10,433 $14,256 $34,621 $44,689 $66,478 Operating costs: Direct costs 16,299 7,947 10,863 26,585 32,793 47,118 Depreciation, depletion and amortization 1,136 505 406 1,371 2,738 4,701 General and administrative 2,697 1,117 1,587 3,540 4,352 6,608 Interest 1,320 464 276 830 1,478 2,477 Income before income taxes, minority interest, reorganization items and extraordinary items 83 400 1,124 2,295 3,328 5,575 Net income (loss) (596) 4,986 711 1,345 2,178 3,586 Income (loss) per common share: Primary: Income before income taxes, minority interest, reorganization items and extraordinary items $0.02 $0.02 $0.21 $0.44 $0.50 $0.70 Net income (loss) (0.04) 0.28 0.14 0.26 0.33 0.45 Fully-diluted: Income before income taxes, minority interest, reorganization items and extraordinary items $0.01 $0.00 $0.21 $0.43 $0.50 $0.69 Net income (loss) (0.02) 0.03 0.14 0.25 0.33 0.44 Average common shares outstanding: Primary 14,717 17,942 5,124 5,274 6,647 7,941 Assuming full dilution 38,339 176,508 5,138 5,288 6,647 8,114 Common shares outstanding at period end 17,942 17,942 5,124 5,274 6,914 10,414 Market price per common share at period end $0.06 n/a $3.67 $4.67 $5.06 $8.19 Cash dividends paid on common shares $ - $ - $ - $ - $ - $ - BALANCE SHEET DATA: Cash and restricted cash $208 * $623 $1,173 $1,275 $4,211 Current assets 3,194 * 4,922 9,167 11,290 27,481 Property and equipment 20,921 * 10,093 18,935 36,336 95,127 Property and equipment, net 7,417 * 9,688 17,159 31,942 87,207 Total assets 12,239 * 15,906 28,095 45,243 121,722 Current liabilities 5,296 * 4,113 8,38 9,228 24,339 Long-term debt, incl. current portion 13,287 * 5,374 11,501 15,949 46,825 Stockholders' equity (deficit) (4,938) * 7,280 9,263 20,111 41,624 OTHER DATA: EBITDA (2) 2,539 * 1,806 4,496 7,544 12,752 Net cash (used) provided by: Operating activities 1,109 * (123) 1,842 3,258 7,121 Investing activities (1,689) * (1,284) (5,608) (7,154) (13,551) Financing actvities 501 * (73) 4,316 3,998 9,366 Working capital (2,102) * 809 784 2,062 3,142 Book value per common share ($0.26) * $1.42 $1.76 $2.91 $4.00 Ratio of earnings to fixed charges (4) 1.05 * 2.91 2.65 2.54 2.77 * - Not applicable due to the Company's 1992 Reorganization plan. (1) Financial Data for the five months ended November 30, 1992 and prior periods, reflect the previous capital structure of Key Energy Group, Inc. (previously "National Environmental Group, Inc.") prior to the 1992 Reorganization Plan and are not always comparable to subsequent periods. (2) Net income before interest, income taxes, depreciation, depletion and amortization. EBITDA should not be considered as an alternative to operating or net net income, (as determined in accordance with GAAP) or as a measure of liquidity. (3) Financial data for the year ended June 30, 1996 includes the allocated purchase price of WellTech Eastern, Inc. and the results of their operations, beginning March 26, 1996. (4) Fixed Charges are the sum of (i) interest costs, (ii) interest component of rent expenses, and (iii) amortization of deferred financing costs (if any). - 12 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Recent Developments In March 1996, the Company completed the merger of WellTech, Inc. ("WellTech"). WellTech was an established oil well services company providing a broad range of workover and production services for oil and gas wells. As a result of the WellTech merger, the Company's fleet of workover rigs more than doubled in number. In April 1996, Odessa Exploration (a wholly-owned subsidiary of the company) acquired approximately $6.9 million of oil and gas producing properties from an unrelated third party. Subsequent Event In July 1996, the Company completed the offering of $52,000,000 7% convertible subordinated debentures due 2003 (the "Offering"). The Offering was a private offering pursuant to Rule 144A under the Securities Act. Net proceeds from the Offering were used substantially to repay existing long-term debt (approximately $35.2 million). The remaining proceeds, together with proceeds of borrowings under existing credit arrangements, are intended to fund the expansion of the Company's services through acquisitions of businesses and assets and for working capital and general corporate purposes. See Note 5 to the Financial Statements for a more detailed description, (including an interest rate increase), of the Offering. Overview Fluctuations in well servicing activity historically have had a strong correlation with fluctuations in oil and gas prices. The Company seeks to minimize the effects of such fluctuations on its operations and financial condition through diversification of services, entry into new markets and customer alliances. Since 1993, the Company has made a number of acquisitions, which have significantly expanded the Company's operations: * In April 1996, Odessa Exploration consummated the purchase of $6.9 million of oil and gas properties, and as a result, acquired additional oil and gas producing properties with daily average net production of 240 barrels of oil and 1.5 million cubic feet of natural gas. * In March 1996, WellTech, a well services provider, merged into the Company, doubling the Company's fleet of well service and workover rigs and adding two oil and gas drilling rigs to the Company's contract drilling operations. WellTech now operates as WellTech Eastern and has two operating divisions, WellTech Mid-Con and WellTech Eastern. * In March 1995, the Company acquired four oil and gas drilling rigs from Clint Hurt. * In August 1994, the Company acquired 58 well service and workover rigs and other well service equipment in West Texas from WellTech. * In July 1993, the Company acquired Odessa Exploration, an oil and gas production company. In addition to the above acquisitions, the Company has acquired several smaller oilwell service related entities and expanded its ancillary equipment services. - 13 - RESULTS OF OPERATIONS FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995 The following discussion provides information to assist in the understanding of Key Energy Group, Inc.'s ("Key" or "the Company") financial condition and results of operations. It should be read in conjunction with the financial statements and related notes appearing elsewhere in this report. Operating results for the fiscal year ended June 30, 1996 include the Company's oilfield well service operations conducted by its wholly-owned subsidiaries, Yale E. Key, Inc. ("Yale E. Key"), its oil and natural gas exploration and production operations conducted by its wholly-owned subsidiary, Odessa Exploration, Inc. ("Odessa Exploration") and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling") which is engaged in oil and natural gas well contract drilling and was acquired in March 1995. Also included are the operating results of WellTech Eastern for the period of March 26, 1996 (the date of the merger, See Note 2 ) to June 30, 1996. Historically, fluctuations in oilfield well service operations and oil and gas well contract drilling activity have been closely linked to fluctuations in crude oil and natural gas prices. However, the Company, through acquisitions, customer alliances and agreements, and diversification of services, seeks to minimize the effects of such fluctuations on the Company's results of operations and financial condition. Operating Income The Company Revenues of the Company for the year ended June 30, 1996 increased $21,789,000 or 49% to $66,478,000 from $44,689,000 for the year ended June 30, 1995, while net income of $3,585,000 increased $1,407,000 or 65% from the 1995 fiscal year total of $2,178,000. The increase in revenues was primarily due to the addition of Clint Hurt Drilling on April 1, 1995, whose operations were only included for one quarter in fiscal year 1995 results, increased oil and gas revenues from Odessa Exploration, increased oilwell service equipment utilization and the acquisition of WellTech operations from the date of acquisition of March 26, 1996 (see Note 2 ). The increase in fiscal year 1996 net income over fiscal year 1995 net income is partially attributable to the inclusion of Clint Hurt Drilling and the acquisition of WellTech, but is also a result of an increase in oilwell service equipment utilization and a decrease in total consolidated Company costs and expenses as a percent of total revenues. Oilfield Services Oilfield services are performed by Yale E. Key and WellTech Eastern. Yale E. Key conducts oilfield services primarily in West Texas, while WellTech Eastern conducts oilfield services in the Mid-Continent region of the United States (primarily in Oklahoma) through its operating division, WellTech Mid-Con, and in the Northeastern United States (primarily in Michigan, Pennsylvania and West Virginia) through its operating division; WellTech Eastern. In addition, the Company conducts oilfield services in Argentina through its 63% ownership in Servicios WellTech, S.A. ("Servicios"), an Argentinean corporation. Oilfield service revenues increased $15,828,000 or 39% from $40,105,000 for the 1995 fiscal year to $55,933,000 for the 1996 fiscal year. The increase in revenues is primarily attributable to higher equipment utilization as the result of an increase in demand for oilfield services and the acquisition of WellTech Eastern whose operating results are included for the period of March 26, 1996 (the date of the merger, see Note 2 ) to June 30, 1996. In addition, Yale E. Key diversified oilfield services into higher margin business segments such as oilfield frac tanks, oilfield fishing tools and trucking operations. - 14 - Oil and Natural Gas Exploration and Production Oil and natural gas exploration and production operations are performed by Odessa Exploration. Revenues from oil and gas activities increased $1,841,000 or 79% from $2,334,000 during the year ended June 30, 1995 to $4,175,000 for the current year. The increase in revenues was primarily the result of increased production of oil and natural gas as several oil and natural gas wells which were drilled began production during 1996, higher oil and natural gas prices for the current year, and the April 1996 purchase of $6.9 million of oil and gas properties from an unrelated third party, which almost doubled the size of Odessa Exploration. Of the total $4,175,000 of revenues for fiscal year 1996, approximately $3,554,000 was from the sale of oil and gas - 97,130 barrels of oil at an average price of $17.74 per barrel and 1,026,577 MCF of natural gas at an average price of $1.79 per MCF. The remaining $621,000 of revenues represented primarily administrative fee income and other miscellaneous income. Oil and Natural Gas Well Drilling Oil and natural gas well drilling operations are performed by Clint Hurt Drilling which was acquired in March 1995. Comparable numbers for the full prior fiscal year are, therefore, not available. In addition, two drilling rigs were acquired in the March 1996 merger with WellTech. Revenues for fiscal 1996 were $6,188,000. Operating Expenses Oilfield Services Oilfield service expenses increased $10,145,000 or 33% from $30,592,000 for the fiscal 1995 to $40,737,000 for fiscal year 1996. The increase was due primarily to the acquisition of WellTech on March 26, 1996 and the increased demand for oilfield services. In addition, the Company has continued to expand its services, offering ancillary services and equipment such as oilwell fishing tools, blow-out preventers and oilwell frac tanks. Oil and Natural Gas Exploration and Production Expenses related to oil and gas activities increased $593,000 or 78% from $757,000 for fiscal year 1995 to $1,350,000 for fiscal year 1996. The increase in expenses was primarily the result of increased production of oil and natural gas as several oil and natural gas wells which were drilled began production during 1996 and the April 1996 purchase of $6.9 million in oil and gas properties which almost doubled the size of Odessa Exploration. Oil and Natural Gas Well Drilling Clint Hurt Drilling was acquired in March 1995. Comparable numbers for the full prior fiscal year are, therefore, not available. Expenses for fiscal year 1996 were $5,031,000. Interest Expense Interest expense increased $999,000 or 68% to $2,477,000 for the fiscal year 1996 from $1,478,000 for fiscal 1995. The increase was primarily the result of acquisitions and the addition of certain oil and gas properties. - 15 - General and Administrative Expenses General and administrative expenses increased $2,256,000, or 52%, to $6,608,000 for the fiscal year 1996 from $4,352,000 for the fiscal year 1995. The increase was primarily attributable to the Company's recent acquisitions and expanded services. Depreciation, Depletion and Amortization Expense Depreciation, depletion and amortization expense increased $1,963,000, or 72%, to $4,701,000 for the fiscal year 1996 from $2,738,000 for the fiscal year 1995. The increase is primarily due to oilfield service depreciation expense, which is the result of increased oilfield service capital expenditures for the current period versus the prior period and the acquisition of WellTech and Clint Hurt. In addition, depletion expense increased for the period due to the increase in the production of oil and natural gas. Income Taxes Income tax expense of $1,888,000 for fiscal year 1996 increased from $1,150,000 in income tax expense for fiscal year 1995. The increase in income taxes is primarily due to the increases in operating income. However, the Company does not expect to be required to remit a significant amount of the $1,888,000 in total federal income taxes for fiscal year 1996, because of the availability of net operating loss carryforwards, accelerated depreciation and drilling tax credits. Cash Flow Net cash provided by operating activities increased $3,863,000 from $3,258,000 during the fiscal year 1995 to $7,121,000 for fiscal year 1996. The increase is attributable primarily to increases in net income. Net cash used in investing activities increased from $7,154,000 for fiscal year 1995 to $13,551,000 for fiscal 1996. The increase is primarily the result of increased capital expenditures for oil and gas properties and costs associated with the acquisition of Welltech. This increase is partially offset by a decrease in oilfield service capital expenditures. Net cash provided by financing activities was $9,366,000 for the fiscal year 1996 as compared to $3,998,000 in net cash provided by financing activities for fiscal year 1995. The increase is primarily the result of an increase in proceeds from long-term debt and borrowings under the line-of-credit during fiscal 1996 primarily as the result of the purchase of oil and gas properties by Odessa Exploration and the acquisition of WellTech. FISCAL YEAR ENDED JUNE 30, 1995 VERSUS FISCAL YEAR ENDED JUNE 30, 1994 Operating Income Fiscal 1995 revenues of $44,689,000 increased $10,068,000 or 29% over fiscal 1994 revenues of $34,621,000. Fiscal 1995 revenues increased due to the acquisition of oil and gas producing properties by Odessa Exploration, the operation of the assets of WellTech West Texas (which included twelve months of fiscal 1995 and seven months of fiscal 1994), and the additional revenues from Clint Hurt Drilling (which was acquired in March 1995). In addition, the Company has continued to expand its services offering oilwell fishing tools, blow-out preventers and oilwell frac tanks. - 16 - Income before income taxes was $3,328,000 for fiscal 1995, which was an increase from $2,295,000 in fiscal 1994. The increase in income before income taxes was due to the increase in gross revenues for the current fiscal year, the acquisition by Odessa Exploration of producing oil and gas properties, the operations of WellTech West Texas and the acquisition of Clint Hurt Drilling. Operating Expenses Fiscal 1995 costs and expenses of $41,361,000 increased $9,035,000 or 28% over fiscal 1994 costs and expenses of $32,326,000. Fiscal 1995 costs and expenses increased primarily due to the operations of WellTech West Texas and the acquisition of Clint Hurt Drilling, as well as increased lease operating costs due to acquisitions of oil and gas producing properties by Odessa Exploration. Interest Expense Interest expense increased from $830,000 during fiscal 1994 to $1,478,000 during fiscal 1995, primarily as a result of borrowings for the acquisition and drilling of oil and gas producing properties by Odessa Exploration and the acquisition of Clint Hurt Drilling. General and Administrative Expenses General and administrative expenses include those of the Company, Yale E. Key, Odessa Exploration and Clint Hurt Drilling. These expenses increased $812,000 to $4,352,000 during fiscal 1995 from $3,540,000 during fiscal 1994, primarily due to increased expenses of Odessa Exploration and the acquisition of Clint Hurt Drilling and WellTech West Texas. However, as a percent of gross revenues, general and administrative expenses decreased from 10.2% of gross revenues during fiscal 1994 to 9.7% of gross revenues during fiscal 1995. Depreciation and Depletion Expense Depreciation and depletion expense increased to $2,738,000 in fiscal 1995 from $1,371,000 in fiscal 1994 due mainly to the additional depreciation expense associated with the acquisition of the WellTech West Texas oilfield service equipment and subsequent capital expenditures on such equipment. Income Taxes Income tax expense of $1,150,000 for fiscal 1995 increased from $950,000 in income tax expense for fiscal 1994. The increase in income taxes is primarily due to the increase in operating income. However, the Company does not expect to be required to remit a significant amount of the $1,150,000 in total federal income taxes in cash during fiscal 1996. Cash Flow Net cash provided by operating activities increased $1,416,000 from $1,842,000 during the 1994 fiscal year to $3,258,000 for the 1995 fiscal period. The increases are attributable primarily to increases in net income. Net cash used in investing activities increased from $5,608,000 for fiscal 1994 to $7,154,000 for fiscal 1995. The increase is primarily the result of increased capital expenditures for oil and gas properties and costs associated with the acquisition of Clint Hurt Drilling. This increase is partially offset by a decrease in oilfield service capital expenditures. The capital expenditures for the oilfield service operations during fiscal 1994 were primarily the result of the improvements necessary for the WellTech West Texas equipment. - 17 - Net cash provided by financing activities was $3,998,000 for the 1995 fiscal year as compared to $4,316,000 in net cash provided by financing activities for fiscal 1994. The decrease is primarily the result of increased principal payments during fiscal 1995. This increase in principal payments is somewhat off-set by an increase in proceeds from long-term debt during fiscal 1995 as the result of the financing of the improvement costs to the equipment of the West Texas operations of WellTech, the purchase of oil and gas properties by Odessa Exploration and the acquisition of Clint Hurt Drilling. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company had $3,240,000 in cash as compared to $865,000 in cash at June 30, 1995. At June 30, 1995, the Company had $865,000 in cash (the Company also had $267,000 in restricted marketable securities) as compared to $717,000 in cash at June 30, 1994. The Company has projected $6.2 million for oilfield service capital expenditures for fiscal 1997 as compared to $5.2 million for fiscal 1996. Capital expenditures are expected to be primarily capitalized improvement costs to existing equipment and machinery. The Company expects to finance these capital expenditures utilizing the operating cash flows of the Company. Capital expenditures were $2,839,000 in fiscal 1995. Odessa Exploration is forecasting outlays of approximately $6.0 million in development costs for fiscal 1997, as compared to $9.8 million during fiscal 1996. Financing is expected to come from borrowings. Clint Hurt Drilling has forecast approximately $250,000 for oil and gas drilling capital expenditures for fiscal 1997 primarily for improvements to existing equipment and machinery compared to $598,000 for fiscal 1996. Such outlays are treated as capital costs. Financing is expected to come from existing cash flow. Debt In July 1996, the Company completed the offering of $52,000,000 7% convertible subordinated debentures due 2003 (the "Debentures" and the "Offering"). In August 1996, the interest rate on the Debentures was increased to 7 1/2%. The Offering was a private offering pursuant to Rule 144A under the Securities Act. Net proceeds from the Offering were used to substantially repay existing long-term debt (approximately $35.2 million). The remaining proceeds are intended to fund the expansion of the Company's services through acquisitions of businesses and assets and for working capital and general corporate purposes. Long-term debt which was repaid with proceeds from the Offering in July 1996 included the term note with CIT Group/Credit Finance, Inc. ("CIT") of approximately $21.1 million and all bank debt associated with Odessa Exploration, previously with Norwest Bank Texas, N.A. ("Norwest"), of approximately $14.1 million. The Debentures mature on July 1, 2003 and are convertible at any time after November 1, 1996 and before maturity, unless previously redeemed, into shares of the Company's common stock at a conversion price of $9 3/4 per share, subject to adjustment in certain events. In addition, holders of the Debentures who convert prior to July 1, 1999 will receive, in addition to the Company's common stock, a payment generally equal to 50% of the interest otherwise payable on the converted Debentures from the date of conversion through July 1, 1999, payable in cash or common stock, at the Company's option. Interest on the Debentures is payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. In August 1996, the interest rate was increased from 7% to 7 1/2% due to certain modifications in the Debenture indenture involving a certain subsidiary's inability to guarantee the obligations under the indenture, relating to the Debentures (the "Prospectus"). The 7 1/2% effective interest rate is expected to remain for the foreseeable future. - 18 - The Debentures will not be redeemable before July 15, 1999. Thereafter, the Debentures will be redeemable at the option of the Company in whole or part, at the declining redemption prices set forth in the original prospectus, together with accrued and unpaid interest thereon. The Debentures also may be redeemed at the option of the holder if there is a change in control (as defined in the original prospectus) at 100% of their principal amount, together with accrued interest thereon. In January 1996, prior to the merger with Welltech described in Note 2, and prior to the consummation of the Offering described above, the Company, Yale E. Key, Clint Hurt Drilling and WellTech entered into separate credit facilities with CIT totaling approximately $35 million (the combined maximum credit limit). The credit facilities were combined into one facility after the consummation of the Welltech merger. As a result of the separate credit facilities, the interest rate for Yale E. Key was lowered from two and one-half to one and one-quarter percent over the stated prime rate of 8.25% at June 30, 1996. Each of the CIT term notes required principal and interest payments, due the first day of each month beginning February 1, 1996, plus a final payment of the unpaid balance of the note due December 31, 1998. The expiration of each of the lines of credit is December 31, 1998. As a result of the convertible subordinated debenture Offering described above and subsequent repayment of all long-term debt with CIT, except the lines of credit, the Company is currently renegotiating its overall credit facilities with CIT, including, but not limited to, maximum credit availability, interest rate and maturity dates. Impact of SFAS 121 In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 - Accounting for Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") regarding the impairment of long-lived assets, identifiable intangibles and goodwill related to those assets. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995, although earlier adoption is encouraged. The application of SFAS 121 will require periodic determination of whether the book value of long-lived assets exceeds the future cash flows expected to result from the use of such assets and, if so, will require reduction of the carrying amount of the "impaired" assets to their estimated fair values. The Company, currently, estimates that the implementation of SFAS 121 will not have a material effect on the Company's financial position. The Company will implement SFAS 121 beginning July 1, 1996. Impact of Inflation on Operations Although in our complex environment it is extremely difficult to make an accurate assessment of the impact of inflation on the Company's operations, management is of the opinion that inflation has not had a significant impact on its business. - 19 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Presented herein are the consolidated financial statements of Key Energy Group, Inc. and Subsidiaries as of June 30, 1996 and 1995 and for the years ended June 30, 1996, 1995 and 1994. Also, included is the report of KPMG Peat Marwick LLP, independent certified public accountants, on such consolidated financial statements as of June 30, 1996 and 1995 and for each of the three years ended June 30, 1996. INDEX to FINANCIAL STATEMENTS Page Consolidated Balance Sheets............................ 21 Consolidated Statements of Operations.................. 22 Consolidated Statements of Cash Flows.................. 23 Consolidated Statements of Stockholders' Equity........ 24 Notes to Consolidated Financial Statements............. 25 Independent Auditors' Report........................... 45 - 20 - Key Energy Group, Inc. and Subsidiaries Consolidated Balance Sheets June 30, June 30, (Thousands, except share and per share data) 1996 1995 --------------------------------------------------------------------------- ASSETS Current Assets: Cash $3,240 $865 Restricted cash 971 410 Restricted marketable securities - 267 Accounts receivable, net of allowance for doubtful accounts of $1,942 and $133, respectively) 20,570 8,133 Inventories 1,957 1,257 Prepaid expenses and other current assets 743 358 -------------------------------------------------------------------------- Total Current Assets 27,481 11,290 -------------------------------------------------------------------------- Property and Equipment: Oilfield service equipment 66,432 23,726 Oil and gas well drilling equipment 4,862 2,014 Motor vehicles 1,159 526 Oil and gas properties and other related equipment,successful efforts method 17,663 7,652 Furniture and equipment 716 332 Buildings and land 5,295 2,086 -------------------------------------------------------------------------- 95,127 36,336 Accumulated depreciation & depletion (8,920) (4,394) -------------------------------------------------------------------------- Net Property and Equipment 87,207 31,942 -------------------------------------------------------------------------- Other Assets 7,034 2,011 -------------------------------------------------------------------------- Total Assets $121,722 $45,243 ========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $11,086 $3,930 Other accrued liabilities 11,002 2,612 Accrued interest 417 145 Accrued income taxes 53 174 Deferred tax liability 310 118 Current portion of long-term debt 1,471 2,249 -------------------------------------------------------------------------- Total Current Liabilities 24,339 9,228 -------------------------------------------------------------------------- Long-term debt,less current portion 45,354 13,700 Non-current accrued expenses 4,909 - Deferred income taxes 4,244 2,204 Minority interest 1,252 - Commitments and contingencies Stockholders' equity: Common stock, $.10 par value; 25,000,000 shares authorized, 10,413,513 and 6,913,513 issued and outstanding at June 30, 1996 and 1995, respectively 1,041 691 Additional paid-in capital 32,763 15,186 Retained earnings 7,820 4,234 -------------------------------------------------------------------------- Total Stockholders' Equity 41,624 20,111 -------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $121,722 $45,243 ========================================================================== See the accompanying notes which are an integral part of these consolidated financial statements. - 21 - Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Operations Fiscal Year Ended June 30, (Thousands, except per share data) 1996 1995 1994 --------------------------------------------------------------------------- REVENUES: Oilfield services $55,933 $40,105 $32,616 Oil and gas 4,175 2,334 1,936 Oil and gas well drilling 6,188 1,932 - Other, net 182 318 69 --------------------------------------------------------------------------- 66,478 44,689 34,621 --------------------------------------------------------------------------- COSTS AND EXPENSES: Oilfield services 40,737 30,592 25,992 Oil and gas 1,350 757 593 Oil and gas well drilling 5,030 1,444 - Depreciation, depletion and amortization 4,701 2,738 1,371 General and administrative 6,608 4,352 3,540 Interest 2,477 1,478 830 --------------------------------------------------------------------------- 60,903 41,361 32,326 --------------------------------------------------------------------------- Income before income taxes and minority interest 5,575 3,328 2,295 Income tax expense 1,888 1,150 950 Minority interest in net income 101 - - --------------------------------------------------------------------------- NET INCOME $3,586 $2,178 $1,345 =========================================================================== EARNINGS PER SHARE : Primary: Income before income taxes and minority interest $0.70 $0.50 $0.44 Net income $0.45 $0.33 $0.26 Assuming full dilution: Income before income taxes and minority interest $0.69 $0.50 $0.43 Net income $0.44 $0.33 $0.25 WEIGHTED AVERAGE OUTSTANDING: Primary 7,941 6,647 5,274 Assuming full dilution 8,114 6,647 5,288 See the accompanying notes which are an integral part of these consolidated financial statements. - 22 - Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows Fiscal Year Ended June 30, (Thousands) 1996 1995 1994 --------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,586 $2,178 $1,345 Adjustments to reconcile income from operations to net cash provided by operations: Depreciation, depletion and amortization 4,701 2,738 1,371 Deferred income taxes 1,618 1,370 493 Minority interest in net income 101 - - Gain on sale of assets (186) - - Other non-cash items 6 (312) - Change in assets and liabilities net of effects from the acquisitions: Increase in accounts receivable (2,180) (1,327) (389) Increase (decrease) in other current assets 765 (940) (613) Decrease in accounts payable and accrued expenses (1,293) (154) (392) Other assets and liabilities 3 (295) 27 --------------------------------------------------------------------------- Net cash provided by operating activities 7,121 3,258 1,842 --------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures - Oilwell service operations (5,188) (2,839) (4,395) Capital expenditures - Oil and gas operations (1,879) (2,823) (1,253) Capital expenditures - Oil and gas well drilling operations (598) (143) - Proceeds from sale of fixed assets 574 - - Cash received in WellTech merger 1,168 - - Acquisitions - oil and gas operations (7,895) (1,348) - Redemption (purchase) of restricted marketable securities 267 (1) 40 --------------------------------------------------------------------------- Net cash used in investing activities (13,551) (7,154) (5,608) --------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt (2,601) (2,148) (1,771) Borrowings (payments) under line-of-credit 1,100 (605) 1,551 Borrowings from long-term debt 10,867 6,751 4,536 --------------------------------------------------------------------------- Net cash provided by financing activities 9,366 3,998 4,316 --------------------------------------------------------------------------- Net increase in cash and restricted cash 2,936 102 550 Cash and restricted cash at beginning of period 1,275 1,173 623 --------------------------------------------------------------------------- Cash and restricted cash at end of period $4,211 $1,275 $1,173 =========================================================================== See the accompanying notes which are an integral part of these consolidated financial statements. - 23 - Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Common Stock ------------------- Number of Additional Shares Amount Paid-in Retained (Thousands) Outstanding at par Capital Earnings Total -------------------------------------------------------------------------- Balance at June 30, 1993 5,124 $512 $6,057 $711 $7,280 Issuance of common stock for Odessa Exploration, Inc. 150 15 623 - 638 Net income - - - 1,345 1,345 -------------------------------------------------------------------------- Balance at June 30, 1994 5,274 $527 $6,680 $2,056 $9,263 -------------------------------------------------------------------------- Issuance of common stock for WellTech West Texas assets 1,635 164 8,420 - 8,584 Issuance of warrants for WellTech West Texas assets - - 63 - 63 Issuance of common stock for Clint Hurt Drilling assets 5 - 23 - 23 Net income - - - 2,178 2,178 -------------------------------------------------------------------------- Balance at June 30, 1995 6,914 $691 $15,186 $4,234 $20,111 -------------------------------------------------------------------------- Issuance of common stock for WellTech merger 3,500 350 17,577 - 17,927 Net income - - - 3,586 3,586 -------------------------------------------------------------------------- Balance at June 30, 1996 10,414 $1,041 $32,763 $7,820 $41,624 ========================================================================== See the accompanying notes which are an integral part of these consolidated financial statements. - 24 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996, 1995 and 1994 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Key Energy Group, Inc. herein after referred to as the "Company" or "Key", was organized in April 1977, and commenced operations in July 1978. Results of operations for the twelve months ended June 30, 1996, 1995 and 1994 include the Company's oilfield service operations conducted by its wholly-owned subsidiary, Yale E. Key, Inc., ("Yale E. Key"), the Company's oil and gas exploration and production wholly-owned subsidiary, Odessa Exploration Incorporated ("Odessa Exploration"), and the Company's oil and gas well drilling operations conducted by the Company's wholly-owned subsidiary, Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling"). Clint Hurt Drilling was acquired in March of 1995 (see Note 2). Also included in the results of operations for the fiscal year ended June 30, 1996 are approximately three months of operating results from the Company's wholly-owned subsidiary; WellTech Eastern, Inc. ("WellTech Eastern") which currently holds the assets acquired in the merger with WellTech, Inc. ("WellTech"), on March 26, 1996 (see Note 2). WellTech Eastern operates through two divisions; the WellTech Mid-Continent Division and the WellTech Eastern Division. In addition, as a result of the Welltech acquisition, the Company acquired a 63% ownership in Servicious WellTech, S.A. ("Servicious"), an Argentinean corporation. Servicious conducts oilfield services operations in Argentina and is accounted for using the consolidation with a minority interest method. Basis of Presentation The Company's consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant inter-company transactions and balances have been eliminated. The accounting policies presented below have been followed in preparing the accompanying financial statements. The Company's ownership of less than 50% owned entities are accounted for by the cost or equity methods, depending on the Company's ownership percentage. The preparation of these financial statements requires the use of management estimates. Cash, Restricted Cash and Marketable Securities The Company holds significant cash in certain financial institutions. Restricted cash, $971,000 and $410,000 at June 30, 1996 and 1995, respectively, consists of monies held in Key's cash lock-box and certifcates of deposit. The cash lock-box is a requirement under the line of credit with CIT (see Note 5). Restricted marketable securities of $267,000 at June 30, 1995 consist primarily of an investment in a mutual fund which invests, primarily, in short-term intermediate government securities which are recorded at market value at June 30, 1995. The investment was held in escrow for a letter-of-credit (issued in the amount of approximately $244,000) for workers' compensation insurance. During fiscal 1996, the investment was converted into a Certificate of Deposit which is recorded at cost. Inventories Inventories, which consist primarily of oilwell service parts and supplies, are held for use in the operations of Key and are valued at the lower of cost (first-in first-out method) or market. - 25 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Property and Equipment The Company provides for depreciation and amortization of non-oil and gas properties using the straight-line method over the following estimated useful lives of the assets: Description Years ------------------------------------------------ Oilfield service equipment 3 - 20 Oil and gas well drilling equipment 3 - 15 Motor vehicles 3 - 7 Furniture and equipment 3 - 10 Buildings and improvements 10 - 40 Gas processing facilities 10 ------------------------------------------------ Upon disposition or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is included in the results of operations. Odessa Exploration's aggregate oil and gas properties are stated at cost, not in excess of total estimated future net revenues net of related income tax effects. Odessa Exploration utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized, while nonproductive exploration costs and geological and geophysical costs (if any), are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method. Upon disposition, the carrying amounts of properties sold or otherwise disposed of and the related allowance for depletion are eliminated from the accounts and any gain/loss is included in results of operations. Gas Balancing Deferred income associated with gas balancing is accounted for on the entitlements method and represents amounts received for gas sold under gas balancing arrangements in excess of Odessa Exploration's interest in properties covered by such agreements. Odessa Exploration had deferred income associated with gas balancing of $198,000 and $253,000 as of June 30, 1996 and 1995, respectively. Environmental The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Other Assets and Goodwill At June 30, 1996 and 1995, other assets consisted primarily of goodwill and security and escrow deposits from Key's workers' compensation retrospective insurance program, in addition to an interest, (approximately 13%), in an insurance company (the insurance company is affiliated with Key's workers' compensation carrier). - 26 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) At June 30, 1996 and 1995, the Company classified as goodwill the cost in excess of fair value of the net assets acquired in purchase transactions. Goodwill is being amortized on a straight-line basis over ten to twenty-five years. Management continually evaluates whether events or circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or the remaining balance of goodwill may not be recoverable. Goodwill amortization expense totaled $100,000 for the year ended June 30, 1996. Earnings per Share Primary earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the year and common equivalent shares resulting from the assumed exercise of stock options and warrants (if any) using the treasury stock method, except in periods with reported losses as the inclusion of common stock equivalents would be antidilutive. Fully diluted earnings per common share are based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the "as if converted" method. Income Taxes The Company accounts for income taxes based upon Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is recognized when it is "more likely than not" that the benefit of deferred tax assets will not be realized. The Company and its wholly-owned subsidiaries file a consolidated federal income tax return. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing and by policy limits the amount of credit exposure to any one financial institution. The Company's customer base consists primarily of multi-national, foreign national and independent oil and natural gas producers. See Note 11 for additional information regarding customers which accounted for more than 10% of consolidated revenues. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on its trade receivables. Such credit risk is considered by management to be limited due to the large number of customers comprising the Company's customer base. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations. Impact of SFAS 121 In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 - Accounting for Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") regarding the impairment of long-lived assets, identifiable intangibles and goodwill related to those assets. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995, although earlier adoption is encouraged. Under SFAS 121 an entity shall review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. - 27 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) If the book value of long-lived assets exceeds the future cash flows expected to result from the use of such assets and a reduction of the carrying amount of the "impaired" assets to their estimated fair values is required. The Company, currently, estimates that the implementation of SFAS 121 will not have a material effect on the Company's financial position. The Company will implement SFAS 121 beginning July 1, 1996. Cash Flows For cash flow purposes, the Company considers all highly liquid investments with less than a three month maturity when purchased as cash equivalents. 2. BUSINESS AND PROPERTY ACQUISITIONS WellTech, Inc. On March 26, 1996, the Company acquired, through a merger, WellTech. Key was the surviving entity in the merger. Net consideration for the merger was 3,500,000 shares of the Company's common stock and warrants to purchase 500,000 additional shares. In the merger, WellTech stockholders received an aggregate of 4,929,962 shares of the Company's common stock and warrants to purchase 750,000 shares of the Company's common stock at $6.75 per share. As part of the merger, 1,429,962 of the 1,635,000 shares of the Company's common stock owned by WellTech and previously issued warrants to purchase 250,000 shares of the Company's common stock at $5.00 per share were cancelled. WellTech's principal line of business is oil and gas well servicing and it operates in the Mid-Continent and Northeast areas of the United States and in Argentina. The acquisition was accounted for using the purchase method and the results from operations from the acquisition have been included in those of the Company's since March 26, 1996. Odessa Exploration Properties In April of 1996, Odessa Exploration purchased approximately $6.9 million of oil and gas producing properties from an unrelated company. Financing for the acquisition came from bank financing. The acquisition was accounted for using the purchase method. The results of operations of the acquired properties are included in the consolidated statements of operations beginning April 26, 1996. Clint Hurt Drilling On March 30, 1995, the Company and Clint Hurt Associates, Inc. ("CHA") entered into an asset purchase agreement pursuant to which CHA sold to the Company all of its assets in West Texas. Such assets mainly consisted of four oil and gas drilling rigs and related equipment. As consideration for the acquisition, the Company paid CHA $1,750,000, of which $1,000,000 was paid in cash and the balance in the form of a $725,000 note payable to CHA (the note was paid in full in July 1995). Mr. Clint Hurt entered into consulting and noncompetition agreements with the Company in consideration for which the Company issued 5,000 shares of common stock. The acquisition was accounted for using the purchase method and the results of operations of Clint Hurt Drilling have been included in those of the Company since April 1, 1995. WellTech West Texas In December 1993, the Company and WellTech entered into a purchase agreement pursuant to which the Company purchased substantially all assets used by Welltech in its West Texas operations. The acquisition was dependent on shareholder approval which occurred in August of 1994. As consideration for the acquisition, the - 28 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Company issued to WellTech 1,635,000 shares of common stock of the Company and warrants to acquire 250,000 additional shares of common stock, (at $5.00 per share which expire on February 5, 1997). The issued warrants have been subsequently modified as the result of the WellTech merger described above. The closing of the transaction occurred on August 11, 1994. Prior to the closing, the Company (through its wholly-owned subsidiary; Yale E. Key, Inc.) operated and managed the operations of the WellTech West Texas region in connection with an interim operating agreement. The Company's consolidated statements of operations from December 10, 1993 through August 11, 1994, include the direct revenues and expenses from the West Texas operations of WellTech. For the period after August 11, 1994, the results of operations include the effects of ownership of WellTech West Texas. The following unaudited pro forma results of operations have been prepared as though WellTech Eastern, Clint Hurt Drilling and WellTech West Texas had been acquired on July 1, 1993: (unaudited) Year Ended June 30, (Thousands, except per share data) 1996 1995 1994 ----------------------------------------------------------------- Revenues $ 113,022 $ 119,645 $ 97,111 Net income 5,247 4,875 4,266 Earnings per share: Primary $0.50 $0.48 $0.42 Fully-diluted $0.47 $0.45 $0.40 Weighted average shares outstanding: Primary 10,414 10,106 10,106 Fully-diluted 11,106 10,798 10,798 3. OTHER ASSETS Other assets consist of the following: June 30, (Thousands) 1996 1995 --------------------------------------------------------------------- Investment in insurance company - common stock * $ 368 $ 368 Workers compensation security premiums 1,117 326 Deferred acquisition costs - 200 Goodwill (net of amortization - $200) 5,400 963 Other 149 154 --------------------------------------------------------------------- $ 7,034 $2,011 ===================================================================== * - Represents approximately 13% ownership. 4. COMMITMENTS AND CONTINGENCIES Various suits and claims arising in the ordinary course of business are pending against the Company. Management does not believe that the disposition of any of these items will result in a material adverse impact to the consolidated financial position of the Company. As of June 30, 1996, the Company had reserved $425,000 for potential suits and claims. During 1995, the Company entered into employment agreements with certain of its officers. These employment agreements generally run to June 30, 1997, but will automatically be extended on a yearly basis - 29 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) unless terminated by the Company or the applicable officer. In addition to providing a base salary for each officer, the employment agreements provide for severance payments for each officer varying from 12 to 24 months of the officers base salary. The current annual base salaries for the officers covered under such employment agreements total approximately $800,000. 5. LONG-TERM DEBT In July 1996, the Company completed the offering of $52,000,000 7% convertible subordinated debentures due 2003 (the "Debentures" or the "Offering"). The Offering was a private offering pursuant to Rule 144A under the Securities Act. Proceeds from the Offering were approximately $52,000,000 and were used to substantially repay existing long-term debt (approximately $35.2 million). The remaining proceeds are intended to fund the expansion of the Company's services through acquisitions of businesses and assets and for working capital and general corporate purposes. Long-term debt which was repaid with proceeds from the Offering in July 1996 were the term note with CIT Group/Credit Finance, Inc. ("CIT") of approximately $21.1 million and all bank debt associated with Odessa Exploration, previously with Norwest Bank Texas, N.A. ("Norwest") of approximately $14.1 million. The Debentures mature on July 1, 2003 and are convertible at any time after November 1, 1996 and before maturity, unless previously redeemed, into shares of the Company's common stock at a conversion price of $9 3/4 per share, subject to adjustment in certain events. In addition, holders of the Debentures who convert prior to July 1, 1999 will receive, in addition to the Company's common stock, a payment generally equal to 50% of the interest otherwise payable on the converted Debentures from the date of conversion through July 1, 1999, payable in cash or common stock, at the Company's option. Interest on the Debentures is payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. In August, 1996, the interest rate was increased from 7% to 7 1/2% due to certain modifications in the Debenture indenture involving a certain subsidiary's inability to guarantee the obligations under the indenture, (specifically, Servicious). The 7 1/2% effective interest rate is expected to remain for the foreseeable future. The Debentures are not redeemable before July 15, 1999. Thereafter, the Debentures will be redeemable at the option of the Company in whole or part, at the declining redemption prices set forth in the original Debenture prospectus, together with accrued and unpaid interest thereon. The Debentures also may be redeemed at the option of the holder if there is a change in control (as defined in the original Debenture prospectus) at 100% of their principal amount, together with accrued interest thereon. In January 1996, prior to the completed merger described in Note 2, and prior to the consummation of the Offering described above, the Company, Yale E. Key, Clint Hurt and WellTech entered into separate credit facilities with CIT totaling approximately $35 million (the combined maximum credit limit). The credit facilities were combined into one facility after the consummation of the Welltech merger. As a result of the separate credit facilities, the interest rate for Yale E. Key was lowered from two and one-half to one and one-quarter percent over the stated prime rate of 8.25% at June 30, 1996. Each of the CIT term notes required principal and interest payments, due the first day of each month beginning February 1, 1996, plus a final payment of the unpaid balance of the note due December 31, 1998. The expiration of each of the lines of credit was December 31, 1998. - 30 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) As a result of the Offering described above and subsequent repayment of all long-term debt with CIT, except the lines of credit, the Company is currently renegotiating its overall credit facilities with CIT including, but not limited to, maximum credit availability, interest rate and maturity dates. The components of long-term debt, prior to the Offering described above, were as follows: June 30, (Thousands) 1996 1995 --------------------------------------------------------------------------- Term Note(s) - CIT, interest and principal payable monthly (i) $ 21,062 $ 6,032 Revolving Line(s) of Credit - CIT, interest payable monthly (i) 9,910 3,846 Revolver Note - Norwest, interest payable monthly (ii) 6,300 4,237 Term Note(s) - Norwest, interest and principal payable monthly (iii) 7,000 944 Other notes payable 2,554 890 --------------------------------------------------------------------------- 46,826 15,949 Less current portion 1,472 2,249 --------------------------------------------------------------------------- Long-term debt $ 45,354 $ 13,700 =========================================================================== (i).Prior to the Offering described above, the CIT term note, as amended, required principal payments of approximately $275,000, plus interest, due the first day of each month plus a final payment of the unpaid balance of the note due December 31, 1998. The interest rate was one and one-quarter percent above the stated prime rate of 8.25% at June 30, 1996. The note was collateralized by all of the assets (including equipment and inventory) of Yale E. Key, Clint Hurt and WellTech Eastern. The CIT line of credit, as amended, currently requires monthly payments of interest at one and one-quarter percent above the stated prime rate of 8.25% at June 30, 1996. The line of credit is collateralized by the accounts receivable of Yale E. Key, Clint Hurt and WellTech Eastern. At June 30, 1996, there was no credit line availability. The agreement with CIT included certain restrictive covenants, the most restrictive of which prohibits the Company from making distributions and declaring dividends on its common stock. (ii). Prior to the Offering described above, Odessa Exploration had a loan agreement, as amended, with Norwest. The loan agreement provided for a $7.5 million revolving line of credit note subject to a borrowing base limitation (approximately $6.3 million at June 30, 1996). The borrowing base was redetermined on at least a semi-annual basis. The borrowing base was reduced by approximately $100,000 per month through October 1997; the maturity of the note. The note's interest rate was one-half of one percent over Norwest's prime rate of 8.25% at June 30, 1996). The note was secured by substantially all of the oil and gas properties of Odessa Exploration. - 31 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The loan agreement had contained various restrictive covenants and compliance requirements, which included (a) prohibits Odessa Exploration from declaring or paying dividends on Odessa Exploration's common stock, (b) limiting the incurrence of additional indebtedness by Odessa Exploration, (c) the limitation on the disposition of assets and (d) various financial covenants. (iii). In April, 1996, as the result of the acquisition of certain properties by Odessa Exploration, but prior to the Offering described above, Odessa Exploration entered into a loan agreement with Norwest. The loan agreement provided for a term loan of $9.3 million to be reduced by $2.4 million in principal amount after the consummation of the acquisition of certain properties by Odessa Exploration. The note's interest rate was one-half of one percent over Norwest's prime rate of 8.25% at June 30, 1996. The note required interest payments beginning June 1, 1996. The note was secured by substantially all of the oil and gas properties of Odessa Exploration. As a result of the Offering described above, the note was repaid in full in July 1996. In March 1995, Clint Hurt entered into a loan agreement with Norwest. The loan agreement provided for a $1 million term note and a $200,000 line of credit note. The $1 million term note required principal payments of approximately $28,000 per month plus interest with the first payment due May 5th, 1995 and monthly thereafter for 36 months with a maturity date of April 1998. The $200,000 line of credit note required principal payments of $20,000 per month beginning July 5, 1995, plus interest, through its maturity in April 1996. Both notes had an interest rate of Norwest prime rate (8.25% at June 30, 1996), plus 3/4 of one percent. The notes were secured by all of the equipment of Clint Hurt Drilling and were guaranteed by the Company. In January 1996, as the result of the new credit facilities with CIT as described above, but prior to the Offering, also described above, the Clint Hurt loan and line of credit with Norwest was repaid in full. Presented below is a schedule of the repayment requirements of long-term debt, which reflects the revised payment terms of the Offering, for each of the next five years and thereafter as of June 30, 1996: (in thousands) Fiscal year Principal Ended Amount -------------------------------- 1997 $ 1,472 1998 111 1999 9,956 2000 39 2001 38 Thereafter 35,210 -------------------------------- $ 46,826 ================================ - 32 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 6. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: June 30, (Thousands) 1996 1995 -------------------------------------------------------------------- Accrued payroll and taxes $ 2,614 $ 624 Group medical insurance 1,536 - Workers compensation 1,067 704 State sales, use and property taxes 414 208 Gas imbalance - deferred income 198 253 Revenue distribution 437 215 Acquisition accrual 3,720 - Other 1,016 608 -------------------------------------------------------------------- Total $ 11,002 $2,612 ==================================================================== 7. STOCKHOLDERS' EQUITY The 1995 Stock Option Plan On October 5, 1995, a Stock Option Plan (the "1995 Plan") was approved by the Company's Board of Director's. The Plan became effective July 1, 1995, and , unless terminated earlier, will terminate July 1, 2005. The 1995 Plan is administered by a committee (the "Committee") consisting of at least three directors of Key, each of whom is a "disinterested person" within the meaning of rule 16b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code. The total number of shares of the Company's common stock that may be subject to options under the 1995 Plan may not exceed 1,150,000 in the aggregate. The total amount of common stock with respect to which options may be granted over the life of the 1995 Plan to any single employee shall not exceed 500,000 shares in the aggregate. Options which are canceled, forfeited or have expired or expire by their terms without being exercised shall be available for future grants under the 1995 Plan. The Committee may determine may determine which key employees of the Company or any subsidiary or other persons shall be granted options under the 1995 Plan, the terms of the options and the number of shares which may be purchased under the option. The individuals eligible to receive options under the 1995 Plan consist of key employees (including officers who may be members of the Board), directors who are neither employees nor members of the Committee and other individuals who render services of special importance to the management, operation or development of Key or any subsidiary, and who have contributed or may be expected to contribute materially to the success of Key or a subsidiary, provided, however, that only key employees are eligible to receive options. The price at which shares of common stock may be purchased upon exercise of an option will be specified by the Committee at the time the option is granted, but in the case of an individual stock option, except under certain conditions, may not be less than the fair market value of the common stock on the date of grant. The duration of any option is determined by the Committee in its discretion and shall be specified in the option agreement. No individual stock option may be exercisable after the expiration of ten years. - 33 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The 1995 Outside Directors Stock Option Plan On October 5, 1995, an Outside Directors Stock Option Plan was approved by the Company's Board of Director's (the "Directors Plan"). Individuals who are "Outside Directors" are eligible to participate in the Directors Plan. An "Outside Director" is defined as a member of the Board of Directors who is not an employee of the Company or any of its subsidiaries. Under the Directors Plan, Outside Directors are divided into three groups dependent upon certain dates and length of service on the Board. Only nonqualified stock options ("NSO's") may be granted under the Directors Plan. An NSO granted under the Directors Plan shall expire ten years after the date of the grant. An NSO may not be granted under the Directors Plan after July 1, 1998. The Directors Plan provides for the issuance of an aggregate of 300,000 shares of common stock, which may be authorized but unissued shares, treasury shares, or shares purchased on the open market. The exercise price of the NSO shall be the fair market value on the date of the grant. The following table summarizes the stock option activity related to the Company's plans: Price Shares Per Share --------------------------------------------------------- Outstanding, July 1, 1995 - $ - Granted 1,075,000 $ 5.00 - $ 7.50 Cancelled - $ - Exercised - $ - ---------------------------------------------------------- Outstanding, June 30, 1996 1,075,000 $ 5.00 - $ 7.50 ========================================================== Exercisable, June 30, 1996 281,250 $ 5.00 - $ 7.50 ========================================================== 8. INCOME TAXES Components of income tax expense (benefit) are as follows: Fiscal Year Ended June 30, (Thousands) 1996 1995 1994 -------------------------------------------------------------- Federal and State: Current $ 270 $ (220) $ 457 Deferred 1,618 1,370 493 -------------------------------------------------------------- $1,888 $ 1,150 $ 950 ============================================================== - 34 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Income tax expense (benefit) differs from amounts computed by applying the statutory federal rate as follows: Fiscal Year Ended June 30, (Thousands) 1996 1995 1994 --------------------------------------------------------------------- Income tax computed at Statutory rate 34.0% 34.0% 34.0% State taxes net of federal benefit - - 2.4 Expiration of capital loss carryover - - 4.4 Meals and entertainment disallowance 1.7 2.2 - Accrual to return adjustments (1.5) (1.0) - Other (0.3) (0.7) .5 --------------------------------------------------------------------- 33.9% 34.5% 41.3% ===================================================================== Deferred tax assets (liabilities) are comprised of the following: Fiscal Year Ended June 30, (Thousands) 1996 1995 1994 ------------------------------------------------------------------------ Net operating loss carry-forwards, net of allowance and Sec. 382 limitations $ 6,293 $ 1,140 $ 1,143 Property and equipment (10,942) (3,437) (2,095) Other 95 (25) - ------------------------------------------------------------------------ Net deferred tax liability $(4,554) $(2,322) $ (952) ======================================================================== A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on expectations for the future, management has determined that taxable income of the Company will more likely than not be sufficient to fully utilize available carryforwards prior to their ultimate expiration. The Company estimates that as of June 30, 1996, the Company will have available approximately $186,837,042 of net operating loss carryforwards (which begin to expire in 2001). The net operating loss carryforwards are subject to an annual limitation of approximately $940,000, under Sections 382 and 383 of the Internal Revenue Code. 9. LEASING ARRANGEMENTS Among other leases, the Company (primarily its subsidiaries), lease certain automotive equipment under non-cancellable operating leases which expire at various dates through 1999. The term of the operating leases generally run from 36 to 60 months with varying payment dates throughout each month. In addition, in the case of Yale E. Key, each lease includes an option to purchase the equipment and an excess mileage charge as defined in the leases. - 35 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) As of June 30, 1996, the future minimum lease payments under non-cancellable operating leases, in thousands, are as follows: Fiscal Year Lease Ending June 30, Payments ------------------------------------- 1997 $ 2,819 1998 2,217 1999 1,371 2000 587 2001 286 ------------------------------------- $ 7,280 ===================================== Operating lease expense was approximately $2,897,000, $1,930,000 and $1,640,000 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. 10. EMPLOYEE BENEFIT PLANS At June 30, 1996, as the result of the WellTech merger (Note 2), the Company maintains two 401-(k) plan's (the "Plans") for its employees. Employee's of WellTech Eastern are eligible for participation in one Plan (the "WellTech 401-(k) Plan"), while all other employee's are eligible for participation in the other Plan (the "Key 401-(k) Plan"). The Company intends to merge the two Plans during fiscal 1997. The 401-(k) plan's cover substantially all employees of the Company. The Company did not make a contribution to the Key 401-(k) Plan during the fiscal year ended June 30, 1994, however, beginning July 1, 1994, the Company agreed to match employees contributions up to 10% of the employees contribution to the Key 401-(k) Plan. These contributions totaled approximately $19,000 and $20,000 for the years ended June 30, 1996 and 1995, respectively. Additionally, the Company contributed $37,000 into the Welltech 401-(k) Plan for the period March 26, 1996 (the date of the WellTech merger) to June 30, 1996. The Company agreed to match employee contributions up to 50% (to a maximum of $1,000 per employee) of the employees contributions to the Welltech 401-(k) Plan. 11. MAJOR CUSTOMERS Sales to customers representing 10% or more of consolidated revenues for the years ended June 30, 1996, 1995 and 1994 were as follows: Fiscal Year Ended June 30, 1996 1995 1994 ---------------------------------------------------------- Customer A 20% 18% 15% Customer B 11% 10% 14% The accounts receivable balance for customers A and B at June 30, 1996 were $1,603,000 and $835,000, respectively. - 36 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 12. TRANSACTIONS WITH RELATED PARTIES WellTech Eastern paid $18,000 for the period March 26, 1996 (the date of the Welltech merger) to June 30, 1996, for office/yard rental expense in which an officer of the Company and WellTech Eastern has an interest. In the opinion of the Board of Directors of the Company, based on the Board's review of competitive bids, this transaction was on terms at least as favorable to the Company as could have been obtained from a third party. In connection with the Odessa Exploration acquisition, (see Note 2) the Company granted D. Kirk Edwards (President of Odessa Exploration) a percentage reversionary working interest in five deep gas wells located in West Texas upon repayment of $1,622,000 of the bank debt assumed by the Company in the acquisition from the Company's earnings from the five wells. The percentage reversionary working interest decreases based on the date of repayment of the assumed bank debt and ranges from 20% of the earnings from the five wells if repayment occurs on or prior to July 7, 1995, to 5% of the earnings from the five wells if repayment occurs after July 7, 1996. The value of the reversionary interest assigned was insignificant at July 1, 1993. Key leases automotive equipment from an independent third party (see Note 9). The independent third party purchases the automotive equipment from an automobile dealership in which a former officer owns a majority interest. Net proceeds to the automobile dealership totaled $399,000 and $1,058,000 for years ended June 30, 1995 and 1994, respectively. The leases are considered operating leases. In the opinion of the Board of Directors of the Company, the net proceeds from automotive equipment were on terms at least as favorable to the Company as could have been obtained from a third party. This opinion is based on information provided by a third party leasing company, that is not affiliated with the former officer or the Company, to the Board of Directors regarding purchase prices and equipment lease rentals offered by third parties. Key paid $55,000 for the year ended June 30, 1994 for oilfield related services and equipment to two oilfield related companies in which two officers of Key had an interest. In the opinion of the Board of Directors of the Company, based on the Board's review of competitive bids, these transactions were on terms at least as favorable to the Company as could have been obtained from a third party. 13. CONCENTRATIONS OF CREDIT RISK The Company has a concentration of customers in the oil and gas industry. Substantially all of the Company's customers are major integrated oil companies, major independent producers of oil and gas and smaller independent producers. This may affect the Company's overall exposure to credit risk either positively or negatively, in as much as its customers are effected by economic conditions in the oil and gas industry, which has historically been cyclical. However, accounts receivable are well diversified among many customers and a significant portion of the receivables are from major oil companies, which management believes minimizes potential credit risk. Historically, credit losses have been insignificant. Receivables are generally not collateralized, although the Company may generally secure a receivable at any time by filing a mechanic's and material-mans' lien on the well serviced. - 37 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 14. BUSINESS SEGMENT INFORMATION Information about the Company's operations by business segment is as follows: Year Ended June 30, (Thousands) 1996 1995 1994 -------------------------------------------------------------------- Revenues: Oil and gas $ 4,175 $ 2,334 $ 1,936 Oilfield services 55,933 40,105 32,616 Oil and gas well drilling services 6,188 1,932 - Other 182 318 69 -------------------------------------------------------------------- $66,478 $ 44,689 $34,621 ==================================================================== Income before minority interest and and income taxes: Oil and gas $ 1,596 $ 941 $ 814 Oilfield services 6,482 4,105 2,823 Oil and gas well drilling services 639 367 - Interest expense (2,477) (1,478) (830) General corporate (665) (607) (512) --------------------------------------------------------------------- $ 5,575 $ 3,328 $ 2,295 ===================================================================== Identifiable assets: Oil and gas $ 18,170 $ 8,289 $ 5,258 Oilfield services 94,962 33,516 22,022 Oil and gas well drilling services 5,583 3,160 - General corporate 3,007 278 815 --------------------------------------------------------------------- $121,722 $ 45,243 $ 28,095 ===================================================================== Capital Expenditures: Oil and gas $ 9,774 $ 3,736 $ 4,449 Oilfield services 5,188 11,422 4,395 Oil and gas well drilling services 598 2,141 - --------------------------------------------------------------------- $ 15,560 $ 17,299 $ 8,844 ===================================================================== Depreciation, depletion and amortization: Oil and gas $ 618 $ 426 $ 412 Oilfield services 3,862 2,279 959 Oil and gas well drilling services 221 33 - --------------------------------------------------------------------- $ 4,701 $ 2,738 $ 1,371 ===================================================================== Key operates a variety of oilfield service equipment including workover rigs, hot oil units, transports and various other oilfield servicing equipment. In addition, Key performs a variety of other oilfield services including fishing tools, frac tanks and blow-out preventers. - 38 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Oil and gas production is conducted by Odessa Exploration. Odessa Exploration acquires and manages interests in producing oil and gas properties for its own account and for its sponsored investors. The Company is engaged in the drilling and production of oil and natural gas in the United States. Odessa Exploration acquires producing oil and gas properties from major and independent producers. After acquisition, Odessa Exploration may either rework the acquired well to increase production and/or form drilling partnerships for additional development wells. Oil and gas well drilling services are conducted by Clint Hurt Drilling. Clint Hurt Drilling operates six drilling rigs which drill for oil and gas in the West Texas area. 15. INFORMATION ON OIL AND GAS ACTIVITIES (unaudited) CAPITALIZED COSTS: June 30, (in thousands) 1996 1995 --------------------------------------------------------------- Oil and Gas Properties: Proved properties $ 17,290 $ 7,652 Unproven properties - - Less accumulated depletion (1,364) (766) --------------------------------------------------------------- Net capitalized costs $ 15,926 $ 6,886 =============================================================== COSTS INCURRED: June 30, (in thousands) 1996 1995 1994 ------------------------------------------------------------------------ Proved property acquisition costs $ 7,786 $ 1,054 $ 4,390 Development costs 1,848 2,581 40 ------------------------------------------------------------------------ Total Costs Incurred $ 9,634 $ 3,635 $ 4,430 ======================================================================== RESULTS OF OPERATIONS: Oil and gas sales $ 3,555 $ 1,793 $ 1,483 Production costs, including production taxes (1,350) (756) (573) Depletion (598) (398) (386) Income taxes * (546) (217) (178) ------------------------------------------------------------------------- Results of operations for oil and gas producing activities ** $ 1,061 $ 422 $ 346 ========================================================================= * - computed at the statutory rate of 34%. ** - excludes corporate overhead and financing costs. - 39 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Oil and Gas Reserve Information Estimates of Odessa Exploration's proved oil and gas reserves as of June 30, 1996, 1995 and 1994 were prepared by the Company and reviewed by independent petroleum reservoir engineering firms. All estimates were made in accordance with guidelines established by the Securities and Exchange Commission. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions, i.e. prices and costs as of the date the estimate is made. Prices utilized reflect consideration of changes in existing prices provided by contractual arrangements, if any, but not of escalations based upon future conditions. The reserve estimates are presented utilizing an average oil price of $19.17 Bbl and an average natural gas price of $1.95 Mcf as of June 30, 1996. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing equipment and operating methods. Proved undeveloped oil and gas reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion or secondary or tertiary recovery. Reserves assigned to undrilled acreage are limited to those drilling units that offset productive units reasonably certain of production when drilled. No major discovery or other favorable or adverse event has occurred since July 1, 1996 which is believed to have caused a significant change in the estimated proved oil and gas reserves of Odessa Exploration. Odessa Exploration's estimate of reserves has not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission. Oil and gas reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future. (continued next page) - 40 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Oil and Gas Producing Activities: Oil and Natural Condensate Gas (Bbls) (Mcf) ---------------------------------------------------------------- Total Proved Reserves: Balance, July 1, 1993: - - Purchases of minerals-in-place 129,291 7,338,452 Production (14,383) (552,791) ---------------------------------------------------------------- Balance, June 30, 1994 114,908 6,785,661 Revisions of previous estimates 92,080 1,945,659 Purchases of minerals-in-place 1,515,559 6,036,937 Production (40,330) (770,197) ---------------------------------------------------------------- Balance, June 30, 1995 1,682,217 13,998,060 Revisions of previous estimates 275,499 4,520,007 Discoveries and extensions 162,643 1,793,111 Purchases of minerals-in-place 3,162,099 16,456,993 Production (97,130) (1,026,577) ---------------------------------------------------------------- Balance, June 30, 1996 5,185,328 35,741,594 ================================================================ Proved Developed Reserves: June 30, 1994 114,908 6,785,661 ================================================================ June 30, 1995 750,604 11,203,232 ================================================================ June 30, 1996 2,727,967 24,517,362 ================================================================ Standardized Measure of Discounted Future Cash Flows The following schedules present estimates of the standardized measure of discounted future net cash flows from the Company's proved reserves as of June 30, 1996, and an analysis of the changes in these amounts for the years ended June 30, 1996, 1995 and 1994. Estimated future cash flows are determined using year-end prices adjusted only for fixed and determinable increases for natural gas provided by contractual agreement (if any). Estimated future production and development costs are based on economic conditions at year-end. Future federal income taxes are computed by applying the statutory federal income tax rate of 34% to the difference between the future pretax net cash flows and the tax basis of proved oil and gas properties, after considering investment tax credits and net operating loss carry-forwards (if any), associated with these properties. Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable reserves, anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise. - 41 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) June 30, (in thousands) 1996 1995 ----------------------------------------------------------------------- Standardized Measure: Future cash inflows $171,000 $ 51,830 Future production costs (61,521) (11,852) Future development costs (15,495) (6,160) Future income taxes (12,092) (10,477) ----------------------------------------------------------------------- Future after-tax net cash flows 81,892 23,341 10% annual discount (42,188) (8,183) ----------------------------------------------------------------------- Standardized Measure $ 39,704 $ 15,158 ======================================================================= Changes in Standardized Measure: Standardized Measure, July 1, 1993 $ - Oil and gas sales, net of production costs (910) Purchases of minerals in place 6,030 Net change in income taxes (381) Accretion of discount - ------------------------------------------------------------- Standardized Measure, June 30, 1994 $ 4,739 Oil and gas sales, net of production costs (1,037) Purchases of minerals in place 13,033 Net change in income taxes (5,881) Accretion of discount 512 Revision of quantity estimates 1,745 Change in future development costs 1,227 Net change in sales prices 79 Changes in production rates (timing) and other 741 ------------------------------------------------------------- Standardized Measure, June 30, 1995 $ 15,158 Oil and gas sales, net of production costs (2,205) Purchases of minerals in place 24,216 Net change in income taxes 75 Accretion of discount 2,142 Revision of quantity estimates 6,189 Change in future development costs (982) Extensions and discoveries 2,952 Net change in sales prices 1,397 Changes in production rates (timing) and other (9,238) ------------------------------------------------------------- Standardized Measure, June 30, 1996 $ 39,704 ============================================================= - 42 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 16. CASH FLOW DISCLOSURES Supplemental cash flow disclosures for the years ended June 30, 1996, 1995 and 1994 are presented below: Year Ended June 30, (Thousands) 1996 1995 1994 -------------------------------------------------------------------------- Interest paid $ 2,205 $ 1,422 $ 759 Taxes paid 391 53 10 Supplemental schedule of non-cash investing and financing transactions for the years ended June 30, 1996, 1995 and 1994 are presented below: Year Ended June 30, (Thousands) 1996 1995 1994 ------------------------------------------------------------------------- Fair value of Common Stock issued for Odessa Exploration, Inc. $ - $ - $ 638 Assumption of Odessa Exploration, Inc. liabilities - - 2,752 Acquisition of Odessa Exploration, Inc. property and equipment - - 3,196 Fair value of Common Stock issued for Clint Hurt Drilling - 23 - Fair value of Common Stock and Warrants issued for WellTech West Texas - 8,647 - Capital lease obligation reduced for purchase of asset - 275 - Proceeds on sale of assets not received - 132 - Property and equipment additions and acquisition costs not paid as of June 30th - 1,015 - Issuance of note payable in Clint Hurt Drilling acquisition - 725 - Fair value of Common Stock issued for WellTech, Inc. 17,729 - - Assumption of Welltech, Inc. working capital deficit 1,734 - - Assumption of Welltech, Inc. non-current liabilities and debt 27,570 - - Acquisition of WellTech, Inc. property and equipment and other assets 47,455 - - - 43 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 17. QUARTERLY RESULTS OF OPERATIONS (Unaudited) Summarized quarterly financial data for 1996 and 1995 are as follows: First Second Third Fourth Quarter Quarter Quarter Quarter (in thousands, except per share amounts) ---------------------------------------------------------------------------- 1996 Revenues . . . . . . . . . . $12,398 $12,394 $14,302 $27,384 Earnings from operations . . 3,522 3,763 4,180 7,895 Net earnings . . . . . . . . 726 768 827 1,265 Earnings per share . . . . . .11 .11 .12 .16 Weighted average common shares and equivalents outstanding 6,914 6,914 6,981 7,941 1995 Revenues . . . . . . . . . . $11,181 $10,781 $11,049 $11,678 Earnings from operations . . 2,645 2,683 3,083 3,485 Net earnings . . . . . . . . 519 492 631 536 Earnings per share . . . . . .09 .08 .10 .08 Weighted average common shares and equivalents outstanding 6,091 6,500 6,637 6,647 18. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes derivative financial instruments to manage well-defined commodity price risks. The Company is exposed to credit losses in the event of nonperformance by the counterparties to its commodity hedges. The Company anticipates, however, that such counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of the counterparties. The Company utilizes option contracts to hedge the effect of price changes on future oil and gas production. If market prices of oil and gas exceed the strike price of put options, the options will expire unexercised, therefore reducing the effective price received for oil and gas sales by the cost of the related option. As of June 30, 1996, Odessa Exploration had 6,000 Bbls of oil per month hedged with a strike price of $19.50 per Bbl., for the period of July 1, 1996 through December 31, 1996. Premiums paid for commodity options contracts are amortized to oil and gas sales, over the terms of the agreements. Unamortized premiums of $91,789 are included in other current assets in the consolidated balance sheet at June 30, 1996. Amounts receivable, if any, under commodity option contracts are accrued as an increase in oil and gas sales for the applicable periods. - 44 - Independent Auditors' Report To The Board of Directors and Stockholders Key Energy Group, Inc. We have audited the accompanying consolidated balance sheets of Key Energy Group, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years ended June 30, 1996. These consolidated financial statements 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 consolidated financial position of Key Energy Group, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years ended June 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Midland, Texas September 13, 1996 - 45 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III. ITEMS 10 - 13. Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10-13 is incorporated by reference from the Company's definitive proxy statement, which will be filed with the Commission pursuant to Regulation 14A within 120 days of June 30, 1996. - 46 - PART IV. TEM 14. EXHIBITS AND REPORTS ON FORM 8-K. (a) Reports on Form 8-K The Company filed a report on Form 8-K during the quarter ended June 30, 1996 which was dated June 28, 1996 relating to the private placement offering of the Company's convertible subordinated debentures. (b) Index to Exhibits The following exhibits have been filed with the Securities and Exchange Commission: Exhibit 2.1 Agreement and Plan of Merger dated as of November 18, 1995, between Key and WellTech, as amended. (Incorporated by reference to the Company's Registration Statement Form S-4, Registration No. 333-369). Exhibit 2.2 Joint Plan of Reorganization, dated as of October 20, 1992, of the Company, ESKEY Inc. and YFC International Finance N.V. and Order, dated December 4, 1992, of the United States Bankruptcy Court for the District of New Jersey, approving the Joint Plan of Reorganization (Incorporated by reference to Exhibits 2 (a) and 28 (a) of the Company's Report on Form 8-K dated December 14, 1992, File No.1-8038). Exhibit 2.3 Agreement and Plan of Merger dated as of July 20, 1993, by and among the Company, OEI Acquisition Corp. and Odessa Exploration Incorporated. (Incorporated by reference to Exhibit 2(a) of the Company's Report on Form 8-K dated September 2, 1993, File No. 1-8038). Exhibit 2.4 Asset Purchase Agreement dated as of December 10, 1993 between the Company and WellTech, Inc. (Incorporated by reference to exhibit 2(a) of the Company's report on Form 8-K dated August 17, 1974, File No. 1-8038). Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 333-369). Exhibit 3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 dated March 8, 1996, Registration No. 333-369). Exhibit 4.1* 7% Convertible Subordinated Debenture of the Company due July 1, 2003. Exhibit 4.2* Indenture for the 7% Convertible Subordinated Debenture of the Company due July 1, 2003. Exhibit 4.3* Registration Rights Agreement among the Company, McMahan Securities Co., L.P. and Rausher Pierce Refsnes, Inc., dated as of July 3, 1996. - 47 - Exhibit 4.4 Registration Rights Agreement between the Company and D. Kirk Edwards, dated as of July 20, 1993. (Incorporated by reference to Exhibit 10 (c) to the Company's Report on Form 8-K/A). Exhibit 4.5 Registration Rights Agreement dated as of March 2, 1996 among the Company and certain of its stockholders (Incorporated by reference to the Company's Registration Statement on Form S-4,Registration No. 353-369). Exhibit 4.6 Registration Rights Agreement dated as of March 30, 1995 between the Company, Clint Hurt and Associates, Inc. and Clint Hurt (Incorporated by reference to Exhibit 10(d) of the Company's Report on Form 10-KSB dated June 30, 1995, File No. 1-8038). Exhibit 4.7 Form of Common Stock Purchase Warrant to Purchase Key Common Stock issued in connection with the WellTech Merger. (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 4.8 Common Stock Purchase Warrant to Purchase 75,000 shares of Key Common Stock issued to CIT Group/Credit Finance, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 10.1 Employment Agreement between the Company and D. Kirk Edwards, dated as of July 20, 1993. (Incorporated by reference to Exhibit 10 (b) to the Company's Report on Form 8-K/A). Exhibit 10.2 Asset Purchase Agreement dated as of March 30, 1995 between the Company and Clint Hurt and Associates, Inc. (Incorporated by reference to the Company's Report on Form 10-KSB dated June 30, 1995, File No. 1-8038). Exhibit 10.3 Non-Competition Agreement dated as of March 30, 1995 between the Company, Clint Hurt and Associates, Inc. and Clint Hurt.(Incorporated by reference to Exhibit 10(f) of the Company's Report on Form 10-KSB dated June 30, 1995, File No. 1-8038). Exhibit 10.4* Employment Agreement between Welltech, Inc. and Kenneth Hill, dated as of March 29, 1996. Exhibit 10.5* Employment Agreement between Welltech, Inc. and Kenneth Huseman, dated as of March 29, 1996. Exhibit 10.6* Letter Agreement between Van Greenfield and the Company dated May 15, 1996. Exhibit 10.7* Amendment No. 2 to the Company's Employment with Agreement between Francis D. John and the Company, dated as of May 15, 1996. Exhibit 10.8* Letter Agreement between Morton Wolkowitz and the Company dated June 3, 1996. - 48 - Exhibit 10.9* Third Amended and restated Loan and Security Agreement between The CIT Group/Credit Finance, Inc., Yale E. Key, Inc., Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling, and Welltech Eastern, Inc. Exhibit 10.10* Cross-Collaterization and Cross-Guaranty Agreement among The CIT Group/Credit Finance, Inc., Yale E. Key, Inc., Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling, and Welltech Eastern, Inc. Exhibit 10.11* Guaranty Agreement among The CIT Group/Credit Finance, Inc., Yale E. Key, Inc., Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling, and Welltech Eastern, Inc. Exhibit 10.12* Asset Purchase Agreement between Hardy Oil & Gas USA, Inc. and Arch Petroleum, Inc. dated as of April. 1996. Exhibit 10.13* Asset Purchase Agreement between Arch Petroleum, Inc. to Odessa Exploration, Inc. dated as of April 18, 1996. Exhibit 10.14* General Conveyance by Arch Petroleum, Inc. to Odessa Exploration, Inc. dated as of January 1, 1996. Exhibit 10.15 Company's 1995 Stock Option Plan (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 10.16 The Company's Outside Directors Stock Option Plan (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 22* Subsidiaries of the Registrant. Exhibit 27* Financial Data Schedule. ______________________________________ * Filed herewith. - 49 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEY ENERGY GROUP, INC. (Registrant) By /s/ Francis D. John Francis D. John President, Chief Executive and Chief Dated: September 25, 1996 Financial Officer and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Francis D. John Francis D. John President, Chief Executive and Chief Dated: September 25, 1996 Financial Officer and Director By /s/ Morton Wolkowitz Morton Wolkowitz Dated: September 25, 1996 Chairman of the Board and Director By /s/ Van Greenfield Van Greenfield Dated: September 25, 1996 Director By /s/ William Manly William Manly Dated: September 25, 1996 Director By /s/ Kevin P. Collins Kevin P. Collins Dated: September 25, 1996 Director By /s/ W. Phillip Marcum W. Phillip Marcum Dated: September 25, 1996 Director By /s/ Danny R. Evatt Danny R. Evatt Dated: September 25, 1996 Chief Accounting Officer - 50 - EX-10.6 2 LETTER AGREEMENT WITH VAN GREENFIELD KEY ENERGY GROUP, INC. 255 Livingston Avenue New Brunswick, New Jersey 08901 May 15, 1996 Mr. Van Greenfield GreenCohn 45 Broadway, 21st Floor New York, NY 10006 Dear Van: The purpose of this letter is to confirm to you that the Board of Directors of Key Energy Group, Inc. ("Key") in March, 1996 agreed, in recognition of the successful completion of the merger of WellTech, Inc. into Key and Key's financing with CIT Group-Credit Finance, Inc., to make to you a payment of $75,000, at your request, which amount shall be utilized by you to acquire shares of common stock of Key. Please confirm your agreement to the foregoing by countersigning this letter where indicated, whereupon this letter agreement shall become a binding letter agreement. Very truly yours, Key Energy Group, Inc. By: /s/ Francis D. John Francis D. John President Agreed to: /s/ Van Greenfield Van Greenfield Date: 5/15/96 EX-10.7 3 AMENDMENT NO. 2 FRANCIS JOHN EMPLOYMENT CONTRACT KEY ENERGY GROUP, INC. 255 Livingston Avenue New Brunswick, New Jersey 08901 May 15, 1996 Mr. Francis D. John 33 Penn Oak Trail Newtown, PA 18940 Dear Fran: The purpose of this letter is to confirm to you that the Board of Directors of Key Energy Group, Inc. ("Key") in March, 1996 agreed, in recognition of the successful completion of the merger of WellTech, Inc. into Key and Key's financing with CIT Group-Credit Finance, Inc., to pay you a bonus of $300,000 on any date after July 1, 1996 that you shall request; after July 1, 1996 the unpaid portion of the bonus shall bear interest at 6% per annum. In addition, the Board of Directors has agreed that Key will pay an additional bonus to you of $150,000, at your request, which amount shall be utilized by you to acquire shares of common stock of Key. Please confirm your agreement to the foregoing by countersigning this letter where indicated, whereupon this letter agreement shall become Amendment No. 2 to your Employment Agreement dated as of July 1, 1995, as amended. Very truly yours, Key Energy Group, Inc. By: /s/ Van Greenfield Co-Chairman of the Board of Directors Agreed to: /s/ Francis D. John Francis D. John Date: 5/15/96 EX-10.8 4 LETTER AGREEMENT WITH MORTON WOLKOWITZ KEY ENERGY GROUP, INC. 255 Livingston Avenue New Brunswick, New Jersey 08901 May 15, 1996 Mr. Morton Wolkowitz 400 West 43rd Street Apartment 41D New York, NY 10036 Dear Mort: The purpose of this letter is to confirm to you that the Board of Directors of Key Energy Group, Inc. ("Key") in March, 1996 agreed, in recognition of the successful completion of the merger of WellTech, Inc. into Key and Key's financing with CIT Group-Credit Finance, Inc., to make to you a payment of $75,000, at your request, which amount shall be utilized by you to acquire shares of common stock of Key. Please confirm your agreement to the foregoing by countersigning this letter where indicated, whereupon this letter agreement shall become a binding letter agreement. Very truly yours, Key Energy Group, Inc. By: /s/ Francis D. John Francis D. John President Agreed to: /s/ Morton Wolkowitz Morton Wolkowitz Date: 6/3/96 EX-10.10 5 CROSS COLLATERALIZATION AND CROSS GUARANTY AGREEMENT CROSS-COLLATERALIZATION AND CROSS-GUARANTY AGREEMENT This CROSS-COLLATERALIZATION AND CROSS-GUARANTY AGREEMENT (this "Agreement"), dated as of May 21, 1996, is among The CIT Group/Credit Finance, Inc. ("Lender"), Yale E. Key, Inc. ("Yale"), Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Hurt"), Key Energy Group, Inc. ("Key"), and WellTech Eastern, Inc. ("WellTech") (Yale, Hurt, and WellTech are referred to each individually as a "Borrower" and collectively as the "Borrowers"). A. Yale, Hurt, and WellTech have entered into that certain Third Amended and Restated Loan and Security Agreement with Lender dated of even date herewith (the "Loan Agreement"). B. In accordance with the terms of the Loan Agreement, Lender has agreed to make loans and other financial accommodations for the benefit of Borrowers. Key owns one hundred percent (100%) of the stock of each of the Borrowers and has executed a separate Guaranty of even date herewith guaranteeing Borrowers' Obligations to Lender under the Loan Agreement. C. Key and Lender have entered into that certain Amended and Restated Stock Pledge Agreement dated of even date herewith (the "Key Stock Pledge Agreement"), under which Key pledged certain stock (the "Key Stock") described therein as security for the obligations of the Borrowers under the Loan Agreement. D. WellTech and Lender have entered into that certain Amended and Restated Stock Pledge Agreement dated of even date herewith (the "WellTech Stock Pledge Agreement"), under which WellTech pledged certain stock (the "WellTech Stock") described therein as security for the obligations of the Borrowers under the Loan Agreement. E. Yale and WellTech have each executed certain deeds of trust or mortgages (the "Mortgages") pledging as additional collateral certain parcels of real estate located in various states (the "Real Estate"). F. Borrowers and Key have also executed certain Assignments of Chattel Paper in favor of Lender. G. Lender has conditioned its obligations under the Loan Agreement and the other documents and instruments executed in connection therewith on the execution of this Agreement by each of the Borrowers and Key. NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, each Borrower, Key and Lender hereby agree as follows: Due to the close business and financial relationships between each and all Borrowers and Key, in consideration of the benefits which will accrue to each Borrower and Key, and as an inducement for and in consideration of Lender at any time providing or extending loans, advances and other financial accommodations to all Borrowers pursuant to the Loan Agreement, each of the Borrowers and Key hereby, irrevocably and unconditionally, (a) guarantees and agrees to be liable for the prompt indefeasible and full payment and performance of all revolving loans, term loans, letters of credit, bankers' acceptances, merchandise purchase guaranties or other guaranties or indemnities for each other Borrower's account and all other obligations, liabilities and indebtedness of every kind, nature or description owing by all other Borrowers to Lender and/or its affiliates, including principal, interest, charges, fees and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under the Loan Agreement, whether now existing or hereafter arising, whether arising during or after the initial or any renewal term of the Loan Agreement or after the commencement of any case with respect to any Borrower or Key under the United States Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended, and whether arising directly or howsoever acquired by Lender including from any other entity outright, conditionally or as collateral security, by assignment, merger with any other entity, participations or interests of Lender in the obligations of any Borrower to others, by assumption, operation of law, subrogation or otherwise, and (b) agrees to pay to Lender on demand the amount of all expenses (including, without limitation, attorneys' fees and legal expenses) incurred by Lender in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of each Borrower's and Key's obligations, liabilities and indebtedness as aforesaid to Lender, Lender's rights in any collateral or under this Agreement, the Loan Agreement and all other Loan Documents, or in any way involving claims by or against Lender directly or indirectly arising out of or related to the relationship between any Borrower or Key and Lender, whether such expenses are incurred before, during or after the initial or any renewal term of the Loan Agreement or after the commencement of any case with respect to any Borrower or Key under the United States Bankruptcy Code or any similar statute (all of which being collectively referred to herein as the "Guaranteed Obligations"). Notice of acceptance of this Agreement, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, each Borrower, and presentment, demand, protest, notice of protest, notice of nonpayment or default, notice of intent to accelerate and notice of acceleration, and all other notices to which each Borrower or Key is or may be entitled are hereby waived. Each of the Borrowers and Key also waives notice of, and hereby consents to, (i) any amendment, modification, supplement, renewal, restatement or extensions of time of payment of or increase or decrease in the amount of any of the Guaranteed Obligations or to the Loan Agreement and any collateral, and the guarantee made herein shall apply to the Guaranteed Obligations as so amended, modified, supplemented, renewed, restated or extended, increased or decreased, (ii) the taking, exchange, surrender and releasing of collateral or guarantees now or at any time held by or available to Lender for the obligations of any Borrower or Key or any other party at any time liable for or in respect of the Guaranteed Obligations (individually, an "Obligor" and collectively, the "Obligors"), (iii) the exercise of, or refraining from the exercise of any rights against any Borrower or Key, or any other Obligor, or any collateral, and (iv) the settlement, compromise or release of, or the waiver of any default with respect to, any Guaranteed Obligations. Each of the Borrowers and Key agrees that the amount of the Guaranteed Obligations shall not be diminished and the liability of such Borrower and Key hereunder shall not be otherwise impaired or affected by any of the foregoing. 2 No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations shall affect, impair or be a defense to this Agreement, nor shall any other circumstance which might otherwise constitute a defense available to, or legal or equitable discharge of any Borrower or Key in respect of any of the Guaranteed Obligations affect, impair or be a defense to the obligations under this Agreement. Without limitation of the foregoing, the liability of each Borrower and Key hereunder shall not be discharged or impaired in any respect by reason of any failure by Lender to perfect or continue perfection of any lien or security interest in any collateral for the Guaranteed Obligations or any delay by Lender in perfecting any such lien or security interest. As to interest, fees and expenses, whether arising before or after the commencement of any case with respect to any Borrower or Key under the United States Bankruptcy Code or any similar statute, each Borrower and Key shall be liable therefor, even if any other Borrower's or Key's liability for such amounts does not, or ceases to, exist by operation of law. Payment of all amounts now or hereafter owed to any Borrower or Key by any other Borrower or Key or any other Obligor is hereby subordinated in right of payment to the indefeasible payment in full to Lender of the Guaranteed Obligations and is hereby assigned to Lender as security therefor. Until such time as the Guaranteed Obligations have been indefeasibly paid to Lender in full in cash or by cashiers' or bank check or wire transfer, each Borrower and Key hereby irrevocably and unconditionally waives and relinquishes all surety defenses including, but not limited to, all statutory, contractual, common law, equitable and all other claims against each other Borrower, any collateral for the Guaranteed Obligations or other assets of any Borrower or any other Obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid or payable to Lender by any Borrower or Key hereunder, and each Borrower hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which such Borrower or Key might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by or collected or due from any other Borrower or any other Obligor upon the Guaranteed Obligations or realized from their property. EACH BORROWER HEREBY PLEDGES, ASSIGNS, AND GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL DESCRIBED IN THE LOAN AGREEMENT TO SECURE ALL OF THE GUARANTEED OBLIGATIONS. IN ADDITION, THE STOCK AND THE REAL ESTATE, AS WELL AS ANY OTHER PROPERTY, REAL OR PERSONAL, AT ANY TIME NOW OR HEREAFTER PLEDGED TO LENDER BY ANY BORROWER OR KEY SHALL SERVE AS COLLATERAL TO SECURE THE GUARANTEED OBLIGATIONS. In the event proceedings shall be instituted by or against any Borrower or Key or any other Obligor in bankruptcy or insolvency, or for reorganization, arrangement, receivership, or the like, or if any Borrower, or Key or any other Obligor calls a meeting of creditors or makes any assignment for the benefit of creditors, or upon the occurrence of any event which constitutes a default or event of default under the Loan Agreement, the liability of such Borrower and Key for the entire Guaranteed Obligations shall, at the option of Lender, mature, even if the liability of any other Borrower or Key or any other Obligor therefor does not. Each Borrower and Key shall continue to be liable hereunder until one of Lender's officers actually receives a written termination notice by certified mail; but the giving of such notice shall not relieve such Borrower or Key from liability for any Guaranteed Obligations incurred before termination or for post-termination collection expenses and interest pertaining to any Guaranteed Obligations arising before termination. 3 Each Borrower and Key agrees that this Agreement shall remain in full force and effect or be reinstated, as the case may be, if at any time payment of any of the Guaranteed Obligations is rescinded or otherwise restored by Lender to any Borrower or Key or to any other person who made such payment, or to the creditors or creditors' representative of such Borrower or Key or such other person. Lender's books and records showing the account between Lender and each Borrower shall be admissible in evidence in any action or proceeding as prima facie proof of the items therein set forth, and any written statements rendered by Lender to any Borrower, to the extent to which no written objection is made within sixty (60) days after the date thereof, shall be considered correct and be binding on Borrowers as an account stated for purposes of this Agreement. No delay on Lender's part in exercising any rights hereunder or failure to exercise the same shall constitute a waiver of such rights. No notice to, or demand on, any Borrower or Key shall be deemed to be a waiver of the obligation of such Borrower or Key to take further action without notice or demand as provided herein. No waiver of any of Lender's rights hereunder, and no modification or amendment of this Agreement, shall be deemed to be made by Lender unless the same shall be in writing, duly signed on Lender's behalf, and each such waiver, if any, shall apply only with respect to the specific instance involved and shall in no way impair Lender's rights or the obligations of any Borrower or Key to Lender in any other respect at any other time. This Agreement is binding upon each Borrower and Key, its successors and assigns and shall benefit Lender and its successors, endorsers, transferees and assigns. All references to Borrower, Key, and Lender herein shall include their respective successors and assigns. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE OFFICE OF LENDER SET FORTH ABOVE IS LOCATED. EACH BORROWER, KEY, AND LENDER WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OR ANY OF THEM AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY ALLEGED TORTIOUS CONDUCT BY ANY BORROWER, KEY, OR LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISING OUT OF OR RELATED TO THE RELATIONSHIP BETWEEN BORROWERS, KEY, AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. Each Borrower and Key waives all rights to interpose any claims, deductions, setoffs or counterclaims of any kind, nature or description in any action or proceeding instituted by Lender with respect to this Agreement or any matter arising herefrom or relating hereto, except compulsory counterclaims. 4 EACH BORROWER AND KEY HEREBY IRREVOCABLY SUBMITS AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE IN WHICH THE OFFICE OF LENDER DESIGNATED ABOVE IS LOCATED WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY MATTER ARISING HEREFROM OR RELATING HERETO. ANY SUCH ACTION OR PROCEEDING COMMENCED BY ANY BORROWER OR KEY AGAINST LENDER WILL BE LITIGATED ONLY IN A FEDERAL COURT LOCATED IN THE DISTRICT, OR A STATE COURT IN THE STATE AND COUNTY, IN WHICH THE OFFICE OF LENDER SET FORTH ABOVE IS LOCATED AND EACH BORROWER AND KEY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE IN CONNECTION THEREWITH. In any such action or proceeding, each Borrower and Key waives personal service of the summons and complaint or other process and papers therein and agrees that any process or notice of motion or other application to any of said Courts or a judge thereof, or any notice in connection with any proceedings hereunder may be served (i) inside or outside such State by registered or certified mail, return receipt requested, addressed to such Borrower or Key at the address set forth below or which such Borrower or Key has previously advised Lender in writing and as indicated in the records of Lender, and service or notice so served shall be deemed complete five (5) days after the same shall have been posted or (ii) in such other manner as may be permissible under the rules of said Courts. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF 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 Agreement may be executed in any number of counterparts, and by the Lender, Key, and the Borrowers in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, each party hereto has executed and delivered this Agreement on the day and year first above written. KEY ENERGY GROUP, INC. By: Name: Francis D. John Title: President 5 "BORROWERS": YALE E. KEY, INC. By: Name: Francis D. John Title: Executive Vice President KEY ENERGY DRILLING, INC. D/B/A CLINT HURT DRILLING By: Name: Francis D. John Title: Executive Vice President WELLTECH EASTERN, INC. By: Name: Francis D. John Title: President "LENDER": THE CIT GROUP/CREDIT FINANCE, INC. By: Name: Morris Horstmann Title: Vice President EX-4.1 6 7% CONVERTIBLE SUBORDINATED DEBENTURE 7% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 1, 2003 No. ____ $______________ KEY ENERGY GROUP, INC. promises to pay to _________________________________________________________________ ______________ or its registered assigns, the principal sum of _________________________________________________________________ ______________ Dollars on July 1, 2003. Interest Payment Dates: July 1 and January 1, commencing January 1, 1997. Record Dates: June 15 and December 15 (whether or not a Business Day). KEY ENERGY GROUP, INC. By: Officer of the Company (SEAL) Attest: By: Officer of the Company This is one of the Convertible Subordinated Debentures referred to in the within-mentioned Indenture: _________________________, as Trustee By Authorized Signature Dated: , 7% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 1, 2003 Unless and until it is exchanged in whole or in part for Securities in definitive form, this Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depositary Trust Company, 55 Water Street, New York, New York ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or 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. THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE, SECURITIES LAWS, 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 (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE DEBENTURE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THE DEBENTURE EVIDENCED HEREBY RESELL OR OTHERWISE TRANSFER THE DEBENTURE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH DEBENTURE EXCEPT (A) TO KEY ENERGY GROUP, INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE DEBENTURE EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE DEBENTURE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT 2 OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE DEBENTURE EVIDENCED HEREBY WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF SUCH DEBENTURE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO IS NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE, SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE 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. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THREE YEARS FROM THE ORIGINAL ISSUANCE OF THE DEBENTURE EVIDENCED HEREBY. 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. Section 1. Interest. Key Energy Group, Inc., a Maryland corporation (the "Company"), promises to pay interest on the principal amount of this 7% Convertible Subordinated Debenture due 2003 (the "Debenture") at the rate and in the manner specified below. The Company shall pay interest on the principal amount of this Debenture in cash at the rate per annum shown above, which rate shall be (i) subject to an increase of fifty (50) basis points (__%) in the event of a Servicios Guaranty Default and (ii) subject to increase as specified in the Registration Rights Agreement dated as of July 3, 1993, to which the Company is a party. The Company will pay interest (including the additional interest as a Servicios Default Payment or any additional interest referred to in such Registration Rights Agreement) semi-annually on July 1 and January 1 of each year commencing January 1, 1997, or if any such day is not a Business Day, on the next Business Day (each an "Interest Payment Date") to record holders of Debentures ("Holders") at the close of business on June 15 or December 15 immediately preceding the applicable Interest Payment Date. A copy of the Indenture (defined Below), the Registration Rights Agreement and all other agreements affecting this Debenture or the Holders may be obtained from the Company upon request. Interest shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of this Debenture. To the extent lawful, the Company shall pay interest on overdue principal at the rate of 1% per annum in excess of the then applicable interest rate on this Debenture; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. Section 2. Method of Payment. The Company shall pay interest on the Debentures (except defaulted interest) to Holders at the close of business on the record date next preceding the Interest Payment Date, even if such Debentures are canceled after such record date and on or before such Interest 3 Payment Date. The Holder hereof must surrender this Debenture to a Paying Agent (as defined in the Indenture) to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal and interest by check payable in such money. It may mail an interest check to a Holder's registered address. Section 3. Paying Agent and Registrar. Initially, the Trustee shall act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to any Holder. The Company and any of its Subsidiaries may act in any such capacity. Section 4. Indenture. The Company issued the Debentures under an Indenture, dated as of July 3, 1996 (the "Indenture"), among the Company, the Subsidiary Guarantors (as defined in the Indenture) and American Stock Transfer & Trust Company, as Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990, and as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Debentures. Capitalized used herein that are not defined herein shall have the meanings set forth in the Indenture. The Debentures are unsecured general obligations of the Company limited to $52,000,000 in aggregate principal amount. Section 5. Optional Redemption. The Company may redeem at any time on or after July 15, 1999, all or any portion of the Securities outstanding at the following redemption prices expressed as a percentage of the principal amount thereof, if the Securities are redeemed during the 12 month period beginning July 15, of the following years: Year Percentage 1999..................... 104% 2000..................... 103% 2001..................... 102% 2002..................... 101% Section 6. Redemption or Repurchase at Option of Holder. If there is a Change of Control (as defined in the Indenture), the Company will be required to offer to purchase on the Change of Control Payment Date (as defined in the Indenture) all outstanding Debentures at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. Holders whose Debentures are subject to an offer to purchase will receive an offer to purchase from the Company prior to any related Change of Control Payment Date and may elect to have their Debentures purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. 4 Section 7. 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 to be redeemed at its registered address. Debentures may be redeemed in part but only in whole multiples of $1,000, unless all of the Debentures held by a Holder are to be redeemed. On and after the redemption date, interest ceases to accrue on Debentures or portions of them called for redemption. Section 8. Conversion. Subject to the provisions of the Indenture, the Holder hereof has the right, at his option, at any time on or after July 15, 1999 and on or before the maturity, or, as to all or any portion hereof called for redemption during such period, the close of business on the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal that is $1,000 or a multiple thereof, into (A) that number of shares of the Company's Common Stock, as such shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Debenture or portion thereof to be converted by the conversion price of $9.75, or such conversion price as adjusted from time to time as provided in the Indenture, and (B) if such conversion occurs after November 1, 1996, and before July 1, 1999, an amount equal to 50% of the interest otherwise payable on the converted securities from the date of conversion through and including July 1, 1999, (the "Premium Protection Payment"), such amount payable, at the option of the Company, in cash or Common Stock based on the Closing Price of the Common Stock on the conversion date, by surrender of this Debenture, together with a conversion notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in New York, New York, and, unless the shares issuable on conversion are to be issued in the same name as this Debenture, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney ; provided, however, that no Premium Protection Payments will be made after the consummation of an all cash tender offer for 100% of the Common Stock at a price per share representing a 40% or greater premium above the conversion price. No adjustments in respect of interest or dividends will be made upon any conversion; provided, however, that if the Debenture shall be surrendered for conversion during the period from the close of business on any record date for the payment of interest to the opening of business on the following interest payment date, this Debenture (unless it or the portion being converted shall have been called for redemption on a date in such period) must be accompanied by an amount, in funds acceptable to the Company, equal to the interest payable on such interest payment date on the principal amount being converted. No fractional shares will be issued upon any conversion, but an adjustment in cash shall be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Debenture or Debentures for conversion. A holder of Debentures is not entitled to any rights of a holder of Common Stock until such holder has converted his Debentures to Common Stock, and only to the extent such Debentures are to have been converted to Common Stock under the Indenture. Section 9. Subordination. The Securities are subordinated to Senior Indebtedness (as defined in the Indenture). To the extent provided in the Indenture, Senior Indebtedness must be paid before the Securities may be paid. 5 The Company agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give effect to such provisions, and each Holder appoints the Trustee his attorney-in-fact for any and all such purposes. Section 10. Denominations, Transfer, Exchange. The Debentures are initially issued in global form. The global Debenture represents such of the outstanding Securities as shall be specified therein or endorsed thereon in accordance with the Indenture. The definitive Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Debentures may be registered and Debentures 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 to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Debenture or portion of an Debenture selected for redemption. Also, it need not exchange or register the transfer of any Debentures for a period of 15 days before a selection of Debentures to be redeemed. Section 11. Persons Deemed Owners. Before due presentment to the Trustee for registration of the transfer of this Debenture, the Trustee, any Agent and the Company may deem and treat the person in whose name this Debenture is registered as its absolute owner for the purpose of receiving payment of principal of and interest on this Debenture and for all other purposes whatsoever, whether or not this Debenture is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. The registered holder of an Debenture shall be treated as its owner for all purposes. Section 12. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the Holders of at least a majority in principal amount of the then outstanding Securities, and any existing default (except a payment default) 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, the Indenture or the Securities may be amended to cure any ambiguity, defect or inconsistency, to provide for assumption of Company obligations to Holders or to make any change that does not adversely affect the rights of any Holder. Section 13. Defaults and Remedies. Events of default include: default in payment of interest on the Securities for 30 days; default in payment of principal of or premium on the Securities when due; failure by the Company for 60 days after notice to it to comply with its agreements in the Indenture or the Securities; defaults under and acceleration before express maturity of certain other Indebtedness that aggregates $1,000,000 or more; certain final judgments which remain undischarged if the aggregate of all such judgments exceeds $1,000,000 or more; certain final judgments which remain undischarged if the aggregate of all such judgments exceeds $1,000,000; and certain events of bankruptcy or insolvency. If an Event of Default 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, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Securities become due and 6 payable immediately without further action or notice and all outstanding Securities, and all Obligations and Claims with respect thereto, become immediately due and payable. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in 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 notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. Section 14. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Subsidiary Guarantors or their Affiliates, and may otherwise deal with the Company, the Subsidiary Guarantors or their Affiliates, as if it were not Trustee; provided, however, that if the Trustee acquires any conflicting interest as described in the Trust Indenture Act, it must eliminate such conflict or resign. Section 15. No Recourse Against Others. No director, officer, employee, agent, manager, stockholder or other Affiliates (other than the Subsidiary Guarantors), of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any of the Subsidiary Guarantors under the Securities, the Indenture or the Subsidiary Guarantees or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. Section 16. Subsidiary Guarantees. Payment of principal, premium (if any) and interest (including interest on overdue principal and overdue interest, if lawful) is unconditionally guaranteed by certain Subsidiaries of the Company. Section 17. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. Section 18. 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). Section 19. 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 Debentures and has directed the Trustee to 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 Debentures or as contained in any notice of redemption and reliance may be placed only on the other identification number placed thereon. 7 Section 20. Additional Rights of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of Securities under the Indenture, Holders of Transferred Restricted Securities shall have all the rights set forth in the Registration Rights Agreement referred to in the Indenture and certain other agreements executed and delivered in connection therewith. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Request may be made to: Key Energy Group, Inc. 255 Livingston Avenue New Brunswick, New Jersey 08901 Attn: Francis D. John 8 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to _________________________________________________________________ _____________ (Insert assignee's soc. sec. or tax I.D. no.) _________________________________________________________________ _____________ _________________________________________________________________ _____________ _________________________________________________________________ _____________ _________________________________________________________________ _____________ (Print or type assignee's name, address and zip code) 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: (Sign exactly as your name appears on the face of this Security) Signature Guaranteed: By: (THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stock Brokers, Savings and Loan Associations, and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15) 9 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Security purchased by the Company pursuant to Section 4.10 of the Indenture (Change of Control), state the amount you elect to have purchased (if all, write "ALL"): $__________________________ Date: Your Signature: (Sign exactly as your name appears on the face of this Security) Signature Guaranteed: By: (THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stock Brokers, Savings and Loan Associations, and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15) 10 EX-10.14 7 GENERAL CONVEYANCE GENERAL CONVEYANCE THIS GENERAL CONVEYANCE (this "Conveyance") executed by ARCH PETROLEUM, INC., a Texas corporation, whose address is 777 Taylor Street, Suite II-A, Fort Worth, Texas 76102 (hereinafter called "Assignor"), to ODESSA EXPLORATION INCORPORATION, whose address is 191 Professional Center, 6010 Highway 191, Suite 210, Odessa, Texas 79762, (hereinafter called "Assignee"), dated effective at 7:00 a.m., Central Daylight Time, on January 1, 1996 (said hour and day hereinafter called the "Effective Time"). Capitalized terms used but not otherwise defined herein shall have the meanings set forth in that certain Asset Purchase Agreement dated April 18, 1996 (the "Agreement"), by and between Assignor, as "Seller", and Assignee, as "Buyer". ARTICLE I Conveyance of Assets Assignor, for Ten and No/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignee, the receipt and sufficiency of which consideration are hereby acknowledged and confessed, by these presents does hereby GRANT, BARGAIN, SELLER, CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER unto Assignee, effective as of the Effective time, the following described assets and properties (except to the extent constituting "Excluded Assets" (hereinafter defined)) (collectively, the "Assets"): (i) (a) The undivided interests specified in Exhibit A hereto (the "Property Schedule") in, to or under the Hydrocarbon Interests (hereinafter defined) specifically described in the Property Schedule, and (b) all other interests of Assignor in, to or under any Hydrocarbon Interests in, to or under or derived from any lands covered by or subject to any of the Hydrocarbon Interests described in the Property Schedule, even though such interests of the Assignor may be incorrectly described or referred to in, or a description thereof may be omitted from, the Property Schedule (collectively, the "Subject Interests"); (ii) All right, title, and interest of Assignor in and to the lands covered by or subject to the Subject Interests (the "Lands"); (iii) All right, title and interest of Assignor in and to or derived from the following insofar as the same are attributable to the Subject Interests: (a) all rights with respect to the use and occupancy of the surface of and the subsurface depths under the Lands; (b) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof; (c) all agreements and contracts, easements, rights-of-way, servitudes and other estates; (d) all real and personal property located upon the Lands and used in connection with the exploration, development or operation of the Subject Interests; and (e) the Records; (iv) All right, title and interest of Assignor to any claims to the extent attributable to ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time, including, without limitation, past, present or future claims, whether or not previously asserted by Assignor; (v) Those separate identifiable accounts (the "Royalty Accounts") which are expressly identified and set forth in Schedule A-1 hereto in which Assignor or any third party operator is holding as of the Effective Time monies which (a) are owing to third party owners of royalty, overriding royalty, working or other interests in respect of past production of oil, gas or other hydrocarbons attributable to the Assets or (b) may be subject to refund by royalty owners or other third parties to purchasers of past production of oil, gas or other hydrocarbons attributable to the Assets; and (vi) All (a) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods subsequent to the Effective time and (b) proceeds from or of such oil, gas and other hydrocarbons. As used in this Conveyance, the term "Hydrocarbon Interests" shall mean (a) leases affecting, relating to or covering any oil, gas and other hydrocarbons and the leasehold interests and estates in the nature of working or operating interests under such leases, as well as overriding royalties, net profits interests, production payments, carried interests, rights of recoupment and other interests in, under or relating to such leases, (b) fee interests in oil, gas or other hydrocarbons, (c) royalty interests in oil, gas or other hydrocarbons, (d) any other interest in oil, gas or other hydrocarbons in place, (e) any economic or contractual rights, options or interests in and to any of the foregoing, including, without limitation, any farmout or farmin agreement or production payment affecting any interest or estate in oil, gas or other hydrocarbons, and (f) any and all rights and interests attributable or allocable thereto by virtue of any pooling, unitization, communitzation, production sharing or similar agreement, order or declaration. There is excluded from this Conveyance and the Assets and reserved unto Assignor the following described interests, rights and properties (collectively, the "Excluded Assets"): (i) Copies of all Records; (ii) Except to the extent constituting the Royalty Accounts, all deposits, cash, checks, funds and accounts receivable attributable to Assignor's interest in the Assets with respect to any period of time prior to the Effective Time; (iii) All (a) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, (b) oil, gas and other hydrocarbons attributable to the Subject Interests which, at the Effective Time, are in storage and are above pipeline connections within processing plants, in pipelines or otherwise held in inventory, and (c) proceeds from or of such oil, gas and other hydrocarbons; 2 (iv) Such assets as Assignor elects to exclude from the Assets pursuant to the terms of the Agreement; (v) All receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of Net Cash Flow pursuant to Section 3.3 of the Agreement, as adjusted pursuant to Section 3.4 of the Agreement; (vi) Claims of Assignor for refund of or loss carry forwards with respect to (i) Taxes attributable to any period prior to theEffective Time or (ii) any Taxes attributable to the Excluded Assets; (vii) All corporate, financial, tax and legal records of Assignor; and (viii) All rights, interests, assets and properties described in Exhibit B hereto. TO HAVE AND TO HOLD the Assets unto Assignee, its successors and assigns, forever; subject, however, to the matters set forth herein. ARTICLE II Limitation of Warranties; Permitted Encumbrances Section 2.1 Limitation of Warranties. (a) Assignor does hereby bind itself, Assignor's successors and assigns, to warrant and forever defend all and singular Defensible Title (hereinafter defined) to the Subject Interests, unto Assignee, its successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under Assignor, but not otherwise, subject, however, to the Permitted Encumbrances (hereinafter defined). As used herein, the term "Defensible Title" shall mean, respectively, as to the Subject Interest or Subject Interests related to a particular Property Subdivision, title to such Property Subdivision and the Subject Interest or Subject Interests related to such Property Subdivision, that: (i) entitles Assignor to receive not less than the applicable Net Revenue Interest or Net Revenue Interests specified for such Property Subdivision in the Property Schedule; (ii) obligates Assignor to bear the costs and expenses relating to the maintenance, development and operation of such Property Subdivision in an amount not greater than the applicable Working Interest or Working Interests specified for such Property Subdivision in the Property Schedule unless Assignor's Net Revenue Interest therein is proportionately increased; and (iii) except for Permitted Encumbrances, is free and clear of liens and encumbrances. Recourse for breach of the foregoing special warranty of title shall be limited to a return of the purchase price allocated to the Subject Interest with respect to which such warranty has been breached in accordance with Section 6.2(b) of the Agreement, without interest thereon. 3 (b) EXCEPT FOR THE SPECIAL WARRANTY OF TITLE SET FORTH HEREIN, THE ASSETS ARE ASSIGNED TO ASSIGNEE "AS IS AND WHERE IS" AND WITH ALL FAULTS AND WITHOUT WARRANTY OR REPRESENTATION OF ANY KIND OR CHARACTER, EITHER EXPRESS OR IMPLIED. ASSIGNOR FURTHER HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A) THE CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) OR (B) ANY INFRINGEMENT BY ASSIGNOR OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; AND (II) NEGATES ANY RIGHTS OR ASSIGNEE UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY ASSIGNEE FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF ASSIGNOR AND ASSIGNEE THAT THE ASSETS ARE ACCEPTED BY ASSIGNEE IN THEIR PRESENT CONDITION AND STATE OF REPAIR. (c) To the extent transferable, Assignee shall be and is hereby subrogated to all covenants and warranties of title by parties (other than Assignor) heretofore given or made to Assignor or its predecessors in title in respect to any of the Assets. Section 2.2 Permitted Encumbrances. The Assets are assigned and conveyed by Assignor and accepted by Assignee expressly subject to the following (the "Permitted Encumbrances"): (a) all agreements, instruments, documents, liens, encumbrances, and other matters which are described in Schedule A-2; (b) any (i) undetermined or inchoate liens or charges constituting or securing the payment of expenses which were incurred incidental to maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing oil, gas or other hydrocarbons therefrom or therein and (ii) materialman's, mechanics', repairman's, employees', contractors', operators' or other similar liens, security interests or charges for liquidated amounts arising in the ordinary course of business incidental to construction, maintenance, development, production or operation of the Assets or the production or processing of oil, gas or other hydrocarbons therefrom, that are not delinquent and that will be paid in the ordinary course of business or, if delinquent, that are being contested in good faith; (c) any liens for Taxes not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business; 4 (d) any liens or security interest created by Law or reserved in oil, gas and/or mineral leases for royalty, bonus or rental or for compliance with the terms of the Subject Interests; (e) all Preference Rights and Transfer Requirements; (f) any easements, rights-of-way, servitudes, permits, licenses, surface leases and other rights with respect to surface operations to the extent such matters do not interfere in any material respect with Assignee's operation of the portion of the Assets burdened thereby; (g) any prohibitions or restrictions similar to those contained in Article VIII.D. of the A.A.P.L. Form 610-1982 Model Form Operating Agreement and any contribution obligations under provisions similar to Article VII.B. of said Model Form Operating Agreement; (h) all agreements and obligations relating to imbalances with respect to the production, transportation or processing of gas or calls or purchase options on oil or gas production; (i) all royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other burdens to the extent that the net cumulative effect of such burdens, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Assignor in such Property Subdivision as specified in the Property Schedule; (j) all obligations by virtue of a prepayment, advance payment or similar arrangement under any contract for the sale of gas production, including by virtue of "take-or-pay" or similar provisions, to deliver gas produced from or attributable to the Subject Interests after the Effective Time without then or thereafter being entitled to receive full payment therefor; (k) all liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects, irregularities and other matters affecting any Asset which individually or in the aggregate are not such as to interfere materially with the operation, value or use of such Asset; (l) any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Assignee pursuant to Article VI of the Agreement; (m) rights reserved to or vested in any Governmental Authority to control or regulate any of the wells or units included in the Assets and all applicable laws, rules, regulations and orders of such 5 authorities so long as the same do not decrease Assignor's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; (n) the terms and conditions of all contracts and agreements relating to the Subject Interests, including, without limitation, exploration agreements, gas sales contracts, processing agreements, farmins, farmouts, operating agreements, and rights-of-way agreements to the extent such terms and conditions do not decrease Assignor's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; and (o) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest. By Assignee's acceptance of this Conveyance, Assignee assumes and agrees to keep and perform the obligations of Assignor under the Permitted Encumbrances which accrue from and after the Effective Time. ARTICLE III Miscellaneous Section 3.1 Further Assurances. Assignor covenants and agrees to execute and deliver to Assignee all such other and additional instruments and other documents and will do all such other acts and things as may be necessary to more fully assure to Assignee or its successor or assigns all of the respective properties, rights and interests herein and hereby granted or intended so to be. Section 3.2 Successors and Assigns. All of the provisions hereof shall inure to the benefit of and be binding upon Assignor and Assignee and their respective successors and assigns. All references herein to either Assignor or Assignee shall include their respective successors and assigns. Section 3.3 Counterparts. This Assignment is being executed in several original counterparts, all of which are identical, except that, to facilitate recordations, there are omitted from certain counterparts those property descriptions in the Property Schedule which contain descriptions of property located in recording jurisdictions other than the jurisdiction in which the particular counterpart is to be recorded. Each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts shall constitute but one and the same assignment. IN WITNESS WHEREOF, the Assignor and Assignee have caused this Conveyance to be executed on the date of their respective acknowledgments set forth below, to be effective, however, as of the Effective Time. 6 ASSIGNOR: ARCH PETROLEUM, INC. By: _____________________________________ Larry Kalas, President ASSIGNEE: ODESSA EXPLORATION INCORPORATED By: _____________________________________ D. Kirk Edwards, President STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on April ___, 1996, by Larry Kalas, President of ARCH PETROLEUM, INC., a Texas corporation, on behalf of said corporation. ----------------------------------------- Notary Public in and for the State of Texas My Commission Expires: ___________________ STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on April ___, 1996, by D. Kirk Edwards, President of ODESSA EXPLORATION INCORPORATED, a Delaware corporation, on behalf of said corporation. - ----------------------------------------- Notary Public in and for the State of Texas My Commission Expires: ____________________ 7 EX-10.11 8 GUARANTY GUARANTY The CIT Group/Credit Finance, Inc. 10 South LaSalle Street Chicago, Illinois 60603 Re: Yale E. Key, Inc., Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling and WellTech Eastern, Inc. (the "Borrowers") Ladies and Gentlemen: Reference is made to the financing arrangements between The CIT Group/Credit Finance, Inc. ("Lender") and Borrowers, pursuant to which Lender may extend loans, advances and other financial accommodations to Borrowers as set forth in the Third Amended and Restated Loan and Security Agreement dated of even date herewith between Borrowers and Lender and various other agreements, documents and instruments now or at any time executed and/or delivered in connection therewith or otherwise related thereto, including, but not limited to, this Guaranty (all of the foregoing, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "Financing Agreements"). Due to the close business and financial relationships between Borrowers and the undersigned ("Guarantor"), in consideration of the benefits which will accrue to Guarantor, and as an inducement for and in consideration of Lender at any time providing or extending loans, advances and other financial accommodations to Borrowers, whether pursuant to the Financing Agreements or otherwise, Guarantor hereby, irrevocably and unconditionally, (a) guarantees and agrees to be liable for the prompt indefeasible and full payment and performance of all revolving loans, term loans, letters of credit, bankers' acceptances, merchandise purchase guaranties or other guaranties or indemnities for each Borrower's account and all other obligations, liabilities and indebtedness of every kind, nature or description owing by any Borrower to Lender and/or its affiliates, including principal, interest, charges, fees and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under any of the Financing Agreements or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Financing Agreements or after the commencement of any case with respect to any Borrower under the United States Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended, and whether arising directly or howsoever acquired by Lender including from any other entity outright, conditionally or as collateral security, by assignment, merger with any other entity, participations or interests of Lender in the obligations of Borrowers to others, assumption, operation of law, subrogation or otherwise and (b) agrees to pay to Lender on demand the amount of all expenses (including, without limitation, attorneys fees and legal expenses) incurred by Lender in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of any Borrower's obligations, liabilities and indebtedness as aforesaid to Lender, Lender's rights in any collateral or under this Guaranty and all other Financing Agreements or in any way involving claims by or against Lender directly or indirectly arising out of or related to the relationship between each Borrower and Lender, Guarantor and Lender, or any other Obligor (as hereinafter defined) and Lender, whether such expenses are incurred before, during or after the initial or any renewal term of the Financing Agreements or after the commencement of any case with respect to any Borrower, Guarantor or any other Obligor under the United States Bankruptcy Code or any similar statute (all of which being collectively referred to herein as the "Guaranteed Obligations"). Notice of acceptance of this Guaranty, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, Borrowers, and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which any Borrower or Guarantor are or may be entitled are hereby waived. Guarantor also waives notice of, and hereby consents to, (i) any amendment, modification, supplement, renewal, restatement or extensions of time of payment of or increase or decrease in the amount of any of the Guaranteed Obligations or to the Financing Agreements and any collateral, and the guarantee made herein shall apply to the Guaranteed Obligations as so amended, modified, supplemented, renewed, restated or extended, increased or decreased, (ii) the taking, exchange, surrender and releasing of collateral or guarantees now or at any time held by or available to Lender for the obligations of any Borrower or any other party at any time liable for or in respect of the Guaranteed Obligations (individually and collectively, the "Obligors"), (iii) the exercise of, or refraining from the exercise of any rights against any Borrower, Guarantor or any other Obligor or any collateral, and (iv) the settlement, compromise or release of, or the waiver of any default with respect to, any Guaranteed Obligations. Guarantor agrees that the amount of the Guaranteed Obligations shall not be diminished and the liability of Guarantor hereunder shall not be otherwise impaired or affected by any of the foregoing. This Guaranty is a guaranty of payment and not of collection. Guarantor agrees that Lender need not attempt to collect any Guaranteed Obligations from the Borrowers or any other Obligor or to realize upon any collateral, but may require Guarantor to make immediate payment of the Guaranteed Obligations to Lender when due or at any time thereafter. Lender may apply any amounts received in respect of the Guaranteed Obligations to any of the Guaranteed Obligations, in whole or in part (including reasonable attorneys fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to any Borrower or Guarantor) and in such order as Lender may elect, whether or not then due. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations shall affect, impair or be a defense to this Guaranty, nor shall any other circumstance which might otherwise constitute a defense available to, or legal or equitable discharge of any Borrower in respect of any of the Guaranteed Obligations or Guarantor in respect of this Guaranty, affect, impair or be a defense to this Guaranty. Without limitation of the foregoing, the liability of Guarantor hereunder shall not be discharged or impaired in any respect by reason of any failure by Lender to perfect or continue perfection of any lien or security interest in any collateral for the Guaranteed Obligations or any delay by Lender in perfecting any such lien or security interest. As to interest, fees and expenses, whether arising before 2 or after the commencement of any case with respect to any Borrower under the United States Bankruptcy Code or any similar statute, Guarantor shall be liable therefor, even if any Borrower's liability for such amounts does not, or ceases to, exist by operation of law. This Guaranty is absolute, unconditional and continuing. Payment by Guarantor shall be made to Lender at its office from time to time on demand as Guaranteed Obligations become due. One or more successive or concurrent actions may be brought hereon against Guarantor either in the same action in which the Borrowers or any of them, or any other Obligors are sued or in separate actions. Payment of all amounts now or hereafter owed to Guarantor by Borrowers or any other Obligor is hereby subordinated in right of payment to the indefeasible payment in full to Lender of the Guaranteed Obligations and is hereby assigned to Lender as security therefor. Guarantor hereby irrevocably and unconditionally waives and relinquishes all surety defenses including, but not limited to, all statutory, contractual, common law, equitable and all other claims against each Borrower, any collateral for the Guaranteed Obligations or other assets of each Borrower or any other Obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid or payable to Lender by Guarantor hereunder, and Guarantor hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which Guarantor might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by or collected or due from Guarantor, any Borrower or any other Obligor upon the Guaranteed Obligations or realized from their property. All sums at any time owed by Lender to Guarantor or to the credit of Guarantor and any property of Guarantor on which Lender at any time has a lien or security interest or of which Lender at any time has possession, shall secure payment and performance of all Guaranteed Obligations and all other obligations of Guarantor to Lender however arising. In case proceedings be instituted by or against any Borrower or Guarantor or any other Obligor in bankruptcy or insolvency, or for reorganization, arrangement, receivership, or the like, or if any Borrower or Guarantor or any other Obligor calls a meeting of creditors or makes any assignment for the benefit of creditors, or upon the occurrence of any event which constitutes a default or event of default under the Financing Agreements, the liability of Guarantor for the entire Guaranteed Obligations shall mature, even if the liability of Borrowers or any other Obligor therefor does not. Guarantor shall continue to be liable hereunder until one of Lender's officers actually receives a written termination notice by certified mail; but the giving of such notice shall not relieve Guarantor from liability for any Guaranteed Obligations incurred before termination or for post-termination collection expenses and interest pertaining to any Guaranteed Obligations arising before termination. Guarantor agrees that this Guaranty shall remain in full force and effect or be reinstated, as the case may be, if at any time payment of any of the Guaranteed Obligations is rescinded or otherwise restored by Lender to Borrowers or to any other person, who made such payment, or to the creditors or creditors representative of Borrowers or such other person. 3 Lender's books and records showing the account between Lender and Borrowers shall be admissible in evidence in any action or proceeding as prima facie proof of the items therein set forth, and any written statements rendered by Lender to Borrowers, to the extent to which no written objection is made within sixty (60) days after the date thereof, shall be considered correct and be binding on Guarantor as an account stated for purposes of this Guaranty. No delay on Lender's part in exercising any rights hereunder or failure to exercise the same shall constitute a waiver of such rights. No notice to, or demand on, Guarantor shall be deemed to be a waiver of the obligation of Guarantor to take further action without notice, or demand as provided herein. No waiver of any of Lender's rights hereunder, and no modification or amendment of this Guaranty, shall be deemed to be made by Lender unless the same shall be in writing, duly signed on Lender's behalf, and each such waiver, if any, shall apply only with respect to the specific instance involved and shall in no way impair Lender's rights or the obligations of Guarantor to Lender in any other respect at any other time. This Guaranty is binding upon Guarantor, its successors and assigns and shall benefit Lender and its successors, endorses, transferees and assigns. If the undersigned are more than one, this Guaranty shall be binding jointly and severally upon them and their respective successors and assigns and the term "Guarantor" wherever used herein shall mean all the undersigned and any one or more of them and their successors and assigns. All references to Borrowers and Lender herein shall include their respective successors and assigns. THIS INSTRUMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE OFFICE OF LENDER SET FORTH ABOVE IS LOCATED. GUARANTOR AND LENDER WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS GUARANTY, ANY ALLEGED TORTIOUS CONDUCT BY GUARANTOR OR LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISING OUT OF OR RELATED TO THE RELATIONSHIP BETWEEN GUARANTOR AND LENDER OR BORROWERS AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. Guarantor waives all rights to interpose any claims, deductions, setoffs or counterclaims of any kind, nature or description in any action or proceeding instituted by Lender with respect to this Guaranty or any matter arising herefrom or relating hereto, except compulsory counterclaims. GUARANTOR HEREBY IRREVOCABLY SUBMITS AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE IN WHICH THE OFFICE OF LENDER DESIGNATED ABOVE IS LOCATED WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING OUT OF THIS GUARANTY OR ANY MATTER ARISING HEREFROM OR RELATING HERETO. ANY SUCH ACTION OR PROCEEDING COMMENCED BY GUARANTOR AGAINST LENDER WILL BE LITIGATED ONLY IN A FEDERAL COURT LOCATED IN THE DISTRICT, OR A 4 STATE COURT IN THE STATE AND COUNTY, IN WHICH THE OFFICE OF LENDER SET FORTH ABOVE IS LOCATED AND GUARANTOR WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE IN CONNECTION THEREWITH. In any such action or proceeding, Guarantor waives personal service of the summons and complaint or other process and papers therein and agrees that any process or notice of motion or other application to any of said Courts or a judge thereof, or any notice in connection with any proceedings hereunder may be served (i) inside or outside such State by registered or certified mail, return receipt requested, addressed to Guarantor at the address set forth below or which Guarantor has previously advised Lender in writing and as indicated in the records of Lender, and service or notice so served shall be deemed complete five (5) days after the same shall have been posted or (ii) in such other manner as may be permissible under the rules of said Courts. THIS WRITTEN 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. IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the ______ day of May, 1996. KEY ENERGY GROUP, INC. a Maryland corporation By: Francis D. John President Address: 257 Livingstone Avenue New Brunswick, New Jersey 08901 5 STATE OF TEXAS ss. ss. COUNTY OF HARRIS ss. On this ______ day of May, 1996, before me personally appeared Francis D. John, President of Key Energy Group, Inc., a Maryland corporation, proved to me to be the person whose name is subscribed to foregoing instrument, and that he executed the foregoing instrument as the act and deed, and by the order of the Board of Directors of said corporation. Notary Public in and for The State of Texas Name (Print): Commission Expires: 6 EX-10.12 9 ASSET PURCHASE AGREEMENT HARDY AND ARCH ASSET PURCHASE AGREEMENT DATED AS OF APRIL ____, 1996, BY AND BETWEEN HARDY OIL & GAS USA INC., AS SELLER, AND ARCH PETROLEUM, INC., AS BUYER ASSET PURCHASE AGREEMENT TABLE OF CONTENTS Page ARTICLE I. CERTAIN DEFINITIONS Section 1.1 Certain Defined Terms.....................................1 Section 1.2 References, Gender, Number................................1 ARTICLE II. SALE AND PURCHASE ARTICLE III. CONSIDERATION AND PAYMENT Section 3.1 Consideration..............................................1 Section 3.2 Payment....................................................2 Section 3.3 Adjustment Period Cash Flow................................2 Section 3.4 Post Closing Review........................................3 Section 3.5 Gas Imbalance Credits......................................3 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller...................4 Section 4.2 Representations and Warranties of Buyer....................5 ARTICLE V. INVESTIGATION OF ASSETS: CONFIDENTIALITY Section 5.1 Investigation of Assets....................................6 Section 5.2 Confidential Information...................................7 ARTICLE VI. TITLE ADJUSTMENTS. Section 6.1 No Warranty or Representation..............................7 Section 6.2 Buyer's Title Review.......................................7 Section 6.3 Determination of Title Defects............................10 Section 6.4 Seller Title Credit.......................................10 Section 6.5 Exclusion of Defect Properties............................11 - i - Section 6.6 Deferred Claims and Disputes..............................11 Section 6.7 No Duplication............................................12 ARTICLE VII. PREFERENCE RIGHTS AND CONSENTS Section 7.1 Compliance................................................12 Section 7.2 Effect of Preference Rights...............................12 Section 7.3 Transfer Requirements.....................................13 ARTICLE VIII. COVENANTS OF SELLER AND BUYER Section 8.1 Conduct of Business Pending Closing.......................13 Section 8.2 Qualifications on Seller's Conduct........................15 Section 8.3 Conveyance................................................16 Section 8.4 Public Announcements......................................16 Section 8.5 Further Assurances........................................16 Section 8.6 Removal...................................................16 Section 8.7 Records...................................................16 ARTICLE IX. CLOSING CONDITIONS Section 9.1 Seller's Closing Conditions...............................17 Section 9.2 Buyer's Closing Conditions................................17 ARTICLE X. CLOSING Section 10.1 Closing...................................................18 Section 10.2 Seller's Closing Obligations..............................18 Section 10.3 Buyer's Closing Obligations...............................19 ARTICLE XI. EFFECT OF CLOSING Section 11.1 Revenues..................................................19 Section 11.2 Expenses..................................................19 Section 11.3 Payments and Obligations..................................19 Section 11.4 Survival..................................................19 - ii - ARTICLE XII. CASUALTY AND CONDEMNATION Section 12.1 No Termination............................................20 Section 12.2 Proceeds and Awards.......................................20 ARTICLE XIII ASSUMPTION AND INDEMNIFICATION Section 13.1 Indemnification By Buyer..................................20 Section 13.2 Indemnification by Seller.................................20 Section 13.3 Third Party Claims........................................21 ARTICLE XIV. TERMINATION; REMEDIES; LIMITATIONS Section 14.1 Termination...............................................21 Section 14.2 Remedies. ...............................................22 Section 14.3 Limitations...............................................22 ARTICLE XV. MISCELLANEOUS Section 15.1 Counterparts..............................................24 Section 15.2 Governing Law.............................................24 Section 15.3 Entire Agreement. .......................................24 Section 15.4 Expenses..................................................24 Section 15.5 Notices...................................................25 Section 15.6 Successors and Assigns....................................25 Section 15.7 Amendments and Waivers....................................25 Section 15.8 Schedules and Exhibits....................................25 Section 15.9 Purchase Price Allocation for Tax Purposes................25 Section 15.10 Ad Valorem Tax Proration..................................26 Section 15.11 Agreement for the Parties' Benefit Only...................26 Section 15.12 Attorneys' Fees...........................................26 Section 15.13 Severability..............................................26 Section 15.14 No Recordation............................................26 Section 15.15 Time of Essence...........................................26 - iii - EXHIBITS Exhibit 8.3 - -- Conveyance Exhibit 10.2(c) - -- Affidavit of Non-Foreign Status Exhibit A-1 - -- Arbitration Procedures Exhibit A-2 - -- Property Schedule Exhibit B - -- Forecast of Costs and Expenses SCHEDULES Schedule 4.1(d) - -- Seller's Conflicts or Violations Schedule 4.1(e) - -- Seller's Consents Schedule 4.1(f) - -- Seller's Actions Schedule 4.1(g) - -- Non-Compliance with Laws Schedule 4.2(d) - -- Buyer's conflicts or Violations Schedule 4.2(e) - -- Buyer's Consents Schedule 4.2(f) - -- Buyer's Actions Schedule 7.1 - Part I - -- Preference Rights Schedule 7.1 - Part II - -- Transfer Requirements Schedule 8.1 - -- Conduct of Business Schedule 15.9 - -- Purchase Price Allocation for Tax Purposes Schedule A-1 - -- Certain Excluded Assets Schedule A-2 - -- Certain Permitted Encumbrances Schedule A-3 - -- Scheduled Imbalances Schedule A-4 - -- Royalty Accounts - iv - ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of April ___, 1996, is by and between HARDY OIL & GAS USA, INC., a Delaware corporation ("Seller"), and ARCH PETROLEUM, INC., a Texas corporation ("Buyer"). WHEREAS, Seller owns certain oil and gas properties and related assets; WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, such oil and gas properties and related assets upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I. CERTAIN DEFINITIONS Section 1.1 Certain Defined Terms. Unless the context otherwise requires, the respective terms defined in Appendix A attached hereto and incorporated herein shall, when used herein, have the respective meanings therein specified, with each such definition to be equally applicable both to the singular and the plural forms of the term so defined. Section 1.2 References, Gender, Number. All references in this Agreement to an "Article," "Section," or "subsection" shall be to an Article, Section, or subsection of this Agreement, unless the context requires otherwise. Unless the context otherwise requires, the words "this Agreement," "hereof," "hereunder," "herein," "hereby," or words of similar import shall refer to this Agreement as whole and not to a particular Article, Section, subsection, clause or other subdivision hereof. Whenever the context requires, the words used herein shall include the masculine, feminine and neuter gender, and the singular and the plural. ARTICLE II. SALE AND PURCHASE Subject to the terms and conditions of this Agreement, Seller agrees to sell and convey to Buyer, and Buyer agrees to purchase from Seller, the Assets. ARTICLE III. CONSIDERATION AND PAYMENT Section 3.1 Consideration. The consideration for the sale and conveyance of the Assets to Buyer is $8,000,000.00, as adjusted in accordance with the terms of this Agreement (the "Purchase Price"). The "Adjusted Purchase Price" shall be the Purchase Price (I) as adjusted by the Initial Adjustment Amount determined pursuant to Section 3.3, (ii) as adjusted for Title Defects, if any, in accordance with Section 6.2, (iii) as may be adjusted for excluded Title Defect Properties, if any, in accordance with Section 6.5, (iv) as may be adjusted for undisclosed gas imbalances, if any, pursuant to Section 3.5, (v) as may be adjusted for payments of portions of the Purchase Price received by Seller from holder of Preference Right contemporaneously with Closing in accordance with and as contemplated by Section 7.2, and (vi) as may be adjusted on account of Retained Assets as contemplated by Section 7.3. Section 3.2 Payment. Contemporaneously with the execution of this Agreement, Buyer has deposited an amount equal to twenty percent (20%) of the Purchase Price with Seller as a deposit hereunder (the "Deposit"). At the Closing, Buyer shall wire transfer the Adjusted Purchase Price minus the Deposit in immediately available funds to Texas Commerce Bank, N.A., ABA No. 113000609 for the account of Seller, Account No. 001-01763374, or such other account specified by Seller to Buyer on or prior to the business day immediately preceding the Closing Date. Section 3.3 Adjustment Period Cash Flow. (a) The Purchase Price shall be increased or decreased, as the case may be, by an amount equal to the Net Cash Flow with respect to the Assets for the time period (the "Adjustment Period") beginning at the Effective Time and ending at 7:00 a.m. (local time) on the Closing Date. The Seller shall deliver to Buyer on or prior to the business day immediately preceding the Closing Date a statement (the "Adjustment Statement") setting forth the Seller's preliminary determination (the "Initial Adjustment Amount") of the Net Cash Flow. If the Initial Adjustment Amount shown on the Adjustment statement is a positive number, then the Purchase Price shall be increased by such amount. If the Initial Adjustment Amount shown on the Adjustment Statement is a negative number, then the Purchase Price shall be decreased by such amount. (b) The Adjustment Statement shall be based upon actual information available to the Seller at the time of its preparation and upon the Seller's good faith estimates and assumptions. There shall be attached to the Adjustment Statement such supporting documentation and other data as is reasonably necessary to provide a basis for the Net Cash Flow shown therein. (c) The "Net Cash Flow" shall be the algebraic sum of (i) a positive amount equal to the aggregate amount paid by Seller as Seller's share of the costs and expenses of exploration, maintenance, development, production and operation of the Assets incurred with respect to the Adjustment Period (including prepayments of any such costs or expenses), (ii) a positive amount equal to the sum of (A) all overhead charges paid by Seller to any operator of any of the Assets, and (B) with respect to any properties operated by Seller or any affiliate of Seller, the overhead charges payable to Seller or such affiliated operator on account of the Subject Interests in such properties under existing operating agreements or, if no overhead charge is applicable to a Subject Interest under an existing operating agreement, an overhead charge to such Subject Interest equal to the Average Drilling and Producing Well Rates in the area as indicated in the most recent Survey of Combined Fixed Rate Overhead Charges for Oil and Gas Producers conducted by Ernst & Young or the prevailing rate in the area if the foregoing survey is not available, and (iii) a negative amount equal to the aggregate gross proceeds received by Seller from the sale or disposition of oil, gas and other hydrocarbons produced from the Assets during the Adjustment Period or from the rental, sale, salvage or other disposition of any other Assets during the Adjustment Period. 2 Section 3.4 Post Closing Review. After the Closing, Seller shall review the Adjustment Statement and determine the actual Net Cash Flow. On or prior to the ninetieth day after the Closing Date, Seller shall present Buyer with a statement of the actual Net Cash Flow and such supporting documentation as is reasonably necessary to support the Net Cash Flow shown therein (the "Final Adjustment Statement"). Buyer will give representatives of Seller reasonable access to its premises and to its books and records for purposes of preparing the Final Adjustment Statement and will cause appropriate personnel of Buyer to assist Seller and Seller's representatives, at no cost to Seller, in the preparation of the Final Adjustment Statement. Seller will give representatives of Buyer reasonable access to its premises and to its books and records for purposes of reviewing the calculation of Net Cash Flow and will cause appropriate personnel of Seller to assist Buyer and its representatives, at no cost to Buyer, in verification of such calculation. The Final Adjustment Statement shall become final and binding on Seller and Buyer as to the Net Cash Flow ninety (90) days following the date the Final Adjustment Statement is received by Buyer, except to the extent that prior to the expiration of such ninety (90) day period Buyer shall deliver to Seller notice, as hereinafter required, of its disagreement with the contents of the Final Adjustment Statement. Such notice shall be in writing and set forth all of Buyer's disagreements with respect to any portion of the Final Adjustment Statement, together with Buyer's proposed changes thereto, and shall include an explanation in reasonable detail of, and such supporting documentation as is reasonably necessary to support, such changes. If Buyer has timely delivered such a notice of disagreement to Seller, then, upon written agreement between Buyer and Seller resolving all disagreements of Buyer set forth in such notice, the Final Adjustment Statement will become final and binding upon Buyer and Seller as to the Net Cash Flow. If the Final Adjustment Statement has not become final and binding by the one hundred twentieth (120th) day following its receipt by Buyer, then Buyer and Seller may submit any unresolved disagreements of Buyer set forth in such notice to final and binding arbitration in accordance with the Arbitration Procedures. Upon resolution of such unresolved disagreements of Buyer, the Final Adjustment Statement shall be final and binding upon Buyer and Seller as to the Net Cash Flow. Within three (3) business days after the Final Adjustment Statement becomes final and binding, Seller or Buyer, as appropriate, shall pay to the other party the amount, if any, by which the Net Cash Flow as shown in the Final Adjustment Statement is less than or exceeds the Initial Adjustment Amount. Section 3.5 Gas Imbalance Credits. The Purchase Price shall be (a) reduced by an amount equal to (1) Unscheduled (Negative) Imbalances multiplied by (2) $1.00 per Mcf and (b) increased by an amount equal to (1) Unscheduled (Positive) Imbalances multiplied by (2) $1.00 per Mcf. 3 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: (a) Organization and Qualification. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to carry on its business as it is now being conducted. Seller is duly qualified to do business, and is in good standing, in each jurisdiction in which the Assets owned or leased by it makes such qualification necessary. (b) Authority. Seller has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of Seller. (c) Enforceability. This Agreement constitutes a valid and binding agreement of Seller enforceable against Seller in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application with respect to creditors, (ii) general principles of equity and (iii) the power of a court to deny enforcement of remedies generally based upon public policy. (d) No Conflict or Violation. Neither the execution and delivery of this Agreement nor the consummation of the transactions and performance of the terms and conditions contemplated hereby by Seller will (i) conflict with or result in any breach of any provisions of the certificate of incorporation or by-laws or other governing documents of Seller; (ii) be rendered void or ineffective by or under the terms, conditions or provisions of any agreement, instrument or obligation to which Seller is a party or is subject; (iii) result in a default under the terms, conditions or provisions of any Asset (or of any agreement, instrument or obligation relating to or burdening the Asset); or (iv) subject to the limitations contained in Section 4.1(c), violate or be rendered void or ineffective under any Law; provided that, the representations and warranties contained in clauses (ii), (iii) and (iv) of this Section 4.1(d) are subject to the matters expressly described and set forth in Schedule 4.1(d). (e) Consents. Except for (i) Preference Rights and Transfer Requirements and (ii) the consents, filings or notices expressly described and set forth in Schedule 4.1(e), no consent, approval, authorization or permit of, or filing with or notification to, any Person is required for or in connection with the execution and delivery of this Agreement by Seller or for or in connection with the consummation of the transactions and performance of the terms and conditions contemplated hereby by Seller. 4 (f) Actions. Except as set forth on Schedule 4.1(f), there are no Actions pending against Seller or, to the knowledge of Seller, threatened against Seller which relate to the Assets or the transactions contemplated by this Agreement. (g) Compliance With Laws. Except as set forth on Schedule 4.1(g), Seller has no knowledge of any violation by Seller of any Law applicable to the Assets which affects in any material respect the value of the Assets taken as a whole. (h) Brokerage Fees and Commissions. Neither Seller nor any affiliate of Seller has incurred any obligation or entered into any agreement for any investment banking, brokerage or finder's fee or commission in respect of the transactions contemplated by this Agreement for which Buyer shall incur any liability. (i) Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or, to the knowledge of Seller, threatened against Seller. Section 4.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: (a) Organization and Qualification. Buyer is in good standing under the laws of the State of Texas and has the requisite power to carry on its business as it is now being conducted. Buyer is duly qualified to do business and is in good standing in each jurisdiction in which the Assets to be acquired by it makes such qualification necessary. (b) Authority. Buyer has all requisite power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by Buyer. (c) Enforceability. This Agreement constitutes a valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application with respect to creditors; (ii) general principles of equity and (iii) the power of a court to deny enforcement of remedies generally based upon public policy. (d) No Conflict or Violation. Neither the execution and delivery of this Agreement nor the consummation of the transactions and performance of the terms and conditions contemplated hereby by Buyer will (i) be rendered void or ineffective by or under the terms, conditions or provisions of any agreement, instrument or obligation to which Buyer is a party or is subject; or (ii) subject to the limitations contained in Section 4.2(c), violate or be rendered void or ineffective under any Law; provided that, the representations and warranties contained in clauses (i) and (ii) of this Section 4.2(d) are subject to the matters expressly described and set forth in Schedule 4.2(d). 5 (e) Consents. Except for (i) Preference Rights and Transfer Requirements, and (ii) the consents, filings or notices expressly described and set forth in Schedule 4.2(e), no consent, approval, authorization or permit of, or filing with or notification to, any Person is required for or in connection with the execution and delivery of this Agreement by Buyer or for or in connection with the consummation of the transaction and performance of the terms and conditions contemplated hereby by Buyer. (f) Actions. Except as set forth on Schedule 4.2(f), there are no Actions pending against Buyer or, to the knowledge of Buyer, threatened against Buyer which relate to the transactions contemplated by this Agreement. (g) Brokerage Fees and Commissions. Neither Buyer nor any affiliate of Buyer has incurred any obligation or entered into any agreement for any investment banking, brokerage or finder's fee or commission in respect of the transactions contemplated by this Agreement for which Seller shall incur any liability. (h) Funds. Buyer has sufficient funds available to enable Buyer to consummate the transactions contemplated hereby and to pay all related fees and expenses of Buyer. (i) Buyer's Knowledge. Buyer has no knowledge of any fact which results in any representations or warranty of Seller in Section 4.1 being breached. (j) No Distribution. Buyer is an experienced and knowledgeable investor in the oil and gas business. Prior to entering into this Agreement, Buyer was advised by its counsel and such other persons it has deemed appropriate concerning this Agreement and has relied solely on an independent investigation and evaluation of, and appraisal and judgment with respect to, the geologic and geophysical characteristics of the Subject Interests, the estimated reserves recoverable therefrom, and the price and expense assumptions applicable thereto. Buyer is not acquiring any interests in the Assets in connection with a distribution thereof in violation of the Securities Act of 1933 and the rules and regulations thereunder or any applicable state blue sky laws. (k) Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or to the knowledge of Buyer, threatened against Buyer. ARTICLE V. INVESTIGATION OF ASSETS: CONFIDENTIALITY Section 5.1 Investigation of Assets. Promptly following the execution of this Agreement and until the Closing Date (or earlier termination of this Agreement), Seller (i) shall permit Buyer and its representatives at reasonable times to examine, in Seller's offices, all abstracts of title, title opinions, title files, ownership maps, lease files, assignments, division orders, and documents relating to the Assets insofar as the same are in Seller's possession and insofar as Seller may do so without (a) violating legal constraints or any 6 legal obligation or (b) waiving any attorney/client privilege and (ii), subject to any required consent of any third Person, shall permit Buyer and its representatives at reasonable times and at Buyer's sole risk, cost and expenses, to conduct reasonable inspections of the Assets; provided, however, Buyer shall repair any damage to the Assets resulting from such inspections and Buyer does hereby indemnify and hold harmless Seller from and against any and all losses, costs, damages, obligations, claims, liabilities, expenses and causes of action arising from Buyer's inspection of the Assets, including, without limitation, claims for personal injuries, property damage and reasonable attorney's fees. Section 5.2 Confidential Information. Unless and until the Closing occurs, Buyer agrees to maintain all information made available to it pursuant to Section 5.1 confidential and to cause its officers, employees, representatives, consultants and advisors to maintain all information made available to them pursuant to Section 5.1 confidential. ARTICLE VI. TITLE ADJUSTMENTS. Section 6.1 No Warranty or Representation. Without limiting Buyer's right to adjust the Purchase Price by operation of Section 6.2 and except for the special warranty of title which is contained in the Conveyance, Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to Seller's title to any of the Assets and Buyer hereby acknowledges and agrees that Buyer's sole remedy for any defect of title, including any Title Defect, with respect to any of the Assets shall be pursuant to the procedures set forth in this Article VI, which remedies shall cease, and be deemed to be finally and conclusively satisfied, in all respects, upon the Closing. Furthermore, Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to the accuracy or completeness of the information, records and data now, heretofore or hereafter made available to Buyer in connection with this Agreement (including, without limitation, any description of the Assets, pricing assumptions, potential for production of oil, gas or other hydrocarbons from the Subject Interests or any other matters contained in or related to any other material furnished to Buyer by Seller or by Seller's agents or representatives). Section 6.2 Buyer's Title Review. (a) Buyer's Assertion of Title Defects. Prior to the expiration of the fourteen (14) day period commencing on the execution of this Agreement (the "Title Examination Period"), Buyer shall notify Seller in writing of any matters which, in Buyer's reasonable opinion, constitute Title Defects and which Buyer intends to assert as a Title Defect with respect to any portion of a Property Subdivision pursuant to this Article VI. For all purposes of this Agreement, Buyer shall be deemed to have waived any Title Defect which Buyer fails to assert as a Title Defect by written notice given to Seller on or before the expiration of the Title Examination Period. To be effective, Buyer's written notice of a Title Defect must include (i) a brief description of the matter constituting the asserted Title Defect, (ii) the claimed Title Defect Amount attributable thereto, and (iii) supporting documents reasonably necessary for 7 Seller (as well as any title attorney or examiner hired by Seller) to verify the existence of such asserted Title Defect. Buyer shall promptly furnish Seller with written notice of any Seller Title Credit which is discovered by any of Buyer's employees or representatives while conducting Buyer's title review, due diligence or investigation with respect to the Subject Interests and Property Subdivisions. (b) Purchase Price Allocations. A portion of the Purchase Price has been allocated to the various Subject Interests in Property Subdivisions in the manner and in accordance with the respective values set forth in the Property Schedule. If any adjustment is made to the Purchase Price pursuant to this Section 6.2, a corresponding adjustment shall be made to the portion of the Purchase Price allocated to the affected Property Subdivision in the Property Schedule. (c) Seller's Opportunity to Cure. Seller shall have until two (2) days prior to the Closing Date, at its cost and expense, if it so elects but without obligation, to cure all or a portion of such asserted Title Defects. Any asserted Title Defects which are waived by Buyer or cured within such time shall be deemed "Permitted Encumbrances" hereunder. If Seller within such time fails to cure any Title Defect of which Buyer has given timely written notice as required above and Buyer has not and does not waive same on or before the day immediately preceding the Closing Date, the Property Subdivision affected by such uncured and unwaived Title Defect shall be a "Title Defect Property". (d) Buyer's Title Adjustments. Subject to Section 6.5, as Buyer's sole and exclusive remedy with respect to Title Defects, Buyer shall be entitled to reduce the Purchase Price by the amount, if any, by which the aggregate amount of Title Defect Amounts with respect to all Title Defect Properties exceeds the sum of $400,000.00 (the "Title Defect Deductible") plus the aggregate amount of Seller Title Credits with respect to all Property Subdivisions. "Title Defect Amount" shall mean, with respect to a Title Defect Property, the amount by which the value of such Title Defect Property is impaired as a result of the existence of one or more Title Defects, which amount shall be determined as follows: (1) If the Title Defect results from Seller having a lesser Net Revenue Interest in such Title Defect Property than the Net Revenue Interest specified therefor in the Property Schedule, the Title Defect Amount shall be equal to the product obtained by multiplying the portion of the Purchase Price allocated to such Title Defect Property in the Property Schedule by a fraction, the numerator or which is the reduction in the Net Revenue Interest and the denominator of which is the Net Revenue Interest specified for such Title Defect Property in the Property Schedule. (2) If the Title Defect results from Seller having a greater Working Interest in a Title Defect Property than the Working Interest specified therefor in the Property Schedule, the Title Defect Amount shall be equal to the present value (discounted at 10% compounded annually) of the increase in the costs and expenses forecasted in Exhibit B hereto with respect to such Title Defect Property for the period from and after the Effective Time which is attributable to such increase in the Seller's Working Interest. 8 (3) If the Title Defect results from the existence of a lien, the Title Defect Amount shall be an amount sufficient to discharge such lien. (4) If the Title Defect results from any matter not described in paragraphs (1), (2) or (3) above, the Title Defect Amount shall be an amount equal to the difference between the value of the Title Defect Property affected by such Title Defect with such Title Defect and the value of such Title Defect Property without such Title Defect (taking into account the portion of the Purchase Price allocated in the Property Schedule to such Title Defect Property); provided, that if such Title Defect is reasonably susceptible of being cured, the Title Defect Amount shall be the reasonable cost and expense of curing such Title Defect, if less. (5) If a Title Defect is not effective or does not affect a Title Defect Property throughout the entire productive life of such Title Defect Property, such fact shall be taken into account in determining the Title Defect Amount. (6) The Title Defect Amount with respect to a Title Defect Property shall be determined without duplication of any costs or losses included in another Title Defect Amount hereunder. For example, but without limitation, if a lien affects more than one Title Defect Property or the curative work with respect to one Title Defect results (or is reasonably expected to result) in the curing of any other Title Defect affecting the same or another Title Defect Property, the amount necessary to discharge such lien or the cost and expense of such curative work shall only be included in the Title Defect Amount for one Title Defect Property and only once in such Title Defect Amount. (7) If a Title Defect affects only a portion of a Property Subdivision (as contrasted with an undivided interest in the entirety of such Property Subdivision) and a portion of the Purchase Price has not been allocated specifically to such portion of a Property Subdivision in the Property Schedule, then for purposes of computing the Title Defect Amount, the portion of the Purchase Price allocated to such Property Subdivision shall be further allocated among the portions of such Property Subdivision in the proportion that the portion of the Property Subdivision affected by such Title Defect bears to the entire Property Subdivision. (8) The Title Defect Amount attributable to a Title Defect Property or any portion thereof shall not exceed the portion of the Purchase Price allocated to such Title Defect Property or such portion in Section 6.2(b) and paragraph (7) above. For example, but without limitation, if the Seller does not own fifty percent (50%) of the Net Revenue Interest specified in the Property Schedule for a Title Defect Property and such unowned fifty percent (50%) interest is also burdened by a lien, the Title Defect Amount for such Title Defect Property shall not exceed the portion of the Purchase Price allocable to such fifty percent (50%) interest notwithstanding that it may be affected by multiple Title Defects. 9 (9) No Title Defect Amount shall be allowed on account of and to the extent that an increase in the Seller's Working Interest in a Property Subdivision has the effect of proportionately increasing the Seller's Net Revenue Interest in such Property Subdivision. (10) With respect to any Subject Interest in a Property Subdivision in which Buyer likewise owned an undivided interest at the Effective Time, no Title Defect Amount shall be allowed on account of a Title Defect affecting such Subject Interest that also affected Buyer's interest in such Property Subdivision at the Effective Time. Section 6.3 Determination of Title Defects. A portion of a Property Subdivision shall be deemed to have a "Title Defect" if any one or more of the following statements is untrue with respect to such portion of a Property Subdivision as of the Effective Time and as of the Closing Date: (a) The Seller has Defensible Title thereto. (b) All royalties, rentals, Pugh clause payments, shut-in gas payments and other payments due with respect to such portion of a Property Subdivision have been properly and timely paid, except for payments held in suspense for title or other reasons which are customary in the industry and which will not result in grounds for cancellation of the Seller's rights in such portion of a Property Subdivision. (c) The Seller is not in default under the material terms of any leases, farm-out agreements or other contracts or agreements respecting such portion of a Property Subdivision which could (1) prevent the Seller from receiving the proceeds of production attributable to the Seller's interest therein, or (2) result in cancellation of the Seller's interest therein. Section 6.4 Seller Title Credit. A "Seller Title Credit" shall mean, with respect to a Property Subdivision, the amount by which the value of such Property Subdivision is enhanced by virtue of (a) Seller having a greater Net Revenue Interest in such Property Subdivision than the Net Revenue specified therefor in the Property Schedule, or (b) Seller having a lesser Working Interest in such Property Subdivision than the Working Interest specified therefor in the Property Schedule, which amount shall be determined as follows: (1) If the Seller Title Credit results from Seller having a greater Net Revenue Interest in such Property Subdivision than the Net Revenue Interest specified therefor in the Property Schedule, the Seller Title Credit shall be equal to the product obtained by multiplying the portion of the Purchase Price allocated to such Property Subdivision in the Property Schedule by a fraction, the numerator of which is the increase in the Net Revenue Interest and the denominator of which is the Net Revenue Interest specified for such Property Subdivision in the Property Schedule. 10 (2) If the Seller Title Credit results from Seller having a lesser Working Interest in a Property Subdivision than the Working Interest specified therefor in the Property Schedule, the Seller Title Credit shall be equal to the present value (discounted at 10% compounded annually) of the decrease in the costs and expenses forecasted in Exhibit B hereto with respect to such Property Subdivision for the period from and after the Effective Time which is attributable to such decrease in Seller's Working Interest. (3) In determining the amount of Seller Title Credits, the principles and methodology set forth in paragraphs (5), (6) and (7) of Section 6.2(d) shall be applied, mutatis mutandis. (4) No Seller Title Credit shall be allowed on account of and to the extent that a decrease in Seller's Working Interest in a Property Subdivision has the effect of proportionately decreasing Seller's Net Revenue Property Interest in such Property Subdivision. The Title Defect Deductible shall be restored to the extent that any portion thereof is applied as a credit against a Title Defect Amount attributable to a Title Defect which is subsequently cured by Seller or determined not to constitute a Title Defect. Section 6.5 Exclusion of Defect Properties. On or before the Closing Date, Seller may elect to retain and exclude from the Assets to be conveyed to Seller by Buyer pursuant to the terms hereof any Title Defect Property so long as the Purchase Price is reduced by the portion of the Purchase Price allocated to such Title Defect Property in the Property Schedule. Upon such election by Seller, said Title Defect Property, together with a pro rata share of all incidental rights, oil, gas and other hydrocarbons and other assets attributable or appurtenant thereto, shall be retained by Seller and excluded from the Assets which are conveyed by Seller to Buyer pursuant to the Conveyance. Section 6.6 Deferred Claims and Disputes. In the event that Buyer and Seller have not agree upon one or more adjustments, credits or offsets claimed by Buyer or Seller pursuant to and in accordance with the requirements of this Article VI, any such claim (a "Deferred Adjustment Claim") shall be settled pursuant to this Section 6.6 and, except as provided in Sections 9.1(g) and 9.2(g), shall not prevent or delay Closing. With respect to each potential Deferred Adjustment Claim, Buyer and Seller shall deliver to the other a written notice describing each such potential Deferred Adjustment Claim, the amount in dispute and a statement setting forth the facts and circumstances that support such party's position with respect to such Deferred Adjustment Claim. At Closing the Purchase Price shall not be adjusted on account of, and, except as provided in Sections 9.1(e) and 9.2(e), no effect shall be given to, the Deferred Adjustment Claim. On or prior to the thirtieth (30th) consecutive calendar day following the Closing Date (the "Deferred Matters Date"), the Seller and Buyer shall attempt in good faith to reach agreement on the Deferred Adjustment Claims and, ultimately, to resolve by written agreement all disputes regarding the Deferred Adjustment Claims. Any Deferred Adjustment Claims which are not so 11 resolved on or before the Deferred Matters Date shall be submitted to final and binding arbitration in accordance with the Arbitration Procedures; provided, however, that the Seller may elect at any time to resolve the disputes relating to the Deferred Adjustment Claims by the payment to Buyer of the amount by which the Purchase Price would have been reduced at Closing on account of the Title Defects which constitute Deferred Adjustment Claims if same did not constitute Deferred Adjustment Claims. Notwithstanding anything herein provided to the contrary, including Section 6.2(c), Seller shall be entitled to cure any Title Defect which constitutes a Deferred Adjustment Claim at any time prior to the point in time when a final and binding written decision of the board of arbitrators is made with respect thereto in accordance with the Arbitration Procedures. The amount of any reduction in the Purchase Price to which Buyer becomes entitled under the final and binding written decision of the board of arbitrators shall be promptly refunded by Seller to Buyer. Section 6.7 No Duplication. Notwithstanding anything herein provided to the contrary, if a Title Defect results from a matter which could also result in the breach of any representation or warranty of Seller set forth in Section 4.1, then Buyer shall only be entitled to assert such matter as a Title Defect pursuant to this Article VI and shall be precluded from also asserting such matter as the basis of the breach of any such representation or warranty. ARTICLE VII. PREFERENCE RIGHTS AND CONSENTS Section 7.1 Compliance. To Seller's knowledge, all agreements containing a (i) Preference Right are set forth in Part I of Schedule 7.1 and (ii) Transfer Requirement are set forth in Part II of Schedule 7.1 (except such agreements with respect to which all Preference Rights and Transfer Requirements applicable to the sale contemplated by this Agreement have been complied with or waived). Prior to the Closing Date, Seller shall initiate all procedures required to comply with or obtain the waiver of all Preference Rights and Transfer Requirements set forth in Schedule 7.1 with respect to the transactions contemplated by this Agreement. Section 7.2 Effect of Preference Rights. If a third party who has been offered a Preference Property pursuant to Section 7.1 elects prior to Closing to purchase such Preference Property in accordance with the terms of such Preference Right, and Seller and Buyer receive written notice of such election prior to the Closing Date, such Preference Property will be eliminated from the Assets and the Purchase Price shall be reduced by the portion of the Purchase Price allocated to such Preference Property pursuant to the immediately following sentence. The portion of the Purchase Price to be allocated to any Asset or portion thereof affected by a Preference Right (a "Preference Property") shall be the portion of the Purchase Price allocated thereto in the Property Schedule. If a Preference Right affects only a portion of a Property Subdivision and a portion of the Purchase Price has not been allocated specifically to such portion of a Property Subdivision in the Property Schedule, then the portion of the Purchase Price to be allocated to such Preference Property shall be determined in the same manner as provided in Section 6.2(d)(7) when a Title Defect affects only a portion of a Property Subdivision. If a third party who has been offered a Preference Property or who has been requested to waive its Preference Right pursuant to Section 7.1 does not elect to purchase 12 such Preference Property or waive such Preference Right with respect to the transactions contemplated by this Agreement prior to the Closing Date, such Preference Property shall be conveyed to Buyer at Closing subject to such Preference Right, unless such Preference Property has been otherwise eliminated from the Assets in accordance with other provisions of this Agreement. If a third party elects to purchase a Preference Property subject to a Preference Right and Closing has already occurred with respect to such Preference Property, Buyer shall be obligated to convey said Preference Property to such third party and shall be entitled to the consideration for the sale of such Preference Property. Section 7.3 Transfer Requirements. If a Transfer Requirement applicable to the transactions contemplated by this Agreement is not obtained, complied with or otherwise satisfied prior to the Closing Date; then, unless otherwise mutually agreed by Seller and Buyer, any Asset or portion thereof affected by such Transfer Requirement (a "Retained Asset") shall be held back from the Assets to be transferred and conveyed to Buyer at Closing and the Purchase Price to be paid at Closing shall be reduced by the portion of the Purchase Price which would be allocated to such Retained Asset pursuant to Section 7.2 if such Retained Asset were a Preference Property. Any Retained Asset so held back at the initial Closing will be conveyed to Buyer within ten (10) days following the date on which Seller obtains, complies with or otherwise satisfies all Transfer Requirements with respect to such Retained Assets for a purchase price equal to the amount by which the Purchase Price was reduced on account of the holding back of such Retained Asset; provided, however, if all Transfer Requirements with respect to any Retained Asset so held back at the initial Closing are not obtained, complied with or otherwise satisfied within one hundred twenty (120) days following the Closing Date, then such Retained Asset shall be eliminated from the Assets and this Agreement unless Seller and Buyer mutually agreed to proceed with a closing on such Retained Asset in which case Buyer shall be deemed to have waived any objection with respect to non-compliance with such Transfer Requirements. In connection with any subsequent conveyance of a Retained Asset, appropriate adjustments in Net Cash Flow and proration of revenues and expenses will be made to account for any delayed Closing with respect to a Retained Asset. ARTICLE VIII. COVENANTS OF SELLER AND BUYER Section 8.1 Conduct of Business Pending Closing. Subject to Section 8.2 and the constraints of applicable operating and other agreements from the date hereof through the Closing, except as disclosed in Schedule 8.1, or as otherwise consented to or approved by Buyer in writing (which consent or approval shall not be unreasonably withheld or delayed), Seller covenants and agrees that: (a) Sales. Sellers shall not sell, transfer, assign, convey, farmout, release, abandon or otherwise dispose of any Assets, or enter into any transaction the effect of which would be to cause Seller's ownership interest in any of the Assets to be altered from Seller's ownership interest as of the date of this Agreement, other than (i) oil, gas and other hydrocarbons produced, saved and sold in the ordinary course of business, and (ii) personal property 13 and equipment which is replaced with personal property and equipment of comparable or better value and utility in the ordinary and routine maintenance and operation of the Assets. (b) Encumbrances. Sellers shall not create or permit the creation of any lien, security interest or encumbrance on any Assets, except to the extent required or permitted incident to the operation of the Assets pursuant to this Section 8.1. (c) Operation of Assets. Seller shall: (1) cause the Assets to be maintained and operated in the ordinary course of business, in accordance with Law, maintain insurance now in force with respect to the Assets, and pay or cause to be paid all costs and expenses in connection therewith promptly when due; (2) not commit to participate in the drilling or any new well or other new operations on the Assets the cost of which (net to Seller's interest) is in excess of $15,000.00 in any single instance, without the advance written consent of Buyer, which consent or non-consent must be given by Buyer within the lesser of (x) ten (10) days of Buyer's receipt of the notice from Seller or (y) one-half (1/2) of the applicable notice period within which Seller is contractually obligated to respond to third parties to avoid a deemed election by Seller regarding such operation, as specified in Seller's notice to Buyer requesting such consent; and (3) maintain and keep the Assets in full force and effect, except where such failure is due to (i) the failure to pay a delay rental, royalty, shut in royalty or other payment by mistake or oversight (including Seller's negligence) unless caused by Seller's gross negligence or willful misconduct, or (ii) the failure to participate in an operation which Buyer does not timely approve. (d) Contracts and Agreements. Seller shall not: (1) grant or create any Preference Right or Transfer Requirement with respect to the Assets except in connection with the performance by Seller or an obligation or agreement existing on the date hereof or pursuant to this Agreement; (2) enter into any oil, gas or other hydrocarbon sales, supply, exchange, processing or transportation contract with respect to the Assets which is not terminable without penalty or detriment on notice of ninety (90) days or less; or (3) voluntarily relinquish any Seller's position as operator with respect to the Assets. (e) Notice of Defaults. Seller shall give prompt written notice to Buyer of any notice of default (or threat of default, whether disputed or denied) received or given by Seller under any material instrument or agreement affecting the Assets to which Seller is a party or by which Seller or any of the Assets are bound. 14 Section 8.2 Qualifications on Seller's Conduct. (a) Emergencies; Legal Requirements. Seller may take (or not take, as the case may be) any of the actions mentioned in Section 8.1 above if reasonably necessary under emergency circumstances (or if required or prohibited (as the case may be) pursuant to Law and provided Buyer is notified as soon thereafter as practicable. (b) Non-Operated Properties. If Seller is not the operator of a particular portion of the Assets, the obligations of Seller in Section 8.1 above with respect to such portion of the Assets, which have reference to operations or activities which pursuant to existing contracts are carried out or performed by the operator, shall be construed to require only that Seller use its best efforts (without being obligated to incur any expense or institute any cause of action) to cause the operator of such portion of the Assets to take such actions or render such performance within the constraints of the applicable operating agreements and other applicable agreements. (c) Certain Operations. Should Seller not wish to pay any lease rental or other payment or participate in any reworking, deepening, drilling, completion, equipping or other operation on or with respect to any well or other Property Subdivision which may otherwise be required by Section 8.1 above, Seller shall give Buyer written notice thereof at least fifteen (15) days prior to the date such rental or other payment is due or, in the case of an operation, promptly after Seller receives notice of such proposed operation from the operator of such property (or if Seller is the operator, at the same time Seller gives or is required to give notice of such proposed operation to the non-operators of such property); and Seller shall not be obligated to make any such payment or to elect to participate in any such operation which Seller does not wish to make or participate in unless Seller receives from Buyer, within a reasonable time prior to the date when such payment or election is required to be made by Seller, the written election and agreement of Buyer (i) to require Seller to take such action and (ii) to pay all costs and expenses of Seller with respect to such lease rental or other payment or such operation. Notwithstanding the foregoing, Seller shall not be obligated to pay any lease rental or other payment or to elect to participate in any operation if the operator of the property involved recommends that such action not be taken. If Buyer advances any funds pursuant to this Section 8.2(c) with respect to a particular portion of the Assets, such portion of the Assets is not conveyed to Buyer at Closing or Closing does not occur, and such funds are not reimbursed to Buyer within thirty (30) days after the earlier of Closing or termination of this Agreement, then with respect to such particular portion of the Assets, (i) Buyer shall own and be entitled to any interest of Seller that would have lapsed but for such payment or (ii) in the case of operations, Buyer shall be entitled to receive the penalty, if any, that Seller, as nonconsenting party, would have suffered under the applicable operating or other agreement with respect to such operations as if Buyer were a consenting party thereunder; in each case, subject to and after deduction of any damages or other relief to which Seller may be entitled with respect to any breach by Buyer of this Agreement. 15 Section 8.3 Conveyance. Upon the terms and subject to the conditions of this Agreement, at or prior to the Closing, Seller and Buyer shall execute and deliver or cause the execution and delivery of the General Conveyance, in substantially the form attached hereto as Exhibit 8.3 (the "Conveyance"). Section 8.4 Public Announcements. Without the prior written approval of the other party hereto, no party hereto will issue, or permit any agent or affiliate of it to issue, any press releases or otherwise make, or cause any agent or affiliate of it to make, any public statements with respect to this Agreement and the transactions contemplated hereby, except where such release or statement is deemed in good faith by the releasing party to be required by Law or any national securities exchange, in which case the party will use its best efforts to provide a copy to the other party prior to any release or statement. Section 8.5 Further Assurances. Seller and Buyer each agrees that, from time to time, whether before, at or after the Closing Date, each of them will execute and deliver or cause their respective affiliates to execute and deliver such further instruments of conveyance and transfer and take such other action as may be necessary to carry out the purposes and intents of this Agreement. Any separate or additional assignment of the Assets or any portion thereof required pursuant to this Section 8.5 (i) shall evidence the conveyance and assignment of the Assets made or intended to be made in the Conveyance, (ii) shall not modify or be deemed to modify any of the terms, covenants and conditions set forth in the Conveyance, and (iii) shall be deemed to contain all of the terms and provisions of the Conveyance, as fully as though the same were set forth at length in such separate or additional assignment. Section 8.6 Removal. Within a reasonable period of time following the Closing, Buyer shall remove the name and mark of Seller and any of its affiliates and any variations and derivatives thereof and logos relating thereto from the Assets. Section 8.7 Records. Within a reasonable period of time following the Closing, Seller shall make all Records available for delivery to Buyer in Houston, Texas. Buyer agrees to maintain the Records that are acquired pursuant to this Agreement until the fifth anniversary of the Closing Date (or for such longer period of time as Seller shall advise Buyer is necessary in order to have Records available with respect to open years for tax audit purposes), or, if any of such Records pertain to any claim or dispute pending on the fifth anniversary of the Closing Date, Buyer shall maintain any of such Records designated by Seller until such claim or dispute is finally resolved and the time for all appeals has been exhausted. Buyer shall provide Seller and its representatives reasonable access to and the right to copy such Records, at Seller's expense, for the purposes of (i) preparing and delivering any accounting provided for in this Agreement, (ii) complying with any law, rule or regulation affecting Seller's interest in the Assets prior to the Closing Date, (iii) preparing any audit of the books and records of any third party relating to Seller's interest in the Assets prior to the Closing Date, or responding to any audit prepared by such third parties, (iv) preparing tax returns, (v) responding to or disputing any tax audit or (vi) asserting, defending or otherwise dealing with any claim or dispute under this Agreement or with respect to the Assets. In no event shall 16 Buyer destroy any such Records without giving Seller sixty (60) days' advance written notice thereof and the opportunity, at Seller's expense, to obtain such Records prior to their destruction. Buyer shall have no liability to Seller regarding this Section 8.7 in the event of any destruction of the Records which may occur due to no fault of Buyer as a result of an act of God. ARTICLE IX. CLOSING CONDITIONS Section 9.1 Seller's Closing Conditions. The obligation of Seller to consummate the transactions contemplated hereby is subject, at the option of Seller, to the satisfaction on or prior to the Closing Date of all of the following conditions: (a) Representations, Warranties and Covenants. The (1) representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, and (2) covenants and agreements of Buyer to be performed on or before the Closing Date in accordance with this Agreement shall have been duly performed in all material respects. (b) Officer's Certificate. Seller shall have received a certificate dated as of the Closing Date, executed by a duly authorized officer of Buyer, to the effect that to such officer's knowledge the conditions set forth in paragraph (a) of this Section 9.1 have bene satisfied. (c) Conveyance. Buyer shall have executed and delivered the Conveyance prior to or on the Closing Date. (d) No Action. On the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by Seller or any of its affiliates) shall be pending or threatened before any court or governmental agency or body of competent jurisdiction seeking to enjoin or restrain the consummation of this Agreement or recover damages from Seller resulting therefrom. (e) Title Adjustments. The sum of (i) the reduction in the Purchase Price on account of the aggregate amount of all Title Defect Amounts and the exclusion of Title Defect Properties pursuant to Section 6.5, and (ii) the aggregate amount of Title Defect Amounts claimed by Buyer with respect to unresolved Deferred Adjustment Claims, and (iii) the reduction in the Purchase Price on account of the exclusion of Retained Assets pursuant to Section 7.3 shall not exceed $1,200,000.00. (f) Lender Approval. Seller shall have received written approval of the sale provided for under this Agreement by Barclays Bank as lead bank pursuant to Seller's Revolving Credit Facility dated January 21, 1991, as amended. Section 9.2 Buyer's Closing Conditions. The obligation of Buyer to consummate the transactions contemplated hereby is subject, at the option of Buyer, to the satisfaction on or prior to the Closing Date of all of the following conditions: 17 (a) Representations, Warranties and Covenants. The (1) representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, and (2) covenants and agreements of Seller to be performed on or before the Closing Date in accordance with this Agreement shall have been duly performed in all material respects. (b) Officer's Certificate. Buyer shall have received a certificate dated as of the Closing Date, executed by a duly authorized officer of Seller, to the effect that to such officer's knowledge the conditions set forth in paragraph (a) of this Section 9.1 have bene satisfied. (c) Conveyance. Seller shall have executed and delivered the Conveyance prior to or on the Closing Date. (d) No Action. On the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by Buyer or any of its affiliates) shall be pending or threatened before any court or governmental agency or body of competent jurisdiction seeking to enjoin or restrain the consummation of this Agreement or recover damages from Buyer resulting therefrom. (e) Title Adjustments. The sum of (i) the reduction in the Purchase Price on account of the aggregate amount of all Title Defect Amounts and the exclusion of Title Defect Properties pursuant to Section 6.5, and (ii) the aggregate amount of Title Defect Amounts claimed by Buyer with respect to unresolved Deferred Adjustment Claims, and (iii) the reduction in the Purchase Price on account of the exclusion of Retained Assets pursuant to Section 7.3 shall not exceed $1,200,000.00. ARTICLE X. CLOSING Section 10.1 Closing. The Closing shall be held on the Closing Date at 10:00 a.m., Houston time, at the offices of Seller at 1600 Smith Street, Suite 1400, Houston, Texas, or at such other time or place as Seller and Buyer may otherwise agree in writing. Section 10.2 Seller's Closing Obligations. At Closing, Seller shall execute and deliver, or cause to be executed and delivered, to Buyer the following: (a) The Conveyance; (b) The officer's certificate referred to in Section 9.2(b); (c) An affidavit of Non-Foreign Status, substantially in the form attached hereto as Exhibit 10.2(c); and (d) Letters in lieu of division and transfer orders executed by Seller relating to the Subject Interests in form reasonably necessary to reflect the conveyances contemplated hereby. 18 Section 10.3 Buyer's Closing Obligations. At Closing, Buyer shall (i) deliver or cause to be delivered, the Adjusted Purchase Price minus the Deposit to Seller in immediately available funds to the bank account as provided in Section 3.2 and (ii) execute and deliver, or cause to be executed and delivered, to Seller the following: (a) The Conveyance; and (b) The officer's certificate of Buyer referred to in Section 9.1(b). ARTICLE XI. EFFECT OF CLOSING Section 11.1 Revenues. After Closing, all proceeds, accounts receivable, notes receivable, income, revenues, monies and other items included in or attributed to the Excluded Assets and all other Excluded Assets shall belong to and be paid over to Seller and all proceeds, accounts receivable, notes receivable, income, revenues, monies and other items included in or attributable to the Assets with respect to any period of time after the Effective Time shall belong to and be paid over to Buyer except to the extent credited to Buyer in calculating the Adjusted Purchase Price. Section 11.2 Expenses. After Closing, all accounts payable and other costs and expenses with respect to the Assets for which Seller is given credit in the determination of Net Cash Flow pursuant to Section 3.3, as adjusted pursuant to Section 3.4, shall be borne by Seller. Section 11.3 Payments and Obligations. If monies are received by any party hereto which, under the terms of this Article XI, belong to another party, the same shall immediately be paid over to the proper party. If an invoice or other evidence of an obligation is received which under the terms of this Article XI is partially the obligation of Seller and partially the obligation of Buyer, then the parties shall consult each other and each shall promptly pay its portion of such obligation to the obligee. Section 11.4 Survival. No representation, warranty, covenant or agreement made herein shall survive the Closing except as provided in this Section 11.4. It is expressly agreed that the terms and provisions of (a) Article IV shall survive the Closing for a period of one hundred eighty (180) days from the Closing Date and (b) Sections 3.4, 3.6, 6.1, 6.6, 6.7, 7.2, 7.3, 8.2(c), 8.4, 8.5, 8.6, 8.7 and 14.3 and Articles XI, XIII and XV shall survive the Closing indefinitely. In addition, the definitions set forth in Appendix A to this Agreement which are used in representations, warranties, covenants and agreements which survive the Closing pursuant to this Section 11.4 shall survive the Closing to the extent necessary to give operative effect to such surviving representations, warranties, covenants and agreements. 19 ARTICLE XII. CASUALTY AND CONDEMNATION Section 12.1 No Termination. If after the Effective Time and prior to the Closing any part of the Assets shall be destroyed by fire or other casualty or if any part of the Assets shall be taken in condemnation or under the right of eminent domain or if proceedings for such purposes shall be pending or threatened, this Agreement shall remain in full force and effect notwithstanding any such destruction, taking or proceeding or the threat thereof. Section 12.2 Proceeds and Awards. To the extent insurance proceeds, condemnation awards or other payments are not committed, used or applied by Seller prior to the Closing Date to repair, restore or replace such damaged or taken Assets, Seller shall at the Closing pay to Buyer all sums paid to Seller by reason of such destruction or taking less any reasonable costs and expenses incurred by Seller in collecting same. ARTICLE XIII ASSUMPTION AND INDEMNIFICATION Section 13.1 Indemnification By Buyer. FROM AND AFTER THE CLOSING DATE, BUYER SHALL ASSUME AND PAY, PERFORM, FULFILL AN DISCHARGE ALL ASSUMED LIABILITIES, AND SHALL INDEMNIFY AND HOLD HARMLESS THE SELLER, ITS PRESENT AND FORMER DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, AND EACH OF THE DIRECTORS, OFFICERS, HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS OF ANY OF THE FOREGOING (COLLECTIVELY, THE "SELLER INDEMNIFIED PARTIES") FROM AND AGAINST ANY AND ALL (I) ASSUMED LIABILITIES INCURRED BY OR ASSERTED AGAINST ANY OF THE SELLER INDEMNIFIED PARTIES, INCLUDING, WITHOUT LIMITATION, ANY ASSUMED LIABILITY OF THE SELLER INDEMNIFIED PARTY OR ANY OTHER THEORY OF LIABILITY, WHETHER IN LAW (WHETHER COMMON OR STATUTORY) OR EQUITY AND (II) ANY COVERED LIABILITY RESULTING FROM ANY MISREPRESENTATION, BREACH OF WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR AGREEMENT ON THE PART OF BUYER HEREUNDER. Section 13.2 Indemnification by Seller. FROM AND AFTER THE CLOSING DATE, SELLER SHALL INDEMNIFY AND HOLD HARMLESS THE BUYER, ITS PRESENT AND FORMER DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, AND EACH OF THE HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS OF ANY OF THE FOREGOING (COLLECTIVELY, THE "BUYER INDEMNIFIED PARTIES") FROM AND AGAINST ANY AND ALL (I) ASSUMED LIABILITIES INCURRED BY OR ASSERTED AGAINST ANY OF THE BUYER INDEMNIFIED PARTIES, INCLUDING, WITHOUT LIMITATION, ANY ASSUMED LIABILITY OF THE BUYER INDEMNIFIED PARTY OR ANY OTHER THEORY OF LIABILITY, WHETHER IN LAW (WHETHER COMMON OR STATUTORY) OR 20 EQUITY AND (II) ANY COVERED LIABILITY RESULTING FROM ANY MISREPRESENTATION, BREACH OF WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR AGREEMENT ON THE PART OF SELLER HEREUNDER. Section 13.3 Third Party Claims. If a claim by a third party is made against a Seller Indemnified Party or a Buyer Indemnified Party (an "Indemnified Party"), and if such party intends to seek indemnity with respect thereto under this Article XIII, such Indemnified Party shall promptly notify Buyer or Seller, as the case may be (the "Indemnitor"), of such claims. The Indemnitor shall have thirty (30) days after receipt of such notice to undertake, conduct and control, through counsel of its own choosing and at its own expense, the settlement or defense thereof, and the Indemnified Party shall cooperate with it in connection therewith; provided that the Indemnitor shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by such Indemnified Party; however, the fees and expenses of such counsel shall be borne by such Indemnified Party. So long as the Indemnitor, at Indemnitor's cost and expense, (1) has undertaken the defense of, and assumed full responsibility for all Covered Liabilities with respect to, such claim, (2) is reasonably contesting such claim in good faith, by appropriate proceedings, and (3) has taken such action (including the posting of a bond, deposit or other security) as may be necessary to prevent any action to foreclose a lien against or attachment of the property of the Indemnified Party for payment of such claim, the Indemnified Party shall not pay or settle any such claim. Notwithstanding compliance by the Indemnitor with the preceding sentence, the Indemnified party shall have the right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefor by the Indemnitor for such claim. If, within thirty (30) days after the receipt of the Indemnified Party's notice of a claim of indemnity hereunder, the Indemnitor does not notify the Indemnified Party that it elects, at Indemnitor's cost and expense, to undertake the defense thereof and assume full responsibility for all Covered Liabilities with respect thereto, or gives such notice and thereafter fails to contest such claim in good faith or to prevent action to foreclose a lien against or attachment of the Indemnified Party's property as contemplated above, the Indemnified Party shall have the right to contest, settle or compromise the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. ARTICLE XIV. TERMINATION; REMEDIES; LIMITATIONS Section 14.1 Termination. (a) Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated at any time prior to the Closing: (1) By the mutual consent of Seller and Buyer; or (2) If the Closing has not occurred by the close of business on the Closing Date, then (i) by Seller if any condition specified in Section 9.1 has not been satisfied on or before such close of business, and shall not theretofore have been waived by Seller, or 21 (ii) Buyer if any condition specified in Section 9.2 has not been satisfied on or before such close of business, and shall not theretofore have been waived by Buyer; provided, in each case, that the failure to consummate the transactions contemplated hereby on or before such date did not result from the failure by the party or parties seeking termination of this Agreement to fulfill any undertaking or commitment provided for herein on the part of such party or parties that is required to be fulfilled on or prior to Closing. (b) Effect of Termination. In the event of termination of this Agreement by Seller, on the one hand, or Buyer, on the other hand, pursuant to Section 14.1, written notice thereof shall forthwith be given by terminating party or parties to the other party or parties hereto, Seller shall return to Buyer the Deposit, and this Agreement shall thereupon terminate; provided, however, that following such termination Buyer will continue to be bound by its obligations set forth in Article V. If this Agreement is terminated as provided herein all filings, applications and other submissions made to any Governmental Authority shall, to the extent practicable, be withdrawn from the Governmental Authority to which they were made and any notices or offers made pursuant to Section 7.1 shall become void. Section 14.2 Remedies. (a) Seller's Remedies. Notwithstanding anything herein provided to the contrary, upon the failure by Buyer to fulfill any undertaking or commitment provided for herein on the part of Buyer that is required to be fulfilled on or prior to the Closing Date, Seller, at its sole option, may (i) enforce specific performance of this Agreement or (ii) terminate this Agreement and retain the Deposit as liquidated damages, as Seller's sole and exclusive remedies for such default, all other remedies being expressly waived by Seller. Seller and Buyer agree upon the Deposit amount as liquidated damages due to the difficulty and inconvenience of measuring actual damages and the uncertainty thereof, and Seller and Buyer agree that the Deposit amount is a reasonable estimate of Seller's loss in the event of any such default by Buyer. (b) Buyer's Remedies. Notwithstanding anything herein provided to the contrary, upon the failure by Seller to fulfill any undertaking or commitment provided for herein on the part of Seller that is required to be fulfilled on or prior to the Closing Date, Buyer, at its sole option, may (i) enforce specific performance of this Agreement or (ii) terminate this Agreement and retain the Deposit as liquidated damages, as Buyer's sole and exclusive remedies for such default, all other remedies being expressly waived by Buyer. Section 14.3 Limitations. (a) Disclaimer of Warranties. NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT SELLER IS NOT MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, BEYOND THOSE REPRESENTATIONS OR WARRANTIES EXPRESSLY GIVEN IN THIS AGREEMENT, AND IT IS 22 UNDERSTOOD THAT BUYER TAKES THE ASSETS AS IS AND WHERE IS AND WITH ALL FAULTS. WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A) THE CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) OR (B) ANY INFRINGEMENT BY SELLER OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; AND (II) NEGATES ANY RIGHTS OF BUYER UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY BUYER FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF SELLER AND BUYER THAT THE ASSETS ARE TO BE ACCEPTED BY BUYER IN THEIR PRESENT CONDITION AND STATE OF REPAIR. (b) Texas Deceptive trade Practices Act Waiver. BUYER (A) REPRESENTS AND WARRANTS TO SELLER THAT IT (i) IS ACQUIRING THE ASSETS FOR COMMERCIAL OR BUSINESS USE, (ii) IS REPRESENTED BY LEGAL COUNSEL, (iii) ACKNOWLEDGES THE CONSIDERATION PAID OR TO BE PAID FOR THE ASSETS WILL EXCEED $500,000, AND (iv) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS SUCH THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT AND IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH RESPECT TO THE SELLER; AND (B) HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY AND ALL RIGHTS OR REMEDIES IT MAY HAVE UNDER THE DECEPTIVE TRADE PRACTICES CONSUMER PROTECTION ACT OF THE STATE OF TEXAS, TEX. BUS. & COM. CODE ss. 17.41 ET SEQ. TO THE MAXIMUM EXTENT IT CAN DO SO UNDER APPLICABLE LAW, IF SUCH ACT WOULD FOR ANY REASON BE DEEMED APPLICABLE TO THE TRANSACTIONS CONTEMPLATED HEREBY. WAIVER OF CONSUMER RIGHTS BUYER WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF BUYER'S OWN SELECTION, BUYER VOLUNTARILY CONSENTS TO THIS WAIVER. (c) Damages. NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, SELLER AND BUYER AGREE THAT, EXCEPT FOR LIQUIDATED DAMAGES SPECIFICALLY PROVIDED FOR IN SECTION 14.2, THE RECOVERY BY 23 EITHER PARTY HERETO OF ANY DAMAGES SUFFERED OR INCURRED BY IT AS A RESULT OF ANY BREACH BY THE OTHER PARTY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED TO THE ACTUAL DAMAGES SUFFERED OR INCURRED BY THE NON- BREACHING PARTY AS A RESULT OF THE BREACH BY THE BREACHING PARTY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER AND IN NO EVENT SHALL THE BREACHING PARTY BE LIABLE TO THE NON-BREACHING PARTY FOR ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES SUFFERED OR INCURRED BY THE NON- BREACHING PARTY AS A RESULT OF THE BREACH BY THE BREACHING PARTY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER. ARTICLE XV. MISCELLANEOUS Section 15.1 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. Section 15.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO THE CONFLICT OF LAW PRINCIPLES THEREOF. Section 15.3 Entire Agreement. This Agreement and the Schedules and Exhibits hereto contain the entire agreement between the parties with respect to the subject matter hereof and there are no agreements, understandings, representations or warranties between the parties other than those set forth or referred to herein. The headings herein are for convenience only and shall have no significance in the interpretation hereof. Section 15.4 Expenses Buyer shall be responsible for (i) any sales Taxes which may become due and owing by reason of the sale of the Assets hereunder, (ii) all transfer, stamp, documentary and similar Taxes imposed on the parties hereto with respect to the property transfer contemplated pursuant to this Agreement and (iii) all recording fees relating to the filing of instruments transferring title to Buyer from Seller. Seller shall be responsible for (i) all recording and other fees relating to title curative documents and (ii) all income and other Taxes incurred by or imposed on Seller with respect to the transactions contemplated hereby. All other costs and expenses incurred by each party hereto in connection with all things required to be done by it hereunder, including attorney's fees, accountant fees and the expense of title examination, shall be borne by the party incurring same. 24 Section 15.5 Notices. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, by United States Mail, telecopy, telefax or other electronic transmission service to the appropriate address or number as set forth below. Notices to Seller shall be addressed as follows: Hardy Oil & Gas USA Inc. 1600 Smith Street, Suite 1400 Houston, Texas 77002-7346 Attention: James M. Fitzpatrick Telecopy No.: (713) 951-7329 or at such other address and to the attention of such other Person as Seller may designate by written notice to Buyer. Notices to Buyer shall be addressed to: Arch Petroleum, Inc. 777 Taylor Street, Suite II-A Fort Worth, Texas 76102 Attention: Larry Kalas Telecopy No: (817) 332-9249 or at such other address and to the attention of such other Person as Buyer may designate be written notice to Seller. Section 15.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the respective rights and obligations of the parties hereto shall not be assignable or delegable by any party hereto without the express written consent of the non-assigning or nondelegating party. Section 15.7 Amendments and Waivers. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by another party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. Section 15.8 Schedules and Exhibits. All Schedules and Exhibits hereto which are referred to herein are hereby made a part hereof and incorporated herein by such reference. Section 15.9 Purchase Price Allocation for Tax Purposes. Seller and Buyer agree that the Purchase Price shall be allocated to the various Assets for federal and state income tax purposes only in the manner set forth in Schedule 25 15.9. The parties agree not to take a federal or state income tax reporting position inconsistent with the allocations set forth on Schedule 15.9. The parties further agree that the allocations set forth on Schedule 15.9 represent reasonable estimates of the fair market values of the Assets described herein. Section 15.10 Ad Valorem Tax Proration. Ad valorem taxes related to the Assets will be prorated as of the Effective Time. For ad valorem taxes for a period which the Effective Time splits which have been paid by Seller, Buyer shall reimburse Seller for the portion thereof equal to the percentage of such period represented by the portion of such period beginning at the Effective Time. For ad valorem taxes for a period which the Effective Time splits which have not been paid by Seller, Buyer shall pay such taxes and Seller shall reimburse Buyer for a percentage of such taxes equal to the portion of such period which ends on the day immediately preceding the Effective Time. Section 15.11 Agreement for the Parties' Benefit Only. Except as specified in Article XIII, which is also intended to benefit and to be enforceable by any of the Indemnified Parties, this Agreement is not intended to confer upon any Person not a party hereto any rights or remedies hereunder, and no Person, other than the parties hereto or the Indemnified Parties, is entitled to rely on any representation, warranty, covenant or agreement contained herein. In each case, such third party beneficiary may only bring suit against the defaulting party or parties. Section 15.12 Attorneys' Fees. The prevailing party in any legal proceeding brought under or to enforce this Agreement shall be additionally entitled to recover court costs and reasonable attorneys' fees from the nonprevailing party. Section 15.13 Severability. If any term or other provision of this Agreement is 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 adverse manner to any party. Upon such determination that any term or other provision is invalid, illegal or incapable or being enforced, the parties hereto 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. Section 15.14 No Recordation. Without limiting any party's right to file suit to enforce its rights under this Agreement, Buyer and Seller expressly covenant and agree not to record or place of record this Agreement or any copy or memorandum hereof. Section 15.15 Time of Essence. Time is of the essence in this Agreement. IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties as of the day first above written. 26 SELLER: HARDY OIL & GAS USA INC. By: ___________________________________ James M. Fitzpatrick, Vice President - Land & Legal BUYER: ARCH PETROLEUM, INC. By: ____________________________________ Larry Kalas President 27 APPENDIX A TO ASSET PURCHASE AGREEMENT DEFINITIONS "Action" shall mean any action, claim, suit, arbitration, inquiry, proceeding, investigation, condemnation or audit by or before any court or other Governmental Authority. "Adjustment Period" shall be as defined in Section 3.3(a). "Adjusted Purchase Price" shall be as defined in Section 3.1. "Adjustment Statement" shall be as defined in Section 3.3(a). "Arbitration Procedures" shall mean the arbitration procedures set forth in Exhibit A-1. "Assets" shall mean the following described assets and properties (except to the extent constituting Excluded Assets): (a) the Subject Interests; (b) the Lands; (c) the Incidental Rights; (d) the Claims; (e) the Royalty Accounts; and (f) all (i) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods subsequent to the Effective Time and (ii) proceeds from or of such oil, gas and other hydrocarbons. "Assumed Liabilities" shall mean (i) all Covered Liabilities of Seller with respect to the Royalty Accounts and the Claims, and (ii) all Covered Liabilities to the extent arising out of or attributable to the ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time. "Buyer Indemnified Parties" shall be as defined in Section 13.2. "Claims" shall mean all right, title and interest of Seller to any claims to the extent attributable to ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time, including, without limitation, past, present or future claims, whether or not previously asserted by Seller. Page - 1 - of Appendix A "Closing" shall be the consummation of the transaction contemplated by Article X. "Closing Date" shall mean (a) April 30, 1996, or (b) such other date as may be mutually agreed to by Seller and Buyer. "Conveyance" shall be as defined in Section 8.3. "Covered Liabilities" shall mean any and all debts, losses, liabilities, duties, claims (including, without limitation, those arising out of any demand, assessment, settlement, judgment or compromise relating to any actual or threatened Action), Taxes, costs and expenses (including, without limitation, any attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending any Action), matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown, including, without limitation, any of the foregoing arising under, out of or in connection with any Action, any order or consent decree of any Governmental Authority, any award of any arbitrator, or any Law, contract, commitment or undertaking. "Defensible Title" shall mean, respectively as to the Subject Interest or Subject Interests related to a particular Property Subdivision, title to such Property Subdivision and the Subject Interest or Subject Interests related to such Property Subdivision that: (i) entitles Seller to receive not less than the applicable Net Revenue Interest or Net Revenue Interests specified for such Property Subdivision in the Property Schedule; (ii) obligates Seller to bear the costs and expenses attributable to the maintenance, development, and operation of such Property Subdivision in an amount not greater than the applicable Working Interest or Working Interests specified for such Property Subdivision in the Property Schedule; and (iii), except for Permitted Encumbrances, is free and clear of all liens and encumbrances. "Deferred Adjustment Claim" shall be defined in Section 6.6. "Deferred Matters Date" shall be as defined in Section 6.6. "Deposit" shall be as defined in Section 3.2. "Disputed Issues" shall be as defined in the Arbitration Procedures. "Effective Time" shall mean 7:00 a.m., Central Daylight Time, on January 1, 1996. "Excluded Assets" shall mean the following: (a) copies of all Records; (b) except to the extent constituting the Royalty Accounts, all deposits, cash, checks, funds and accounts receivable attributable to Seller's interest in the Assets with respect to any period of time prior to the Effective Time; Page - 2 - of Appendix A (c) all (i) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, (ii) oil, gas and other hydrocarbons attributable to the Subject Interests which, at the Effective Time, are in storage, within processing plants, in pipelines or otherwise held in inventory, and (iii) proceeds from or of such oil, gas and other hydrocarbons; (d) such assets as Seller elects to exclude from the Assets pursuant to the terms hereof; (e) all receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of Net Cash Flow pursuant to Section 3.3, as adjusted pursuant to Section 3.4; (f) claims of Seller for refund of or loss carry forwards with respect to (i) Taxes attributable to any period prior to the Effective time or (ii) any Taxes attributable to the Excluded Assets; (g) all corporate, financial, tax and legal records of Seller; and (h) all rights, interests, assets and properties described in Schedule A-1. "Excluded Liabilities" shall mean, except to the extent constituting an Assumed Liability, any Covered Liabilities to the extent arising out of or attributable to the ownership, use, construction, maintenance or operation of the Assets by Seller prior to the Effective Time. "Final Adjustment Statement" shall be as defined in Section 3.4. "Governmental Authority" shall mean (i) the United States of America, (ii) any state, county, municipality or other governmental subdivision within the United States of America, and (iii) any court or any governmental department, commission, board, bureau, agency or other instrumentality of the United States of America or of any state, county, municipality or other governmental subdivision within the United States of America. "Hydrocarbon Interests" shall mean (a) leases affecting, relating to or covering any oil, gas and other hydrocarbons and the leasehold interests and estates in the nature of working or operating interests under such leases, as well as overriding royalties, net profits interests, production payments, carried interests, rights of recoupment and other interests in, under or relating to such leases; (b) fee interests in oil, gas or other hydrocarbons; (c) royalty interests in oil, gas or other hydrocarbons; (d) any other interest in oil, gas or other hydrocarbons in place, (e) any economic or contractual rights, options or interests in and to any of the foregoing, including, without limitation, any farmout or farmin agreement or production payment affecting any interest or estate in oil, gas or other hydrocarbons; and (f) any and all rights and interests attributable or allocable thereto by virtue of any pooling, unitization, communitization, production sharing or similar agreement, order or declaration. Page - 3 - of Appendix A "Incidental Rights" shall mean all right, title and interest of Seller in and to or derived from the following insofar as the same are attributable to the Subject Interests: (a) all rights with respect to the use and occupancy of the surface of and the subsurface depths under the Lands; (b) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof; (c) all agreements and contracts, easements, rights-of-way, servitudes and other estates; and (d) all real and personal property located upon the Lands and used in connection with the exploration, development or operation of the Subject Interests; and (e) the Records. "Indemnified Party" shall be as defined in Section 13.3. "Indemnitor" shall be as defined in Section 13.3. "Initial Adjustment Amount" shall be as defined in Section 3.3(a). "Knowledge" shall mean the actual knowledge of any fact, circumstance or condition by the officers (if the party involved is a corporation), partners (if the party involved is a partnership) or employees at a supervisory or higher level of the party involved. "Lands" shall mean, except to the extent constituting Excluded Assets, all right, title, and interest of Seller in and to the lands covered by or subject to the Subject Interests. "Law" shall mean any applicable statute, law, ordinance, regulation, rule, ruling, order, restriction, requirement, writ, injunction, decree or other official act of or by any Governmental Authority. "Net Cash Flow" shall be as defined in Section 3.3(c). "Net Revenue Interest" shall mean an interest (expressed as a percentage or decimal fraction) in and to all oil and gas produced and saved from or attributable to a Property Subdivision. "Permitted Encumbrances" shall mean any of the following matters: (a) all agreements, instruments, documents, liens, encumbrances, and other matters which are described in Schedule A-2; (b) any (i) undetermined or inchoate liens or charges constituting or securing the payment of expenses which were incurred incidental to maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing oil, gas or other hydrocarbons therefrom or therein and (ii) materialman's, mechanics', repairman's, employees', contractors', operators' or other similar liens, security interests or charges for liquidated amounts arising in the ordinary course of business incidental to construction, maintenance, development, production or operation Page - 4 - of Appendix A of the Assets or the production or processing of oil, gas or other hydrocarbons therefrom, that are not delinquent and that will be paid in the ordinary course of business, or if delinquent, that are being contested in good faith; (c) any liens for Taxes not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business; (d) any liens or security interests created by Law or reserved in oil, gas and/or mineral leases for royalty, bonus or rental or for compliance with the terms of the Subject Interests; (e) all Preference Rights and Transfer Requirements; (f) any easements, rights-of-way, servitudes, permits, licenses, surface leases and other rights with respect to surface operations to the extent such matters do not interfere in any material respect with Buyer's operation of the portion of the Assets burdened thereby; (g) any prohibitions or restrictions similar to those contained in Article VIII.D. of the A.A.P.L. Form 610-1982 Model Form Operating Agreement and any contribution obligations under provisions similar to Article VII.B. of said Model Form Operating Agreement; (h) all agreements and obligations relating to imbalances with respect to the production, transportation or processing of gas or calls or purchase options on oil or gas production; (i) all royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other burdens to the extent that the net cumulative effect of such burdens, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Seller in such Property Subdivision as specified in the Property Schedule; (j) all obligations by virtue of a prepayment, advance payment or similar arrangement under any contract for the sale of gas production, including by virtue of "take-or-pay" or similar provisions, to deliver gas produced from or attributable to the Subject Interests after the Effective Time without then or thereafter being entitled to receive full payment therefor; (k) all liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects, irregularities and other matters affecting any Asset which individually or in the aggregate are not such as to interfere materially with the operation, value or use of such Asset; Page - 5 - of Appendix A (l) any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Buyer pursuant to Article VI; (m) rights reserved to or vested in any Governmental Authority to control or regulate any of the wells or units included in the Assets and all applicable laws, rules, regulations and orders of such authorities so long as the same do not decrease Seller's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; (n) the terms and conditions of all contracts and agreements relating to the Subject Interests, including, without limitation, exploration agreements, gas sales contracts, processing agreements, farmins, farmouts, operating agreements, and right-of-way agreements, to the extent such terms and conditions do not decrease Seller's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; and (o) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest. "Person" shall mean any Governmental Authority or any individual, firm, partnership, corporation, joint venture, trust, unincorporated organization or other entity or organization. "Preference Property" shall be as defined in Section 7.2. "Preference Right" shall mean any right or agreement that enables or may enable any Person to purchase or acquire any Asset or any interest therein or portion thereof as result of or in connection with (i) the sale, assignment, encumbrance or other transfer of any Asset or any interest therein or portion thereof or (ii) the execution or delivery of this Agreement or the consummation or performance of the terms and conditions contemplated by this Agreement. "Property Schedule" means Exhibit A-2 attached to and made a part of this Agreement. "Property Subdivision" means each well location, well, well completion, multiple well completion, unit, lease, or other subdivision of property described or referenced in the Property Schedule. "Purchase Price" shall be as defined in Section 3.1. "Records" shall mean, except to the extent constituting Excluded Assets, and except to the extent the transfer thereof may not be made without violating legal constraints or legal obligations or waiving any attorney/client privilege, any and all lease files, land files, division order files, production marketing files, well files, production records, seismic, geological, geophysical and engineering data, litigation files, and all other files, maps and data (in whatever form) arising out of or relating to the Subject Interests or the ownership, use, maintenance or operation of the Assets. Page - 6 - of Appendix A "Retained Assets" shall be defined in Section 7.3. "Royalty Accounts" shall mean those separately indentifiable accounts which are expressly identified and set forth in Schedule A-4 in which Seller or any third party operator is holding as of the Effective Time monies which (i) are owing to third party owners of royalty, overriding royalty, working or other interests in respect of past production of oil, gas or other hydrocarbons attributable to the Assets or (ii) may be subject to refund by royalty owners or other third parties to purchasers of past production of oil, gas or other hydrocarbons attributable to the Assets. "Seller Indemnified Parties" shall be as defined in Section 13.1. "Seller Title Credit" shall be as defined in Section 6.4. "Subject Interests" shall mean and include (i) the undivided interests specified in the Property Schedule in, to or under the Hydrocabon Interests specifically described in the Property Schedule, and (ii) all other interests of Seller in, to or under any Hydrocarbon Interests in, to or under or derived from any lands covered by or subject to any of the Hydrocarbon Interests described in the Property Schedule, even though such interests of the Seller may be incorrectly described or referred to in, or a description thereof may be omitted from, the Property Schedule. "Taxes" shall mean all federal, state and local taxes or similar assessments or fees, together with all interest, fines, penalties and additions thereto. "Title Defect" shall be as defined in Section 6.3. "Title Defect Amount" shall be as defined in Section 6.2(d). "Title Defect Deductible" shall be as defined in Section 6.2(d). "Title Defect Property" shall be as defined in Section 6.2(c). "Title Examination Period" shall be as defined in Section 6.2(a). "Transfer Requirement" shall mean any consent, approval, authorization or permit of, or filing with or notification to, any Person which must be obtained, made or complied with for or in connection with any sale, assignment, transfer or encumbrance of any Asset or any interest therein in order (a) for such sale, assignment, transfer or encumbrance to be effective, (b) to prevent any termination, cancellation, default, acceleration or change in terms (or any right thereof from arising) under any terms, conditions or provisions of any Asset (or of any agreement, instrument or obligation relating to or burdening any Asset) as a result of such sale, assignment, transfer or encumbrance, or (c) to prevent the creation or imposition of any lien, charge, penalty, restriction, security interest or encumbrance on or with respect to any Asset (or any right thereof from arising) as a result of such sale, assignment, transfer or encumbrance. Page - 7 - of Appendix A "Unscheduled (Negative) Imbalance" shall mean, respectively as to each Property Subdivision to which the Subject Interests are attributable and without duplication, the sum (expressed in Mcfs) of (i) the aggregate make-up, prepaid or other volumes of oil, gas or other hydrocarbons, not described on Schedule A-3, that Seller was obligated as of the Effective time, on account of prepayment, advance payment, take-or-pay, gas balancing or similar obligations, to deliver from the Subject Interests attributable to such Property Subdivision after the Effective time without then or thereafter begin entitled to receive full payment therefor and (ii), to the extent such obligations burden the Assets or Buyer could incur any liability therefor as a result of the transaction contemplated hereby and the same are not described on Schedule A-3 or covered by clause (i) above, the aggregate pipeline or processing plant imbalances or overdeliveries for which Seller is obligated to pay or deliver oil, gas or other hydrocarbons or cash to any pipeline, gatherer, transporter, processor, co-owner or purchaser in connection with any other oil, gas or other hydrocarbons attributable to the Subject Interests. "Unscheduled (Negative) Imbalance" shall mean, respectively as to each Property Subdivision to which the Subject Interests are attributable and without duplication, the sum (expressed in Mcfs) of (i) the aggregate make-up, prepaid or other volumes of oil, gas or other hydrocarbons, not described on Schedule A-3, that Seller was obligated as of the Effective Time, on account of prepayment, advance payment, take-or-pay, gas balancing or similar obligations, to deliver from the Subject Interests attributable to such Property Subdivision after the Effective Time without then or thereafter being entitled to receive full payment therefor and (ii), to the extent such obligations burden the Assets or Buyer could incur any liability therefor as a result of the transaction contemplated hereby and the same are not described on Schedule A-3 or covered by clause (i) above, the aggregate pipeline or processing plant imbalances or overdeliveries for which Seller is obligated to pay or deliver oil, gas or other hydrocarbonds or cash to any pipeline, gatherer, transporter, processor, co-owner or purchaser in connection with any other oil, gas or other hydrocarbons attributable to the Subject Interests. "Unschedule (Positive) Imbalances" shall mean, respectively as to each Property Subdivision to which the Subject Interests are attributable and without duplication, the sum (expressed in Mcfs) of (i) the aggregate make-up, prepaid or other volumes of oil, gas or other hydrocarbons, not described on Schedule A-3, that Seller was entitled as of the Effective Time, on account of prepayment, advance payment, take-or-pay, gas balancing or similar obligations, to receive from the Subject Interests attributable to such Property Subdivision after the Effective Time without then and thereafter being obligated to make any payment therefor and (ii) to the extent such entitlements run with the Assets and the same are not described on Schedule A-3 or covered by clause (i) above, the aggregate pipeline or processing plant imbalances or underdeliveries for which Seller is entitled to receive oil, gas or other hydrocarbons or cash from any pipeline, gatherer, transporter, processor, co-owner or purchaser in connection with any oil, gas or other hydrocarbons attributable to the Subject Interests. "Working Interest" shall mean the percentage of costs and expenses attributable to the maintenance, development and operation of a Property Settlement. Page - 8 - of Appendix A EXHIBIT 8.3 GENERAL CONVEYANCE THIS GENERAL CONVEYANCE (this "Conveyance") executed by HARDY OIL & GAS USA INC., a Delaware corporation, whose address is 1600 Smith, Suite 1400, Houston, Texas 77002-7346 (hereinafter called "Assignor"), to ARCH PETROLEUM, INC., whose address is 777 Taylor Street, Suite II-A, Fort Worth, Texas 76102 (hereinafter called "Assignee"), dated effective at 7:00 a.m., Central Daylight Time, on January 1, 1996 (said hour and day hereinafter called the "Effective Time"). Capitalized terms used but not otherwise defined herein shall have the meanings set forth in that certain Asset Purchase Agreement dated April 18, 1996 (the "Agreement"), by and between Assignor, as "Seller", and Assignee, as "Buyer". ARTICLE I Conveyance of Assets Assignor, for Ten and No/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignee, the receipt and sufficiency of which consideration are hereby acknowledged and confessed, by these presents does hereby GRANT, BARGAIN, SELLER, CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER unto Assignee, effective as of the Effective time, the following described assets and properties (except to the extent constituting "Excluded Assets" (hereinafter defined)) (collectively, the "Assets"): (i) (a) The undivided interests specified in Exhibit A hereto (the "Property Schedule") in, to or under the Hydrocarbon Interests (hereinafter defined) specifically described in the Property Schedule, and (b) all other interests of Assignor in, to or under any Hydrocarbon Interests in, to or under or derived from any lands covered by or subject to any of the Hydrocarbon Interests described in the Property Schedule, even though such interests of the Assignor may be incorrectly described or referred to in, or a description thereof may be omitted from, the Property Schedule (collectively, the "Subject Interests"); (ii) All right, title, and interest of Assignor in and to the lands covered by or subject to the Subject Interests (the "Lands"); (iii) All right, title and interest of Assignor in and to or derived from the following insofar as the same are attributable to the Subject Interests: (a) all rights with respect to the use and occupancy of the surface of and the subsurface depths under the Lands; (b) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof; (c) all agreements and contracts, easements, rights-of-way, servitudes and other estates; (d) all real and personal property Page - 1 - of Exhibit 8.3 located upon the Lands and used in connection with the exploration, development or operation of the Subject Interests; and (e) the Records; (iv) All right, title and interest of Assignor to any claims to the extent attributable to ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time, including, without limitation, past, present or future claims, whether or not previously asserted by Assignor; (v) Those separate identifiable accounts (the "Royalty Accounts") which are expressly identified and set forth in Schedule A-1 hereto in which Assignor or any third party operator is holding as of the Effective Time monies which (a) are owing to third party owners of royalty, overriding royalty, working or other interests in respect of past production of oil, gas or other hydrocarbons attributable to the Assets or (b) may be subject to refund by royalty owners or other third parties to purchasers of past production of oil, gas or other hydrocarbons attributable to the Assets; and (vi) All (a) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods subsequent to the Effective time and (b) proceeds from or of such oil, gas and other hydrocarbons. As used in this Conveyance, the term "Hydrocarbon Interests" shall mean (a) leases affecting, relating to or covering any oil, gas and other hydrocarbons and the leasehold interests and estates in the nature of working or operating interests under such leases, as well as overriding royalties, net profits interests, production payments, carried interests, rights of recoupment and other interests in, under or relating to such leases, (b) fee interests in oil, gas or other hydrocarbons, (c) royalty interests in oil, gas or other hydrocarbons, (d) any other interest in oil, gas or other hydrocarbons in place, (e) any economic or contractual rights, options or interests in and to any of the foregoing, including, without limitation, any farmout or farmin agreement or production payment affecting any interest or estate in oil, gas or other hydrocarbons, and (f) any and all rights and interests attributable or allocable thereto by virtue of any pooling, unitization, communitzation, production sharing or similar agreement, order or declaration. There is excluded from this Conveyance and the Assets and reserved unto Assignor the following described interests, rights and properties (collectively, the "Excluded Assets"): (i) Copies of all Records; (ii) Except to the extent constituting the Royalty Accounts, all deposits, cash, checks, funds and accounts receivable attributable to Assignor's interest in the Assets with respect to any period of time prior to the Effective Time; (iii) All (a) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, (b) oil, gas and other hydrocarbons attributable Page - 2 - of Exhibit 8.3 to the Subject Interests which, at the Effective Time, are in storage and are above pipeline connections within processing plants, in pipelines or otherwise held in inventory, and (c) proceeds from or of such oil, gas and other hydrocarbons; (iv) Such assets as Assignor elects to exclude from the Assets pursuant to the terms of the Agreement; (v) All receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of Net Cash Flow pursuant to Section 3.3 of the Agreement, as adjusted pursuant to Section 3.4 of the Agreement; (vi) Claims of Assignor for refund of or loss carry forwards with respect to (i) Taxes attributable to any period prior to the Effective Time or (ii) any Taxes attributable to the Excluded Assets; (vii) All corporate, financial, tax and legal records of Assignor; and (viii) All rights, interests, assets and properties described in Exhibit B hereto. TO HAVE AND TO HOLD the Assets unto Assignee, its successors and assigns, forever; subject, however, to the matters set forth herein. ARTICLE II Limitation of Warranties; Permitted Encumbrances Section 2.1 Limitation of Warranties. (a) Assignor does hereby bind itself, Assignor's successors and assigns, to warrant and forever defend all and singular Defensible Title (hereinafter defined) to the Subject Interests, unto Assignee, its successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under Assignor, but not otherwise, subject, however, to the Permitted Encumbrances (hereinafter defined). As used herein, the term "Defensible Title" shall mean, respectively, as to the Subject Interest or Subject Interests related to a particular Property Subdivision, title to such Property Subdivision and the Subject Interest or Subject Interests related to such Property Subdivision, that: (i) entitles Assignor to receive not less than the applicable Net Revenue Interest or Net Revenue Interests specified for such Property Subdivision in the Property Schedule; (ii) obligates Assignor to bear the costs and expenses relating to the maintenance, development and operation of such Property Subdivision in an amount not greater than the applicable Working Interest or Working Interests specified for such Property Subdivision in the Property Schedule unless Assignor's Net Revenue Interest therein is proportionately increased; and (iii) except for Permitted Encumbrances, is free and clear of liens and encumbrances. Recourse for breach of the foregoing special warranty of title Page - 3 - of Exhibit 8.3 shall be limited to a return of the purchase price allocated to the Subject Interest with respect to which such warranty has been breached in accordance with Section 6.2(b) of the Agreement, without interest thereon. (b) EXCEPT FOR THE SPECIAL WARRANTY OF TITLE SET FORTH HEREIN, THE ASSETS ARE ASSIGNED TO ASSIGNEE "AS IS AND WHERE IS" AND WITH ALL FAULTS AND WITHOUT WARRANTY OR REPRESENTATION OF ANY KIND OR CHARACTER, EITHER EXPRESS OR IMPLIED. ASSIGNOR FURTHER HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A) THE CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) OR (B) ANY INFRINGEMENT BY ASSIGNOR OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; AND (II) NEGATES ANY RIGHTS OR ASSIGNEE UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY ASSIGNEE FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF ASSIGNOR AND ASSIGNEE THAT THE ASSETS ARE ACCEPTED BY ASSIGNEE IN THEIR PRESENT CONDITION AND STATE OF REPAIR. (c) To the extent transferable, Assignee shall be and is hereby subrogated to all covenants and warranties of title by parties (other than Assignor) heretofore given or made to Assignor or its predecessors in title in respect to any of the Assets. Section 2.2 Permitted Encumbrances. The Assets are assigned and conveyed by Assignor and accepted by Assignee expressly subject to the following (the "Permitted Encumbrances"): (a) all agreements, instruments, documents, liens, encumbrances, and other matters which are described in Schedule A-2; (b) any (i) undetermined or inchoate liens or charges constituting or securing the payment of expenses which were incurred incidental to maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing oil, gas or other hydrocarbons therefrom or therein and (ii) materialman's, mechanics', repairman's, employees', contractors', operators' or other similar liens, security interests or charges for liquidated amounts arising in the ordinary course of business incidental to construction, maintenance, development, production or operation of the Assets or the production or processing of oil, gas or other hydrocarbons therefrom, that are not delinquent and that will be paid in the ordinary course of business or, if delinquent, that are being contested in good faith; Page - 4 - of Exhibit 8.3 (c) any liens for Taxes not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business; (d) any liens or security interest created by Law or reserved in oil, gas and/or mineral leases for royalty, bonus or rental or for compliance with the terms of the Subject Interests; (e) all Preference Rights and Transfer Requirements; (f) any easements, rights-of-way, servitudes, permits, licenses, surface leases and other rights with respect to surface operations to the extent such matters do not interfere in any material respect with Assignee's operation of the portion of the Assets burdened thereby; (g) any prohibitions or restrictions similar to those contained in Article VIII.D. of the A.A.P.L. Form 610-1982 Model Form Operating Agreement and any contribution obligations under provisions similar to Article VII.B. of said Model Form Operating Agreement; (h) all agreements and obligations relating to imbalances with respect to the production, transportation or processing of gas or calls or purchase options on oil or gas production; (i) all royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other burdens to the extent that the net cumulative effect of such burdens, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Assignor in such Property Subdivision as specified in the Property Schedule; (j) all obligations by virtue of a prepayment, advance payment or similar arrangement under any contract for the sale of gas production, including by virtue of "take-or-pay" or similar provisions, to deliver gas produced from or attributable to the Subject Interests after the Effective Time without then or thereafter being entitled to receive full payment therefor; (k) all liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects, irregularities and other matters affecting any Asset which individually or in the aggregate are not such as to interfere materially with the operation, value or use of such Asset; (l) any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Assignee pursuant to Article VI of the Agreement; Page - 5 - of Exhibit 8.3 (m) rights reserved to or vested in any Governmental Authority to control or regulate any of the wells or units included in the Assets and all applicable laws, rules, regulations and orders of such authorities so long as the same do not decrease Assignor's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; (n) the terms and conditions of all contracts and agreements relating to the Subject Interests, including, without limitation, exploration agreements, gas sales contracts, processing agreements, farmins, farmouts, operating agreements, and rights-of-way agreements, to the extent such terms and conditions do not decrease Assignor's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; and (o) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest. By Assignee's acceptance of this Conveyance, Assignee assumes and agrees to keep and perform the obligations of Assignor under the Permitted Encumbrances which accrue from and after the Effective Time. ARTICLE III Miscellaneous Section 3.1 Further Assurances. Assignor covenants and agrees to execute and deliver to Assignee all such other and additional instruments and other documents and will do all such other acts and things as may be necessary to more fully assure to Assignee or its successor or assigns all of the respective properties, rights and interests herein and hereby granted or intended so to be. Section 3.2 Successors and Assigns. All of the provisions hereof shall inure to the benefit of and be binding upon Assignor and Assignee and their respective successors and assigns. All references herein to either Assignor or Assignee shall include their respective successors and assigns. Section 3.3 Counterparts. This Assignment is being executed in several original counterparts, all of which are identical, except that, to facilitate recordations, there are omitted from certain counterparts those property descriptions in the Property Schedule which contain descriptions of property located in recording jurisdictions other than the jurisdiction in which the particular counterpart is to be recorded. Each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts shall constitute but one and the same assignment. IN WITNESS WHEREOF, the Assignor and Assignee have caused this Conveyance to be executed on the date of their respective acknowledgments set forth below, to be effective, however, as of the Effective Time. Page - 6 - of Exhibit 8.3 ASSIGNOR: HARDY OIL & GAS USA INC. By: _____________________________________ James M. Fitzpatrick, Vice President of Land and Legal ASSIGNEE: ARCH PETROLEUM, INC. By: _____________________________________ Larry Kalas, President STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on April 18, 1996, by James M. Fitzpatrick, Vice President of HARDY OIL & GAS USA INC., a Delaware corporation, on behalf of said corporation. - ----------------------------------------- Notary Public in and for the State of Texas My Commission Expires: ____________________ STATE OF TEXAS ) ) COUNTY OF ___________ ) This instrument was acknowledged before me on April 18, 1996, by Larry Kalas, President of ARCH PETROLEUM, INC., a Texas corporation, on behalf of said corporation. - ----------------------------------------- Notary Public in and for the State of Texas My Commission Expires: ____________________ Page - 7 - of Exhibit 8.3 EXHIBIT "A" Page - 8 - of Exhibit 8.3 EXHIBIT 10.2(c) AFFIDAVIT STATE OF TEXAS ) ) COUNTY OF HARRIS ) Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a U.S. real property interest must withhold tax if the transferor (seller) is a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate. To inform the transferee (buyer) that the withholding of taxes is not required upon the disposition of a U.S. real property interest, before me, the undersigned authority, on this day personally appeared James M. Fitzpatrick, Vice President of Hardy Oil & Gas USA Inc., a Delaware corporation, well known to me to be the person whose name is subscribed hereto, who being first duly sworn by me, upon oath deposed and stated as follows: 1. Hardy Oil & Gas USA Inc. is not a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations). 2. The U.S. employer's identification number of Hardy Oil & Gas USA Inc. is 86-0460233. 3. The office address of Hardy Oil & Gas USA Inc. is 1600 Smith, Suite 1400, Houston, Texas 77002-7346. 4. I understand that this Affidavit may be disclosed to the Internal Revenue Service by the transferee and that any false statement contained herein could be punished by fine, imprisonment or both. 5. Under penalties of perjury, I declare that I have examined this Affidavit and to the best of my knowledge and belief, it is true, correct and complete. - ------------------------------------- James M. Fitzpatrick Page - 1 - of Exhibit 10.2(c) STATE OF TEXAS ) ) COUNTY OF HARRIS ) Subscribed, sworn to and acknowledged before me, in my presence, this the ___ day of __________, 1996. - --------------------------------------- Notary Public in and for the State of Texas My Commission Expires: __________________ Page - 2 - of Exhibit 10.2(c) EXHIBIT A-1 ARBITRATION PROCEDURES The Arbitration Procedures referred to in the Asset Purchase Agreement (the "Agreement") to which this Exhibit A-1 is attached shall be as follows: 1. Capitalized terms used herein, and not otherwise herein defined, shall have the meaning ascribed to such terms in the Agreement. 2. (a) With respect to unresolved Deferred Adjustment Claims, on or before the Deferred Matters Date, Seller and Buyer shall each submit to the other the list of what such party considers to comprise the remaining unresolved Deferred Adjustment Claims. The two lists shall together comprise the "Disputed Issues" relating to Deferred Adjustment Claims which shall be resolved by the binding arbitration provided for herein. (b) If, pursuant to Section 3.4 of the Agreement, either Buyer or Seller elects to submit any Final Adjustment Statement disagreements to arbitration, such disagreements will also constitute "Disputed Issues" to be resolved by the binding arbitration provided for herein. 3. Seller and Buyer, each being duly authorized by all necessary corporate, partnership or other proceedings, if any are applicable, shall submit the Disputed Issues to binding arbitration by a board of arbitration to be selected by the following procedures. Notices hereunder shall be sufficient if sent in accordance with the terms of the Agreement. With respect to Disputed Issues involving Deferred Adjustment Claims, within five (5) days after the Deferred Matters Date, Seller shall by written notice name one arbitrator and Buyer shall by written notice name one arbitrator. With respect to Disputed Issues involving Final Adjustment Statement disagreements, within five (5) days after either Buyer or Seller provides the other party with written notice that such party desires to submit such Final Adjustment Statement disagreements to arbitration, Seller shall by written notice name one arbitrator and Buyer shall by written notice name one arbitrator. If a party fails to name an arbitrator, the other party shall by further written notice name the second arbitrator. The two arbitrators so appointed shall name the third arbitrator within ten (10) days after the selection of the second arbitrator. If they fail to do so, either arbitrator may request the judge of the United States District Court for the Southern District of Texas having greatest tenure; but not yet on retired or senior status, to appoint the third arbitrator. If that judge fails to do so within thirty (30) days, either party may request the judge of that court next senior to name the third arbitrator, and if that judge fails to do so after ten (10) days, either party may make the request of the judge of that court next senior, and so on, until the board of arbitration is constituted. With respect to Disputed Issues involving Deferred Adjustment Claims, each of the arbitrators shall be knowledgeable about matters affecting title to oil and gas properties in the state or other jurisdiction in which Page - 1 - of Exhibit A-1 such properties are located, by virtue of managerial, land property administration, legal or judicial experience. With respect to Disputed Issues involving Final Adjustment Statement disagreements, each of the arbitrators shall be knowledgeable about oil and gas related accounting matters. In addition, the third arbitrator, in each case, shall be required to meet the qualification requirements of the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules"), whether appointed by the arbitrators or by a judge as provided above. 4. If prior to rendering a decision an arbitrator resigns or becomes unable to serve, the arbitrator shall be replaced as follows. If that arbitrator was one of the two arbitrators appointed by the parties, the party that names him or her shall name a replacement; provided, however, that if that replacement is not named within five (5) days from notice of resignation or inability to serve, the other party shall name a replacement. If he or she was the third arbitrator, the other two arbitrators shall name a replacement; provided, however, that if they fail to agree on a replacement within ten (10) days, either arbitrator may follow the procedures specified in Paragraph 3 above and request judicial appoint of the replacement. 5. No party subject to these Arbitration Procedures will commence or prosecute any suit or action against another party subject to these Arbitration Procedures relating to the Disputed Issues, other than as may be necessary to compel arbitration under these Arbitration Procedures or to enforce the award of the board of arbitration. 6. The board of arbitration may in all matters act through a majority of its members on each matter if unanimity is not attained. It shall not be necessary that the same majority agree on each and every item; that is, the parties will be bound by majority rulings on each Disputed Issue even though the majority is not the same as to each Disputed Issue. In fulfilling their duties hereunder with respect to Deferred Adjustment Claims, each of the arbitrators shall be bound by the matters set forth in Article VI of the Agreement. The arbitrators shall not add any interest factor reflecting the time value of money to any title Defect Amount. 7. No matters whatsoever, other than the Disputed Issues, are subject to the agreement to arbitrate embodied in these Arbitration Procedures. The board of arbitration shall be empowered hereunder solely to resolve the Disputed Issues. The board of arbitration shall not have any authority to award punitive damages. The sole forum for the arbitration shall be Harris County, Texas and all hearings shall be conducted in Harris County, Texas. 8. The decision of the board of arbitration shall be rendered in writing and shall be final and binding upon the parties as to the Disputed Issues. The expenses of arbitration, including reasonable compensation to the third arbitrator, shall be borne equally by the parties. Each party shall bear the compensation and expenses of its own counsel, witnesses and employees and of any arbitrator it has appointed. If the Page - 2 - of Exhibit A-1 testimony of a witness is obtained by both parties, the costs associated with obtaining such testimony shall be borne equally between the parties. 9. Matters not specifically provided for in the Arbitration Procedures shall be governed by the AAA Rules. Page - 3 - of Exhibit A-1 EX-10.4 10 EMPLOYMENT AGREEMENT WITH KENNETH HILL WellTech Eastern, Inc. 5976 Venture Way Mt. Pleasant, MI 48858 As of March 29, 1996 Mr. Kenneth Hill 10530 Lumberjack Riverdale, MI 48877 EMPLOYMENT AGREEMENT (the "Agreement") Dear Mr. Hill: WellTech Eastern, Inc., a Delaware corporation (the "Company") and a wholly owned subsidiary of Key Energy Group, Inc., a Maryland corporation ("Key"), with its principal offices at the address set forth above, and you, an individual residing at your address set forth above, agree as follows: 1. Employment; Term. a. The Company agrees to employ you, and you accept employment by the Company, as Vice President of the Company and President and Chief Executive Officer of the division of the Company which you operate. Your employment will commence as of March 29, 1996 (the "Commencement Date") and continue until the close of business on March 29, 1999, subject to extension as provided in this Section 1(a), unless sooner terminated in accordance with this Agreement (the "Initial Employment Period"). On each March 30, commencing with March 30, 1999, the term of your employment will be automatically extended for twelve (12) months unless either you or the Company gives written notice to the other, no later than thirty (30) days prior to the relevant March 30, that such automatic extension shall not occur. The Initial Employment Period, together with any extensions, until termination in accordance herewith is referred to herein as the "Employment Period". b. You will have the usual duties of a Vice President and will be responsible, subject to the Chairman of the Board, the President and the Board of Directors of the Company (the "Board"), for participating in the management and direction of the Company's business and operations; provided, however, that you shall not be required to permanently relocate by the Company to a location outside of Michigan. You will, if elected, serve as a director of the Company and as an officer and/or director of the Company and its subsidiaries and perform all duties incident to such offices and such specific other tasks as may from time to time be assigned to you by the Chairman of the Board or the Board or by the President of the Company. During the Employment Period, you will devote your full time and best efforts to the business and affairs of the Company and its subsidiaries. 2. Salary; Bonuses; Expenses. a. During the Employment Period, the Company will pay a salary to you at the annual rate of One Hundred Eighty Thousand Dollars ($180,000) per year (the "Base Salary"), payable in substantially equal installments in accordance with the Company's existing payroll practices, but no less frequently than monthly. b. For each fiscal year of the Company commencing after June 30, 1996, you will be eligible to participate in an incentive plan for key employees and other persons involved in the business of Key and its subsidiaries (the "Incentive Plan") providing for the payment of cash bonuses of up to fifty percent (50%) of your Base Salary and in the 1995 Stock Option Plan of Key (the "1995 Stock Option Plan"). c. You will be reimbursed by the Company for reasonable travel, lodging, meal and other expenses incurred by you in connection with performing your services hereunder in accordance with the Company's policies from time to time in effect. 3. Stock Options. As performance-based incentive compensation to you in connection with your services hereunder, there shall be granted to you options (the "Options") to acquire Seventy Five Thousand (75,000) shares of the Common Stock, par value $.10 per share, of Key (the "Common Stock") at an exercise price per share equal to the fair market value of the Common Stock at the date of grant, with such options to be granted pursuant to, and subject to the terms and provisions (including vesting provisions) of, the 1995 Stock Option Plan and an agreement substantially in the form attached hereto as Exhibit A. 4. Benefit Plans; Vacations. You will be entitled during the Employment Period (and thereafter to the extent provided in Section 5(d) below) to such fringe benefits, including without limitation group medical and dental, life, executive life, accident and disability insurance, retirement plans and supplemental and excess retirement benefits and a Company-leased automobile and payment of expenses associated therewith, as the Company may provide from time to time for its senior management; not less than twenty (20) vacation days. 5. Termination. a. Termination by Company. The Company shall have the right to terminate your employment under this Agreement for Cause at any time without obligation to make any further payments to you hereunder. The Company shall have the right to terminate your employment for any reason other than for Cause, subject only to the Company's obligations under Section 5(d) below. As used in this Agreement, the term "Cause" shall mean the willful and continued failure by you to substantially -2- perform your duties hereunder (other than any such willful or continued failure resulting from your incapacity due to physical or mental illness or physical injury), or the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise, or your conviction of a felony by a court of competent jurisdiction. b. Termination upon Disability. If you become totally and permanently disabled during the Employment Period so that you are unable to perform your obligations hereunder by reasons involving physical or mental illness or physical injury ("Disability"), then the term of your employment hereunder may be terminated by the Company. c. Termination by Executive. You may terminate your employment by giving written notice to the Company at any time by written notice of at least thirty (30) days. d. Severance Compensation. In the event your employment hereunder is terminated following a change of control of the Company or by you because of a material breach by the Company of its obligations under this Agreement or by the Company other than for Cause, you will be entitled to severance compensation at your Base Salary at the monthly rate in effect on the termination date, payable in arrears, during the period expiring eighteen (18) months after the termination date, commencing at the end of the calendar month in which the termination date occurs; provided, however, that in the event your employment should be terminated by the Company as a result of Disability in accordance with Section 5(b) above, then the severance compensation to which you are entitled shall be reduced by the amount of any disability insurance proceeds actually paid to you or for your benefit during the said time period. You shall have the right to terminate receipt of such severance pay at any time. 6. Limitation on Competition. During the Employment Period, and for such period thereafter as you receive severance compensation under this Agreement or, if you are terminated for just cause, for a period of one year after your termination, you shall not, directly or indirectly, without the prior written consent of the Company, participate or engage in, whether as a director, officer, employee, advisor, consultant, stockholder, partner, joint venturer, owner or in any other capacity, any business engaged in the business of furnishing oil field services or the drilling, production or sale of natural gas or crude oil (a "Competing Enterprise"), provided, however, that you shall not be deemed to be participating or engaging in any such business solely (i) by virtue of your ownership of not more than five percent of any class of stock or other securities which is publicly traded on a national securities exchange or in a recognized over-the-counter market; and (ii) by virtue of ownership of royalty interests, overriding royalty interests, or working interests (in which you are a passive investor), whether presently owned or hereafter acquired). You shall not, directly or indirectly, solicit, raid, entice or otherwise induce any employee of the Company or any of its subsidiaries to be employed by a Competing Enterprise. During the Employment Period, you shall not engage in the activities that are permitted under this Section 6 if doing so would interfere with the fulfillment of your duties and obligations under this Agreement. -3- If this Agreement correctly sets forth your understanding of the agreement between the Company and you, please indicate your agreement hereto by signing this Agreement in the space for that purpose below. WELLTECH EASTERN, INC. By: /s/Francis D. John Name: Francis D. John Title: President ACCEPTED AND AGREED: /s/Kenneth Hill Kenneth Hill -4- KEY ENERGY GROUP, INC. - ------------------------------ Stock Option Agreement Option Certificate: No. 16 - ------------------------------ Specific Terms of the Option Subject to the terms and conditions hereinafter set forth and the terms and conditions of the Key Energy Group, Inc. 1995 Stock Option Plan (the "Plan"), Key Energy Group, Inc., a Maryland corporation (the "Company" which term shall include, unless the context otherwise clearly requires, all Subsidiaries [as defined in the Plan] of the Company), hereby grants the following option to purchase Common Stock, par value $.10 per share (the "Stock"), of the Company: 1. Name of Person to Whom the Option is Granted (the "Optionee"): Kenneth C. Hill. 2. Date of Grant of Option: March 29, 1996. 3. An Option for 53,333 Shares of Stock. 4. Option Exercise Price (per Share): $7.50. 5. Term of Option: Subject to Section 9 below, this Option expires at 5:00 p.m. Eastern Time on March 29, 2006. 6. Exercise Schedule: Subject to the provisions of Section 9 below, this Option will be exercisable as follows: With respect to 13,334 shares, the Option shall be exercisable as of March 29, 1996; and with respect to the balance of 39,999 shares of Stock, the Option shall become exercisable in three annual installments of 13,333 shares of Stock on March 29, 1997, March 29, 1998 and March 29, 1999; provided, however, that the Option shall become immediately exercisable in full upon a change of control of the Company. KEY ENERGY GROUP, INC. By: /s/Francis D. John /s/ Kenneth C. Hill Title: President (Signature of Optionee) Date: March 29, 1996 Optionee's Address: 10530 Lumberjack Riverdale, MI 48877 -2- OTHER TERMS OF THE OPTION WHEREAS, the Board of Directors (the "Board") has authorized the grant of stock options upon certain terms and conditions set forth in the Plan and herein; and WHEREAS, the Compensation Committee (the "Committee") has authorized the grant of this stock option pursuant and subject to the terms of the Plan, a copy of which is available from the Company and is hereby incorporated herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Company and the Optionee, intending to be legally bound, covenant and agree as set forth on the first page hereof and as follows: 7. Grant. Pursuant and subject to the Plan, the Company does hereby grant to the Optionee a stock option (the "Option") to purchase from the Company the number of shares of Stock set forth in Section 3 on the first page hereof upon the terms and conditions set forth in the Plan and upon the additional terms and conditions contained herein. This Option is an incentive stock option and is intended to qualify for special federal income tax treatment as an "incentive stock option" pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Option Price. This Option may be exercised at the option price per share of Stock set forth in Section 4 on the first page hereof, subject to adjustment as provided herein and in the Plan. 9. Term and Exercisability of Option. This Option shall expire on the date determined pursuant to Section 5 on the first page hereof and shall be exercisable prior to that date in accordance with and subject to the conditions set forth in the Plan (including but not limited to Section 16 of the Plan) and those conditions, if any, set forth in Section 6 on first page hereof. If before this Option has been exercised in full, the Optionee ceases to be an employee of the Company for any reason other than a termination for a reason specified in Section 16 of the Plan, the Optionee may exercise this Option to the extent that he or she might have exercised it on the date of termination of his or her employment, but only during the period ending on the earlier of (a) the date on which the Option expires in accordance with Section 5 of this Agreement or (b) three (3) months after the date of termination of the Optionee's employment with the Company. If the Optionee dies before the date of expiration of this Option and while in the employ of the Company or during the three month period described in the preceding sentence, or in the event of the retirement of the Optionee for reasons of disability (within the meaning of Code ss. 22(e)(3)), the Option shall terminate on the earlier of such date of expiration or one year following the date of such death or disability retirement. If the Optionee dies before this Option has been exercised in full, the personal representative of the Optionee may exercise this Option as set forth in the preceding sentence. 10. Method of Exercise. To the extent that the right to purchase shares of Stock has accrued hereunder, this Option may be exercised from time to time by written notice to the Company substantially in the form attached hereto as Exhibit A, stating the number of shares with respect to which this Option is being exercised, and accompanied by payment in full of the option price for the number of shares to be delivered, by means of payment acceptable to the Company in accordance with Section 10 of the Plan. Subject to the Plan and to Section 13 -3- hereof, as soon as practicable after its receipt of such notice, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise this Option), deliver to the Optionee (or other person entitled to exercise this Option), at the principal executive offices of the Company or such other place as shall be mutually acceptable, a certificate or certificates for such shares out of theretofore authorized but unissued shares or reacquired shares of its Stock as the Company may elect; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable requirements of law. Payment of the option price may be made in cash or cash equivalents or otherwise in accordance with the terms and conditions of Section 10 of the Plan; provided, however, that the Board reserves the right upon receipt of any written notice of exercise from the Optionee to require payment in cash with respect to the shares contemplated in such notice. If the Optionee (or other person entitled to exercise this Option) fails to pay for and accept delivery of all of the shares specified in such notice upon tender of delivery thereof, his or her right to exercise this Option with respect to such shares not paid for may be terminated by the Company. 11. Forfeiture; Restrictions on Exercise. This Option may be subject to forfeiture upon the occurrence of the events specified in Section 16 of the Plan or restrictions on exercise upon the occurrence of events specified in Section 9 of the Plan. 12. Nonassignability of Option Rights. This Option shall not be assignable or transferable by the Optionee except by will or by the laws of descent and distribution. During the life of the Optionee, this Option shall be exercisable only by him or her. 13. Compliance with Securities Act. The Company shall not be obligated to sell or issue any shares of Stock or other securities pursuant to the exercise of this Option unless the shares of Stock or other securities with respect to which this Option is being exercised are at that time effectively registered or exempt from registration under the Securities Act of 1933, as amended, and applicable state securities laws. In the event shares or other securities shall be issued which shall not be so registered, the Optionee hereby represents, warrants and agrees that he or she will receive such shares or other securities for investment and not with a view to their resale or distribution, and will execute an appropriate investment letter satisfactory to the Company and its counsel. 14. Legends. The Optionee hereby acknowledges that the stock certificate or certificates evidencing shares of Stock or other securities issued pursuant to any exercise of this Option will bear a legend setting forth the restrictions on their transferability described in Section 13 hereof, in Section 13 of the Plan, and under any applicable agreements between the Optionee and the Company or any of its stockholders. 15. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares of Stock or other securities covered by this Option until the date of issuance of a certificate to him or her for such shares or other securities. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 16. Certain Agreements. The Optionee agrees, at the request of the Company, to enter into a noncompetition agreement substantially in the form heretofore furnished to the Optionee. -4- 17. Withholding Taxes. The Optionee hereby agrees, as a condition to any exercise of this Option, to provide to the Company an amount sufficient to satisfy its obligation to withhold certain federal, state and local taxes arising by reason of such exercise (the "Withholding Amount") by (a) authorizing the Company to withhold the Withholding Amount from his or her cash compensation, or (b) remitting the Withholding Amount to the Company in cash, or (c) with the consent of the Committee, in its discretion, by withholding from shares of Stock to be delivered upon exercise of the Option that number of shares having a fair market value, on the date of exercise, sufficient to eliminate any deficiency in the Withholding Amount; provided, however, that to the extent that the Withholding Amount is not provided by one or a combination of such methods, the Company in its sole and absolute discretion may refuse to issue such shares of Stock. 18. Termination or Amendment of Plan. The Board may in its sole and absolute discretion at any time terminate or from time to time modify and amend the Plan, but no such termination or amendment will adversely affect rights and obligations under this Option without the consent of the Optionee. 19. Effect Upon Employment. Nothing in this Option or the Plan shall be construed to impose any obligation upon the Company to employ or retain in its employ, or continue its involvement with, the Optionee. 20. Time for Acceptance. Unless the Optionee shall evidence his or her acceptance of this Option by execution of this Agreement within seven (7) days after its delivery to him or her, the Option and this Agreement shall be null and void. 21. General Provisions. (a) Amendment; Waivers. This Agreement, including the Plan, contains the full and complete understanding and agreement of the parties hereto as to the subject matter hereof and may not be modified or amended, nor may any provision hereof be waived, except by a further written agreement duly signed by each of the parties. The waiver by either of the parties hereto of any provision hereof in any instance shall not operate as a waiver of any other provision hereof or in any other instance. (b) Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and, to the extent provided herein and in the Plan, their respective heirs, executors, administrators, representatives, successors and assigns. (c) Construction. This Agreement is to be construed in accordance with the terms of the Plan. In case of any conflict between the Plan and this Agreement, the Plan shall control. The titles of the sections of this Agreement and of the Plan are included for convenience only and shall not be construed as modifying or affecting their provisions. The masculine gender shall include both sexes; the singular shall include the plural and the plural the singular unless the context otherwise requires. (d) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the United State of America and the law (other than the law governing conflict of law questions) of the State of Maryland except to the extent the laws of any other jurisdiction are mandatorily applicable. -5- (e) Notices. Any notice in connection with this Agreement shall be deemed to have been properly delivered if it is in writing and is delivered in hand or sent by registered or certified mail, return receipt requested, to the party addressed as follows, unless another address has been substituted by notice so given: To the Optionee: To his or her address as listed on the books of the Company. To the Company: Key Energy Group, Inc. 255 Livingston Avenue New Brunswick, NJ 08901 Attention: Francis D. John, President Copy to: Sullivan & Worcester LLP One Post Office Square Boston, MA 02109 Attention: Karen L. Linsley (f) Definition. As used herein, a "change of control" means that any of the following events has occurred: (I) Any person (as defined in Section 3(a)(9) of the 1934 Act (or any successor provision), other than the Company, is the beneficial owner directly or indirectly of more than twenty-five percent (25%) of the outstanding Common Stock of the Company, determined in accordance with Rule 13d-3 under the 1934 Act (or any successor provision), or otherwise becomes entitled to vote more than twenty-five percent (25%) of the voting power entitled to be cast at elections for directors ("Voting Power") of the Company, or in any event such lower percentage as may at any time be provided for in any similar provision for any director or officer of the Company or of any Subsidiary approved by the Board; (II) If the Company is subject to the reporting requirements of Section 13 or 15(d) (or any successor provision) of the 1934 Act, any person (as defined in Section 3(a)(9) of the 1934 Act), other than the Company, shall purchase shares pursuant to a tender offer or exchange offer to acquire Common Stock of the Company (or securities convertible into or exchangeable for or exercisable for Common Stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner, directly or indirectly, of more than twenty-five percent (25%) of the outstanding Common Stock of the Company, determined in accordance with Rule 13d-3 under the 1934 Act (or any successor provision) or such lower percentage as may at any time be provided for in any similar provision for any director or officer of the Company or of any Subsidiary approved by the Board; -6- (III) The stockholders or the Board shall have approved any consolidation or merger of the Company in which (i) the Company is not the continuing or surviving corporation unless such merger is with a Subsidiary at least eighty percent (80%) of the Voting Power of which is held by the Company or (2) pursuant to which the holders of the Company's shares of Common Stock immediately prior to such merger or consolidation would not be the holders immediately after such merger or consolidation of at least a majority of the Voting Power of the Company or such lower percentage as may at any time be provided for in any similar provision for any director or officer of the Company or of any Subsidiary approved by the Board; (IV) The stockholders or the Board shall have approved any sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company; or (V) Upon the election of one or more new directors of the Company, a majority of the directors holding office, including the newly elected directors, were not nominated as candidates by a majority of the directors in office immediately before such election. As used in this definition of "change of control", "Common Stock" means the Common Stock, or if changed, the capital stock of the Company as it shall be constituted from time to time entitling the holders thereof to share generally in the distribution of all assets available for distribution to the Company's stockholders after the distribution to any holders of capital stock with preferential rights. EXHIBIT A to Stock Option Agreement [FORM FOR EXERCISE OF STOCK OPTION] Key Energy Group, Inc. [Address as specified in Section 20(e) of the Option Agreement] RE: Exercise of Option under Key Energy Group, Inc. 1995 Stock Option Plan Gentlemen: Please take notice that the undersigned hereby elects to exercise the stock option granted to __________________ on _______________, ____ by and to the extent of purchasing shares of Common Stock, par value $.10 per share, of Key Energy Group, Inc. (the "Company") for the option price of $__________ per share, subject to the terms and conditions of the Stock Option Agreement between ______________ and the Company dated as of ___________, ____ (the "Option Agreement"). The undersigned encloses herewith payment, in cash or in such other property as is permitted under the Plan, of the purchase price for said shares. If the undersigned is making payment of any part of the purchase price by delivery of shares of Common Stock of the Company, he or she hereby confirms that he or she has investigated and considered the possible income tax consequences to him or her of making such payments in that form. The undersigned hereby agrees to provide the Company an amount sufficient to satisfy the obligation of the Company to withhold certain taxes, as provided in Section 16 of the Option Agreement. The undersigned hereby specifically confirms to Key Energy Group, Inc. that he or she is acquiring said shares for investment and not with a view to their sale or distribution, and that said shares shall be held subject to all of the terms and conditions of said Stock Option Agreement. Very truly yours, Date _______________ (Signed by __________________ or other party duly exercising option) KEY ENERGY GROUP, INC. ------------------------------ Stock Option Agreement Option Certificate: No. 18 ------------------------------ Specific Terms of the Option Subject to the terms and conditions hereinafter set forth and the terms and conditions of the Key Energy Group, Inc. 1995 Stock Option Plan (the "Plan"), Key Energy Group, Inc., a Maryland corporation (the "Company", which term shall include, unless the context otherwise clearly requires, all Subsidiaries [as defined in the Plan] of the Company), hereby grants the following option to purchase Common Stock, par value $.10 per share (the "Stock"), of the Company: 1. Name of Person to Whom the Option is Granted (the "Optionee"): Kenneth C. Hill. 2. Date of Grant of Option: As of March 29, 1996. 3. An Option for 21,667 Shares of Stock. 4. Option Exercise Price (per Share): $7.50. 5. Term of Option: Subject to Section 9 below and to vesting as set forth in Section 6 below, this Option expires at 5:00 p.m. Eastern Time on March 29, 2006. 6. Exercise Schedule: Subject to the provisions of Section 9 below, the Option shall become fully exercisable upon the first to occur of (a) a change of control of the Company or (b) with respect to 5,416 shares on March 29, 1996, and the balance in three annual installments of 5,417 shares on March 29, 1997, March 29, 1998 and March 29, 1999. KEY ENERGY GROUP, INC. OPTIONEE By: /s/Francis D. John /s/Kenneth C. Hill Title:______________________ Kenneth C. Hill Date: 5-20-96 Optionee's Address: 10530 Lumberjack Road Riverdale, MI 48877 OTHER TERMS OF THE OPTION WHEREAS, the Board of Directors of the Company (the "Board") has authorized the grant of stock options upon certain terms and conditions set forth in the Plan and herein; and WHEREAS, the Compensation Committee (the "Committee") has authorized the grant of this stock option pursuant and subject to the terms of the Plan, a copy of which is available from the Company and is hereby incorporated herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Company and the Optionee, intending to be legally bound, covenant and agree as set forth on the first page hereof and as follows: 7. Grant. Pursuant and subject to the Plan, the Company does hereby grant to the Optionee a stock option (the "Option") to purchase from the Company the number of shares of Stock set forth in Section 3 on the first page hereof upon the terms and conditions set forth in the Plan and upon the additional terms and conditions contained herein. This Option is a nonqualified stock option and is not intended to qualify for special federal income tax treatment as an "incentive stock option" pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Option Price. This Option may be exercised at the option price per share of Stock set forth in Section 4 on the first page hereof, subject to adjustment as provided herein and in the Plan. 9. Term and Exercisability of Option. This Option shall expire on the date determined pursuant to Section 5 on the first page hereof and shall be exercisable prior to that date in accordance with and subject to the conditions set forth in Section 5(e) of the Employment Agreement, dated as of July 1, 1995, between the Company and the Optionee. 10. Method of Exercise. To the extent that the right to purchase shares of Stock has accrued hereunder, this Option may be exercised from time to time by written notice to the Company substantially in the form attached hereto as Exhibit A, stating the number of shares with respect to which this Option is being exercised, and accompanied by payment in full of the option price for the -2- number of shares to be delivered, by means of payment acceptable to the Company in accordance with Section 10 of the Plan. Subject to the Plan and to Section 13 hereof, as soon as practicable after its receipt of such notice, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise this Option), deliver to the Optionee (or other person entitled to exercise this Option), at the principal executive offices of the Company or such other place as shall be mutually acceptable, a certificate or certificates for such shares out of theretofore authorized but unissued shares or reacquired shares of its Stock as the Company may elect; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable requirements of law. Payment of the option price may be made in cash or cash equivalents or otherwise in accordance with the terms and conditions of Section 10 of the Plan; provided, however, that the Board reserves the right upon receipt of any written notice of exercise from the Optionee to require payment in cash with respect to the shares contemplated in such notice. If the Optionee (or other person entitled to exercise this Option) fails to pay for and accept delivery of all of the shares specified in such notice upon tender of delivery thereof, his or her right to exercise this Option with respect to such shares not paid for may be terminated by the Company. 11. Forfeiture; Restrictions on Exercise. This Option may be subject to forfeiture upon the occurrence of the events specified in Section 16 of the Plan or restrictions on exercise upon the occurrence of events specified in Section 9 of the Plan. 12. Nonassignability of Option Rights. This Option shall not be assignable or transferable by the Optionee except by will or by the laws of descent and distribution; provided, however, that the Optionee may transfer Options to members of his or her immediate family (or to trusts or partnerships for the benefit of such persons) by gift. During the life of the Optionee, this Option shall be exercisable only by him or her. 13. Compliance with Securities Act. The Company shall not be obligated to sell or issue any shares of Stock or other securities pursuant to the exercise of this Option unless the shares of Stock or other securities with respect to which this Option is being exercised are at that time effectively registered or exempt from registration under the Securities Act of 1933, as amended, and applicable state securities laws. In the event shares or other securities shall be issued which shall not be so registered, the Optionee hereby represents, warrants and agrees that he or she will receive such shares or other securities for investment and not with a view to their resale or distribution, and will execute an appropriate investment letter satisfactory to the Company and its counsel. 14. Legends. The Optionee hereby acknowledges that the stock certificate or certificates evidencing shares of Stock or other securities issued pursuant to any exercise of this Option will bear a legend setting forth the restrictions on their transferability described in Section 13 hereof, in Section 13 of the Plan, and under any applicable agreements between the Optionee and the Company or any of its stockholders. 15. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares of Stock or other securities covered by this Option until the date of issuance of a certificate to him or her for such -3- shares or other securities. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 16. Withholding Taxes. The Optionee hereby agrees, as a condition to any exercise of this Option, to provide to the Company an amount sufficient to satisfy its obligation to withhold certain federal, state and local taxes arising by reason of such exercise (the "Withholding Amount") by (a) authorizing the Company to withhold the Withholding Amount from his or her cash compensation, or (b) remitting the Withholding Amount to the Company in cash, or (c) with the consent of the Committee, in its discretion, by withholding from shares of Stock to be delivered upon exercise of the Option that number of shares having a fair market value, on the date of exercise, sufficient to eliminate any deficiency in the Withholding Amount; provided, however, that to the extent that the Withholding Amount is not provided by one or a combination of such methods, the Company in its sole and absolute discretion may refuse to issue such shares of Stock. 17. Termination or Amendment of Plan. The Board may in its sole and absolute discretion at any time terminate or from time to time modify and amend the Plan, but no such termination or amendment will adversely affect rights and obligations under this Option without the consent of the Optionee. 18. Effect upon Employment. Nothing in this Option or the Plan shall be construed to impose any obligation upon the Company to employ or retain in its employ, or continue its involvement with, the Optionee. 19. General Provisions. (a) Amendment; Waivers. This Agreement, including the Plan, contains the full and complete understanding and agreement of the parties hereto as to the subject matter hereof and may not be modified or amended, nor may any provision hereof be waived, except by a further written agreement duly signed by each of the parties. The waiver by either of the parties hereto of any provision hereof in any instance shall not operate as a waiver of any other provision hereof or in any other instance. (b) Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and, to the extent provided herein and in the Plan, their respective heirs, executors, administrators, representatives, successors and assigns. (c) Construction. This Agreement is to be construed in accordance with the terms of the Plan. In case of any conflict between the Plan and this Agreement, the Plan shall control. The titles of the sections of this Agreement and of the Plan are included for convenience only and shall not be construed as modifying or affecting their provisions. The masculine gender shall include both sexes; the singular shall include the plural and the plural the singular unless the context otherwise requires. -4- (d) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the United State of America and the law (other than the law governing conflict of law questions) of the State of Maryland except to the extent the laws of any other jurisdiction are mandatorily applicable. (e) Notices. Any notice in connection with this Agreement shall be deemed to have been properly delivered if it is in writing and is delivered in hand or sent by registered or certified mail, return receipt requested, to the party addressed as follows, unless another address has been substituted by notice so given: To the Optionee: To his or her address as listed on the books of the Company. To the Company: Key Energy Group, Inc. 255 Livingston Avenue New Brunswick, NJ 08901 Attention: President Copy to: Sullivan & Worcester LLP One Post Office Square Boston, MA 02109 Attention: Karen L. Linsley (f) Definition. As used herein, a "change of control" means that any of the following events has occurred: (I) Any person (as defined in Section 3(a)(9) of the 1934 Act (or any successor provision), other than the Company, is the beneficial owner directly or indirectly of more than twenty-five percent (25%) of the outstanding Common Stock of the Company, determined in accordance with Rule 13d-3 under the 1934 Act (or any successor provision), or otherwise becomes entitled to vote more than twenty-five percent (25%) of the voting power entitled to be cast at elections for directors ("Voting Power") of the Company, or in any event such lower percentage as may at any time be provided for in any similar provision for any director or officer of the Company or of any Subsidiary approved by the Board; (II) If the Company is subject to the reporting requirements of Section 13 or 15(d) (or any successor provision) of the 1934 Act, any person (as defined in Section 3(a)(9) of the 1934 Act), other than the Company, shall purchase shares pursuant to a tender offer or exchange offer to acquire Common Stock of the Company (or securities convertible into or exchangeable for or exercisable for Common Stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner, directly or indirectly, of more than twenty-five percent (25%) of the outstanding Common Stock of the Company, determined in accordance with Rule 13d-3 under the 1934 Act (or any successor provision) or such lower percentage as may at any time be provided for in any similar provision for any director or officer of the Company or of any Subsidiary approved by the Board; -5- (III) The stockholders or the Board shall have approved any consolidation or merger of the Company in which (i) the Company is not the continuing or surviving corporation unless such merger is with a Subsidiary at least eighty percent (80%) of the Voting Power of which is held by the Company or (2) pursuant to which the holders of the Company's shares of Common Stock immediately prior to such merger or consolidation would not be the holders immediately after such merger or consolidation of at least a majority of the Voting Power of the Company or such lower percentage as may at any time be provided for in any similar provision for any director or officer of the Company or of any Subsidiary approved by the Board; (IV) The stockholders or the Board shall have approved any sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company; or (V) Upon the election of one or more new directors of the Company, a majority of the directors holding office, including the newly elected directors, were not nominated as candidates by a majority of the directors in office immediately before such election. As used in this definition of "change of control", "Common Stock" means the Common Stock, or if changed, the capital stock of the Company as it shall be constituted from time to time entitling the holders thereof to share generally in the distribution of all assets available for distribution to the Company's stockholders after the distribution to any holders of capital stock with preferential rights. -6- EXHIBIT A to Stock Option Agreement [FORM FOR EXERCISE OF STOCK OPTION] Key Energy Group, Inc. [Address as specified in Section 20(e) of the Option Agreement] RE: Exercise of Option under Key Energy Group, Inc. 1995 Stock Option Plan Gentlemen: Please take notice that the undersigned hereby elects to exercise the stock option granted to __________________ on _______________, ____ by and to the extent of purchasing shares of Common Stock, par value $.10 per share, of Key Energy Group, Inc. (the "Company") for the option price of $__________ per share, subject to the terms and conditions of the Stock Option Agreement between ______________ and the Company dated as of ___________, ____ (the "Option Agreement"). The undersigned encloses herewith payment, in cash or in such other property as is permitted under the Plan, of the purchase price for said shares. If the undersigned is making payment of any part of the purchase price by delivery of shares of Common Stock of the Company, he or she hereby confirms that he or she has investigated and considered the possible income tax consequences to him or her of making such payments in that form. The undersigned hereby agrees to provide the Company an amount sufficient to satisfy the obligation of the Company to withhold certain taxes, as provided in Section 15 of the Option Agreement. The undersigned hereby specifically confirms to Key Energy Group, Inc. that he or she is acquiring said shares for investment and not with a view to their sale or distribution, and that said shares shall be held subject to all of the terms and conditions of said Stock Option Agreement. Very truly yours, Date _______________ (Signed by Kenneth C. Hill or other party duly exercising option) EX-10.5 11 EMPLOYMENT AGREEMENT WITH KENNETH HUSEMAN WellTech Eastern, Inc. 5776 Venture Way Mt. Pleasant, MI 48858 As of March 29, 1996 Mr. Kenneth Huseman 6105 Kingbridge Drive Oklahoma City, OK 73162 EMPLOYMENT AGREEMENT (the "Agreement") Dear Mr. Huseman: WellTech Eastern, Inc., a Delaware corporation (the "Company") and wholly owned subsidiary of Key Energy Group, Inc., a Maryland corporation ("Key"), with its principal offices at the address set forth above, and you, an individual residing at your address set forth above, agree as follows: 1. Employment; Term. a. The Company agrees to employ you, and you accept employment by the Company, as a Vice President of the Company and President and Chief Executive Officer of the division of the Company which you operate. Your employment will commence as of March 29, 1996 (the "Commencement Date") and continue until the close of business on March 29, 1999, subject to extension as provided in this Section 1(a), unless sooner terminated in accordance with this Agreement (the "Initial Employment Period"). On each March 30, commencing with March 30, 1999, the term of your employment will be automatically extended for twelve (12) months unless either you or the Company gives written notice to the other, no later than thirty (30) days prior to the relevant March 30, that such automatic extension shall not occur. The Initial Employment Period, together with any extensions, until termination in accordance herewith is referred to herein as the "Employment Period". b. You will have the usual duties of a Vice President and will be responsible, subject to the Chairman of the Board, the President and the Board of Directors of the Company (the "Board"), for participating in the management and direction of the Company's business and operations. You will, if elected, serve as a director of the Company and as an officer and/or director of the Company and its subsidiaries and perform all duties incident to such offices and such specific other tasks as may from time to time be assigned to you by the Chairman of the Board or the Board or by the President of the Company. During the Employment Period, you will devote your full time and best efforts to the business and affairs of the Company and its subsidiaries. 2. Salary; Bonuses; Expenses. a. During the Employment Period, the Company will pay a salary to you at the annual rate of One Hundred Eighty Thousand Dollars ($180,000) per year (the "Base Salary"), payable in substantially equal installments in accordance with the Company's existing payroll practices, but no less frequently than monthly. b. For each fiscal year of the Company commencing after June 30, 1996, you will be eligible to participate in an incentive plan for key employees and other persons involved in the business of Key and its subsidiaries (the "Incentive Plan") providing for the payment of cash bonuses of up to fifty percent (50%) of your Base Salary and in the 1995 Stock Option Plan of Key (the "1995 Stock Option Plan"). c. You will be reimbursed by the Company for reasonable travel, lodging, meal and other expenses incurred by you in connection with performing your services hereunder in accordance with the Company's policies from time to time in effect. 3. Stock Options. As performance-based incentive compensation to you in connection with your services hereunder, there shall be granted to you options (the "Options") to acquire One Hundred Thousand (100,000) shares of the Common Stock, par value $.10 per share, of Key (the "Common Stock") at an exercise price per share equal to the fair market value of the Common Stock at the date of grant, with such options to be granted pursuant to, and subject to the terms and provisions (including vesting provisions) of, the 1995 Stock Option Plan and an agreement substantially in the form attached hereto as Exhibit A. 4. Benefit Plans; Vacations. You will be entitled during the Employment Period (and thereafter to the extent provided in Section 5(d) below) to such fringe benefits, including without limitation group medical and dental, life, executive life, accident and disability insurance, retirement plans and supplemental and excess retirement benefits and a Company-leased automobile and payment of expenses associated therewith, as the Company may provide from time to time for its senior management; not less than twenty (20) vacation days. 5. Termination a. Termination by Company. The Company shall have the right to terminate your employment under this Agreement for Cause at any time without obligation to make any further payments to you hereunder. The Company shall have the right to terminate your employment for any reason other than for Cause, subject only to the Company's obligations under Section 5(d) below. As used in this Agreement, the term "Cause" shall mean the willful and continued failure by you to substantially perform your duties hereunder (other than any such willful or continued failure resulting from your incapacity due to physical or mental illness or physical injury), or the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise, or your conviction of a felony by a court of competent jurisdiction. -2- b. Termination upon Disability. If you become totally and permanently disabled during the Employment Period so that you are unable to perform your obligations hereunder by reasons involving physical or mental illness or physical injury ("Disability"), then the term of your employment hereunder may be terminated by the Company. c. Termination by Executive. You may terminate your employment by giving written notice to the Company at any time by written notice of at least thirty (30) days. d. Severance Compensation. In the event your employment hereunder is terminated following a change of control of the Company or by you because of a material breach by the Company of its obligations under this Agreement or by the Company other than for Cause, you will be entitled to severance compensation at your Base Salary at the monthly rate in effect on the termination date, payable in arrears, during the period expiring eighteen (18) months after the termination date, commencing at the end of the calendar month in which the termination date occurs; provided, however, that in the event your employment should be terminated by the Company as a result of Disability in accordance with Section 5(b) above, then the severance compensation to which you are entitled shall be reduced by the amount of any disability insurance proceeds actually paid to you or for your benefit during the said time period. 6. Limitation on Competition. During the Employment Period, and for such period thereafter as you are entitled to receive severance compensation under this Agreement or, if not entitled to receive severance compensation, for a period of one year after your termination, you shall not, directly or indirectly, without the prior written consent of the Company, participate or engage in, whether as a director, officer, employee, advisor, consultant, stockholder, partner, joint venturer, owner or in any other capacity, any business engaged in the business of furnishing oilfield services (a "Competing Enterprise"), provided, however, that you shall not be deemed to be participating or engaging in any such business solely by virtue of your ownership of not more than five percent of any class of stock or other securities which is publicly traded on a national securities exchange or in a recognized over-the-counter market; and you shall not, directly or indirectly, solicit, raid, entice or otherwise induce any employee of the Company or any of its subsidiaries to be employed by a Competing Enterprise. -3- If this Agreement correctly sets forth your understanding of the agreement between the Company and you, please indicate your agreement hereto by signing this Agreement in the space for that purpose below. WELLTECH EASTERN, INC. By: /s/Francis D. John Name: Francis D. John Title: President/CEO ACCEPTED AND AGREED: /s/Kenneth Huseman Kenneth Huseman -4 EX-4.2 12 7% CONVERTIBLE SUBORDINATED DEBENTURE KEY ENERGY GROUP, INC. $52,000,000 Principal Amount of 7% Convertible Subordinated Debentures Due 2003 - ----------------------------------------------------------------- - - INDENTURE - ----------------------------------------------------------------- - - Dated as of July 3, 1996 - ----------------------------------------------------------------- - - AMERICAN STOCK TRANSFER & TRUST COMPANY Trustee - ----------------------------------------------------------------- - - TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions.................................................... 1 Section 1.2 Other Definitions.............................................. 6 Section 1.3 Incorporation by Reference of Trust Indenture Act.............. 6 Section 1.4 Rules of Construction.......................................... 7 ARTICLE 2 THE SECURITIES Section 2.1 Form and Dating; Securities in Global Form..................... 7 Section 2.2 Execution and Authentication................................... 8 Section 2.3 Registrar, Paying Agent, Depository and Securities Custodian... 8 Section 2.4 Paying Agent to Hold Money in Trust............................ 9 Section 2.5 Holder Lists................................................... 9 Section 2.6 Transfer and Exchange..........................................10 Section 2.7 Replacement Securities.........................................16 Section 2.8 Outstanding Securities.........................................16 Section 2.9 Treasury Securities............................................16 Section 2.11 Cancellation...................................................17 Section 2.12 Defaulted Interest.............................................17 ARTICLE 3 REDEMPTION Section 3.1 Notices to Trustee.............................................17 Section 3.2 Selection of Securities to be Redeemed.........................18 Section 3.3 Notice of Redemption...........................................18 Section 3.4 Effect of Notice of Redemption.................................19 Section 3.5 Deposit of Redemption Price....................................19 Section 3.6 Securities Redeemed in Part....................................20 Section 3.7 Optional Redemption............................................20 i TABLE OF CONTENTS (Continued) Page ARTICLE 4 COVENANTS Section 4.1 Payment of Securities..........................................20 Section 4.2 Maintenance of Office or Agency................................21 Section 4.3 SEC Reports....................................................21 Section 4.4 Compliance Certificate.........................................22 Section 4.5 Compliance with Laws; Taxes....................................23 Section 4.6 Stay, Extension and Usury Laws.................................23 Section 4.7 Corporate Existence............................................23 Section 4.8 Liquidation....................................................24 Section 4.9 Limitation on Dispositions of Assets...........................24 Section 4.10 Change of Control..............................................24 Section 4.11 Additional Subsidiary Guarantees...............................25 ARTICLE 5 SUCCESSORS Section 5.1 When the Company May Merge, etc................................26 Section 5.2 Successor Corporation Substituted..............................27 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.1 Events of Default..............................................27 Section 6.2 Acceleration...................................................29 Section 6.3 Other Remedies.................................................29 Section 6.4 Waiver of Past Defaults........................................29 Section 6.5 Control by Majority............................................29 Section 6.6 Limitation on Suits............................................30 Section 6.7 Rights of Holders to Receive Payment...........................30 Section 6.8 Collection Suit by Trustee.....................................30 Section 6.9 Trustee May File Proofs of Claim...............................31 Section 6.10 Priorities.....................................................31 Section 6.11 Undertaking for Costs..........................................32 ii TABLE OF CONTENTS (Continued) Page ARTICLE 7 TRUSTEE Section 7.1 Duties of a Trustee............................................32 Section 7.2 Rights of Trustee..............................................33 Section 7.3 Individual Rights of Trustee...................................34 Section 7.4 Trustee's Disclaimer...........................................34 Section 7.5 Notice of Defaults.............................................34 Section 7.6 Reports by Trustee to Holders..................................34 Section 7.7 Compensation and Indemnity.....................................35 Section 7.8 Replacement of Trustee.........................................35 Section 7.9 Successor Trustee by Merger, etc...............................36 Section 7.10 Eligibility; Disqualification..................................36 Section 7.11 Preferential Collection of Claims Against Company and Subsidiary Guarantors......................................37 ARTICLE 8 DISCHARGE OF INDENTURE Section 8.1 Termination of Company's and Subsidiary Guarantors' Obligation.37 Section 8.2 Application of Trust Money.....................................38 Section 8.3 Repayment to Company...........................................38 Section 8.4 Reinstatement..................................................39 ARTICLE 9 AMENDMENTS Section 9.1 Without Consent of Holders.....................................39 Section 9.2 With Consent of Holders........................................40 Section 9.3 Compliance with Trust Indenture Act............................41 Section 9.4 Revocation and Effect of Consents..............................41 Section 9.5 Notation on or Exchange of Securities..........................41 Section 9.6 Trustee to Sign Amendments, etc................................42 iii TABLE OF CONTENTS (Continued) Page ARTICLE 10 SUBSIDIARY GUARANTEES Section 10.1 Subsidiary Guarantees..........................................42 Section 10.2 Execution and Delivery of Subsidiary Guarantees................43 Section 10.3 Subsidiary Guarantors May Consolidate, etc. on Certain Terms...43 Section 10.4 Releases Following Sale of Assets..............................44 Section 10.5 "Trustee" to Include Paying Agent..............................44 Section 10.6 Limitation of Subsidiary Guarantor's Liability.................45 ARTICLE 11 CONVERSION Section 11.1 Right to Convert...............................................45 Section 11.2 Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends.........46 Section 11.3 Cash Payments in Lieu of Fractional Shares.....................47 Section 11.4 Conversion Price...............................................47 Section 11.5 Adjustment of Conversion Price.................................47 Section 11.6 Effect of Reclassification, Consolidation, Merger or Sale......51 Section 11.7 Taxes on Shares Issued.........................................52 Section 11.8 Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock........52 Section 11.9 Responsibility of Trustee......................................53 Section 11.10 Notice to Holders Before Certain Actions.......................54 ARTICLE 12 SUBORDINATION Section 12.1 Agreement to Subordinate.......................................55 Section 12.2 Certain Definitions............................................55 Section 12.3 Liquidation; Dissolution; Bankruptcy...........................56 Section 12.4 Company Not to Make Payments with Respect to Securities in Certain Circumstances..........................................56 Section 12.5 Acceleration of Securities.....................................57 Section 12.6 When Distribution Must Be Paid Over............................57 Section 12.7 Notice by Company..............................................57 Section 12.8 Subrogation....................................................57 Section 12.9 Relative Rights................................................57 Section 12.10 Subordination May Not be Impaired by Company...................58 iv TABLE OF CONTENTS (Continued) Page Section 12.11 Distribution or Notice to Representative......................58 Section 12.12 Rights of Trustee and Paying Agent............................58 Section 12.13 Effectuation of Subordination by Trustee......................59 ARTICLE 13 MISCELLANEOUS Section 13.1 Trust Indenture Act Controls..................................59 Section 13.2 Notices.......................................................59 Section 13.3 Communication to Holders with Other Holders...................61 Section 13.4 Certificate and Opinion as to Conditions Precedent............61 Section 13.5 Statements Required in Certificate............................61 Section 13.6 Rules by Trustee and Agents...................................61 Section 13.7 Additional Rights of Holders of Transfer Restricted Securities.................................................. ..61 Section 13.8 Legal Holidays................................................62 Section 13.9 No Recourse Against Others....................................62 Section 13.10 Duplicate Originals...........................................62 Section 13.11 Governing Law.................................................62 Section 13.12 No Adverse Interpretation of Other Agreements.................62 Section 13.13 Successors....................................................62 Section 13.14 Severability..................................................62 Section 13.15 Counterpart Originals.........................................63 Section 13.16 Table of Contents, Headings, .................................63 v INDENTURE dated as of July 3, 1996, among KEY ENERGY GROUP, INC., a Maryland corporation (the "Company"), YALE E. KEY, INC., a Texas corporation ("Yale E. Key"), WELLTECH EASTERN, INC., a Delaware corporation ("WellTech Eastern"), ODESSA EXPLORATION, INC., a Delaware corporation ("Odessa"); and KEY ENERGY DRILLING, INC., D/B/A CLINT HURT DRILLING, a Delaware corporation ("Clint Hurt"), SERVICIOS WELLTECH, SA, an Argentine corporation ("Servicios"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a Delaware corporation, as trustee (the "Trustee"). The Company and, with respect to Article 10 only, Yale E. Key, WellTech Eastern, Odessa, Clint Hurt and Servicios, jointly and severally, and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 7% Convertible Subordinated Debentures due 2003 (collectively, the "Securities"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1. Definitions. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person directly or indirectly, whether through the ownership of Voting Stock, by agreement or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing; provided, however, that beneficial ownership of 10% or more of the Voting Stock of a person shall be deemed control. "Agent" means any Registrar (as defined in Section 2.3), Paying Agent (as defined in Section 2.3) or co-Registrar. "Board of Directors" means the Board of Directors of the Company, or any authorized committee of the Board of Directors. "Board Resolution" means a resolution of the Board of Directors of the Company. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in the Borough of Manhattan, New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such Person and any warrants, options or other rights to acquire such stock. "Common Stock" means, any stock of any class of the Company that has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. Subject to the provisions of Section 11.6, however, shares issuable on conversion of Securities shall include only shares of the class or classes resulting that have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company, provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Consolidated Net Worth" with respect to any Person means the amount by which the assets of such Person and its Subsidiaries on a consolidated basis exceed the sum of (i) the total liabilities of such Person and its Subsidiaries on a consolidated basis, plus (ii) Disqualified Capital Stock of such Person or Disqualified Capital Stock of any Subsidiary of such Person issued to any Person other than such Person or another Wholly Owned Subsidiary of such Person, all as determined on a consolidated basis and in accordance with GAAP. "Conversion Price" has the meaning set forth in Section 11.4. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 13.2 or such other address as the Trustee may give by notice to the Company. "Debentures" means the 7% Convertible Subordinated Debentures due July 1, 2003 issued under this Indenture. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Definitive Securities" means Securities that are in the form of the Debenture attached hereto as Exhibit A that do not include the information called for by footnotes 1 and 2 thereof. "Depository" means, with respect to the Securities issuable or issued in whole or in part in global form, the Person specified in Section 2.3 as the Depository with respect to the Securities, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and, thereafter, "Depository" shall mean or include such successor. "Disqualified Capital Stock" means any Capital Stock that, by its terms or by the terms of any security into which, at the option of the holder, it is convertible or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased, including at the option of the holder, in whole or in par, or has, or upon the happening of an event or the passage of time would have, a redemption or similar payment due, on or before the maturity date of the Securities. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2 "GAAP" means generally accepted accounting principles as in effect in the United States of America as of any date of determination. "Global Security" means a Security that contains the additional paragraph referred to in footnote 1 to the form of Debenture and the additional schedule referred to in footnote 2 to the form of Debenture. "Group of Persons" means any group of Persons or other entities acting in concert as a partnership or other group within the meaning of Section 13(d) of the Exchange Act. "Holder" means a person in whose name a Security is registered in the records of the Registrar. "Indebtedness" means, with respect to any Person, without duplication, (i) any indebtedness of such Person for money borrowed or for the deferred purchase price of property or services (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor created, incurred, assumed or guaranteed by such Person in connection with obtaining goods, materials or services and due within 12 months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 120 days, according to the original terms of sale, unless such account payable is being contested in good faith or has otherwise been extended), (ii) all capitalized lease obligations, (iii) any such indebtedness or obligation secured by any Lien on the assets of such Person and (iv) any such indebtedness or obligation of others which such Person has directly or indirectly guaranteed, endorsed with recourse (otherwise than for collection, deposit or other similar transactions in the ordinary course of business), agreed to purchase or repurchase or in respect of which such Person has agreed contingently to supply or advance funds. "Indenture" means this Indenture, as amended or supplemented from time to time. "Issue Date" means the date on which the Debentures are originally issued under this Indenture. "Lien" means, with respect to any Person, any mortgage, pledge, lien, encumbrance, easement, restriction, covenant, right-of-way, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property of such Person, or a security interest of any kind 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, right of first refusal or other similar agreement to sell in each case securing obligations of such Person and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statute or statutes) of any jurisdiction). "Memorandum" means the Confidential Private Placement Memorandum, dated June 28, 1996, of the Company relating to the Securities and the Offering. 3 "Obligations" means any principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the sale of the Securities to the Purchasers. "Officers" means the Chairman of the Board, the President, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary or any Vice President of the Company or of any Subsidiary Guarantor, as the case may be. "Officers' Certificate" means a certificate signed by two Officers, one of whom who must be the principal executive officer, principal financial officer or principal accounting officer of the Company. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company, any Subsidiary Guarantor or the Trustee. "Person" means any individual, corporation, partnership, limited liability company, joint venture, trust, estate, unincorporated organization or government or any agency or political subdivision thereof. "Property" means with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, Capital Stock in any other Person. "Purchasers" means the initial purchasers of the Debentures. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof by and among the Company and the Purchasers, as such agreement may be amended, modified or supplemented from time to time. "Related Person" means (i) any Affiliate of the Company, (ii) any individual or other Person who directly or indirectly holds 10% or more of any class of Capital Stock of the Company, (iii) any relative of such individual by blood, marriage or adoption not more remote than first cousin and (iv) any officer or director of the Company. "Responsible Officer" when used with respect to the Trustee, means any officer within the Corporate Trust Office (or any successor group of the Trustee) including any President, Vice President, Secretary, Assistant Secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. 4 "SEC" means the Securities and Exchange Commission. "Securities" means the Debentures issued pursuant to this Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Securities Custodian" means the Person named in Section 2.3, as custodian with respect to the Securities in global form, or any successor entity thereto. "Senior Indebtedness" has the meaning provided in Section 12.2 hereof. "Servicios Default Payment" means an increase of fifty (50) basis points (1/2%) on the interest rate payable on the Debentures, which increase is payable during such period of time as a Servicios Guaranty Default exists. "Servicios Guaranty Default" means the failure of Servicios, at anytime after August 3, 1996, to have obtained the approval of its shareholders to the incurrence by Servicios of its covenants and obligations under this Indenture. "Shelf Registration Statement" means a registration statement filed with the SEC relating to the sale by the holders thereof of Common Stock to be acquired upon conversion of the Securities. "Subsidiary" means 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 shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. "Subsidiary Guarantors" means each of (i) Yale E. Key, (ii) WellTech Eastern, (iii) Odessa, (iv) Clint Hurt, (v) Servicios and (vi) any other Subsidiary of the Company that executes a Subsidiary Guarantee in accordance with the provisions of this Indenture, and their respective successors and assigns. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990, and as in effect on the date on which this Indenture is qualified under the TIA. "Trading Day" means a day on which the American Stock Exchange and the NASDAQ --NMS are open for the transaction of business. "Transfer Restricted Securities" means Securities that bear or are required to bear the legend set forth in Section 2.6 hereof. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. 5 "U.S. Government Obligations" means direct obligations of the United States of America, or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged. "Voting Stock" means, with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of Directors or other governing body of such Person. "Wholly-Owned Subsidiary" means a Subsidiary, all the Capital Stock (other than directors' qualifying shares, if applicable) of which is owned by the Company or another Wholly Owned Subsidiary. Section 1.2 Other Definitions. Defined in Term Section "Bankruptcy Law"........................................................6.1 Change of Control"....................................................4.10 "Change of Control Date"...............................................4.10 "Change of Control Offer"..............................................4.10 "Change of Control Payment Date".......................................4.10 "Custodian"...................................................... .......6.1 "Event of Default"......................................................6.1 "Expiration Time"......................................................11.5 "Legal Holiday"........................................................1 3.8 "Paying Agent"..........................................................2 .3 "Purchased Shares".....................................................11.5 "Registrar"...................................................... .......2.3 "Representative"................................................. ......12.2 "Securities Register"...................................................2.3 Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities and the Subsidiary Guarantees; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; 6 "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Securities means the Company, any successor obligor and any Subsidiary Guarantor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.4 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE 2 THE SECURITIES Section 2.1. Form and Dating; Securities in Global Form. The Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, which is incorporated in and made a part of this Indenture and shall be in a principal amount at maturity of no greater than $52,000,000. The Subsidiary Guarantees shall be substantially in the form of Exhibit B hereto, the terms of which are incorporated in and made part of this Indenture. The Securities may have notations, legends or endorsements as required by law, stock exchange rule, agreements to which the Company is subject or usage. Each Security shall be dated the date of its authentication. The Securities shall be issued initially in denominations of $1,000 and whole multiples thereof. The terms and provisions contained in the Securities, and the Subsidiary Guarantee in the form annexed hereto as Exhibit B, shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company, the Subsidiary Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. 7 The Debentures will initially be issued in global form, substantially in the form of Exhibit A. Such Global Securities shall represent such of the outstanding Securities as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee or the Securities Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof. Payment of the principal of and any interest on any Security in global form shall be made to the Holder thereof. Section 2.2. Execution and Authentication. Officers of the Company shall sign and attest the Securities for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Securities. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Security has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Securities shall be substantially as set forth in Exhibit A hereto. The Trustee shall, upon receipt of an Officers' Certificate directing it to do so, authenticate Securities for original issue up to an aggregate principal amount stated in Section 2.1. The aggregate principal amount of Securities outstanding at any time may not exceed such amount, except as provided in Section 2.7. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. Section 2.3. Registrar, Paying Agent, Depository and Securities Custodian. The Company shall maintain (i) an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and (ii) an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange (the "Securities Register"). The Company may appoint one or more co-Registrars and one or more additional Paying Agents. The term "Paying Agent" includes any additional Paying Agent. The Company may change any 8 Paying Agent, Registrar or co-Registrar without notice to any Holder. The Company shall notify the Trustee and the Trustee shall notify the Holders of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent, Registrar or co- Registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.7 hereof. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Securities. The Company initially appoints The Depositary Trust Company ("DTC") to act as Depositary with respect to the Global Securities. The Company initially appoints Cede & Co. to act as Securities Custodian with respect to the Global Securities. Section 2.4. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Securities, and will notify the Trustee of any default by the Company or any Subsidiary Guarantor in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. If the Company or any Subsidiary Guarantor acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Section 2.5. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA ss.312(a). If the Trustee is not the Registrar, the Company and/or any Subsidiary Guarantor shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, including the aggregate principal amount of Securities held by them, and the Company and the Subsidiary Guarantors shall otherwise comply with TIA ss.312(a). 9 Section 2.6 Transfer and Exchange. (a) Transfer and Exchange of Definitive Securities. When Definitive Securities are presented to the Registrar or co-Registrar with a request: (x) to register the transfer of the Definitive Securities; or (y) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Definitive Securities presented or surrendered for registration of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar or co-Registrar, duly executed by the Holder thereof or by his attorney, duly authorized in writing; and (ii) in the case of Transfer Restricted Securities that are Definitive Securities, shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar or co- Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Transfer Restricted Security is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rules 144 or 145 or Regulation S under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferee or transferor and an Opinion of Counsel from the transferee or transferor reasonably acceptable to the Company and to the Registrar or co- Registrar to the effect that such transfer is in compliance with the Securities Act, or (C) if such Transfer Restricted Security is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect and an Opinion of Counsel reasonably acceptable to the Company and to the Registrar or co-Registrar to the effect that such transfer is in compliance with the Securities Act. (b) Restrictions on Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A Definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the 10 requirements set forth below. Upon receipt by the Trustee of a Definitive Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (A) if such Definitive Security is a Transfer Restricted Security, certification in form and substance satisfactory to the Trustee that such Definitive Security is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act; and (B) whether or not such Definitive Security is a Transfer Restricted Security, written instructions directing the Trustee to make, or to direct the Securities Custodian to make, an endorsement on the Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, then the Trustee shall cancel such Definitive Security and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Custodian, the aggregate principal amount of Securities represented by the Global Security to be increased accordingly. If no Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate a new Global Security in the appropriate principal amount. (c) Transfer and Exchange of Global Securities. The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depositary in accordance with this Indenture (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor. (d) Transfer of a Beneficial Interest in a Global Security for a Definitive Security. (i) Any person having a beneficial interest in a Global Security may upon request exchange such beneficial interest for a Definitive Security. Upon receipt by the Trustee of written instructions (or such other form of instructions as is customary for the Depositary) from the Depositary or its nominee on behalf of any person having a beneficial interest in a Global Security and upon receipt by the Trustee of a written order or such other form of instructions as is customary for the Depositary or the person designated by the Depositary as having such a beneficial interest containing registration instructions and, in the case of a beneficial interest in a Transfer Restricted Security only, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the person designated by the Depositary as being the beneficial owner, a certification from such person to that effect; or 11 (B) if such beneficial interest is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rules 144 or 145 or Regulation S under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferee or transferor and an Opinion of Counsel from the transferee or transferor reasonably acceptable to the Company and to the Registrar or co-Registrar to the effect that such transfer is in compliance with the Securities Act; or (C) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect from the transferee or transferor and an Opinion of Counsel from the transferee or transferor reasonably acceptable to the Company and to the Registrar or co-Registrar to the effect that such transfer is in compliance with the Securities Act, then the Trustee or the Securities Custodian, at the direction of the Trustee, will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Custodian, the aggregate principal amount of the Global Security to be reduced and, following such reduction, the Company will execute and, upon receipt of an authentication order in the form of an Officers' Certificate, the Trustee will authenticate and deliver to the transferee, as the case may be, a Definitive Security. (ii) Definitive Securities issued in exchange for a beneficial interest in a Global Security pursuant to this Section 2.6(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Securities to the persons in whose names such Securities are so registered. (e) Restrictions on Transfer and Exchange of Global Securities. Notwithstanding any other provisions of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.6), a Global Security may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Authentication of Definitive Securities in Absence of Depositary. If at any time: (i) the Depositary for the Securities notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Securities and a successor Depositary for the Global Securities is not appointed by the Company within 90 days after delivery of such notice; or 12 (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Securities under this Indenture, then the Company will execute, and the Trustee, upon receipt of an Officers' Certificate requesting the authentication and delivery of Definitive Securities, will authenticate and deliver Definitive Securities, in an aggregate principal amount equal to the principal amount of the Global Securities, in exchange for such Global Securities. (g) Legends. (i) Except as permitted by the following paragraph (ii), each Debenture certificate evidencing the Global Securities and the Definitive Securities (and all Debentures issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form: THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE, SECURITIES LAWS, 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 (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE DEBENTURE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THE DEBENTURE EVIDENCED HEREBY RESELL OR OTHERWISE TRANSFER THE DEBENTURE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH DEBENTURE EXCEPT (A) TO KEY ENERGY GROUP, INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE DEBENTURE EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE DEBENTURE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE DEBENTURE EVIDENCED HEREBY WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF SUCH DEBENTURE, THE 13 HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO IS NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE, SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE 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. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THREE YEARS FROM THE ORIGINAL ISSUANCE OF THE DEBENTURE EVIDENCED HEREBY. 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. (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to an effective registration statement under the Securities Act or satisfying the condition set forth in subclause (2)(E) of the legend set forth in the immediately preceding paragraph: (A) in the case of any Transfer Restricted Security that is a Definitive Security, the Registrar or co-Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security; and (B) any such Transfer Restricted Security represented by a Global Security shall not be subject to the provisions set forth in (i) above (such sales or transfer being subject only to the provisions of Section 2.6(c) hereof); provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Security for a Definitive Security that does not bear a legend, which request is made in reliance upon Rule 144 or 145, the Holder thereof shall certify in writing to the Registrar or co-Registrar and shall provide an Opinion of Counsel to the Registrar or co-Registrar that such request is being made pursuant to Rule 144 or 145. (h) Cancellation or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have either been exchanged for Definitive Securities, redeemed, repurchased or canceled, such Global Security shall be returned to or retained and canceled by the Trustee. At any time before such cancellation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced and an endorsement shall be made on such Global Security, by the Trustee or the Securities Custodian, at the direction of the Trustee, to reflect the reduction. 14 (i) Obligations with respect to Transfers and Exchanges of Definitive Securities. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Definitive Securities and Global Securities at the Registrar's or co-Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchanges or transfers pursuant to Sections 2.10, 3.6 and 9.5 hereof). (iii)The Registrar or co-Registrar shall not be required to register the transfer or exchange of any Definitive Security selected for redemption in whole or in part, except the unredeemed portion of any Definitive Security being redeemed in part. (iv) All Definitive Securities and Global Securities issued upon any registration of transfer or exchange of Definitive Securities or Global Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture as the Definitive Securities or Global Securities surrendered upon such registration of transfer or exchange. (v) The Company shall not be required: (A) to issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption under Section 3.2 and ending at the close of business of the day of selection, or (B) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. (vi) Before due presentment for registration of transfer of any Security, the Trustee, any Agent and the Company may deem and treat the person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. 15 Section 2.7 Replacement Securities. If any mutilated Security is surrendered to the Trustee or the Company, or the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Security if the Trustee's requirements for replacements of Securities are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Subsidiary Guarantors, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Security is replaced. The Company and the Trustee may charge for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. Section 2.8 Outstanding Securities. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those reductions in the interests in a Global Security effected by the Trustee hereunder, and those described in this Section 2.8 as not outstanding. If a Security is replaced pursuant to Section 2.7 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the principal amount of any Security is considered paid under Section 4.1 hereof, it ceases to be outstanding, and interest on it ceases to accrue. Except as set forth in Section 2.9 hereof, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. Section 2.9 Treasury Securities. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, any Subsidiary Guarantor or any Affiliate of the Company or any Subsidiary Guarantor (whether directly or by or through the Depository) shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that a Responsible Officer knows to be so owned shall be so considered. Section 2.10 Temporary Securities. Until Definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Company and the Trustee consider appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and 16 the Trustee, upon receipt of an Officers' Certificate of the Company directing it to do so, shall authenticate Definitive Securities in exchange for temporary Securities. Until such exchange, temporary Securities shall be entitled to the same rights, benefits and privileges as Definitive Securities. Section 2.11 Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, conversion, replacement or cancellation and shall destroy canceled Securities and certification of their destruction shall be delivered to the Company (subject to the record retention requirement of the Exchange Act) unless by a written order, signed by two Officers of the Company, the Company shall direct that canceled Securities be returned to it. The Company may not issue new Securities to replace Securities that it has redeemed or paid, converted or that have been delivered to the Trustee for cancellation. Section 2.12 Defaulted Interest. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the persons who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five Business Days before the payment date, in each case at the rate provided in the Securities and in Section 4.1 hereof. The Company shall, with the consent of the Trustee, fix or cause to be fixed each such special record date and payment date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. ARTICLE 3 REDEMPTION Section 3.1 Notices to Trustee. If the Company elects to redeem Securities pursuant to the optional redemption provisions of Section 3.7 hereof, it shall furnish to the Trustee, at least 60 days but not more than 90 days before a redemption date, an Officers' Certificate setting forth the Section of this Indenture pursuant to which the redemption shall occur, the redemption date, the principal amount of Securities to be redeemed and the redemption price. If the Company is required to make an offer to redeem Securities pursuant to a Change of Control, it shall furnish to the Trustee, within 60 days after a Change of Control, an Officers' Certificate setting forth (a) the Section of this Indenture pursuant to which the redemption shall occur, (b) the date of the Change of Control, (c) the Change of Control Payment Date, (d) the principal amount of the Securities offered to be redeemed, (e) a statement that 17 a Change of Control has occurred and a description thereof, and (f) a description of the procedures to be followed by Holders in order to have their Securities repurchased. If the Company is required to increase the interest rate on the Securities pursuant to the Registration Rights Agreement or as a Servicios Default Payment, it shall furnish to the Trustee not more than 15 days before the date such interest is due to be paid an Officers' Certificate setting forth the rate at which interest on the Securities is to be paid. The Company, or the Trustee, at the expense of the Company, shall notify the Holders of the change in interest rate by notice sent in accordance with Section 11.10(e) of this Indenture. Notwithstanding any other provisions of this Indenture, the Trustee shall have no duty to inquire as to whether the interest rate on the Securities has increased and shall not be bound by the terms and conditions of the Registration Rights Agreement or any other agreements or documents between the Holders and the Company. Section 3.2 Selection of Securities to be Redeemed. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed among the Holders of the Securities in accordance with a method the Trustee considers fair and appropriate (and in such manner as complies with applicable legal and stock exchange requirements, if any). In the event of partial redemption by lot, the particular Securities to be redeemed shall be selected, unless otherwise provided herein, not less than 15 nor more than 60 days before the redemption date by the Trustee from the outstanding Securities not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the principal amount thereof to be redeemed. Securities and portions of them selected shall be in amounts of $1,000 or whole multiples thereof. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. Section 3.3 Notice of Redemption. Subject to the provisions of Sections 4.10 and 4.11 hereof, at least 15 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption to each Holder whose Securities are to be redeemed at its registered address. The notice shall identify the Securities to be redeemed and shall state: (a) the redemption date; and that the right to convert such Securities pursuant to Article 11 hereof shall be terminated on such date; (b) the redemption price; (c) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the redemption date upon surrender of such Security, a new Security of the same series of Securities in principal amount equal to the unredeemed portion will be issued; 18 (d) the name and address of the Paying Agent; (e) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Securities called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Securities and Section of this Indenture pursuant to which the Securities called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 60 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. Section 3.4 Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.3 hereof, Securities called for redemption become due and payable on the redemption date at the redemption price. On and after the redemption date, unless the Company defaults in the payment of the redemption price, interest shall cease to accrue on the Securities or portions of them called for redemption and all rights of Holders of such Securities shall terminate, including without limitation the right to convert such Securities, except for the right to receive the redemption price. Upon surrender to the Paying Agent, such Securities shall be paid the redemption price plus accrued interest, if any, to the redemption date, but interest installments whose maturity is on or before the redemption date shall be payable to the Holder of record at the close of business on the relevant record dates referred to in the Securities. Section 3.5 Deposit of Redemption Price. One Business Day before the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. The Trustee or the Paying Agent shall return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Securities to be redeemed. Interest on the Securities to be redeemed shall cease to accrue on the applicable redemption date, whether or not such Securities are presented for payment, if the Company provides money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on such date. If any 19 Security called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Securities and in Section 4.1 hereof. Section 3.6 Securities Redeemed in Part. Upon surrender of a Definitive Security that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Security of the same series equal in principal amount to the unredeemed portion of the Definitive Security surrendered. Section 3.7 Optional Redemption. The Company may redeem at any time on or after July 15, 1999, all or any portion of the Securities outstanding at the following redemption prices expressed as a percentage of the principal amount thereof, if the Securities are redeemed during the 12 month period beginning July 15, of the following years: Year Percentage 1999........................................................... 104% 2000....................................................... .... 103% 2001....................................................... .... 102% 2002....................................................... .... 101% Any redemption pursuant to this Section 3.7 shall be made, to the extent applicable, pursuant to the provisions of Sections 3.1 through 3.6 hereof. ARTICLE 4 COVENANTS Section 4.1 Payment of Securities. The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. Principal and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary of the Company, holds at least one Business Day before that date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal and interest then due. Such Paying Agent shall return to the Company, no later than five days following the date of payment, any money (including accrued interest) that exceeds such amount of principal and interest paid on the Securities. 20 The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Securities to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. Section 4.2 Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, New York, New York, an office or agency (which may be an office of the Trustee, Registrar or co-Registrar) where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company also may from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, New York, New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.3. Section 4.3 SEC Reports. (a) So long as any of the Securities remain outstanding and the Company is subject to the reporting requirements of the Exchange Act, the Company shall file with the SEC and distribute to the Trustee for delivery to the Holders of the Securities copies of the quarterly and annual reports required to be filed with the SEC, and if the Company ceases to become subject to the reporting requirements of the Exchange Act, the Company shall distribute to the Trustee for delivery to the Holders of the Securities copies of the quarterly and annual financial information that would have been required to be filed with the SEC pursuant to the Exchange Act had the Company been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. All such financial information shall include consolidated financial statements (including footnotes) prepared in accordance with GAAP. Such annual financial information shall also include an opinion thereon expressed by an independent accounting firm of established national reputation. All such consolidated financial statements shall be accompanied by a "Management's Discussion and Analysis of Financial Condition and Results of Operations." 21 (b) The financial information to be distributed to Holders of Securities shall be filed with the Trustee and shall be mailed by the Trustee to the Holders at their addresses appearing in the register of Securities maintained by the Registrar, within 15 days after receipt of such financial information. The Company shall file such financial information with the Trustee within 15 days after it is filed with the SEC, if required, but in no event later than 105 days after the end of the Company's fiscal year or later than 60 days after the end of each of the first three quarters of each such fiscal year, in the case of quarterly reports; provided, however, that the Trustee's only obligation is to mail the financial information that it receives from the Company to the Holders and not to obtain such information from the Company. (c) No Subsidiary Guarantor shall be required to file separate financial statements or a separate "Management's Discussion and Analysis of Financial Condition and Results of Operations" if its results are included and discussed in the Company's consolidated financial statements and 'Management's Discussion and Analysis of Financial Condition and Results of Operations" relating thereto filed with the Trustee pursuant to Section 4.3(b). (d) The Company and the Subsidiary Guarantors shall make such financial information described in Section 4.3 (a) available to prospective purchasers of the Debentures. (e) The Company and each Subsidiary Guarantor shall provide the Trustee with a sufficient number of copies of all reports and other documents and information that the Trustee may be required to deliver to the Holders under this Section 4.3. Section 4.4 Compliance Certificate. (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries (including the Subsidiary Guarantors) during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge each has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge and what action he is taking or proposes to take with respect thereto) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities or the Subsidiary Guarantees are prohibited or if such event has occurred, a description of the event and what action each signing Officer is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the financial statements delivered pursuant to Section 4.3 above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for 22 certification of such financial statements nothing has come to their attention which would lead them to believe that the Company or any of the Subsidiary Guarantors has violated any provisions of Sections 4.1, 4.5, 4.7, 4.9, 4.10 or 4.11 hereof or of Article 5 or Article 10 of this Indenture or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any person for any failure to obtain knowledge of any such violation. (c) The Company and each of the Subsidiary Guarantors shall, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default or default in the performance of any covenant, agreement or condition contained in this Indenture an Officers' Certificate specifying such Default, Event of Default or default and what action the Company and the Subsidiary Guarantors are taking or propose to take with respect thereto. Section 4.5 Compliance with Laws; Taxes. Each of the Company and the Subsidiary Guarantors shall, and shall cause each of its Subsidiaries to, comply with all statutes, laws, ordinances or government rules and regulations to which it is subject, noncompliance with which would materially adversely affect the business, prospects, earnings, properties, assets or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. Each of the Company and the Subsidiary Guarantors shall, and shall cause each of its respective Subsidiaries to, pay before delinquency all material taxes, assessments, and governmental levies except as contested in good faith and by appropriate proceedings. Section 4.6 Stay, Extension and Usury Laws. Each of the Company and the Subsidiary Guarantors covenants (to the extent that each may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and each of the Company and the Subsidiary Guarantors (to the extent that each may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. Section 4.7 Corporate Existence. Subject to Sections 4.8 and 10.3 and Article 5 hereof, each of the Company and the Subsidiary Guarantors shall do or cause to be done all things necessary to preserve and keep in full force and effect (a) their corporate existence, and the corporate, partnership or other existence of each of their Subsidiaries, in accordance with their respective organizational documents (as the same may be amended from time to time) of each Subsidiary and (b) their (and 23 their Subsidiaries') rights (charter and statutory), licenses and franchises; provided, however, that the Company and the Subsidiary Guarantors shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of their Subsidiaries, if the Board of Directors of the Company or such Subsidiary Guarantor, as the case may be, shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. Section 4.8 Liquidation. The Board of Directors or the stockholders of the Company may not adopt a plan of liquidation that provides for, contemplates or the effectuation of which is preceded by (a) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company otherwise than substantially as an entirety (Section 5.1 of this Indenture being the Section hereof that governs any such sale, lease, conveyance or other disposition substantially as an entirety) and (b) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and of the remaining assets of the Company to the holders of Capital Stock of the Company, unless the Company, before making any liquidating distribution pursuant to such plan, makes provision for the satisfaction of the Company's Obligations hereunder and under the Securities as to the payment of principal and premium thereon, if any, and interest. The Company shall be deemed to make provision for such payments only if (x) the Company delivers in trust to the Trustee or Paying Agent (other than the Company or its Subsidiaries) money or U.S. Government Obligations maturing as to principal and interest in such amounts and at such times as are sufficient without consideration of any reinvestment of such interest to pay the principal of and premium on, if any, and accrued interest on the Securities, or (y) there is an express assumption and observance of all covenants and conditions to be performed by the Company hereunder by the execution and delivery of a supplemental indenture in form satisfactory to the Trustee by a Person that acquires or will acquire (otherwise than pursuant to a lease) a portion of the assets of the Company and which Person will have Consolidated Net Worth (immediately after the acquisition) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the acquisition and which is organized and existing under the laws of the United States, any State thereof or the District of Columbia; provided, however, that the Company shall not make any liquidating distribution until after the Company shall have certified to the Trustee pursuant to an Officers' Certificate at least five days before the making of any liquidating distribution that it has complied with the provisions of this Section 4.8 and that no Default or Event of Default then exists or would occur as a result of any such liquidating distribution. Section 4.9 Limitation on Dispositions of Assets. The Company shall not, and shall not permit any of its Subsidiaries to, sell, transfer or otherwise dispose of all or substantially all of its properties or assets (including by way of a sale and leaseback) except in accordance with the provisions of Section 5.1 hereof. 24 Section 4.10 Change of Control. If, at any time, (a) an event or series of events by which any Person or Group of Persons shall, as a result of a tender or exchange offer, open market purchase, privately negotiated purchases, merger, consolidation or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 50% or more of the combined voting power of the then outstanding Voting Stock and warrants or options to acquire such Voting Stock, calculated on a fully-diluted basis, of the Company, (b) the Company is merged with or into another corporation with the effect that immediately after such transaction the stockholders of the Company hold less than a majority of the combined voting power of the then outstanding Voting Stock of the Person surviving such transaction or, (c) the direct or indirect, sale, lease, exchange or other transfer to any Person or Group of Persons of all or substantially all of the assets of the Company (each a "Change of Control" and the time of such Change of Control being referred to as the "Change of Control Date"), then the Company shall notify the Holders in writing of such occurrence and shall make an offer to purchase (as the same may be extended in accordance with applicable law, the "Change of Control Offer") on a Business Day (the "Change of Control Payment Date") not later than 60 days following each Change of Control Date all then outstanding Securities at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the Change of Control Payment Date, if any. The Change of Control Offer shall be mailed by the Company not less than 30 days nor more than 45 days before any Change of Control Payment Date to Holders of Securities at their last registered address with a copy to the Trustee and the Paying Agent and shall set forth (w) notice that a Change of Control has occurred and that each Holder of Securities then outstanding has the right to require the Company to repurchase, for cash, all or any portion (which is equal to $1,000 or a whole multiple thereof) of such Holder's Securities at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the Change of Control Payment Date, (x) the Change of Control Payment Date, (y) a description of the Change of Control and (z) a description of the procedures to be followed by such Holder in order to have its Securities repurchased. The Change of Control Offer shall remain open for not less than 30 days, nor more than 45 days, and until the close of business on any such Change of Control Payment Date. If the Change of Control Payment Date is on or after an interest payment record date and on or before the related Interest Payment Date, any accrued interest will be paid to the person in whose name a Security is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender a Security pursuant to the Change of Control Offer. The Company shall comply with 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 the event that a Change of Control occurs and the Company is required to repurchase the Securities pursuant to this Section 4.10. On the Change of Control Payment Date, the Company shall (x) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (y) deposit with the Paying Agent money sufficient to pay the purchase price of all Securities or portions thereof so tendered and (z) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof tendered to the Company. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an 25 amount equal to the purchase price and the Trustee shall promptly authenticate and mail to such Holders a new Security of the same series equal in principal amount to any unpurchased portion of the Security surrendered. Section 4.11 Additional Subsidiary Guarantees. If the Company or any of its Subsidiaries shall transfer or cause to be transferred in one, or a series of related transactions, any assets, businesses, divisions, real property or equipment having a book value in excess of $1,000,000 to any Subsidiary that is not a Subsidiary Guarantor, or if the Company or any of its Subsidiaries shall acquire another Subsidiary having assets with a book value in excess of $1,000,000, the Company shall (a) cause such transferee Subsidiary or acquired Subsidiary, as the case may be, to execute a Subsidiary Guarantee having the same terms and conditions as those set forth in Article 10 hereof and (b) deliver to the Trustee an Opinion of Counsel, in form and substance satisfactory to the Trustee, that such Subsidiary Guarantee is a legally valid, binding and enforceable obligation of such Subsidiary Guarantor, subject to customary exceptions for bankruptcy and equitable principles. Section 4.12 Rule 144A Information Requirement. The Company and the Subsidiary Guarantors have agreed to furnish to the Holders or beneficial holders of Debentures and prospective purchasers of Debentures designated by the holders of Transfer Restricted Securities, upon their request, the information required to be delivered pursuant to Rule 144(d)(4) under the Securities Act unless and until such time as the Company has registered the Debentures for resale under the Securities Act. ARTICLE 5 SUCCESSORS Section 5.1 When the Company May Merge, etc. The Company will 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, or permit any of its Subsidiaries to sell, transfer, lease, convey or otherwise dispose of all or substantially all of its and its Subsidiaries' properties or assets (determined on a consolidated basis for the Company and its Subsidiaries taken as a whole), in one or more related transactions, to another Person or entity (other than a merger between the Company and any Wholly-Owned Subsidiary of the Company) unless: (a) the Company survives such merger or such Person is a corporation organized and existing under the laws of the United States of America, one of the states thereof or the District of Columbia, and expressly assumes by supplemental indenture all of the obligations under the Securities, the Indenture, the Registration Rights Agreement and all other agreements pertaining thereto, (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing, and 26 (c) immediately after giving effect to such transaction, the Consolidated Net Worth of the resulting, surviving corporation is not less than that of the Company immediately before the transaction. The Company shall deliver to the Trustee before the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel to the effect that such merger, sale, assignment, transfer, lease, conveyance or other disposition and, if applicable, such Supplemental Indenture, comply with this Indenture and all conditions precedent to such merger, sale, assignment, transfer, lease, conveyance or other disposition have been satisfied. The Trustee shall be entitled to conclusively rely upon such Officers' Certificate and Opinion of Counsel. Section 5.2 Successor Corporation Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company or its Subsidiaries in accordance with Section 5.1 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of the Company under this Indenture with the same effect as if such successor person has been named as the Company, herein; provided, however, that the Company shall not be released or discharged from the obligation to pay the principal of or interest on the Securities. ARTICLE 6 DEFAULTS AND REMEDIES Section 6.1 Events of Default. The following shall constitute an "Event of Default": (a) default in the payment of principal of, or premium if any, on, the Securities when due at maturity, upon repurchase, upon acceleration or otherwise, including failure of the Company to repurchase the Securities following a Change of Control and failure to make any redemption payment when due; (b) default in the payment of any installment of interest on the Securities when due (including any interest payable in connection with any redemption payment) and continuance of such Default for more than 30 days; (c) default on any other Indebtedness of the Company or any Subsidiary if either (i) such default results from the failure to pay principal of, premium, if any, or interest on any such Indebtedness when due in excess of $1,000,000, or (ii) as a result of such default, the maturity of such Indebtedness has been accelerated before its expected maturity, without such default and acceleration having been rescinded or annulled within a period of 10 days, and the principal amount of any other such Indebtedness in default, or the maturity of which has been so accelerated, aggregates $1,000,000 or more; 27 (d) default by the Company or any Subsidiary in the performance, or the breach, of any other covenant or warranty of the Company or such Subsidiary in this Indenture and the failure to remedy such Default within a period of 60 days after written notice thereof to the Company from the Trustee or to the Company and the Trustees from the Holders of 25% in principal amount of the outstanding Securities; (e) except as permitted by this Indenture and except for the existence of a Servicios Guaranty Default, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect, or any Guarantor, or any person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; (f) the entry by a court of one or more judgments or orders against the Company or any Subsidiary in an aggregate amount in excess of $1,000,000 that are not covered by insurance written by third parties that has not been vacated, discharged, satisfied or stayed pending appeal within 60 days after the entry thereof; (g) any act or acts by the Company or its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (i) commencing a voluntary case, (ii) consenting to the entry of an order for relief against it in an involuntary case, (iii) consenting to the appointment of a Custodian of it or for all or substantially all of its property, (iv) making a general assignment for the benefit of its creditors, or (v) which results in the Company or its Subsidiaries generally not paying its debts as they become due; or (h) the entry of an order or decree by a court of competent jurisdiction under any Bankruptcy Law that: (i) is for relief against the Company or any Subsidiary in an involuntary case, (ii) appoints a Custodian of the Company or any Subsidiary or for all or substantially all of the property of the Company or any Subsidiary, or (iii) orders the liquidation of the Company or any Subsidiary, in each case, if such order or decree remains unstayed and in effect for 60 consecutive days. 28 The term "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. Section 6.2 Acceleration. If an Event of Default (other than an Event of Default specified in clauses (g) and (h) of Section 6.1) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Securities by notice to the Company and the Trustee, may declare the unpaid principal of and any accrued interest on all the Securities to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately. If an Event of Default specified in clause (g) or (h) of Section 6.1 occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Securities by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. Section 6.3 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy occurring upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.4 Waiver of Past Defaults. Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a continuing Default or Event of Default in the payment of the principal or interest on any Security held by a nonconsenting Holder. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.5 Control by Majority. The Holders of a majority in principal amount of the outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising 29 any trust or power conferred on such Trustee, provided that (a) such direction is not in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action it deems proper that is not inconsistent with such direction and (c) such Holders have offered to the Trustee indemnity as provided in Section 7.1(e). Section 6.6 Limitation on Suits. No Holder of any of the Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee or for any other remedy under this Indenture, unless (a) such Holder has previously given notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal amount of the outstanding Securities have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee under this Indenture; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 30 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 30-day period by the Holders of a majority in principal amount of the outstanding Securities. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Section 6.7 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Section 6.8 Collection Suit by Trustee. If an Event of Default specified in Section 6.1(a) or (b) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company, any Subsidiary Guarantor or any other obligor for the whole amount of principal and interest remaining unpaid on the Securities and interest on overdue principal and, to the extent lawful, 30 interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9 Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and if the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders of the Securities may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.7, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection. Second: to Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. 31 Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. ARTICLE 7 TRUSTEE Section 7.1 Duties of a Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee undertakes to perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee. (ii) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, however, that the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and 32 (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to the provisions of this Section 7.1. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) The Trustee shall have no responsibility for making any calculations hereunder, including, without limitation, the amount of interest owing on the Securities under any of the provisions of the Registration Rights Agreement or pursuant to a Servicios Guaranty Default. The Company shall deliver to the Trustee an Officers' Certificate specifying any additional interest due under the Registration Rights Agreement or as a Servicios Default Payment on or before the 15th day prior to an interest payment date. Section 7.2 Rights of Trustee. (a) The Trustee may rely and shall be fully protected in relying upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed and monitored with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company, and any demand, request, direction or notice from any Subsidiary Guarantor shall be sufficient if signed by an Officer of such Subsidiary Guarantor. 33 Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, the Subsidiary Guarantors or any Affiliate of the Company or the Subsidiary Guarantors with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights; provided, however, the Trustee is subject to Sections 7.10 and 7.11. Section 7.4 Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture, the Securities or any documents relating to the Securities. It shall not be accountable for the Company's use of the proceeds from the Securities or any money paid to the Company or upon the Company's discretion under any provision hereof. It shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement or recital herein or any statement in the Securities or any other document in connection with the sale of the Securities or pursuant to this Indenture, other than its certificate of authentication. Section 7.5 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. A Default or an Event of Default shall not be considered known to the Trustee unless it is a Default or Event of Default under Section 6.1(a) or (b) or the Trustee shall have received notice thereof, in accordance with this Indenture, from the Company or from the Holders of a majority in principal amount of the outstanding Securities, and in the absence of such notice the Trustee may conclusively assume there is no Default or Event of Default. Except in the case of a Default or Event of Default in payment of principal or interest on any Security (including the failure to make a mandatory redemption pursuant hereto), the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Holders. Section 7.6 Reports by Trustee to Holders. Within 60 days after each May 15 beginning with the May 15 following the date hereof, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the 12 months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA ss. 313(n). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange on which the Securities are listed. The Company shall promptly notify the Trustee when the Securities are listed on any stock exchange. 34 Section 7.7 Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, advances and expenses incurred or made by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth in the next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim, and the Trustee shall cooperate in the defense. The Trustee may have separate counsel, and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien with priority over the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(g) or (h) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 7.8 Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; 35 (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee after written request by any Holder who had been a Holder for at least six months fails to comply with Section 7.10, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all of the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to the Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.7. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. Section 7.9 Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10 Eligibility; Disqualification. There shall at all times be a Trustee hereunder that shall be a corporation organized and doing business under the laws of the United States of America or of any state thereof authorized under such laws to exercise corporate trustee power, shall be subject to supervision or examination by federal or state authority and shall have a combined capital and surplus of at least $10 million as set forth in its most recent published annual report of condition. 36 This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1). The Trustee is subject to TIA ss. 310(b), including the optional provision permitted by the second sentence of TIA ss. 310(b)(9). Section 7.11 Preferential Collection of Claims Against Company and Subsidiary Guarantors. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or has been removed shall be subject to TIA ss. 311(a) to the extent indicated therein. ARTICLE 8 DISCHARGE OF INDENTURE Section 8.1 Termination of Company's and Subsidiary Guarantors' Obligation. This Indenture shall cease to be of further effect (except that the Company's obligations under Section 7.7 and 8.4, the Subsidiary Guarantors' obligations under Section 10.1 and the Company's, Trustee's and Paying Agent's obligations under Section 8.3 shall survive) when all outstanding Securities theretofore authenticated and issued have been delivered (other than destroyed, lost or stolen Securities that have been replaced or paid) to the Trustee for cancellation and the Company and the Subsidiary Guarantors have paid all sums payable by the Company or such Subsidiary Guarantors hereunder and under the Subsidiary Guarantees, respectively. In addition, subject to the conditions described below, at the Company's option, either (a) the Company and the Subsidiary Guarantors will be deemed to have been discharged from their obligations with respect to the Securities on the 31st day after the applicable conditions set forth below have been satisfied or (b) the Company and the Subsidiary Guarantors shall cease to be under any obligation to comply with Article 4 of this Indenture, at any time after the conditions set forth below have been satisfied: (i) the Company has deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders (A) money or (B) noncallable U.S. Government Obligations, which through the payment of interest and principal in respect thereof in accordance with their terms, will provide either (I) payment in full of principal, premium on, if any, and interest on, the outstanding Securities as of the date of such payment, or (II) (without any reinvestment of such interest or principal), not later than one day before the due date of any payment, money or (C) a combination of (A) and (B), in an amount sufficient, in the opinion (with respect to (B) and (C)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee at or before the time of such deposit, to pay and discharge each installment of principal of, premium on, if any, and interest on, the outstanding Securities on the dates such installments are due; (ii) no Default or Event of Default has occurred and is continuing on the date of such deposit or shall occur as a result of such deposit, and such deposit shall not result in a breach or violation of, or constitute a Default under, any other instrument to which the Company is a party to or is bound, as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee concurrently with such deposit; 37 (iii) the Company has paid or duly provided for payment of all amounts then due or to become due to the Trustee pursuant to Section 7.7 of the Indenture; and (iv) the Company has delivered to the Trustee an Officers' Certificate, stating that there has been compliance with all conditions precedent provided for in the Indenture relating to the satisfaction and discharge of this Indenture. If the Company selects option (a) above, this Indenture shall cease to be of further effect on the 31st day after the conditions set forth above have been satisfied (except as provided in this paragraph), and the Trustee, on demand of the Company or any Subsidiary Guarantor, shall execute proper instruments acknowledging confirmation of and discharge under this Indenture, the Securities and the Subsidiary Guarantees; provided, however, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 4.1, 4.6, 7.7, 7.8, 8.3 and 8.4, the Subsidiary Guarantors' obligations under Article 10 and the Trustee's and Paying Agent's obligations in Section 8.3 shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations under Sections 7.7 and 8.4, the Subsidiary Guarantors' obligations under Section 10.1 and the Company's, Trustee's and Paying Agent's obligations under Section 8.3 shall survive. If the Company elects option (b) above, the Company's obligations under Article 4 hereunder shall terminate upon the satisfaction of the conditions, and all other obligations shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations under Sections 7.7 and 8.4, the Subsidiary Guarantors' obligations under Section 10.1 and the Company's, Trustee's and Paying Agent's obligations under Section 8.3 above shall survive. After such irrevocable deposit is made pursuant to this Section 8.1 and satisfaction of the other conditions set forth herein, the Trustee, upon request, shall acknowledge in writing the discharge of the Company's and the Subsidiary Guarantors' obligations under this Indenture and the Subsidiary Guarantees except for those surviving obligations specified above. In order to have money available on a payment date to pay principal of or interest on the Securities, the U.S. Government Obligations shall be payable as to principal or interest at least one Business Day before such payment date in such amounts as will provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. Section 8.2 Application of Trust Money. The Trustee or a trustee satisfactory to the Trustee and the Company shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.1. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Securities. Section 8.3 Repayment to Company. 38 To the extent permitted by applicable law, the Trustee and the Paying Agent shall promptly pay to the Company upon written request any excess money or securities held by them at any time in excess of amounts required to pay principal of or interest on the Securities. The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal or interest that remains unclaimed for one year after the date upon which such payment shall have become due; provided, however, that the Company shall have either caused notice of such payment to be mailed to each Holder entitled thereto no less than 30 days before such repayment or within such period shall have published such notice in a financial newspaper of widespread circulation published in New York, New York. After payment to the Company, Holders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. Section 8.4 Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.2 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.2; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENTS Section 9.1 Without Consent of Holders. The Company and the Trustee may amend this Indenture and the Securities without the consent of any Holder: (a) to cure any ambiguity, defect or inconsistency; (b) to comply with Section 5.1 or 10.3; (c) to provide for uncertificated Securities in addition to certificated Securities; (d) to make any change that does not adversely affect the legal rights hereunder of any Holder; and 39 (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such Supplemental Indenture and upon receipt by the Trustee of the documents described in Section 9.6 hereof, the Trustee shall join with the Company in the execution of any Supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into such Supplemental Indenture which affects its own rights, duties or immunities under this Indenture or otherwise. Section 9.2 With Consent of Holders. Except as provided below in this Section 9.2, the Company and the Trustee may amend this Indenture or the Securities with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities. The Holders of a majority in principal amount of the Securities then outstanding may, or the Trustee with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities may, waive compliance in a particular instance by the Company with any provision of this Indenture or the Securities. Upon the request of the Company, accompanied by a resolution of its Board of Directors authorizing the execution of any such Supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.6 hereof, the Trustee shall join with the Company in the execution of such Supplemental Indenture unless such Supplemental Indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such Supplemental Indenture. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section becomes effective, the Company shall mail to the Holders of each Security affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Indenture or waiver. Subject to Sections 6.4 and 6.7 hereof, the Holders of a majority in principal amount of the Securities then outstanding may waive compliance in particular instance by the Company or any Subsidiary Guarantor with any provision of this Indenture or the Securities, provided, however, that without the consent of each Holder affected, an amendment or waiver under this Section may not (with respect to any Securities held by a non-consenting Holder): (a) reduce the principal amount of Securities whose Holders must consent to an amendment or waiver; 40 (b) reduce the rate of or change the time for payment of interest, including default interest, on any Security; (c) reduce the principal of or change the fixed maturity of any Security or alter the optional or mandatory redemption provisions or the price at which the Company shall offer to purchase such Securities pursuant to Sections 3.7 and 4.10 hereof; (d) make any Security payable in money other than that stated in the Security; (e) make any change in Section 6.4 or 6.7 hereof or in this sentence of this Section 9.2; (f) waive a Default in the payment of principal of, premium or interest on, or redemption payment with respect to, any Security; or (g) except as provided in Sections 8.1 and 10.4 hereof, release any of the Subsidiary Guarantors from their obligations under the Subsidiary Guarantees or make any change in the Subsidiary Guarantees that would adversely affect the Holders. Section 9.3 Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall be set forth in a Supplemental Indenture that complies with the TIA as then in effect. Section 9.4 Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security; provided, however, that any such Holder or subsequent Holder may revoke the consent as to his or her security if the Trustee receives written notice of revocation before the date the waiver or amendment becomes effective. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Holder. The Company may fix a record date for determining which Holders must consent to such amendment or waiver. If the Company fixes a record date, the record date shall be fixed at (a) the later of 30 days before the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee before such solicitation pursuant to Section 2.05, or (b) such other date as the Company shall designate. Section 9.5 Notation on or Exchange of Securities. The Trustee may place an appropriate notation about an amendment or waiver on any Security thereafter authenticated. The Company in exchange for all Securities may issue and the Trustee shall authenticate new Securities of the same series that reflect the amendment or waiver. 41 Failure to make the appropriate notation or issue a new Security of the same series shall not affect the validity and effect of such amendment or waiver. Section 9.6 Trustee to Sign Amendments, etc. The Trustee shall sign any amendment or Supplemental Indenture authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or Supplemental Indenture, the Trustee shall be entitled to receive, and, subject to Section 7.1, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or Supplemental Indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. Neither the Company nor any Subsidiary Guarantor may sign an amendment or Supplemental Indenture until the Board of Directors approves it. ARTICLE 10 SUBSIDIARY GUARANTEES Section 10.1 Subsidiary Guarantees The Subsidiary Guarantors hereby, jointly and severally, unconditionally guarantee to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, regardless of the validity and enforceability of this Indenture, the Securities and the Obligations of the Company hereunder and thereunder, that (a) the principal 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 the Securities, if any, to the extent lawful, and all other Obligations of the Company to the Holders or the Trustee hereunder or thereunder shall be promptly paid in full, 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 in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise; subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 10.6. Failing payment when due of any amount so guaranteed for whatever reason, the Subsidiary Guarantors will be jointly and severally obligated to pay the same immediately. Each Subsidiary Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Subsidiary Guarantee will 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 Subsidiary Guarantors, or any Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or 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 Subsidiary Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the 42 Holders in respect of any obligations guaranteed hereby until payment in full of all Obligations guaranteed hereby. Each Subsidiary Guarantor 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 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 non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantee. Section 10.2 Execution and Delivery of Subsidiary Guarantees. To evidence its Subsidiary Guarantee set forth in Section 10.1, each Subsidiary Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form of Exhibit B shall be endorsed by an officer of such Subsidiary Guarantor on each Security authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Subsidiary Guarantor by its President or one of its Vice Presidents and attested to by an Officer. Each Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 10.1 shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Subsidiary Guarantee. If an Officer or Officer whose signature is on this Indenture or on the Subsidiary Guarantee no longer holds that office at the time the Trustee authenticates the Security on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee shall be valid nevertheless. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of the Subsidiary Guarantors. Section 10.3 Subsidiary Guarantors May Consolidate, etc. on Certain Terms. (a) Except as set forth in Articles 4 and 5, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Subsidiary Guarantor with or into the Company or any other Subsidiary Guarantor or shall prevent any transfer, sale or conveyance of the property of a Subsidiary Guarantor as an entirety or substantially as an entirety, to the Company or any other Subsidiary Guarantor. (b) Except as set forth in Article 4 and 5, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Subsidiary Guarantor with or into a corporation or corporations other than the Company or any other Subsidiary Guarantor (in each case, whether or not affiliated with the Subsidiary Guarantor), or successive consolidations or mergers in which a Subsidiary Guarantor or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of the property of a 43 Subsidiary Guarantor as an entirety or substantially as an entirety, to a corporation other than the Company or any other Subsidiary Guarantor (in each case, whether or not affiliated with the Subsidiary Guarantor) authorized to acquire and operate the same; provided, however, that each Subsidiary Guarantor hereby covenants and agrees that, upon any such consolidation, merger, sale or conveyance, the Subsidiary Guarantee endorsed on the Securities, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by such Subsidiary Guarantor, shall be expressly assumed (if the Subsidiary Guarantor is not the surviving corporation in the merger), by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee, by the corporation formed by such consolidation, or into which the Subsidiary Guarantor shall have been merged, or by the corporation which shall have acquired such property. In case of any such consolidation merger, sale or conveyance and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory 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 the Subsidiary Guarantor, such successor corporation shall succeed to and be substituted for the 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. Section 10.4 Releases Following Sale of Assets. Concurrently with any sale of substantially all of the assets of any Subsidiary Guarantor, or successor Subsidiary Guarantor, in compliance with the terms of Sections 5.1 and 10.3 hereof, such Subsidiary Guarantor, or successor Subsidiary Guarantor, shall be released from and relieved of its obligations under its Subsidiary Guarantee or Section 10.3 hereof, as the case may be. 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 5.1 hereof, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor, or successor Subsidiary Guarantor, from its obligations under its Subsidiary Guarantee. Any Subsidiary Guarantor, or successor Subsidiary Guarantor, not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of, premium on, if any, and interest on the Securities and for the other obligations of any Subsidiary Guarantor under the Indenture as provided in this Article 10. 44 Section 10.5 "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 this Article 10 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 this Article 10 in place of the Trustee. Section 10.6 Limitation of Subsidiary Guarantor's Liability. Each Subsidiary Guarantor and by its acceptance hereof each Holder hereby confirms that it is the intention of all such parties that the guarantee by such Subsidiary Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effect the foregoing intention, the Holders and such Subsidiary Guarantor hereby irrevocably agree that the obligations of such Subsidiary Guarantor under the Guarantee shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting such fraudulent transfer or conveyance. ARTICLE 11 CONVERSION Section 11.1 Right to Convert. Subject to and upon compliance with the provisions of this Indenture, each Holder on or after November 1, 1996, shall have the right, at his option, at any time on or before maturity (except that, with respect to any Security or portion of a Security that shall be called for redemption or delivered for repurchase, such right shall terminate at the close of business on the date fixed for redemption of such Security or portion of a Security or the second trading day preceding a Change of Control Payment Date, as the case may be, unless the Company shall default in payment due upon redemption or repurchase thereof) to convert the principal amount of any such Security, or any portion of such principal amount which is $1,000 or a whole multiple thereof, into (y) that number of fully paid and nonassessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Security or portion thereof surrendered for conversion by the conversion price in effect at such time plus (z) if such conversion occurs after November 1, 1996, and before July 1, 1999, an amount equal to 50% of the interest otherwise payable on the converted Securities from the date of conversion through and including July 1, 1999 (the "Premium Protection Payment"), such amount payable, at the option of the Company, in cash or Common Stock based on the Closing Price of the Common Stock on the conversion date (as calculated in accordance with Section 11.5(f) hereof, by surrender of the Security so to be converted in whole or in part in the manner provided in Section 11.2; provided, however, that no Premium Protection Payments will be made after the consummation of an all cash tender offer for 100% of the Common Stock at a price per share representing a 40% or greater premium above the conversion price. A holder of Securities is not entitled to any rights of a holder of Common Stock until such holder has converted his Securities to Common Stock, and only to the extent such Securities are deemed to have been converted to Common Stock under this Article 11. 45 Section 11.2 Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends. In order to exercise the conversion privilege, the holder of any Security to be converted in whole or in part shall surrender such Security, duly endorsed, at an office or agency maintained by the Company pursuant to Section 2.3, accompanied by the funds, if any, required by the last paragraph of this Section, and shall give written notice of conversion in the form provided on the Securities (or such other notice that is acceptable to the Company) to the Company at such office or agency that the holder elects to convert such Security or the portion thereof specified in such notice. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock that shall be issuable on such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 11.7. Each Security surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration under such Security, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the Holder or his duly authorized attorney. As promptly as practicable after the surrender of such Security and the receipt of such notice and funds, if any, as aforesaid, the Company shall issue and shall deliver at such office or agency to such holder, or on his written order, (x) a certificate or certificates for the number of full shares issuable upon the conversion of such Security or portion thereof in accordance with the provisions of this Article, (y) a check or cash, or such number of shares of Common Stock issuable in respect of the Premium Protection Payment, if any, required to be paid upon conversion pursuant to Section 11.1, and (z) a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion as provided in Section 11.3. In case any Security of a denomination greater than $1,000 shall be surrendered for partial conversion, and subject to Article 2, the Company shall execute and the Trustee shall authenticate and deliver to or upon the written order of the holder of the Debenture so surrendered, without charge to him, a new Security or Securities in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Security. Each conversion shall be deemed to have been effected on the date on which such Security shall have been surrendered (accompanied by the funds, if any, required by the last paragraph of this Section 11.2) and such notice shall have been received by the Company, as aforesaid, and the person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next day on which such stock transfer books are open, but such conversion shall be at the conversion price in effect on the date upon which such Security shall have been surrendered. Any Security or portion thereof surrendered for conversion during the period from the close of business on the record date for any interest payment date to the opening of business on such interest payment date shall (unless such Security or portion thereof being converted shall have been called for 46 redemption on a date in such period) be accompanied by payment, in funds acceptable to the Company, of an amount equal to the interest otherwise payable on such interest payment date on the principal amount being converted; provided, however, that no such payment need be made if there shall exist at the time of conversion a default in the payment of interest on the Securities. An amount equal to such payment shall be paid by the Company on such interest payment date to the holder of such Security at the close of business on such record date; provided, however, that if the Company shall default in the payment of interest on such interest payment date, such amount shall be paid to the person who made such required payment. Except as provided above in this Section 11.2, no adjustment shall be made for interest accrued on any Security converted or for dividends on any shares issued upon the conversion of such Security as provided in this Article 11. If any Security or portion thereof which has been called for redemption on a date during the period from the close of business on the record date for any interest payment date to the opening of business on such interest payment date is surrendered for conversion during such period, no interest shall be payable to the holder of such Security on account of such Security or portion thereof. Section 11.3 Cash Payments in Lieu of Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of Common Stock would be issuable upon the conversion of any Security or Securities, including fractional shares issuable as a Premium Protection Payment, the Company shall make an adjustment therefor in cash at the current market value thereof. The current market value of a share of Common Stock shall be the Closing Price on the day (that is not a Legal Holiday as defined in Section 13.8) before the day on which the Securities (or specified portions thereof) are deemed to have been converted and such Closing Price shall be determined as provided in subsection (f) of Section 11.5. Section 11.4 Conversion Price. The conversion price shall be as specified in the form of Security hereinabove set forth, subject to adjustment as provided in this Article. Section 11.5 Adjustment of Conversion Price. (a) In case the Company shall (i) pay a dividend, or make a distribution, in shares of its Common Stock on its Common Stock, (ii) subdivide its outstanding Common Stock into a greater number of shares or (iii) combine its outstanding Common Stock into a smaller number of shares, the conversion price in effect immediately prior thereto shall be adjusted so that the holder of any Security thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Company that he would have owned or have been entitled to receive after the happening of any of the events described above had such Security been converted immediately before the happening of such event. An adjustment made pursuant to this subsection 47 (a) shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of subdivision or combination. (b) In case the Company shall issue rights or warrants to all holders of its Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Common Stock at a price per share less than the current market price per share of Common Stock (as determined in accordance with subsection (f) below) at the record date for the determination of stockholders entitled to receive such rights or warrants, except as provided in subsection (f) below, the conversion price in effect immediately prior thereto shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately before the date of issuance of such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price (determined by multiplying the total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by the current price), and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after such record date. Except as provided in subsection (f) below, in determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such current market price, and in determining the aggregate offering price of such shares of Common stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors of the Company whose determination shall be conclusive and described in a certificate filed with the Trustee. Upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the conversion price pursuant to this subsection (b), if any such right or warrant shall expire and shall not have been exercised, the conversion price shall immediately upon such expiration be recomputed to the conversion price which would have been in effect had the adjustment of the conversion price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (c) In case the Company shall distribute to all holders of its Common Stock any shares of Capital Stock of the Company (other than Common Stock) or evidences of its indebtedness or assets (excluding cash dividends or other distributions to the extent paid from retained earnings of the Company) or rights or warrants to subscribe for or purchase any of its securities (excluding those referred to in subsection (b) above), then, except as provided in subsection (f) below, in each such case the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately before the date of such distribution by a fraction of which the numerator shall be the current market price per share (as defined in subsection (f) below) of the Common Stock on the record date mentioned below less the fair market value on such record date (as determined by the Board of Directors of the Company, whose determination shall be conclusive, and described in a certificate filed with the Trustee) of the portion of the Capital Stock or 48 assets or evidences of indebtedness so distributed or of such rights or warrants applicable to one share of Common Stock, and the denominator shall be the market price per share (as defined in subsection (f) below) of the Common Stock on such record date. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to received such distribution, except as provided in subsection (f) below. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash in an aggregate amount that, combined together with (1) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this paragraph (d) has been made and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (e) of this Section has been made, exceeds 10% of the product of the current market price per share of the Common Stock on the date for the determination of holders of shares of Common Stock entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, then, and in each such case, immediately after the close of business on such date for determination, the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately before the close of business on the date fixed for determination of the stockholders entitled to receive such distribution by a fraction (i) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of shares of Common Stock outstanding on such date for determination and (ii) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (f) of this Section) of the Common Stock on such date for determination. (e) In case a tender offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender offer (as amended at the time of the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchase Shares (as defined below) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) that combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) as of the expiration of such tender offer, of consideration payable in respect of any other tender offer, by the Company or any Subsidiary for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this paragraph (e) has been made and (2) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to paragraph (d) of this Section has been made, exceeds 10% of the product of the current market price per share of the Common Stock (determined as 49 provided in paragraph (f) of this Section) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, then, and in each such case, immediately before the opening of business on the day after the date of the Expiration Time, the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately before close of business on the date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (I) the current market price per share of the Common Stock (determined as provided in paragraph (f) of this Section) on the date of the Expiration Time and (II) the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, less (B) the amount of cash plus the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares, and (ii) the denominator of which shall be equal to the product of (A) the current market price per share of the Common Stock (determined as provided in paragraph (f) of this Section) as of the Expiration Time and (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Expiration Time less the number of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the "Purchased Shares"). (f) For the purpose of any computation under paragraphs (b), (c), (d) and (e) of this Section 11.5, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Company commencing not more than twenty Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. The "Closing Price" for each Trading Day shall be the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the American Stock Exchange or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotations systems ("NASDAQ") National Market System ("NASDAQ/NMS") or, if not listed or admitted to trading on NASDAQ/NMS, on NASDAQ, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or NASDAQ/NMS or quoted on NASDAQ, the average of the closing bid and asked prices in the over-the-counter market as furnished by any American Stock Exchange member firm selected from time to time by the Company for that purpose. For purposes of this paragraph, the term "ex date," when used with respect to any issuance of distribution, shall mean the first date on which the Common Stock trades regular way on such exchange or in such market without the right to receive such issuance or distribution. (g) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this subsection (g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 11 shall be made by the Company and shall be made to the nearest cent or to the nearest one 50 hundredth of a share, as the case may be. Anything in this Section 11.5 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the conversion price, in addition to those required by this Section 11.5, as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the conversion price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the conversion price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the conversion price setting forth the adjusted conversion price and the date on which such adjustment becomes effective and shall mail or cause to be mailed such notice of such adjustment of the conversion price to the Holder of each Security at his last address appearing on the Security register provided for in Section 2.3 of this Indenture. (i) In any case in which this Section 11.5 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the Holder of any Security converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such Holder any amount in cash in lieu of any fraction pursuant to Section 11.3. Section 11.6 Effect of Reclassification, Consolidation, Merger or Sale. If any of the following events occur, namely (i) any reclassification or change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation, merger or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock shall occur, then the Company or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall conform to the TIA as in force at the date of execution of such supplemental indenture) providing that each Security shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Securities immediately before such reclassification, change, consolidation, merger, combination, sale or conveyance. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. 51 The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder of Securities, at his address appearing on the Security register provided for in Section 2.3 of this Indenture. The above provisions of this Section 11.6 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. Section 11.7 Taxes on Shares Issued. The issue of stock certificates on conversions of Securities shall be made without charge to the converting Holder of Securities for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the Holder of any Security converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. Section 11.8 Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock. The Company shall use its best efforts to provide, free from preemptive rights, out of its authorized but unissued shares or shares held in treasury, sufficient shares of Common Stock to provide for the conversion of the Securities (including Common Stock issuable as a Premium Protection Payment) from time to time as such Securities are presented for conversion. Before taking any action which would cause an adjustment reducing the conversion price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Securities, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted conversion price. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be fully paid and nonassessable by the Company and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of Securities hereunder require registration with or approval of any governmental authority under any Federal or State law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. 52 The Company further covenants that if at any time Common Stock shall be listed on the American Stock Exchange or any other national securities exchange the Company will, if permitted by the rules of such exchange, list and keep listed so long as the Common Stock shall be so listed on such exchange, all Common Stock issuable upon conversion of the Securities. Section 11.9 Responsibility of Trustee. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any Holder of Securities to determine whether any facts exist which may require any adjustment of the conversion price or other adjustment or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Security; and the Trustee and any other conversion agent make no representations with respect thereto. Subject to the provisions of Section 7.1, neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Security for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article 11. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 11.6 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Holders of Securities upon the conversion of their Securities after any event referred to in Section 11.6 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 7.1, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Company shall be obligated to file with the Trustee before the execution of any such supplemental indenture) with respect thereto. 53 Section 11.10 Notice to Holders Before Certain Actions. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (e) of an increase in the interest rate on the Securities pursuant to the Registration Rights Agreement or a Servicios Guaranty Default, the Company shall cause to be filed with the Trustee and to be mailed to each Holder of Securities at his address appearing on the Securities Register provided for in Section 2.3 of this Indenture, as promptly as possible but in any event at least fifteen days before the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occurring and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. 54 ARTICLE 12 SUBORDINATION Section 12.1 Agreement to Subordinate. The Company agrees, and each Holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Indebtedness, and that the subordination is for the benefit of the holders of Senior Indebtedness. Section 12.2 Certain Definitions. "Senior Indebtedness"means: (a) the principal of, interest (including, to the extent permitted by applicable law, interest on or after the commencement of a proceeding referred to in clauses (g) or (h) of Section 6.1 whether or not representing an allowed claim in such proceeding) and premium, if any, on and any other amounts owing with respect to (i) any indebtedness of the Company, now or hereafter outstanding, in respect of borrowed money (other than the Securities), (ii) any indebtedness of the Company, now or hereafter outstanding, evidenced by a bond, note, debenture, capitalized lease, letter of credit or other similar instrument, (iii) any other written obligation of the Company, now or hereafter outstanding, to pay money issued or assumed as all or part of the consideration for the acquisition of property, assets or securities, including without limitation, hedging obligations with respect to the purchase and sale of oil and gas, and (iv) any guaranty or endorsement (other than for collection or deposit in the ordinary course of business) or discount with recourse of, or other agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire, to supply or advance funds or to become liable with respect to (directly or indirectly), any indebtedness or obligation of any person of the type referred to in the preceding subclauses (i), (ii) and(iii) now or hereafter outstanding; and (b) any refunds, refinancings, renewals or extensions of any indebtedness or other obligation described in clause (a) of this Section 12.2. Notwithstanding the foregoing, if, by the terms of the instrument creating or evidencing any indebtedness or obligation referred to in clauses (a) and (b) above, it is expressly provided that such indebtedness or obligation is not senior in right of payment to the Securities, such indebtedness or obligation shall not be included as Senior Indebtedness. "Representative" means the indenture trustee or other trustee, agent or representative for an issue of Senior Indebtedness. 55 Section 12.3 Liquidation; Dissolution; Bankruptcy. Upon any distribution to creditors of the Company in a liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property: (1) holders of Senior Indebtedness shall be entitled to receive payment in full, in cash or in a manner satisfactory to the holders of such Senior Indebtedness, of all Senior Indebtedness before Holders shall be entitled to receive any payments of principal of or premium, if any, or interest on Securities; and (2) until the Senior Indebtedness is paid in full in cash or in a manner satisfactory to the holders of such Senior Indebtedness, any distribution to which Holders would be entitled but for this Article shall be made to holders of Senior Indebtedness as their interest may appear, except that Holders may receive securities that are subordinated to Senior Indebtedness to at least the same extent as the Securities. A distribution may consist of cash, securities or other property. Section 12.4 Company Not to Make Payments with Respect to Securities in Certain Circumstances. (a) Upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, all principal thereof, premium, if any, and interest thereon and any other amounts owing in respect thereof shall first be paid in full, or such payment duly provided for in cash or in a manner satisfactory to the holders of such Senior Indebtedness, before any payment is made on account of the principal of or premium, if any, or interest on the Securities or to acquire any of the Securities. (b) Upon the happening of an event of default (or if any event of default would result upon any payment upon or with respect to the Securities) with respect to any Senior Indebtedness as such event of default is defined therein or in the instrument under which it is outstanding, permitting holders to accelerate the maturity thereof, and, if the default is other than default in payment of the principal of, premium, if any, or interest on or any other amount owing in respect of such Senior Indebtedness, upon written notice thereof given to the Company and the Trustee by the holders of Senior Indebtedness or their Representative, then, unless such an event of default shall have been cured or waived or shall have ceased to exist, no payment shall be made by the Company with respect to the principal of or premium, if any, or interest on the Securities or to acquire any of the Securities. 56 Section 12.5 Acceleration of Securities. If payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. Section 12.6 When Distribution Must Be Paid Over. If a distribution is made to Holders that, because of this Article 12, should not have been made to them, the Holders who receive the distribution shall hold it in trust for holders of Senior Indebtedness and pay it over to them as their interests may appear. Section 12.7 Notice by Company. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of principal of or premium, if any, or interest on the Securities to violate this Article 12. Section 12.8 Subrogation. After all Senior Indebtedness is paid in full and until the Securities are paid in full, Holders shall be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. A distribution made under this Article 12 to holders of Senior Indebtedness which otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on Senior Indebtedness. Section 12.9 Relative Rights. This Article 12 defines the relative rights of Holders and holders of Senior Indebtedness. Nothing in this Indenture shall: (1) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and premium, if any, and interest on the Securities in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company, other than holders of Senior Indebtedness; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Indebtedness to receive distributions otherwise payable to Holders. If the Company fails because of this Article 12 to pay principal of or premium, if any, or interest on a Security on the due date, such failure shall nevertheless be deemed a Default. 57 Section 12.10 Subordination May Not be Impaired by Company. No right of any holder of Senior Indebtedness to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with the terms of this Indenture. Section 12.11 Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative. Section 12.12 Rights of Trustee and Paying Agent. Notwithstanding any provisions of this Indenture to the contrary, the Trustee and any Paying Agent may continue to make payments on the Securities and shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of such payments until it receives written notice (received by a Responsible Officer, in the case of the Trustee) reasonably satisfactory to it that payments may not be made under this Article 12 and, before the receipt of any such notice, the Trustee, subject to the provisions of Article 7, and any agent shall be entitled to assume conclusively that no such facts exist. The Company, an Agent, a Representative or a holder of Senior Indebtedness may give the notice. If an issue of Senior Indebtedness has a Representative, only the Representative (or any Representative, if more than one) may give the notice with respect to such Senior Indebtedness. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a Representative) to establish that such notice has been given by a holder of Senior Indebtedness (or a Representative), and shall be entitled to rely on any written notice by a Person representing himself to be a holder of Senior Indebtedness to the effect that such issue of Senior Indebtedness has no Representative. Any deposit of moneys by the Company with the Trustee or any Paying Agent (whether or not in trust) for the payment of the principal of or premium, if any, or interest on, or payment on account of Change of Control or Premium Protection Payment, if any, of, any Securities shall be subject to the provisions of this Article 12, except that if, at least three business days before the date on which by the terms of this Indenture any such moneys may become payable for any purpose (including, without limitation, the payment of principal of or premium, if any, or interest on any Security), the Trustee shall not have received with respect to such moneys the notice provided for in this Section 12.12, then the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary which may be received by it within three business days before or on or after such date. This Section 12.12 shall be construed solely for the benefit of the Trustee and Paying Agent and shall not otherwise affect the rights of holders of Senior Indebtedness. If the Trustee determines in good faith that further evidence is required with respect to the right of any Person as holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article 12, the Trustee may request such Person to furnish evidence to the reasonable 58 satisfaction of the Trustee as to the amount of the Senior Indebtedness held by such Person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article 12, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive payment. The Trustee shall not be deemed to owe any fiduciary duty to holders of Senior Indebtedness by virtue of the provisions of this Article 12. The Trustee's responsibilities to the holders of Senior Indebtedness are limited to those set forth in this Article 12, and no implied covenants or obligations shall be read into this Indenture. The Trustee shall not become liable to the holders of Senior Indebtedness if it makes a payment prohibited by this Article 12 in good faith. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any agent may do the same with like rights. Section 12.13 Effectuation of Subordination by Trustee. Each Holder of Securities, by acceptance thereof, authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effect the subordination provided in this Article 12 and appoints the Trustee his attorney-in-fact for any and all such purposes. ARTICLE 13 MISCELLANEOUS Section 13.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss. 318 (C), the imposed duties shall control. Section 13.2 Notices. Any notice or communication by the Company, 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), telex, telecopier or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company or any Subsidiary Guarantor: Key Energy Group, Inc. 255 Livingston Avenue New Brunswick, New Jersey 08901 Attention: Francis D. John Telecopier No.: (908) 247-5148 59 With a copy to: Sullivan & Worcester, LLP One Post Office Square Boston, Massachusetts 02109 Attention: Karen L. Linsley, Esq. Telecopier No.: (617) 338-2880 If to the Trustee: American Stock Transfer & Trust Company 40 Wall Street 46th Floor New York, New York 10005 Attention: Executive Vice President Telecopier No.: (718) 236-4558 With a copy to: Herbert J. Lemmer American Stock Transfer & Trust Company 6201 15th Avenue, 3rd Floor Brooklyn, New York 11219 Telecopier No.: (718) 331-1552 The Company, the Subsidiary Guarantors (or any of them), 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 delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. 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 mails a notice or communication to Holders, it shall mail a copy to the Trustee at the same time. 60 Section 13.3 Communication to Holders with Other Holders. Holders may communicate pursuant to TIA ss. 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 any anyone else shall have the protection of TIA ss. 312(c). Section 13.4 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, upon request, furnish to the Trustee an Officer's Certificate and Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.5) 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. Section 13.5 Statements Required in Certificate. Each certificate with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a) (4)) shall include: (a) a statement that the person making such certificate 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 contained in such certificate are based; (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him 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. Section 13.6 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 13.7 Additional Rights of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of Securities under this Indenture, Holders of Transferred Restricted Securities shall have all the rights set forth in the Registration Rights Agreement and certain other agreements executed and delivered in connection herewith. 61 Section 13.8 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in New York, New York, or at a place of payment are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 13.9 No Recourse Against Others. No past, present or future director, officer, employee, agent, manager, stockholder or other Affiliate (other than the Subsidiary Guarantor) of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Securities, the Indenture or the Subsidiary Guarantee or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. Section 13.10 Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. Section 13.11 Governing Law. This indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of law rules thereof. Section 13.12 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.13 Successors. All agreements of the Company and the Subsidiary Guarantors in this Indenture and the Securities shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 13.14 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. 62 Section 13.15 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 13.16 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 hereof and shall in no way modify or restrict any of the terms or provisions hereof. [SIGNATURE PAGES FOLLOW] 63 IN WITNESS WHEREOF, the parties hereto have causes this Indenture to be executed as of the day and year first above written. Dated as of July 3, 1996 KEY ENERGY GROUP, INC. By: Its: Attest: (SEAL) Dated as of July 3, 1996 YALE E. KEY, INC., as Subsidiary Guarantor By: Its: Attest: (SEAL) Dated as of July 3, 1996 WELLTECH EASTERN, INC., as Subsidiary Guarantor By: Its: Attest: (SEAL) 64 Dated as of July 3, 1996 ODESSA EXPLORATION, INC., as Subsidiary Guarantor By: Its: Attest: (SEAL) Dated as of July 3, 1996 KEY ENERGY DRILLING, INC. D/B/A CLINT HURT DRILLING, as Subsidiary Guarantor By: Its: Attest: (SEAL) Dated as of July 3, 1996 SERVICIOS WELLTECH, SA, as Subsidiary Guarantor By: Its: Attest: (SEAL) 65 Dated as of July 3, 1996 AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee By: Its: Attest: (SEAL) 66 Exhibit A (Face of Security) 7% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 1, 2003 No. $______ KEY ENERGY GROUP, INC. promises to pay to _________________________________________________________________ ____________ or its registered assigns, the principal sum of _________________________________________________________________ ____________ Dollars on July 1, 2003. Interest Payment Dates: July 1 and January 1, commencing January 1, 1997. Record Dates: June 15 and December 15 (whether or not a Business Day). KEY ENERGY GROUP, INC. By: Officer of the Company (SEAL) Attest: This is one of the Convertible Subordinated Debentures referred to in the within-mentioned By: Indenture: Officer of the Company _________________________, as Trustee By Authorized Signature Dated: , A-1 (Back of Security) 7% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 1, 2003 [Unless and until it is exchanged in whole or in part for Securities in definitive form, this Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depositary Trust Company, 55 Water Street, New York, New York ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or 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.]1 THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE, SECURITIES LAWS, 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 (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE DEBENTURE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THE DEBENTURE EVIDENCED HEREBY RESELL OR OTHERWISE TRANSFER THE DEBENTURE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH DEBENTURE EXCEPT (A) TO KEY ENERGY GROUP, INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE DEBENTURE EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (E) PURSUANT - --------1 This paragraph is to be included only if the Security is in global form. A-2 TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE DEBENTURE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE DEBENTURE EVIDENCED HEREBY WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF SUCH DEBENTURE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO IS NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE, SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE 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. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THREE YEARS FROM THE ORIGINAL ISSUANCE OF THE DEBENTURE EVIDENCED HEREBY. 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. Section 1. Interest. Key Energy Group, Inc., a Maryland corporation (the "Company"), promises to pay interest on the principal amount of this 7% Convertible Subordinated Debenture due 2003 (the "Debenture") at the rate and in the manner specified below. The Company shall pay interest on the principal amount of this Debenture in cash at the rate per annum shown above, which rate shall be (i) subject to an increase of fifty (50) basis points (1/2%) in the event of a Servicios Guaranty Default and (ii) subject to increase as specified in the Registration Rights Agreement dated as of July 3, 1993, to which the Company is a party. The Company will pay interest (including the additional interest as a Servicios Default Payment or any additional interest referred to in such Registration Rights Agreement) semi-annually on July 1 and January 1 of each year commencing January 1, 1997, or if any such day is not a Business Day, on the next Business Day (each an "Interest Payment Date") to record holders of Debentures ("Holders") at the close of business on June 15 or December 15 immediately preceding the applicable Interest Payment Date. A copy of the Indenture (defined below), the Registration Rights Agreement and all other agreements affecting this Debenture or the Holders may be obtained from the Company upon request. Interest shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of this Debenture. To the extent lawful, the Company shall pay interest on overdue principal at the rate of 1% per annum in excess of the then applicable interest rate on this Debenture; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. A-3 Section 2. Method of Payment. The Company shall pay interest on the Debentures (except defaulted interest) to Holders at the close of business on the record date next preceding the Interest Payment Date, even if such Debentures are canceled after such record date and on or before such Interest Payment Date. The Holder hereof must surrender this Debenture to a Paying Agent (as defined in the Indenture) to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal and interest by check payable in such money. It may mail an interest check to a Holder's registered address. Section 3. Paying Agent and Registrar. Initially, the Trustee shall act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to any Holder. The Company and any of its Subsidiaries may act in any such capacity. Section 4. Indenture. The Company issued the Debentures under an Indenture, dated as of July 3, 1996 (the "Indenture"), among the Company, the Subsidiary Guarantors (as defined in the Indenture) and American Stock Transfer & Trust Company, as Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990, and as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Debentures. Capitalized terms used herein that are not specifically defined herein shall have the meanings set forth in the Indenture. The Debentures are unsecured general obligations of the Company limited to $52,000,000 in aggregate principal amount. Section 5. Optional Redemption. The Company may redeem at any time on or after July 15, 1999, all or any portion of the Securities outstanding at the following redemption prices expressed as a percentage of the principal amount thereof, if the Securities are redeemed during the 12 month period beginning July 15, of the following years: Year Percentage---- - ----------1999................................................... ........ 104% 2000........................................................... 103% 2001........................................................... 102% 2002........................................................... 101% Section 6. Redemption or Repurchase at Option of Holder. If there is a Change of Control (as defined in the Indenture), the Company will be required to offer to purchase on the Change of Control Payment Date (as defined in the Indenture) all outstanding Debentures at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. Holders whose Debentures are subject to an offer to purchase will receive an offer to purchase A-4 from the Company prior to any related Change of Control Payment Date and may elect to have their Debentures purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. Section 7. 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 to be redeemed at its registered address. Debentures may be redeemed in part but only in whole multiples of $1,000, unless all of the Debentures held by a Holder are to be redeemed. On and after the redemption date, interest ceases to accrue on Debentures or portions of them called for redemption. Section 8. Conversion. Subject to the provisions of the Indenture, the Holder hereof has the right, at his option, at any time on or after July 15, 1999 and on or before the maturity, or, as to all or any portion hereof called for redemption during such period, the close of business on the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal that is $1,000 or a multiple thereof, into (A) that number of shares of the Company's Common Stock, as such shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Debenture or portion thereof to be converted by the conversion price of $9.75, or such conversion price as adjusted from time to time as provided in the Indenture, and (B) if such conversion occurs after November 1, 1996, and before July 1, 1999, an amount equal to 50% of the interest otherwise payable on the converted securities from the date of conversion through and including July 1, 1999, (the "Premium Protection Payment"), such amount payable, at the option of the Company, in cash or Common Stock based on the Closing Price of the Common Stock on the conversion date, by surrender of this Debenture, together with a conversion notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in New York, New York, and, unless the shares issuable on conversion are to be issued in the same name as this Debenture, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the Holder or by his duly authorized attorney ; provided, however, that no Premium Protection Payments will be made after the consummation of an all cash tender offer for 100% of the Common Stock at a price per share representing a 40% or greater premium above the conversion price. No adjustments in respect of interest or dividends will be made upon any conversion; provided, however, that if the Debenture shall be surrendered for conversion during the period from the close of business on any record date for the payment of interest to the opening of business on the following interest payment date, this Debenture (unless it or the portion being converted shall have been called for redemption on a date in such period) must be accompanied by an amount, in funds acceptable to the Company, equal to the interest payable on such interest payment date on the principal amount being converted. No fractional shares will be issued upon any conversion, but an adjustment in cash shall be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Debenture or Debentures for conversion. A holder of Debentures is not entitled to any rights of a holder of Common Stock until such holder has converted his Debentures to Common Stock, and only to the extent such Debentures are to have been converted to Common Stock under the Indenture. Section 9. Subordination. The Securities are subordinated to Senior Indebtedness (as defined in the Indenture). To the extent provided in the Indenture, Senior Indebtedness must be paid before the Securities may be paid. A-5 The Company agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give effect to such provisions, and each Holder appoints the Trustee his attorney-in-fact for any and all such purposes. Section 10. Denominations, Transfer, Exchange. The Debentures are initially issued in global form. The global Debenture represents such of the outstanding Securities as shall be specified therein or endorsed thereon in accordance with the Indenture. The definitive Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. The transfer of Debentures may be registered and Debentures 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 to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Debenture or portion of an Debenture selected for redemption. Also, it need not exchange or register the transfer of any Debentures for a period of 15 days before a selection of Debentures to be redeemed. Section 11. Persons Deemed Owners. Before due presentment to the Trustee for registration of the transfer of this Debenture, the Trustee, any Agent and the Company may deem and treat the person in whose name this Debenture is registered as its absolute owner for the purpose of receiving payment of principal of and interest on this Debenture and for all other purposes whatsoever, whether or not this Debenture is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. The registered holder of an Debenture shall be treated as its owner for all purposes. Section 12. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the Holders of at least a majority in principal amount of the then outstanding Securities, and any existing default (except a payment default) 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, the Indenture or the Securities may be amended to cure any ambiguity, defect or inconsistency, to provide for assumption of Company obligations to Holders or to make any change that does not adversely affect the rights of any Holder. Section 13. Defaults and Remedies. Events of default include: default in payment of interest on the Securities for 30 days; default in payment of principal of or premium on the Securities when due; failure by the Company for 60 days after notice to it to comply with its agreements in the Indenture or the Securities; defaults under and acceleration before express maturity of certain other Indebtedness that aggregates $1,000,000 or more; certain final judgments which remain undischarged if the aggregate of all such judgments exceeds $1,000,000 or more; certain final judgments which remain undischarged if the aggregate of all such judgments exceeds $1,000,000; and certain events of bankruptcy or insolvency. If an Event of Default 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, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Securities become due and payable immediately without further action or notice and all outstanding A-6 Securities, and all Obligations and Claims with respect thereto, become immediately due and payable. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in 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 notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. Section 14. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Subsidiary Guarantors or their Affiliates, and may otherwise deal with the Company, the Subsidiary Guarantors or their Affiliates, as if it were not Trustee; provided, however, that if the Trustee acquires any conflicting interest as described in the Trust Indenture Act, it must eliminate such conflict or resign. Section 15. No Recourse Against Others. No director, officer, employee, agent, manager, stockholder or other Affiliates (other than the Subsidiary Guarantors), of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any of the Subsidiary Guarantors under the Securities, the Indenture or the Subsidiary Guarantees or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. Section 16. Subsidiary Guarantees. Payment of principal, premium (if any) and interest (including interest on overdue principal and overdue interest, if lawful) is unconditionally guaranteed by certain Subsidiaries of the Company. Section 17. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. Section 18. 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). Section 19. 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 Debentures and has directed the Trustee to 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 Debentures or as contained in any notice of redemption and reliance may be placed only on the other identification number placed thereon. Section 20. Additional Rights of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of Securities under A-7 the Indenture, Holders of Transferred Restricted Securities shall have all the rights set forth in the Registration Rights Agreement referred to in the Indenture and certain other agreements executed and delivered in connection therewith. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Request may be made to: Key Energy Group, Inc. 255 Livingston Avenue New Brunswick, New Jersey 08901 Attn: Francis D. John A-8 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to (Insert assignee's soc. sec. or tax I.D. no.) (Print or type assignee's name, address and zip code) 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: (Sign exactly as your name appears on the face of this Security) Signature Guaranteed: By: (THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stock Brokers, Savings and Loan Associations, and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.) A-9 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Security purchased by the Company pursuant to Section 4.10 of the Indenture (Change of Control), state the amount you elect to have purchased (if all, write "ALL"): $__________________________ Date: Your Signature: (Sign exactly as your name appears on the face of this Security) Signature Guaranteed: By: (THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stock Brokers, Savings and Loan Associations, and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.) A-10 SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES'2 The following exchanges of a part of this Global Security for Definitive Securities have been made:
Amount of Principal Signature of decrease in Amount of Amount of this authorized Date of Principal Increase in Global officer of Exchange Amount of Principal Security Trustee or this Global Amount of this following such Securities Security Global Security decrease (or Custodian increase) - ----------------- ------------------- - ---------------------- --------------------- - ----------------------- - -------- 2 This is to be included only if the Security is in global form A-11 Exhibit B [Form of Subsidiary Guarantee] Subsidiary Guarantee _______________, the undersigned (the "Subsidiary Guarantor"), hereby expressly guarantees the performance of all obligations and duties set forth in Section 10.1 of an indenture dated June __, 1996 (the "Indenture") and hereby agrees to be jointly and severally bound with all other Subsidiary Guarantors to all the terms, conditions and responsibilities and liabilities contained therein or that may arise by operation of law. Defined terms and sections of the Indenture referred to in this Guarantee are incorporated herein by reference. Subsidiary Guarantor: [Name] [Address] By: Name: Office: B-1
EX-10.9 13 THIRD AMENDED AND RESTATED LOAN AGREEMENT THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Agreement") is between the undersigned Borrowers, YALE E. KEY, INC. ("Yale"), KEY ENERGY DRILLING, INC. D/B/A CLINT HURT DRILLING ("Hurt"), and WELLTECH EASTERN, INC. ("WellTech") and the undersigned Lender, THE CIT GROUP/CREDIT FINANCE, INC., concerning loans and other credit accommodations to be made by Lender to Borrowers. SECTION 1. PARTIES; BACKGROUND 1.1 The "Borrowers" are the persons, firms, corporations or other entities, identified as the Borrowers in Section 10.6(c) and their successors and assigns. All references to "Borrower" shall mean each of them individually, and all references to "Borrowers" shall mean each of them, jointly, severally and collectively, and the successors and assigns of each. 1.2 The "Lender" is The CIT Group/Credit Finance, Inc. and its successors and assigns. 1.3 (i) Yale (the "Original Borrower"), Eskey, Inc. (the "Original Guarantor"), and Fidelcor Business Credit Corporation ("Fidelcor") entered into a loan transaction (the "Original Loan Transaction") on December 29, 1988, and, in connection therewith, Yale executed a Promissory Note in favor of Fidelcor (the "Original Note"), and Yale delivered to Fidelcor a Security Agreement (the "Security Agreement") and certain related agreements and documents. As part of the Original Loan Transaction, Eskey, Inc. executed a Corporate Continuing Guaranty (the "Original Guaranty") in favor of Fidelcor, guaranteeing unconditionally Yale's obligations to Fidelcor. The Original Note, the Security Agreement, the Original Guaranty, and all documents related thereto are referred to herein as the "1988 Agreements". (ii) On June 29, 1990, Yale and Fidelcor entered into an Amended and Restated Loan and Security Agreement (the Security Agreement as amended by the Amended and Restated Loan and Security Agreement, being referred to herein as the "Original Loan Agreement"); Yale executed a Restated Promissory Note which amended and restated the Original Note; and Eskey, Inc. reaffirmed its obligations under the Original Guaranty by executing the Reaffirmation and Amendment of Guaranty and Subordination Agreement; all of the foregoing being referred to as the "Amendment Agreements". On July 25, 1990, Skeeter Well Service, Inc. ("Skeeter") executed a Guaranty in favor of Lender and entered into a Security Agreement with Lender (the "Skeeter Agreements"). The Amendment Agreements and the Skeeter Agreements, along with all documents executed in connection therewith, are referred to as the "1990 Agreements". (iii) On February 4, 1991, Fidelcor sold and assigned to CIT the Original Loan Transaction, including all of its right, title, and interest in and to the 1988 Agreements and the 1990 Agreements. (iv) On or about December 8, 1992, pursuant to a plan of reorganization, Key Energy Group, Inc., a newly formed wholly-owned subsidiary of National Environmental Group, Inc. ("NEGI"), and ESKEY, Inc., a wholly-owned subsidiary of NEGI, merged with NEGI. NEGI was the surviving corporation and its name was changed to Key Energy Group, Inc. (v) In March 1991, Yale, a wholly-owned subsidiary of Key Energy Group, Inc. ("Key"), merged with Skeeter Well Service, Inc. and Yale was the surviving corporation. In July 1993, OEI Acquisition Corp., a wholly-owned subsidiary of Key, merged with Odessa Exploration Incorporated. OEI Acquisition Corp. was the surviving corporation and its name was changed to "Odessa Exploration Incorporated" ("Odessa"). In March 1995, Key Energy Drilling, Inc., a wholly-owned subsidiary of Key, acquired the assets of Clint Hurt & Associates, Inc. and the right to use the name "Clint Hurt Drilling." (vi) On May 19, 1994, Yale executed a Second Amended and Restated Promissory Note (the "Second Amended Note") in favor of CIT in the principal amount of $4,326,666.69. On December 27, 1994, Yale executed a Promissory Note (Term Note) (the "Term Note") in favor of CIT in the principal amount of $2,500,000.00. The Second Amended Note and the Term Note are referred to as the "1994 Notes". (vii) The 1988 Agreements, the 1990 Agreements, and the 1994 Notes are referred to herein as the "Original Loan Documents". Yale and Key are from time-to-time referred to as the "Original Obligors". (viii) On November 18, 1995, Key and WellTech, Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement") evidencing their intent to merge WellTech, Inc. with and into Key in accordance with the general corporation laws of the states of Delaware and Maryland (the "Merger"). (ix) On January 19, 1996: (i) Yale, Hurt, Key and Lender entered into that certain Second Amended and Restated Loan and Security Agreement which amended and restated the Original Loan Agreement (the "Second Loan Agreement"); and (ii) WellTech, Inc., Bronson Production, Inc. ("BPI") and Lender entered into that certain Loan and Security Agreement (the "WellTech Agreement""). (x) In connection with the Second Loan Agreement and the WellTech Agreement, Borrowers and BPI executed the following promissory notes (the "1996 Notes") which amended, renewed and restated in part the 1994 Notes: (i) that certain Promissory Note dated January 19, 1996 in the original principal amount of $10,004,082 executed by Yale and payable to CIT (the "Original Yale Note"); (ii) that certain Promissory Note dated January 19, 1996 in the original principal amount of $1,230,000 executed by Hurt and payable to CIT (the "Original Clint Hurt Note"); 2 (iii) that certain Promissory Note dated January 19, 1996 in the original principal amount of $875,350 executed by BPI and payable to CIT (the "Original BPI Note"); (iv) that certain Promissory Note dated January 19, 1996 in the original principal amount of $10,946,836 executed by WellTech, Inc. and payable to CIT (the "Original WellTech Note"). (xi) The Merger was concluded and became effective on March 28, 1996. Following the Merger, Key, as the survivor of the merged entities, transferred all of the assets and liabilities of WellTech, Inc. to WellTech. On May 10, 1996 BPI and WellTech merged and WellTech is the surviving corporation. (xii) Yale, Hurt and WellTech have requested, and Lender has agreed, to consolidate and amend the Second Loan Agreement and the WellTech Agreement, and accordingly the parties are entering into this Agreement. In addition, Key, which is not a party to this Agreement, has entered into that certain Guaranty dated of even date herewith by which Key has unconditionally guaranteed all Obligations of the Borrowers to CIT hereunder. (xiii) In connection with this Agreement the 1996 Notes are being amended and restated as follows, all such notes as amended, renewed or restated from time to time hereafter being referred to as the "Promissory Notes": (i) The Original Yale Note has been amended and restated of even date herewith by that certain Amended and Restated Promissory Note dated of even date herewith in the original principal amount of $10,004,082 executed by Yale and payable to CIT; (ii) The Original Clint Hurt Note has been amended and restated of even date herewith by that certain Amended and Restated Promissory Note dated of even date herewith in the original principal amount of $1,230,000 executed by Hurt and payable to CIT; (iii) The Original BPI Note and the Original WellTech Note have been amended and restated of even date herewith by that certain Amended and Restated Promissory Note dated of even date herewith in the original principal amount of $11,822,186 executed by WellTech and payable to CIT. 1.4 Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given in accordance with generally accepted accounting principles ("GAAP"), and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP as consistently applied and using the same method for inventory valuation as used in the preparation of a Borrower's financial statements. 1.5 Capitalized terms not otherwise defined herein shall, unless the context indicates otherwise, have the meanings provided for by the Uniform Commercial Code to the extent the same are used or defined therein. Wherever 3 appropriate in the context, terms used herein in the singular also include the plural, and vice versa, and each masculine, feminine, or neuter pronoun shall also include the other genders. 1.6 The terms "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. The section titles, and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of this Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any instruments or agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS 2.1 Revolving Loans. Lender shall, subject to the terms and conditions contained herein, make revolving loans to each of the Borrowers ("Revolving Loans") in amounts requested by such Borrower from time to time, but not in excess of such Borrower's Net Availability existing immediately prior to the making of the requested loan and provided the requested loan would not cause the outstanding Obligations of all Borrowers in the aggregate to exceed the Maximum Credit; provided further, however, that Lender shall be under no obligation to make Revolving Loans to any Borrower following the filing of an involuntary petition, action or proceeding against any Borrower or guarantor (and for so long thereafter as such involuntary petition, action, or proceeding remains undismissed or unstayed, and subject to the terms and provisions of Section 7.1(h)) seeking reorganization, arrangement or readjustment of such Borrower's or guarantor's debts or for any other relief under the bankruptcy laws of the United States now or hereafter in effect. (a) The " Maximum Credit" is set forth in Section 10.1(a) hereof. (b) "Accounts Availability" equals the product obtained by multiplying the outstanding amounts of a Borrower's separate Eligible Accounts, net of taxes, discounts, allowances, and credits given or claimed, by the Eligible Accounts Percentage set forth in Section 10.1(b), and deducting therefrom any Reserves. (c) The "Net Availability" shall be calculated at any time as an amount equal to the Maximum Credit minus the aggregate amount of all then-outstanding Obligations by the Borrowers to Lender. (d) "Yale's Net Availability" shall be calculated as the lesser of (i) the Maximum Credit, less the Obligations; and (ii) Yale's Accounts Availability, less Yale's Revolving Loans. (e) "Hurt's Net Availability" shall be calculated as the lesser of: (i) the Maximum Credit, less the Obligations; and 4 (ii) $2,000,000, less the sum of Hurt's Term Loan, Hurt's Capital Expenditures Loan, and Hurt's Revolving Loans; and (iii) Hurt's Accounts Availability, less Hurt's Revolving Loans. (f) "WellTech's Net Availability" shall be calculated as the lesser of: (i) the Maximum Credit, less the Obligations; and (ii) WellTech's Accounts Availability, less WellTech's Revolving Loans and Accommodations. (g) "Eligible Accounts" are accounts created by a Borrower in the ordinary course of its business which are and remain acceptable to Lender for lending purposes. General criteria for Eligible Accounts are set forth below but may be revised from time to time, by Lender, in its sole judgment, on fifteen (15) days prior written notice to the Borrowers. Lender shall, in general, deem accounts to be Eligible Accounts if: (1) such accounts arise from bona fide completed transactions and have not remained unpaid for more than the number of days after the invoice date set forth in Section 10.1(c); (2) the amounts of the accounts reported to Lender are absolutely owing to a Borrower and do not arise from sales on consignment, guaranteed sale or other terms under which payment by the account debtors may be conditional or contingent; (3) the account debtor's chief executive office or principal place of business is located in the United States; (4) such accounts do not arise from progress billings or retainages or bill and hold sales; (5) there are no contra relationships, setoffs, counterclaims or disputes existing with respect thereto (but that portion of the account for which no contras, setoffs, counterclaims or disputes are applicable may be deemed an Eligible Account) and there are no other facts existing or threatened which would impair or delay the collectibility of all or any portion thereof; (6) the goods giving rise thereto were not at the time of the sale subject to any liens except those permitted in this Agreement; (7) such accounts are not accounts with respect to which the account debtor or any officer or employee thereof is an officer, employee or agent of or is affiliated with any Borrower, directly or indirectly, whether by virtue of family membership, ownership, control, management or otherwise; (8) such accounts are not accounts with respect to which the account debtor is the United States or any State or political subdivision thereof or any department, agency or instrumentality of the United States, any State or political subdivision, unless there has been compliance with the Assignment of Claims Act or any similar State or local law, if applicable; (9) the Borrowers have delivered to Lender or Lender's representative such original documents as Lender may have reasonably requested pursuant to Section 5.8 hereof in connection with such accounts and Lender shall have received a verification of such account, reasonably satisfactory to it, if sent to the account debtor or any other obligor or any bailee pursuant to Section 5.4 hereof; (10) there are no facts existing or threatened which are reasonably likely to result in any adverse change in the account debtor's financial condition; (11) such accounts owed by a single account debtor or its affiliates do not represent more than twenty percent (20%) of all otherwise Eligible Accounts of all Borrowers, provided, however, that with respect to the Eligible Accounts of Parker & Parsley, Inc., such accounts may not represent more than thirty-two percent (32%) of all otherwise Eligible Accounts of all Borrowers (accounts excluded from Eligible Accounts solely by reason of this subsection (11) shall nevertheless be considered Eligible Accounts to the extent of the amount of such accounts which does not exceed twenty percent (20%) or in the case of Parker & Parsley, Inc. thirty-two percent (32%), of all otherwise 5 Eligible Accounts); (12) such accounts are not owed by an account debtor who is or whose affiliates are "past due" (i.e. where more than 90 days have elapsed since the invoice date of such accounts) upon other accounts owed to Borrowers comprising more than fifty percent (50%) of the accounts of such account debtor or its affiliates owed to such Borrower; (13) such accounts are owed by account debtors whose total indebtedness to a Borrower does not exceed the amount of any customer credit limits as established, and changed, from time to time by Lender upon notice to such Borrower (accounts excluded from Eligible Accounts solely by reason of this subsection (13) shall nevertheless be considered Eligible Accounts to the extent the amount of such accounts does not exceed such customer credit limit); (14) with respect to which the account debtor is located in the states of New Jersey, Minnesota, West Virginia, or any other state requiring the filing of a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such account debtor in the courts or through any judicial process of such state, unless such Borrower has qualified to do business in such states, or has filed a Notice of Business Activities Report or similar document with such states, as appropriate, for the then current year; and (15) such accounts are owed by account debtors deemed creditworthy at all times by Lender. (h) Lender shall have a continuing right to deduct reserves in determining Accounts Availability and each individual Borrower's Net Availability ("Reserves"), and to increase and decrease such Reserves from time to time, if and to the extent that, in Lender's sole judgement, such Reserves are necessary to protect Lender against any state of facts which does, or would, with notice or passage of time or both, constitute an Event of Default or have a material adverse effect on any Collateral. Lender may, at its option, implement Reserves by designating as ineligible a sufficient amount of accounts which would otherwise be Eligible Accounts so as to reduce Net Availability and/or each individual Borrower's Accounts Availability by the amount of the intended Reserve. (i) Subject to the terms and conditions hereof, including but not limited to the existence of sufficient Net Availability and Accounts Availability, each Borrower agrees to borrow amounts from time to time such that the aggregate outstanding Revolving Loans and Term Loans to both Borrowers shall at all times equal or exceed the principal amount set forth in Section 10.1(d) as the Minimum Borrowing. Each Borrower covenants, represents and warrants to Lender that they will jointly and severally maintain Net Availability at all times in amounts sufficient to permit Borrowers to comply with the Minimum Borrowing requirement. In the event Borrowers do not borrow sufficient amounts to continuously meet or exceed the Minimum Borrowing requirement, or in the event Borrowers fail to maintain Net Availability at all times at amounts sufficient to permit Borrowers to comply with the Minimum Borrowing requirement, then, in either of such events, Borrowers shall be deemed to have borrowed from Lender jointly such additional sums from time to time as may be necessary in order for Borrowers to continuously meet the Minimum Borrowing requirement. Such sums shall be added to the principal amount of the outstanding Revolving Loans for the sole purpose of computing interest due under this Agreement. Notwithstanding the provisions of the immediately preceding sentence, Lender shall have no obligation to disburse to Borrowers, or any of them, any amount deemed to have been borrowed for purposes of meeting the Minimum Borrowing requirement unless Borrowers actually requested such disbursement from Lender and unless the Net Availability is sufficient to support such disbursement. 6 2.2 Term Loan. (a) The amount of any term loans made by Lender to any Borrower on the date hereof is set forth in Section 10.2(a) (the "Initial Term Loans"). Such Initial Term Loans are evidenced by Promissory Notes delivered by each Borrower receiving an Initial Term Loan to Lender and shall be repaid, together with interest and other amounts, in accordance with this Agreement and such Promissory Notes. (b) The amount of any additional term loans which may be available to any Borrower at Lender's discretion after the date hereof is set forth in Section 10.2(b) ("Capital Expenditures Loans" and together with the Initial Term Loans, the "Term Loans"). Such Capital Expenditures Loans shall be evidenced by promissory notes delivered by such Borrower to Lender, in form and substance reasonably acceptable to Lender, and shall be repaid together with interest and other amounts in accordance with this Agreement and such promissory notes. (c) All appraisals conducted in connection with the Term Loans shall be conducted at Borrowers' expense by an independent appraiser reasonably acceptable to Lender. In addition, with respect to the Capital Expenditures Loans, (i) Lender shall have received such appraisal at least thirty (30) days prior to the date of the requested advance for such Capital Expenditures Loan, (ii) Lender shall have received from Borrower evidence reasonably satisfactory to Lender that the machinery and equipment has been purchased by Borrower and delivered to such Borrower at one of its locations set forth in Section 10.6(e) and that such machinery and equipment is in place and operational and (iii) Lender shall have received invoices and such other documentation as reasonably requested by Lender. 2.3 Accommodations. (a) Lender may, in its sole discretion, issue or cause to be issued, from time to time at any Borrower's request and on terms and conditions and for purposes satisfactory to Lender, credit accommodations consisting of letters of credit, bankers' acceptances, merchandise purchase guaranties or other guaranties or indemnities for such Borrower's account ("Accommodations"). Each such Borrower shall execute and perform additional agreements relating to the Accommodations in form and substance reasonably acceptable to Lender and the issuer of any Accommodations, all of which shall supplement the rights and remedies granted herein. Any payments made by Lender or any affiliate of Lender in connection with the Accommodations shall constitute additional Revolving Loans to such Borrower. (b) In addition to the fees and costs of any issuer in connection with issuing or administering Accommodations, the Borrower requesting the Accommodation shall pay monthly to Lender, on the first day of each month, a charge on such Borrower's open Accommodations at the rate per annum set forth in Section 10.3(a) (the "Accommodation Charges"). (c) No Accommodation will be issued (i) unless the full amount of the Accommodation requested, plus fees and costs for issuance (unless paid by Borrower), is less than the Net Availability existing immediately prior to the issuance of the requested Accommodation, or (ii) if the requested Accommodation would cause the outstanding Obligations to exceed the Maximum Credit, or (iii) if the requested Accommodation would cause the open amount of Accommodations 7 issued to all Borrowers to exceed, at any time, the Accommodation sublimit set forth in Section 10.3(b), or (iv) if the expiry date of the requested Accommodation extends beyond the initial term (or any renewal terms if applicable) of this Agreement. (d) All indebtedness, liabilities and obligations of any sort whatsoever, however arising, whether present or future, fixed or contingent, secured or unsecured, due or to become due, paid or incurred, arising or incurred in connection with any Accommodation shall be included in the term "Obligations," as defined herein, and shall include, without limitation, (i) all amounts due or which may become due under any Accommodation; (ii) all amounts charged or chargeable to any Borrower or to Lender by any bank, other financial institution or correspondent bank which opens, issues, or is involved with such Accommodations; (iii) Lender's Accommodation Charges and all fees, costs and other charges of any issuer of any Accommodation; and (iv) all duties, freight, taxes, costs, insurance and all such other charges and expenses which may pertain directly or indirectly to any Obligations or Accommodations or to the goods or documents relating thereto. (e) Each Borrower unconditionally agrees to indemnify and hold Lender harmless from any and all loss, claim or liability (including reasonable attorneys' fees) arising from any transactions or occurrences relating to any Accommodation established or opened for such Borrower's account, the Collateral relating thereto and any drafts or acceptances thereunder, including any such loss or claim due to any action taken by an issuer of any Accommodation. Each Borrower further agrees to indemnify and hold Lender harmless for any errors or omissions other than gross negligence, bad faith, or willful misconduct in connection with the Accommodations, whether caused by Lender, by the issuer of any Accommodation or otherwise. Each Borrower's unconditional obligation to indemnify and hold Lender harmless under this provision shall not be modified or diminished for any reason or in any manner whatsoever, except for Lender's gross negligence, bad faith, or willful misconduct. Each Borrower agrees that any charges made to Lender by any issuer of any Accommodation shall be conclusive on such Borrower and may be charged to such Borrower's account. (f) Lender shall not be responsible for (i) the conformity of any goods to the documents presented; (ii) the validity or genuineness of any documents; or (iii) delay, default, or fraud by any Borrower or shipper and/or anyone else in connection with the Accommodations or any underlying transaction. (g) Each Borrower agrees that any action taken by Lender, if taken in good faith, or any action taken by an issuer of any Accommodation, under or in connection with any Accommodation, shall be binding on such Borrower and shall not create any resulting liability to Lender. In furtherance thereof, Lender shall have the full right and authority to clear and resolve any questions of non-compliance of documents; to give any instructions as to acceptance or rejection of any documents or goods; to execute for each Borrower's account any and all applications for steamship or airway guarantees, indemnities or delivery orders; to grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents; and to agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications or Accommodations. All of the foregoing actions may be taken in Lender's sole name, and the issuer thereof shall be entitled to comply with and honor any and all such documents or instruments executed by or received solely from Lender, all without any notice 8 to or any consent from any Borrower. None of the foregoing actions described in this subsection (g) may be taken by any Borrower without Lender's express written consent. 2.4 Certain Amounts Due on Demand. Lender may, in its sole discretion, make or permit Revolving Loans, Accommodations, or other Obligations in excess of the Maximum Credit, Accounts Availability or Net Availability or applicable formulas or sublimits. All or any portion of such excess(es) shall become immediately due and payable upon Lender's demand. SECTION 3. INTEREST AND FEES 3.1 (a) Interest on the Revolving Loans shall be payable by the Borrowers on the first day of each month, calculated upon the closing daily balances in the loan account of the Borrowers for each day during the immediately preceding month, at the per annum rate (the "Annual Rate") set forth as the Interest Rate in Section 10.4(a). The Annual Rate shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate (as herein defined), effective as of the date of each such change, On and after any Event of Default or termination or non-renewal hereof, interest on all unpaid matured obligations shall accrue at a rate equal to two percent (2%) per annum in excess of the Annual Rate otherwise payable until such time as all Obligations are indefeasibly paid in full (notwithstanding entry of any judgment against any Borrower or the exercise of any other right or remedy by Lender), and all such interest shall be payable on demand. Notwithstanding the foregoing provisions of this Section 3.1(a) regarding the rates of interest applicable to Revolving Loans and any rate of interest applicable to any Term Loan: (i) If at any time the amount of interest computed on the basis of either the Annual Rate or the rate provided by any Promissory Note pursuant to Section 2.2 of this Agreement (the "Note Rate") would exceed the amount of interest computed upon the basis of the maximum rate of interest (the "Maximum Legal Rate") permitted by applicable state or federal law in effect from time to time hereafter, after taking into account, to the extent required by applicable law, any and all fees, payments, charges and calculations provided for in this Agreement or in any other agreement between Borrowers or any individual Borrower and Lender, the interest payable under this Agreement shall be computed on the basis of the Maximum Legal Rate, but any subsequent reduction in the Annual Rate or the Note Rate (if applicable) shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount equals the total amount of interest which would have accrued if such interest had been at all times computed solely on the basis of the Annual Rate and the Note Rate (if applicable). (ii) No agreements, conditions, provisions or stipulations contained in this Agreement or any other instrument, document or agreement between Borrowers, or any of them, and the Lender, or default of any Borrower, or the exercise by the Lender of the right to accelerate the maturity of the payment of the principal and interest or to exercise any option whatsoever contained in this Agreement or any other agreement among Borrowers, or any of them, and the Lender, or the arising of any contingency whatsoever, shall entitle the Lender to collect, in any event, interest exceeding the Maximum Legal Rate and in no event shall any Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel any Borrower to pay a rate of interest 9 exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event that any interest is charged in excess of the Maximum Legal Rate ("Excess"), each Borrower acknowledges and stipulates that any such charge shall be the result of an accidental and bona fide error, and such Excess shall be, first, applied to reduce the principal amount of indebtedness then unpaid hereunder; second, applied to reduce such Borrower's other Obligations hereunder; and third, returned to such Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship. Each Borrower recognizes that, with fluctuations in the Annual Rate, the Note Rate, and the Maximum Legal Rate, such an unintentional result could inadvertently occur. By the execution of this Agreement, each Borrower covenants that (x) the credit or return of any Excess shall constitute the acceptance by each Borrower of such Excess, and (y) no Borrower shall seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon the charging or receiving of any interest in excess of the maximum authorized by applicable law. For the purpose of determining whether or not any Excess has been contracted for, charged, or received by Lender, all interest at any time contracted for, charged or received by the Lender in connection with this Agreement shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement. (iii) The provisions of Section 3.1(a)(ii) shall be deemed to be incorporated into every document or communication relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or claim of the Lender with respect to each Borrower (or any other obligor in respect of the Obligations), whether or not any provision of Section 3.1 is referred to therein. All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the liabilities and obligations of each Borrower (or any other obligor) asserted by the Lender thereunder, be automatically recomputed by such Borrower or obligor, and by any court considering the same, to give effect to the adjustments or credits required by Section 3.1(a)(ii). (iv) If the applicable state or federal law is amended in the future to allow a greater rate of interest to be charged under this Agreement or any other loan documents than is presently allowed by applicable state or federal law, then the limitation of interest hereunder shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to the Lender by reason thereof shall be payable upon demand. (b) The "Prime Rate" is the per annum rate of interest publicly announced by Chase Manhattan Bank, New York, New York, or the applicable rate of its successors or assigns, from time to time as its prime rate (the prime rate is not intended to be the lowest rate of interest charged by Chase Manhattan Bank, New York, New York, or its successors or assigns, to its borrowers). 3.2 The Borrowers collectively shall pay Lender on the date hereof a Closing Commitment Fee in the amount set forth in Section 10.4(b), which fee is fully earned as of the date hereof. 10 3.3 The Borrowers collectively shall pay Lender monthly, on the first day of each month, in arrears, an Unused Line Fee for each month during the initial and each renewal Term at the rate per annum set forth in Section 10.4(c), calculated upon the amount, if any, by which the Maximum Credit exceeds the average outstanding daily principal balance during the preceding month of all Revolving Loans, Accommodations and any Term Loan and Capital Expenditures Loan. 3.4 At Lender's option, all principal, interest (other than unmatured accrued interest), fees, costs, expenses and other charges provided for in this Agreement, or in any other agreement now or hereafter existing between Lender and any Borrower, may be charged to any loan account of such Borrower maintained by Lender. Interest, fees for Accommodations, the Unused Line Fee and any other amounts payable by the Borrowers, or any of them, to Lender based on a per annum rate shall be calculated on the basis of actual days elapsed over a 360-day year. 3.5 If as a result of any regulatory change directly or indirectly affecting Lender or any of Lender's affiliated companies there shall be imposed, modified or deemed applicable any tax excluding any tax on or measured by income, gross receipts, charges, or rates of Lender, reserve, special deposit, minimum capital, capital ratio, or similar requirement against or with respect to or measured by reference to loans made or to be made hereunder or participations therein, or to Accommodations, and the result shall be to increase the cost to Lender or to any of Lender's affiliated companies of making or maintaining any loan or Accommodation hereunder or to any other party maintaining any participation therein, or reduce any amount receivable in respect of any such loan (which increase in cost, or reduction in amount receivable, shall be the result of Lender's or Lender's affiliated companies' reasonable allocation among all affected customers of the aggregate of such increases or reductions resulting from such event), then, within ten (10) days after receipt by the Borrowers of a certificate from Lender containing the information described in this Section 3.5, each Borrower agrees, jointly and severally, from time to time to pay Lender such additional amounts as shall be sufficient to compensate Lender or any of Lender's affiliated companies for such increased costs or reductions in amounts which Lender determines in its sole discretion are material. Notwithstanding the foregoing, all such amounts shall be subject to the provisions of Section 3.1. The certificate requesting compensation under this Section 3.5 shall identify the regulatory change which has occurred, the requirements which have been imposed, modified or deemed applicable, the amount of such additional cost or reduction in the amount receivable and the way in which such amount has been calculated. 3.6 For purposes of calculating any interest, fees, balances or expenses hereunder, the outstanding daily principal balance of the Revolving Loans will be deemed to be zero in the event that the outstanding daily principal balance of the Revolving Loans is a credit balance. SECTION 4. GRANT OF SECURITY INTEREST 4.1 To secure the payment and performance in full of all Obligations, each Borrower hereby grants to Lender a continuing security interest in and lien upon, and a right of setoff against, and each Borrower hereby assigns and pledges to Lender, all of the Collateral, including any Collateral not deemed eligible for lending purposes. 4.2 "Obligations" shall mean any and all Revolving Loans, Term Loans, Accommodations and all other indebtedness, liabilities and obligations of every kind, nature and description owing by any Borrower to Lender and/or its 11 affiliates, including principal, interest, charges, fees and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal Term or after the commencement of any case with respect to any Borrower under the United States Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended and whether arising directly or howsoever acquired by Lender including from any other entity outright, conditionally or as collateral security, by assignment, merger with any other entity, participations or interests of Lender in the obligations of such Borrower to others, assumption, operation of law, subrogation or otherwise and shall also include all amounts chargeable to the Borrowers under this Agreement or in connection with any of the foregoing. 4.3 "Collateral" shall mean all of the following property of each Borrower: All now owned and hereafter acquired right, title and interest of each Borrower in, to and in respect of all: accounts, interests in goods represented by accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; contract rights; chattel paper; general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims, and existing and future leasehold interests in equipment, real estate and fixtures); documents; instruments; letters of credit, bankers' acceptances or guaranties; cash monies, deposits, securities, bank accounts, deposit accounts, investment property, credits and other property now or hereafter held in any capacity by Lender, its affiliates, or any entity which, at any time, participates in Lender's financing of such Borrower, or at any other depository or other institution; agreements or property securing or relating to any of the items referred to above; All now owned and hereafter acquired right, title and interest of each Borrower in, to and in respect of goods, including, but not limited to: All inventory, wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description, including all raw materials, work-in-process, finished goods, and materials to be used or consumed in each Borrower's business; and all names or marks affixed to or to be affixed thereto for purposes of selling same by the seller, manufacturer, lessor or licensor thereof; All equipment and fixtures, wherever located, whether now owned or hereafter acquired, including, without limitation, all machinery, equipment, motor vehicles, furniture and fixtures, and any and all additions, substitutions, replacements (including spare parts), and accessions thereof and thereto; All consumer goods, farm products, crops, timber, minerals or the like (including oil and gas), wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description; 12 All now owned and hereafter acquired right, title and interests of each Borrower in, to and in respect of any real or other personal property in or upon which Lender has or may hereafter have a security interest, lien or right of setoff; All present and future books and records relating to any of the above including, without limitation, all computer programs, printed output and computer readable data in the possession or control of any Borrower, any computer service bureau or other third party; All products and proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds and all claims against third parties for loss or destruction of or damage to any of the foregoing. SECTION 5. COLLECTION AND ADMINISTRATION 5.1 Borrowers are authorized to collect the accounts and any other proceeds of Collateral, on behalf of and in trust for Lender, at the Borrowers' expense, but such authority shall automatically terminate upon an Event of Default. Lender may modify or terminate such authority at any time whether or not an Event of Default has occurred and directly collect the accounts and other monetary obligations included in the Collateral. Each Borrower shall, at such Borrower's expense and in the manner requested by Lender from time to time, direct that remittances and all other proceeds of accounts and other Collateral shall be (a) sent to a post office box designated by and/or in the name of Lender or in the name of such Borrower, but as to which access is limited to Lender and/or (b) deposited into a bank account maintained in the name of Lender and/or a blocked bank account under arrangements with the depository bank under which all funds deposited to such blocked bank account are required to be transferred solely to Lender. Regardless whether such account is maintained in the name of the Borrowers, or any of them, or the Lender, the Borrowers shall bear the risk of loss of all funds in such account. In connection therewith, each Borrower shall execute such post office box and/or blocked bank account agreements as Lender shall specify. 5.2 All Obligations shall be payable at Lender's office set forth below or at Lender's bank designated in Section 10.6(b) or at such other bank or place as Lender may expressly designate from time to time for purposes of this Section. Lender shall apply all proceeds of accounts or other Collateral received by Lender and all other payments in respect of the Obligations to the Revolving Loans whether or not then due or to any other Obligations then due, in whatever order or manner Lender shall determine. Lender shall have the continuing and exclusive right to apply and reverse and reapply any and all such proceeds and payments to any portion of the Obligations. For purposes of determining Accounts Availability and Net Availability, remittances and other payments with respect to the Collateral and Obligations will be treated as credited to the loan account of the Borrowers maintained by Lender and Collateral balances to which they relate, upon the date of Lender's receipt of advice from Lender's bank that such remittances or other payments have been credited to Lender's account or in the case of remittances or other payments received, directly in kind by Lender, upon the date of Lender's deposit thereof at Lender's bank, subject to final payment and collection. In computing interest charges, the loan account of the Borrowers maintained by Lender will be credited with remittances and other payments two (2) Business Days after Lender's receipt of advice of deposit of remittances and other payments in Lender's account at Lender's bank designated in Section 10.6(b) or at such other financial 13 institution as Lender may designate. "Business Day" shall mean any day other than a Saturday or Sunday or any other day on which Lender or banks in Chicago, Illinois or New York, New York are authorized to close. 5.3 Lender shall render to Borrowers monthly a loan account statement. Each statement shall be considered correct and binding upon each Borrower as an account stated, except to the extent that Lender receives, within ninety (90) days after the mailing of such statement, written notice from any Borrower of any specific exceptions by such Borrower to that statement. 5.4 Lender may, at any time, whether or not an Event of Default has occurred, without notice to or assent of any Borrower, (a) notify any account debtor that the accounts and other Collateral which includes a monetary obligation have been assigned to Lender by any such Borrower and that payment thereof is to be made to the order of and directly to Lender, (b) send, or cause to be sent by its designee, requests (which may identify the sender by a pseudonym) for verification of accounts and other Collateral directly to any account debtor or any other obligor or any bailee with respect thereto, and (c) demand, collect or enforce payment of any accounts or such other Collateral, but without any duty to do so, and Lender shall not be liable for any, failure to collect or enforce payment thereof. At Lender's request, all invoices and statements sent to any account debtor, other obligor or bailee, shall state that the accounts and such other Collateral have been assigned to Lender and are payable directly and only to Lender. 5.5 Each Borrower hereby appoints Lender and any designee of Lender as such Borrower's attorney-in-fact and authorizes Lender or such designee, at such Borrower's sole expense, to exercise at any times in Lender's or such designee's discretion all or any of the following powers, which powers of attorney, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) receive, take, endorse, assign, deliver, accept and deposit, in the name of Lender or such Borrower, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof, (b) transmit to account debtors, other obligors or any bailees notice of the interest of Lender in the Collateral or request from account debtors or such other obligors or bailees at any time, in the name of such Borrower or Lender or any designee of Lender, information concerning the Collateral and any amounts owing with respect thereto, (c) notify account debtors or other obligors to make payment directly to Lender, or notify bailees as to the disposition of Collateral, (d) after an Event of Default has occurred and has not been waived or cured to Lender's satisfaction, take or bring, in the name of Lender or such Borrower, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of or other realization upon the accounts and other Collateral, (e) after an Event of Default has occurred and has not been waived or cured to Lender's satisfaction, change the address for delivery of mail to such Borrower and to receive and open mail addressed to any such Borrower, (f) after an Event of Default has occurred and has not been waived or cured to Lender's satisfaction, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations, and (g) execute in the name of such Borrower and file against such Borrower in favor of Lender financing statements or amendments with respect to the Collateral. 5.6 Each Borrower hereby releases and exculpates Lender, its officers, employees and designees, from any liability arising from any acts under this Agreement or in furtherance thereof, whether as attorney-in-fact or otherwise, 14 whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, except for willful misconduct, gross negligence, or bad faith. In no event will Lender have any liability to any Borrower for lost profits or other special or consequential damages. 5.7 After written notice by Lender to the Borrowers and automatically, without notice, after an Event of Default which has not been waived or cured to Lender's satisfaction, no Borrower shall, without the prior written consent of Lender in each instance, (a) grant any extension of time of payment of any of the accounts or any other Collateral which includes a monetary obligation, (b) compromise or settle any of the accounts or any such other Collateral for less than the full amount thereof, (c) release in whole or in part any account debtor or other person liable for the payment of any of the accounts or any such other Collateral, or (d) grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any of the accounts or any such other Collateral. 5.8 At such times as Lender may reasonably request and in the manner specified by Lender, each Borrower shall deliver to Lender or Lender's representative true and correct copies of original invoices, agreements, proofs of rendition of services and delivery of goods and other documents evidencing or relating to the transactions which gave rise to accounts or other Collateral, together with customer statements, schedules describing the accounts or other Collateral and/or statements of account and confirmatory assignments to Lender of the accounts or other Collateral, in form and substance reasonably satisfactory to Lender and duly executed by such Borrower. After an Event of Default has occurred, each Borrower shall deliver to Lender the originals of the foregoing documents upon Lender's request therefor. Without limiting the provisions of Section 5.7, a Borrower's granting of credits, discounts, allowances, deductions, return authorizations or the like will be promptly reported to Lender in writing. In no event shall any such schedule or confirmatory assignment (or the absence thereof or omission of any of the accounts or other Collateral therefrom) limit or in any way be construed as a waiver, limitation or modification of the security interests or rights of Lender or the warranties, representations and covenants of any Borrower under this Agreement. Any documents, schedules, invoices or other paper delivered to Lender by the Borrowers may be destroyed or otherwise disposed of by Lender six (6) months after receipt by Lender, unless such Borrower requests their return in writing in advance, and makes prior arrangements for their return, at such Borrower's expense. 5.9 From time to time as requested by Lender, at the sole expense of the Borrowers, Lender or its designee shall have access, prior to an Event of Default during reasonable business hours and on or after an Event of Default at any time, to all of the premises where Collateral is located for the purposes of inspecting the Collateral and all Borrowers' books and records, and each Borrower shall permit Lender or its designee to make such copies of such books and records or extracts therefrom as Lender may reasonably request. Without expense to Lender, Lender may use such of any Borrower's personnel, equipment, including computer equipment, programs, printed output and computer readable media, supplies and premises for the collection of accounts and realization on other Collateral as Lender, in its sole discretion, deems appropriate. Each Borrower hereby irrevocably authorizes all accountants and third parties to disclose and deliver to Lender at such Borrower's expense all financial information, books and records, work papers, management reports and other information in their possession regarding such Borrower. 15 5.10 If after receipt of any payment of, or proceeds applied to the payment of, all or any part of the Obligations, the Lender is for any reason required to surrender such payment or proceeds because such payment or proceeds is invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, or a diversion of trust funds, or for any other reason, then: the Obligations or any part thereof intended to be satisfied shall be revived and continue and this Agreement shall continue in full force as if such payment or proceeds had not been received by the Lender, and each Borrower shall be jointly and severally liable to pay to the Lender, and hereby does indemnify the Lender and hold the Lender harmless, for the amount of such payment or proceeds surrendered. The provisions of this Section 5.10 shall be and remain effective notwithstanding any contrary action which may have been taken by the Lender in reliance upon such payment or proceeds, and any such contrary action so taken shall be without prejudice to the Lender's rights under this Agreement and shall be deemed to have been conditioned upon such payment or proceeds having become final and irrevocable. The provisions of this Section 5.10 shall survive the termination of this Agreement. SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS Each Borrower hereby represents, warrants and covenants to Lender the following, the truth and accuracy of which, and compliance with which, shall be continuing conditions of the making of loans or other credit accommodations by Lender to any Borrower: 6.1 Each Borrower shall keep and maintain its books and records in accordance with generally accepted accounting principles, consistently applied. The Borrowers shall on a consolidated basis, at each Borrower's expense, on or before the fifteenth (15th) day of each month, deliver to Lender true and complete monthly agings of its accounts receivable and, on or before the twentieth (20th) day of each month, deliver to Lender true and complete agings of its accounts and notes payable, monthly inventory reports and monthly internally prepared interim financial statements including consolidating financial statements of the Borrowers and any of the Borrowers' subsidiaries, all in such form, and together with such other information with respect to the business of each Borrower or any guarantor, as Lender may reasonably request. Quarterly, the Borrowers shall deliver to Lender a certificate verifying Borrowers' compliance with the financial covenants set forth in Section 6.11 and Section 10.5, such certificate to be delivered as soon as available but in no event later than forty-five (45) days after the end of the relevant fiscal quarter, provided, however, that with respect to the certificate verifying compliance during the final fiscal quarter of each fiscal year, Borrowers shall deliver such certificate to Lender no later than sixty (60) days after the end of such fiscal quarter. Annually, the Borrowers shall deliver to Lender consolidated audited financial statements of Key accompanied by the report and opinion thereon of independent certified public accountants reasonably acceptable to Lender and consolidating financial statements of Borrowers and any of Borrowers' subsidiaries, as soon as available, but in no event later than ninety (90) days after the end of the Borrowers' fiscal year. Additionally, promptly upon the filing thereof, Borrower shall deliver to Lender true and complete copies of any 10-Q Report, 10-K Report and any other report or document filed by Borrowers, or any of them, with the Securities and Exchange Commission, or any other governmental agency. 6.2 Each Borrower may from time to time render invoices to account debtors under its trade names set forth in Section 10.6(f) after Lender has received prior written notice from such Borrower of the use of such trade names and as to which, such Borrower agrees that: (a) each trade name does not refer 16 to another corporation or other legal entity, (b) all accounts and proceeds thereof (including any returned merchandise) invoiced under any such trade names are owned exclusively by such Borrower and are subject to the security interest of Lender and the other terms of this Agreement, and (c) all schedules of accounts and confirmatory assignments including any sales made or services rendered using the trade name shall show such Borrower's name as assignor and Lender is authorized to receive, endorse and deposit to any loan account of such Borrower maintained by Lender all checks or other remittances made payable to any trade name of such Borrower representing payment with respect to such sales or services. 6.3 Each Borrower shall promptly notify Lender in writing of any loss, damage, investigation, action, suit, proceeding or claim relating to a material portion of the Collateral or which may result in any material adverse change in such Borrower's business, assets, liabilities or condition, financial or otherwise. 6.4 Each Borrower's books and records concerning accounts and its chief executive office are and shall be maintained only at the address set forth in Section 10.6(d). Each Borrower's only other places of business and the only other locations of Collateral, if any, are and shall be the addresses set forth in Section 10.6(e) hereof, except any Borrower may change such locations in the ordinary course of business or open a new place of business after thirty (30) days prior written notice to Lender. Prior to any change in location or opening of any new place of business, each Borrower shall execute and deliver or cause to be executed and delivered to Lender such financing statements, financing documents, mortgages, and security and other agreements as Lender may reasonably require, including, without limitation, those described in Section 6.14. Without otherwise limiting the effect of the foregoing, Borrower may change the location of its well servicing rigs and drilling rigs without prior approval of Lender; provided, however, such well servicing rigs and drilling rigs may not be removed from the state where they are located as of the date hereof, and Borrowers shall within five (5) days of Lender's request, provide Lender with a listing of the current locations of all well servicing rigs and drilling rigs. 6.5 Each Borrower has and at all times will continue to have good and marketable title to all of the Collateral, free and clear of all liens, security interests, claims or encumbrances of any kind except those, if any, set forth on Schedule A hereto. 6.6 No Borrower shall directly or indirectly: (a) sell, lease, transfer, assign, abandon or otherwise dispose of any part of the Collateral or any material portion of its other assets (other than sales of inventory to buyers in the ordinary course of business) or (b) consolidate with or merge with or into any other entity, or permit any other entity to consolidate with or merge with or into such Borrower or (c) form or acquire any interest in any firm, corporation or other entity. 6.7 Each Borrower shall at all times maintain, with financially sound and reputable insurers, casualty insurance with respect to the Collateral and other assets. All such insurance policies shall be in such form, substance, amounts and coverage as may be reasonably satisfactory to Lender and shall provide for thirty (30) days prior written notice to Lender of cancellation or reduction of coverage. Each Borrower hereby irrevocably appoints Lender and any designee of Lender as, attorney-in-fact for such Borrower to obtain at such Borrower's expense, any such insurance should such Borrower fail to do so and, after an Event of Default that is continuing, to adjust or settle any claim or other matter under or arising pursuant to such insurance or to amend or cancel 17 such insurance. Each Borrower shall deliver to Lender evidence of such insurance and a lender's loss payable endorsement satisfactory to Lender as to all existing and future insurance policies with respect to the Collateral. Each Borrower shall deliver to Lender, in kind, all instruments representing proceeds of insurance received by such Borrower. Prior to an Event of Default, Lender may permit Borrowers to apply any insurance proceeds received at any time to the cost of repairs to or replacement of any portion of the Collateral and/or, at Lender's option, payment of or as security for any of the Obligations, whether or not due; provided, however, that if Lender elects to apply the insurance proceeds to the then outstanding Obligations, Lender will apply the proceeds (i) first to reduce the Capital Expenditures Loans, (ii) second, to reduce other Term Loans, and (iii) third, to reduce the Revolving Loans. After the occurrence of an Event of Default which has not been cured to Lender's satisfaction, Lender may permit Borrowers to apply any insurance proceeds received at any time to the cost of repairs to or replacement of any portion of the Collateral and/or, at Lender's option, to payment of or as security for any of the Obligations, whether or not due, in any order or manner as Lender determines. 6.8 Each Borrower is and at all times will continue to be in compliance with the requirements of all material laws, rules, regulations and orders of any governmental authority relating to its business (including laws, rules, regulations and orders relating to taxes, payment and withholding of payroll taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety, or environmental matters) and all material agreements or other instruments, binding on such Borrower or its property. All of each Borrower's inventory shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto. Each Borrower shall pay and discharge all taxes, assessments and governmental charges against such Borrower or any Collateral prior to the date on which penalties are imposed or liens attach with respect thereto, unless the, same are being contested in good faith and, at Lender's option, Reserves are established for the amount contested and penalties which may accrue thereon. 6.9 With respect to each account deemed an Eligible Account, except as reported in writing to Lender, (a) Borrower has no knowledge that any of the criteria for eligibility are not or are no longer satisfied, (b) each is valid and legally enforceable and represents an undisputed bona fide indebtedness incurred by the account debtor for the sum reported to Lender, (c) each arises from an absolute and unconditional sale of goods, without any right of return or consignment, or from a completed rendition of services, (d) each is not, at the time such account arises, subject to any defense, offset, dispute, contra relationship, counterclaim, or any given or claimed credit, allowance or discount except as disclosed to Lender in writing and approved by Lender in writing, and (e) all statements made and all unpaid balances and other information appearing in the invoices, agreements, proofs of rendition of services and delivery of goods and other documentation relating to the accounts, and all confirmatory assignments, schedules, statements of account and books and records with respect thereto, are in all material respects true and correct and what they purport to be. 6.10 With respect to each Borrower's equipment, each such Borrower shall maintain equipment having an aggregate value of at least 85% of the then current appraised forced liquidation value of all of such Borrower's equipment in good order and repair, and in running and marketable condition, ordinary wear and tear excepted. 18 6.11 Borrowers shall at all times on a consolidated basis maintain cash flow coverage, tangible net worth, and liabilities to tangible net worth as set forth in Section 10.5 and no Borrower shall, directly or indirectly, expend or commit to expend, for fixed or capital assets (including capital lease obligations) an amount in excess of the capital expenditure limit set forth in Section 10.5 in any fiscal year of Borrowers. In addition, after the date of this Agreement no Borrower will enter into any operating or capital lease as lessee or sublessee if, after giving effect thereto, the aggregate amount of additional operating or capital lease rentals payable by all Borrowers in any fiscal year with respect to all such leases entered into in such fiscal year would exceed $1,500,000. 6.12 Except as set forth on Schedule 6.12 hereto and as otherwise provided herein, no Borrower will, directly or indirectly: (a) lend or advance money or property to, guarantee or assume indebtedness of, or invest (by capital contribution or otherwise) in any person, firm, corporation or other entity; or (b) declare, pay or make any cash dividend, redemption or other distribution on account of any shares of any class of stock of such Borrower now or hereafter outstanding; or (c) make any payment of the principal amount of or interest on any indebtedness owing to any officer, director, shareholder, or affiliate of such Borrower; or (d) make any loans or advances to any officer, director, employee, shareholder or affiliate of such Borrower (including, but not limited to, any other Borrower) provided, however, that, with respect to advances to officers and employees, Borrowers may make such advances in the ordinary course of business as long as all such advances at any time outstanding do not exceed $25,000 in the aggregate during any fiscal year of Borrowers; or (e) enter into any sale or lease or other transaction with any officer, director, employee, shareholder or affiliate of such Borrower on terms that are less favorable to such Borrower than those which might be obtained at the time from persons who are not an officer, director, employee, shareholder or affiliate of such Borrower. Notwithstanding the foregoing, each Borrower (each, an "Intercompany Lender") may make loans to any other Borrower (each, an "Intercompany Borrower") provided however that (i) all such loans to any Intercompany Borrower shall be evidenced by the Intercompany Note and Security Agreement executed by such Intercompany Borrower (the "Chattel Paper") and (ii) Lender retains a properly perfected security interest in the Chattel Paper at the time of such intercompany loan. In addition, WellTech may make intercompany loans to WellTech's 63% owned subsidiary, Servicios WellTech, S.A. ("Servicios") as long as (a) all such intercompany loans are properly documented on WellTech's books and records, (b) all such intercompany loans are memorialized by one or more Intercompany Note and Security Agreements (the "Servicios Chattel Paper"), (c) no such additional intercompany loans to Servicios after January 19, 1996 would exceed the amount of $500,000 which is part of the principal amount as set forth in the related Intercompany Note and Security Agreement executed by Servicios of even date herewith, and (d) Lender retains a properly perfected security interest in the Servicios Chattel Paper at the time of such intercompany loan. 6.13 Each Borrower shall pay, on Lender's demand, all costs, expenses, filing fees and taxes payable in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement and all other existing and future agreements or documents contemplated herein or related hereto, including any amendments, waivers, supplements or consents which may hereafter be made or entered into in respect hereof, or in any way involving claims or defense asserted by Lender or claims or defense against Lender asserted by such Borrower, any guarantor or any third party directly or indirectly arising out of or related to the relationship between such Borrower and Lender or any guarantor and Lender, including, but not limited to the 19 following, whether incurred before, during or after the initial or any renewal Term or after the commencement of any case with respect to any such Borrower or any guarantor under the United States Bankruptcy Code or any similar statute: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all title insurance and other insurance premiums, appraisal fees, fees incurred in connection with any environmental report, audit or survey and search fees; (c) all fees relating to the wire transfer of loan proceeds and other funds and fees for returned checks; (d) all reasonable expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and the Borrowers' operations, plus a per diem charge at the rate of $650 per person, per day for Lender's examiners in the field and office; and (e) the reasonable costs, fees and disbursements of in-house and outside counsel to Lender. 6.14 At the request of Lender, at any time and from time to time at such Borrower's sole expense, each Borrower shall execute and deliver or cause to be executed and delivered to Lender such agreements, documents and instruments, including waivers, consents and subordination agreements from mortgagees or other holders of security interests or liens, landlords or bailees, and do or cause to be done such further acts as Lender, in its discretion, deems necessary or desirable to create, preserve, perfect or validate any security interest of Lender or the priority thereof in the Collateral and otherwise to effectuate the provisions and purposes of this Agreement. Each Borrower hereby authorizes Lender to file financing statements or amendments against such Borrower in favor of Lender with respect to the Collateral, without such Borrower's signature and to file as financing statements any carbon, photographic or other reproductions of this Agreement or any financing statements signed by such Borrower. 6.15 Each Borrower authorizes Lender, at Lender's option, as attorney-in-fact for such Borrower, to commence, appear in and prosecute, in Lender's or such Borrower's name and with the participation of such Borrower, any action or proceeding relating to any condemnation or other taking of any Collateral comprised of real property and to settle or compromise any claim in connection with any such condemnation or other taking. Any award for the taking of, or damage to, all or any part of the Collateral, or any interest therein, upon the lawful exercise of power of eminent domain shall be payable to Lender who, after deducting its expenses, including reasonable attorneys' fees, may apply the sums so received to the portion of the Obligations hereby secured last falling due or in such other manner as Lender may desire. Each Borrower agrees to execute such further assignments of any compensations, awards, damages, claims, rights of action and proceeds as Lender reasonably may require. 6.16 Each Borrower assumes all responsibility and liability arising from or relating to the use, sale, or other disposition of the Collateral. Neither the Lender nor any of its officers, directors, employees, and agents shall be liable or responsible in any way for the safekeeping of any of the Collateral, or for any act or failure to act with respect to the Collateral, or for any loss or damage thereto, or for any diminution in the value thereof, or for any act of default by any warehouseman, carrier, forwarding agency or, other person whomsoever, all of which shall be at the Borrowers' sole risk. The Obligations shall not be affected by any failure of the Lender to take any steps to perfect its security interest in or to collect or realize upon the Collateral, nor shall loss of or damage to the Collateral release any Borrower from any of the Obligations. The Lender may (but shall not be required to), to the extent set forth in this Agreement or applicable law, without notice to or 20 consent from any Borrower, sue upon or otherwise collect, extend the time for payment of, modify or amend the terms of, compromise or settle for cash or credit, grant other indulgences, extensions, renewals, compositions, or releases, and take or omit to take any other action with respect to the Collateral, any security therefor, any agreement relating thereto, any insurance applicable thereto, or any person liable directly or indirectly in connection with any of the foregoing, without discharging or otherwise affecting the liability of the Borrower for the Obligations. 6.17 Each Borrower shall notify Lender in writing of the following matters at the following times: (a) Immediately after becoming aware of the existence of any Event of Default. (b) Immediately after becoming aware that the holder of any capital stock of such Borrower has given notice or taken any action with respect to a claimed default. (c) Immediately after becoming aware of any material adverse change in the Collateral or in any Borrower's property, business, operations, or condition (financial or otherwise). (d) Immediately after becoming aware of any pending or threatened action, proceeding, or counterclaim by any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, Public Authority, or any other entity, or any pending or threatened investigation by a Public Authority, which may materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or the Collateral or in any Borrower's property, business, operations, or condition (financial or otherwise). (e) Immediately after becoming aware of any pending or threatened strike, work stoppage, material unfair labor practice claim, or other material labor dispute affecting any Borrower or any of its subsidiaries. (f) Immediately after becoming aware of any violation of any law, statute, regulation, or ordinance of a Public Authority applicable to any Borrower, which may materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under this Agreement, or the Collateral or any Borrower's property, business, operations, or condition (financial or otherwise). (g) Immediately after becoming aware of any violation or any investigation of a violation by any Borrower of environmental laws which would materially and adversely affect the Collateral, any Borrower's property, business, operation or condition (financial or otherwise). (h) Thirty (30) days prior to any Borrower changing its name. Each notice given under this Section 6.17 shall describe the subject matter thereof in reasonable detail and shall set forth the action that such Borrower has taken or proposes to take with respect thereto. As used herein, the term 21 "Public Authority" shall mean the government of any country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or any department, agency, public corporation or other instrumentality of any of the foregoing. 6.18 (a) Except with respect to the matters described in Schedule B hereto, neither Borrower nor any subsidiary of any Borrower, except in compliance in all material respects with all laws, ordinances, regulations, administrative orders, notices and decrees of any governmental authority pertaining to Borrower or such subsidiary, (i) may own, occupy, or operate a site or vessel on which any hazardous material or oil is stored, transported or disposed of; or (ii) may directly or indirectly transport, or arrange for the transport, of any hazardous material or oil; or (iii) will cause, or have legal responsibility for, any release, or threat of release, of any hazardous material or oil on or from the real property identified in Section 10.6 (the "Premises"), or any other site or vessel presently owned, occupied, or operated either by any Borrower or any subsidiary or any person for whose conduct any Borrower or any subsidiary is responsible. Except with respect to the matters described in Schedule B, neither Borrower nor any subsidiary of any Borrower may cause, or have legal responsibility for, any release, or threat of release, of any hazardous material or oil on or from the Premises, or any other site or vessel presently owned, occupied, or operated by any Borrower, any subsidiary or any person for whose conduct any Borrower or any subsidiary is responsible, where any such release or threat of release can reasonably be expected to result in a material liability of any Borrower or any subsidiary or a lien on the Premises or other property of any Borrower or any subsidiary. (b) Except with respect to the matters described in Schedule B hereto, no Borrower nor any Borrower's subsidiary has, except in compliance in all material respects with all laws, ordinances, regulations, administrative orders, notices and decrees of any governmental authority pertaining thereto, (i) owned, occupied or operated a site or vessel on which any hazardous materials or oil were stored, transported or disposed of by any Borrower or such subsidiary; (ii) directly or indirectly transported, or arranged for the transport, of any hazardous material or oil; or (iii) caused, or become legally responsible for, any material release or threat of release, of any hazardous material or oil on or from the Premises or any other site or vessel owned, occupied or operated either by any Borrower, any subsidiary of any Borrower or any person for whose conduct any Borrower or any subsidiary of any Borrower is responsible. Except with respect to the matters described in Schedule B, no Borrower nor its subsidiaries has caused, or become legally responsible for, any release or threat of release of any hazardous material or oil on or from the Premises or any other site or vessel owned, occupied or operated either by any Borrower, any subsidiary of any Borrower or any person for whose conduct any Borrower or any subsidiary of any Borrower is responsible, where any such release or threat of release can reasonably be expected to result in a material liability to any Borrower or any subsidiary of any Borrower or a lien on the Premises or other property of any Borrower or any subsidiary of any Borrower. (c) Except with respect to the matters described in Schedule B, no Borrower nor any subsidiary of any Borrower has received notification from any federal, state, foreign or other governmental authority of: any potential, known or threat of release of any hazardous material or oil on or from the Premises or any other site or vessel at any time owned, occupied or operated either by any Borrower, any subsidiary of any Borrower or any person for whose conduct any Borrower or any subsidiary of any Borrower is responsible or whose liability may result in a lien on the Premises or any other property of any Borrower or any subsidiary of any Borrower; or of the incurrence of any expense or loss by such 22 governmental authority or by any other person, in connection with the assessment, containment, or removal of any release, or threat of release, of any hazardous material or oil from the Premises or any such site or vessel. (d) Each Borrower shall, and shall cause the other Borrowers and each subsidiary of any Borrower to: (i) comply with all material laws, ordinances, regulations, administrative orders, notices and decrees of any governmental authority pertaining to the storage, transport, release and disposal of hazardous material or oil; (ii) except in compliance with all applicable laws, ordinances, regulations, administrative orders, notices and decrees of any governmental authority refrain from disposing of hazardous material or oil on the Premises or on any other site or vessel owned, occupied or operated either by any Borrower, any subsidiary of any Borrower, or by any person for whose conduct any Borrower or any subsidiary of any Borrower is responsible; (iii) engage in such activity as is reasonable and prudent under the circumstances to (w) determine whether and to what extent hazardous materials or oil is present on the Premises or on any other site or vessel at any time owned, occupied or operated either by any Borrower, any subsidiary of any Borrower, or by any person for whose conduct any Borrower or any subsidiary of any Borrower is responsible or whose liability may result in a lien on the Premises or other property of any Borrower or any subsidiary of any Borrower, (x) determine whether and to what extent containment or removal of such hazardous material or oil as may then be present is necessary or appropriate in light of applicable law or potential harms or damages which may result therefrom, (y) carry out any activities necessary or appropriate under clauses (w) and (x), and (z) qualify for insurance programs or safe harbors which may be available under applicable law, ordinances and regulations; (iv) provide Lender with written notice: (x) upon any Borrower's obtaining knowledge or any material release, or threat of release, or any hazardous material or oil at or from the Premises, or any other site or vessel at any time owned, occupied, or operated by any Borrower, or any subsidiary of any Borrower, or by any person for whose conduct any Borrower, or any subsidiary of any Borrower, is responsible, where such release or threat of release is required to be reported to any governmental authority by any Borrower or any subsidiary of any Borrower or any other such person, or may result in a lien on the Premises or other property of any Borrower or any subsidiary of any Borrower; (y) upon any Borrower's or any Borrower's subsidiary's receipt of any notice to such effect from any federal, state, foreign or other governmental authority; and (z) upon any Borrower's or any Borrower's subsidiary's obtaining knowledge of any incurrence of any expense or loss by any such governmental authority in connection with the assessment, containment, or removal of any hazardous material or oil for which expense or loss any Borrower or any subsidiary may be liable in any material amount or for which expense a lien may be imposed on the Premises or any other property of any Borrower or any subsidiary of any Borrower; and (v) jointly and severally indemnify, defend and hold Lender harmless from any claim brought or threatened against Lender by any Borrower, or any subsidiary of any Borrower, any guarantor or endorser of the Obligations, or any governmental agency or authority or any 23 other person (as well as from attorneys' and environmental expert's reasonable fees and expenses in connection therewith) on account of the presence of hazardous material or oil on the Premises, or any other site or vessel at any time owned, occupied or operated by any Borrower or any subsidiary of any Borrower or any person for whose conduct any Borrower or any subsidiary of any Borrower may be responsible, or whose liability may result in a lien on the Premises or other property of any Borrower or any subsidiary of any Borrower, the past, present or future release or threat of release of hazardous materials or oil on or from the Premises, or any other site or vessel at any time owned, occupied or operated by any Borrower, or any subsidiary of any Borrower, or by any person for whose conduct any Borrower or any subsidiary of any Borrower may be responsible or whose liability may result in a lien on the Premises or other property of any Borrower or any subsidiary of any Borrower, or the failure by any Borrower to comply with the terms and provisions of this Section 6.18 (each of which may be defended, compromised, settled, or pursued by Lender with counsel of Lender's selection, but at the expense of the Borrowers, on a joint and several basis, and, in the case of compromise or settlement prior to an Event of Default, with the consent of any Borrower, which consent shall bind all Borrowers). The within indemnification shall survive payment of the Obligations and/or any termination, release, or discharge executed by Lender in favor of any Borrower or any subsidiary of any Borrower or other person. (e) As used in this Section 6.18, the term "oil" shall mean oil and/or any other petroleum product or by-product. 6.19 At Lender's option, and at each Borrower's expense, Lender may order appraisals of the forced liquidation value of Borrower's machinery and equipment, provided, however, that the timing and manner of all such appraisals shall be commercially reasonable in all respects. If the principal balance of the Term Loans outstanding to any Borrower, as of the date of the appraisal, exceeds eighty-two percent (82%) of the appraised forced liquidation value of such Borrower's machinery and equipment, such Borrower shall make additional principal payments with respect to the Term Loan in an amount equal to 1/12 of the amount by which the outstanding principal balance of such Borrower's Term Loans exceeds eighty-two percent (82%) of the appraised forced liquidation value of such Borrower's machinery and equipment as of the date of the appraisal, such payments to be paid concurrently with the monthly Term Loan installments due under the Term Loans, until the entire excess amount has been fully amortized. 6.20 No Borrower shall directly or indirectly enter into or permit to exist, any transaction with Odessa as obligor to such Borrower, direct or contingent, by reason of any loan, advance, lease, sale or other financing transaction, investment or otherwise; provided, however, that Hurt may provide services from time to time to Odessa as long as the aggregate of all such accounts outstanding at any time does not exceed $300,000.00. SECTION 7. EVENTS OF DEFAULT AND REMEDIES 7.1 All Obligations shall be immediately due and payable, without notice or demand, and any provisions of this Agreement as to future loans and credit accommodations by Lender shall terminate automatically, upon the termination or non-renewal of this Agreement or, at Lender's option, upon or at any time after the occurrence or existence of any one or more of the following "Events of Default": 24 (a) Any Borrower fails to pay when due any of the Obligations or fails to perform any of the terms of this Agreement or any other existing or future financing, security or other agreement between such Borrower and Lender or any affiliate of Lender; (b) Any representation, warranty or statement of fact made by any Borrower to Lender in this Agreement or any other agreement, schedule, confirmatory assignment or otherwise, or to any affiliate of Lender, shall prove inaccurate or misleading in any material respect; (c) Any guarantor revokes, terminates or fails to perform any of the terms of any guaranty, endorsement or other agreement of such party in favor of Lender or any affiliate of Lender; (d) Any judgment or judgments aggregating in excess of $50,000 or any injunction or attachment (except statutory liens or attachments for amounts not yet due and payable) is obtained against any Borrower or any guarantor which remains unstayed for a period of ten (10) days or is enforced; (e) Any Borrower or any guarantor or a general partner of a guarantor or a Borrower (which is a partnership), being a natural person, dies, or any Borrower or any guarantor which is a partnership or corporation, is dissolved, or any Borrower or any guarantor which is a corporation fails to maintain its corporate existence in good standing, or Borrower or any guarantor suspends its usual business or engages in a different line of business from the line of business it is engaged in as of the date of this Agreement; (f) Any change in the chief executive officer or president of Key without Lender's prior written consent; (g) Any Borrower or any guarantor of any of the Obligations becomes insolvent, makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a general meeting of its creditors or principal creditors; (h) Any petition or application for any relief under the bankruptcy laws of the United States now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed by any Borrower or any guarantor or, if filed against any Borrower or any guarantor of any of the Obligations, is not dismissed within sixty (60) days; (i) The indictment or threatened indictment of any Borrower or any guarantor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against any Borrower or any guarantor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of such Borrower or such guarantor; 25 (j) Any event of default under any financing, security or other agreement, document or instrument at any time executed and/or delivered to, with or in favor of Lender or any of its affiliates by any affiliate of any Borrower; (k) Lender in good faith believes that either (i) the prospect of payment or performance of the Obligations is impaired or (ii) the Collateral is not sufficient to secure fully the Obligations; or (l) Any default by any Borrower under any material agreement or instrument, in favor of any individual or entity other than Lender and such default continues for thirty (30) days after such breach first occurs; provided, however, that such grace period shall not apply, and an Event of Default shall exist, promptly upon such breach, if such breach may not, in Lender's reasonable determination, be cured by Borrower during such thirty (30) day grace period. 7.2 Upon the occurrence of an Event of Default which has not been waived by Lender or cured to Lender's satisfaction and at any time thereafter, Lender shall have all rights and remedies provided in this Agreement, any other agreements between any Borrower and Lender, the Uniform Commercial Code or other applicable law, all of which rights and remedies may be exercised without notice to any Borrower, all such notices being hereby waived, except such notice as is expressly provided for hereunder or is not waivable under applicable law. All rights and remedies of Lender are cumulative and not exclusive and are enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions and in any order Lender may determine. Without limiting the foregoing, Lender may (a) accelerate the payment of all Obligations and demand immediate payment thereof to Lender, (b) to the extent permitted by law, with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion, of the Collateral, (c) require any Borrower, at such Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (d) collect, foreclose, receive, appropriate, set off and realize upon any and all Collateral, (e) extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations, (f) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, by public or private sales at any exchange, broker's board, any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of any Borrower which right or equity of redemption is hereby expressly waived and released by each Borrower. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, ten (10) business days prior notice by Lender to the Borrowers designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and each Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, each Borrower waives to the extent permitted by law the posting of any bond which might otherwise be required. 26 7.3 Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of any of the Obligations, in whole or in part (including reasonable attorneys' fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to the Borrowers) and in such order as Lender may elect, whether or not then due. Each Borrower shall remain liable to Lender for the payment of any deficiency together with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses. 7.4 Lender may, at its option, cure any default by any Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against any Borrower, discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and pay any amount, incur any expense or perform any act which, in Lender's sole judgment, is necessary or appropriate to preserve, protect, insure, maintain or realize upon the Collateral. Lender may charge the Borrowers' loan account for any amounts so expended, such amounts to be repayable by the Borrowers on demand. Lender shall be under no obligation to effect such cure, payment, bonding or discharge, and shall not by doing so, be deemed to have assumed any obligation or liability of any Borrower. SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS 8.1 WAIVER OF JURY TRIAL. LENDER AND EACH BORROWER ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES, AND THEREFORE, THE PARTIES AGREE THAT ANY LAWSUIT GROWING OUT OF ANY SUCH CONTROVERSY WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT JURY. TRIAL BY A JUDGE SITTING WITHOUT A JURY WILL FURTHER RESULT IN THE AVOIDANCE OF DELAYS, A STREAMLINING OF THE PROCEEDINGS INVOLVED AND, AS A RESULT, WILL MINIMIZE THE EXPENSE OF ANY SUCH LAWSUIT FOR THE BENEFIT OF EACH BORROWER AND LENDER. EACH BORROWER HEREBY WAIVES TRIAL BY JURY, RIGHTS OF SET OFF, AND THE RIGHT TO IMPOSE COUNTERCLAIMS (EXCEPT BY COMPULSORY COUNTERCLAIMS) IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE BORROWERS, OR ANY OF THEM, AND THE LENDER. EACH BORROWER HEREBY CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE. 8.2 Each Borrower hereby irrevocably submits and consents to the nonexclusive jurisdiction of the State and Federal Courts located in the State in which the office of Lender designated in Section 10.6(a) is located and any other State where any Collateral is located with respect to any action or 27 proceeding arising out of this Agreement, the Collateral or any matter arising therefrom or relating thereto. In any such action or proceeding, each Borrower waives personal service of the summons and complaint or other process and papers therein and agrees that the service thereof may be made by mail directed to such Borrower at its chief executive office set forth herein or other address thereof of which Lender has received notice as provided herein, service to be deemed complete five (5) days after mailing by certified or registered mail, or as permitted under the rules of either of said Courts. Any such action or proceeding commenced by any Borrower against Lender will be litigated only in a Federal Court located in the district, or a State Court in the State and County, in which the office of Lender designated in Section 10.6(a) is located and each Borrower waives any objection based on forum non conveniens and any objection to venue in connection therewith. 8.3 Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. A waiver by Lender of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 8.4 Unless otherwise expressly provided herein, each Borrower waives, to the extent permitted by applicable law, diligence, presentment, protest and notice of demand or dishonor and protest as to any instrument, notice of intent to accelerate and notice of acceleration, notice of default, notice of protest, demand, dishonor or nonpayment, as well as any and all other notices to which it might otherwise be entitled. No notice to or demand on any Borrower which the Lender may elect to give shall entitle such Borrower to any further notice or demand in the same, similar or other circumstances. 8.5 The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes) Article 5069-15 are specifically declared by Lender and the Borrowers not to be applicable to this Agreement or the transactions contemplated hereby. SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS 9.1 Term. This Agreement shall only become effective upon the execution and delivery of this Agreement by each Borrower and Lender and shall continue in full force and effect until either December 31, 1998, or January 5, 1999, at Lender's option, and shall be deemed automatically renewed for successive terms of two (2) years thereafter unless terminated as of the end of the initial or any renewal term (each a "Term") by the Lender or any Borrower giving the other parties hereto written notice at least sixty (60) days prior to the end of the then-current Term. 9.2 Any of the Borrowers may also terminate this Agreement by giving Lender at least thirty (30) days prior written notice at any time upon payment in full of all of the Obligations as provided herein, including the early termination fee provided below. Lender shall also have the right to terminate this Agreement at any time upon or after the occurrence of an Event of Default. If Lender terminates this Agreement upon or after the occurrence of an Event of Default, or if any of the Borrowers shall terminate this Agreement as permitted herein effective prior to the end of the then-current Term, in addition to all other Obligations, the Borrowers collectively shall pay to Lender, upon the effective date of termination, in view of the impracticality and extreme 28 difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits, an early termination fee equal to: (a) fifty percent (50%) of the average monthly interest and fees payable by the Borrowers to Lender with respect to the Revolving Loans for the immediately preceding six (6) months or from the date of this Agreement, whichever is the shorter period, multiplied by (b) either (i) the number of months (or any part thereof) remaining in the then-current Term, if the Borrowers' written notice of termination is received by Lender or termination by Lender is effective more than sixty (60) days prior to the end of the then-current Term or (ii) the number of months (or any part thereof) remaining in the then-current Term plus twenty-four (24) if the Borrowers' written notice of termination is received by Lender or termination by Lender is effective within sixty (60) days prior to the end of the then-current Term. For purposes of calculating the early termination fee, in no event will the average monthly interest be less than the interest which would have been payable if the Revolving Loans had equaled the Minimum Borrowing set forth in Section 10.1(d) on each day during the calculation period. 9.3 Borrowers may prepay, in whole or in part, the Term Loans prior to the end of the then current Term. If such prepayment is made with funds other than funds obtained from a public offering or private placement of equity or debt by Borrowers, the Borrowers collectively shall pay to Lender, upon the effective date of termination, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits, an early termination fee equal to: (a) fifty percent (50%) of the average monthly interest and fees payable by the Borrowers to Lender with respect to the Term Loans for the immediately preceding six (6) months or from the date of this Agreement, whichever is the shorter period, multiplied by (b) either (i) the number of months (or any part thereof) remaining in the then-current Term, if the Borrowers' written notice of termination is received by Lender or termination by Lender is effective more than sixty (60) days prior to the end of the then-current Term or (ii) the number of months (or any part thereof) remaining in the then-current Term plus twenty-four (24) if the Borrowers' written notice of termination is received by Lender or termination by Lender is effective within sixty (60) days prior to the end of the then-current Term. If such payment is made with funds obtained from a public offering or private placement of equity or debt by Borrowers, then, in lieu of the fee set forth in (a) and (b) above, Borrowers shall collectively pay to Lender an early termination fee of $100,000.00. 9.4 Upon termination of this Agreement by the Borrowers, as permitted herein, in addition to payment of all Obligations which are not contingent, each Borrower shall deposit such amount of cash collateral as Lender reasonably determines is necessary to secure Lender from loss, cost, damage or expense, including reasonable attorneys' fees, in connection with any open Accommodations 29 or remittance items or other payments provisionally credited to the Obligations and/or to which Lender has not yet received final and indefeasible payment. 9.5 Except as otherwise provided, all notices, requests and demands hereunder shall be (a) made to Lender at its address set forth in Section 10.6(a) and to each Borrower at its chief executive office set forth in Section 10.6(d), or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if by hand, immediately upon delivery; if by telex, telegram or telecopy (fax), immediately upon receipt; if by overnight delivery service, upon receipt; and if by certified mail, return receipt requested five (5) days after mailing. 9.6 If any provision of this Agreement is held to be invalid or unenforceable, such provision shall not affect this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable. 9.7 Neither this Agreement nor any provision hereof shall be amended, modified or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender and Borrowers. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns, except that any obligation of Lender under this Agreement shall not be assignable nor inure to the successors and assigns of Borrowers. 9.8 No termination of this Agreement shall relieve or discharge any Borrower of its Obligations, grants of Collateral, duties and covenants hereunder or otherwise including, without limitation, the continuation and survival in full force and effect of all security interests and liens of Lender in and upon all then-existing and thereafter-arising or acquired Collateral and all warranties and waivers of Borrowers, until such time as all Obligations to Lender have been indefeasibly paid and satisfied in full. 9.9 The enumeration herein of the Lender's rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies that the Lender may have under the Uniform Commercial Code or other applicable law. The Lender shall have the right, in its sole discretion, to determine which rights and remedies are to be exercised and in which order. The exercise of one right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. The Lender may, without limitation, proceed directly against the Borrowers, or any of them, to collect the Obligations without any prior recourse to the Collateral. 9.10 Whenever an Event of Default exists, the Lender is hereby authorized at any time and from time to time, 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 the Lender or any affiliate of such Lender to or for the credit or the account of any Borrower against any and all of the Obligations, whether or not then due and payable. 9.11 Lender may grant the right to participate in Loans and to enter into participation agreements with one or more participating lenders; and, in the event that Lender does grant such right to participate in Loans, Lender may do so with such participating lenders, and on such terms and conditions, as 30 shall be acceptable to Lender. If a participating lender shall at any time with the Borrowers' knowledge participate with the Lender in the Loans, each Borrower hereby grants to such participating lender, and the Lender and such participating lender shall have and are hereby given, a continuing lien on and security interest in any money, securities and other property of such Borrower in the custody or possession of the participating lender, including, the right of set-off, to the extent of such participating lender's participation in the Obligations, and such participating lender shall be deemed to have the same right of set-off to the extent of such participating lender's participation in the Obligations under this Agreement, as it would have if it were a direct lender. 9.12 All terms used herein which are defined in the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement and all references to the singular or plural herein shall also mean the plural or singular, respectively. 9.13 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE OFFICE OF LENDER SET FORTH IN SECTION 10.6(a) BELOW IS LOCATED. 9.14 THIS AGREEMENT (AND THE PROMISSORY NOTES REFERRED TO IN SECTION 2.2), ARE INTENDED BY THE BORROWERS AND THE LENDER TO BE THE FINAL, COMPLETE, AND EXCLUSIVE EXPRESSION OF THE AGREEMENT BETWEEN THEM. THIS AGREEMENT SUPERSEDES ANY AND ALL PRIOR ORAL OR WRITTEN AGREEMENTS RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE, OR AMENDMENT OF ANY PROVISION OF THIS AGREEMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE BORROWERS AND A DULY AUTHORIZED OFFICER OF LENDER. 9.15 This Agreement may be executed in any number of counterparts, and by the Lender and the Borrowers in separate counterparts, each of which shall be an original, but all of which shall together constitute on and the same agreement. 9.16 The captions contained in this Agreement are for convenience only, are without substantive meaning and should not be construed to modify, enlarge, or restrict any provision. 9.17 This Agreement amends and restates in its entirety the Second Loan Agreement and the WellTech Agreement. The execution of this Agreement, the Promissory Notes, and the other loan documents executed in connection herewith does not extinguish the indebtedness outstanding in connection therewith nor does it constitute a novation with respect to indebtedness outstanding in connection with the Original Loan Agreement or the indebtedness evidenced by the Original Loan Documents or the Second Loan Agreement or the WellTech Agreement. The Borrowers and Lender ratify and confirm each of the Original Loan Documents including each of the security documents executed pursuant to the Original Loan Agreement or the Second Loan Agreement or the WellTech Agreement, and agree that such Original Loan Documents as amended and modified hereby continue to be legal, valid, binding and enforceable in accordance with their respective terms. Without limiting the generality of the foregoing and notwithstanding any loan document to the contrary, each Borrower and Lender agree and acknowledge that: 31 (i) the term "Loan Agreement" as used in each loan document, including, but not limited to, each of the Promissory Notes, means this Agreement; (ii) the term "Indebtedness," "Obligations" or "Secured Obligations" as used in any loan document means the Obligations; and (iii) the term "Lender" as used in the Loan Documents means the Lender as defined herein. 9.18 Releases. As a material inducement to Lender to enter into this Agreement, each Borrower hereby represents and warrants that there are no claims or offsets against, or defenses or counterclaims to, the terms and provisions of and the other obligations created or evidenced by the Original Loan Documents, the Second Loan Agreement or the WellTech Agreement. Each of the Original Obligors hereby releases, acquits, and forever discharges Lender, and its current parent, subsidiaries and affiliated organizations, and the current offices, employees, attorneys and agents of each of the foregoing (all of whom are herein jointly and severally referred to as the "Released Parties") from any and all liability, damages, losses, obligations, costs, expenses, suits, claims, demands, causes of action for damages or any other relief, whether or not now known or suspected, of any kind, nature or character, at law or in equity, that any of them now has or may have ever had against any of the Released Parties, including, but not limited to, those relating to (a) usury or penalties or damages therefor, (b) allegations that a partnership existed between Borrower and the Released Parties, (c) allegations of unconscionable acts, deceptive trade practices, lack of good faith or fair dealing, lack of commercial reasonableness or special relationships, such as fiduciary, trust or confidential relationships, (d) allegations of dominion, control, alter ego, instrumentality, fraud, misrepresentation, duress, coercion, undue influence, interference or negligence, (e) allegations of tortious interference with present or present or prospective business relationships or of antitrust or (f) slander, libel or damage to reputation (hereinafter being collectively referred to as the "Claims"), all of which Claims are hereby waived. SECTION 10. ADDITIONAL DEFINITIONS AND TERMS 10.1 (a) Maximum Credit: $35,000,000 (b) Eligible Accounts Percentage: Eighty-Five Percent (85%) so long as the dilution percentage of such accounts does not exceed Four Percent (4%) whereupon the Eligible Accounts Percentage shall be reduced to an amount deemed reasonable by Lender. (c) Maximum days after Invoice Date for Eligible Accounts: 90 days; provided, however, that Lender may make advances up to $250,000.00 in the aggregate at any given time against Eligible Accounts which are between 91 days and 120 days past invoice date. (d) Minimum Borrowing: $20,000,000; provided, however, that if the Term Loans are repaid in full from either (i) Borrowers' operating income or (ii) the proceeds of a stock offering of Key, then the Minimum Borrowing will be $12,000,000. (e) Sublimits: (i) For Yale, $35,000,000 less all Obligations of Hurt and WellTech; 32 (ii) For Hurt, the lesser of (i) $2,000,000, and (ii) $35,000,000 less all Obligations of Yale and WellTech; and (iii) For WellTech, $35,000,000 less all Obligations of Hurt and Yale; 10.2 The lesser of eighty-two percent (82%) of the forced liquidation value of the Borrower's equipment and (a) Term Loan: (i) For Yale, $10,004,082; (ii) For Hurt, $1,230,000; and (iii) For WellTech, $11,822,186. (b) Capital Expenditures Loans (ss.2.2(b)): In addition, Lender will provide Borrowers with a line of credit in the aggregate amount of up to the amount set forth below ("Capital Expenditures Line") for the equipment purchased by Borrowers after November 6, 1995, which is acceptable to Lender for lending purposes ("Acceptable Capital Expenditures"). Advances, if any, by Lender against Borrower' Acceptable Capital Expenditures ("Capital Expenditures Loans") shall be limited to seventy percent (70%) of the forced liquidation value of such Capital Expenditures, as set forth in an appraisal delivered to Lender in accordance with Section 2.2(c), and such advances will be evidenced by a Promissory Note and be amortized over 84 months. Any advances made under the Capital Expenditures Line will be made at the sole discretion of Lender. (i) For Yale, up to $2,500,000 less all outstanding Advances under the Capital Expenditures Line; (ii) For Hurt, up to the lesser of (i) $2,000,000, and (ii) $2,500,000 less all outstanding Advances under the Capital Expenditures Line; and (iii) For WellTech, up to $2,500,000 less all outstanding advances under the Capital Expenditures Line. 10.3 Accommodations: (a) Lender's Charge for Accommodations: 1.25% per annum with respect to all outstanding Accommodations (b) Sublimit for Accommodations: $1,800,000 33 10.4 Fees: (a) Interest Rate: Prime Rate plus 1.25% per annum (b) Closing Fees: N/A (c) Unused Line Fee Rate: N/A 10.5 Financial Covenants: Unless indicated otherwise, all amounts below shall be determined in accordance with generally accepted accounting principles, in effect on the date hereof, consistently applied: (a) "Consolidated Debt Service (Fixed Charge) Coverage Ratio" means the ratio of (a) the sum of net income plus (i) depreciation and amortization expenses plus (ii) increases in deferred taxes less (iii) decreases in deferred taxes resulting from tax payments actually made; divided by (b) the sum of payments on long term indebtedness plus (i) capital lease payments plus (ii) any unfunded capital expenditures; (c) determined on a consolidated basis. Testing of the following ratio will begin on March 31, 1996. Borrowers will maintain a Consolidated Debt Service (Fixed Charge) Coverage Ratio of not less than 1.30 to 1.00, such ratio to be tested at the end of each calendar quarter (i.e. as of March 31, June 30, September 30 and December 31) based on the prior 12-month period. (b) "Consolidated Tangible Net Worth" means the amount by which the sum of (a) Shareholders' Equity plus Subordinated Debt (non-current balance) exceeds (b) Intangible Assets, determined on a consolidated basis for all Borrowers. For this purpose: "Shareholders Equity" means shareholders' equity determined according to GAAP; and "Intangible Assets" means (i) assets which are treated as intangible pursuant to GAAP; (ii) obligations owing by any persons that are officers, directors, shareholders, employees, subsidiaries or affiliates, or any entity in which any such person owns any interest; and (iii) any asset which is intangible or lacks intrinsic and marketable value or collectibility, including without limitation goodwill, noncompetition agreements, patents, copyrights, trademarks, franchises or organization or research and development costs, prepaid expenses or investments in subsidiaries/affiliates; and (iv) any other assets determined to be intangible by Lender in its reasonable credit judgment. Borrowers will maintain a Consolidated Tangible Net Worth of not less than $30,000,000, such ratio to be tested as of the end of each calendar quarter (i.e. as of March 31, June 30, September 30 and December 31). (c) Total Liabilities (as defined by GAAP) to Consolidated Tangible Net Worth: Borrowers will not allow the ratio of Total Liabilities to Consolidated Tangible Net Worth to be greater than 2.25 to 1.00, such ratio to be tested as 34 of the end of any calendar quarter (i.e. as of March 31, June 30, September 30 and December 31). (d) Maximum Annual Capital Expenditures: Borrowers will not allow their Capital Expenditures to exceed $7,000,000 during any Fiscal Year. 10.6 (a) Lender's Office: 10 South LaSalle Street Chicago, Illinois 60603 (b) Lender's Bank: Bank of America Illinois 231 South LaSalle Street Chicago, Illinois 60697 (c) Borrowers: Yale E. Key, Inc. Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling WellTech Eastern, Inc. (d) Borrowers' Chief Executive Offices: 1. Yale: 1503 East Taylor Midland, Texas 79702 2. Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling: 1503 East Taylor Midland, Texas 79702 3. WellTech Eastern, Inc. 5967 Venture Way Mt. Pleasant, Michigan 48858 (e) Attached hereto as Schedule 10.6(e) is a correct and complete listing of all of Borrowers' other Offices and Locations of Collateral identifying each location by street address, listing the name and address of each owner of each location and if different from the owner, the name and address of each lessor of each location. (f) Borrowers' Trade Names for Invoicing: 1. Yale: Bonner Hoffman Oil Well Service Skeeter Machen Oil Well Service Key Fishing & Rental Tools Key Tank Rentals Key Mud 2. Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling: None 3. WellTech: WellTech Mid-Continent Division 35 IN WITNESS WHEREOF, Borrowers and Lender have duly executed this Agreement this day of May, 1996. LENDER: BORROWERS: THE CIT GROUP/CREDIT YALE E. KEY, INC. FINANCE, INC. By: By: Name: Mr.Morris Horstmann Name: Francis D. John Title: Vice President Title: Executive Vice President KEY ENERGY DRILLING, INC. D/B/A CLINT HURT DRILLING By: Name: Francis D. John Title: Executive Vice President WELLTECH EASTERN, INC. By: Name: Francis D. John Title: President 36 SCHEDULE A Permitted Liens Amended and Restated Intercompany Notes and Security Agreements as follows: Intercompany Note and Security Agreement executed by Hurt for the benefit of Yale and endorsed to Lender. Intercompany Note and Security Agreement executed by Key for the benefit of Yale and endorsed to Lender. Intercompany Note and Security Agreement executed by WellTech for the benefit of Yale and endorsed to Lender. Intercompany Note and Security Agreement executed by Yale for the benefit of Hurt and endorsed to Lender. Intercompany Note and Security Agreement executed by Key for the benefit of Hurt and endorsed to Lender. Intercompany Note and Security Agreement executed by WellTech for the benefit of Hurt and endorsed to Lender. Intercompany Note and Security Agreement executed by Yale for the benefit of Key and endorsed to Lender. Intercompany Note and Security Agreement executed by Hurt for the benefit of Key and endorsed to Lender. Intercompany Note and Security Agreement executed by WellTech for the benefit of Key and endorsed to Lender. Intercompany Note and Security Agreement executed by Yale for the benefit of WellTech and endorsed to Lender. Intercompany Note and Security Agreement executed by Key for the benefit of WellTech and endorsed to Lender. Intercompany Note and Security Agreement executed by Hurt for the benefit of WellTech and endorsed to Lender. Security Agreement between Nubs Well Servicing, Inc., and WellTech, Inc., and Assumption Agreement entered into by WellTech Eastern, Inc., and Guaranty executed by Key. SCHEDULE B The following should be noted with respect to environmental matters: 1. WellTech conducts its operations from well servicing yards owned and leased as described on Schedule 10.6(e). These yards and vehicles located thereon are subject to contamination resulting from fueling of the rigs from gasoline and diesel tanks situated on certain of the properties; washing the rigs using a mild detergent with resulting flow-off and servicing the rigs at the site using oil, grease and other types of lubricants. 2. WellTech conducts liquid hauling operations in both Oklahoma and Michigan. These operations entail the hauling of liquid substances and wastes and the disposal of such substances in disposal wells permitted for this purpose. 3. In connection with the trucking operations mentioned in No. 2 above, WellTech has acquired three disposal wells in the State of Michigan and five disposal wells in the State of Oklahoma. These wells are properly permitted and caution is taken to deter unauthorized use of the wells. 4. Bronson Production, Inc., acquired the Wlosinski No. 2-27 well in Manistee County, Michigan in 1994 from Terra Energy, Ltd. Terra has entered into final administrative consent order assessing civil penalty against respondent, Terra Energy, Ltd., on May 9, 1995. The alleged infractions relate to injecting into the well pressures in excess of permissible pressures; failing to submit monthly, quarterly and annual monitoring reports; and failure to post an acceptable alternative demonstration of financial responsibility. Terra paid a fine of approximately $35,000 and seeks reimbursement from the Company for a portion of the amount paid. 5. The Santa Maria, California property, formerly leased and utilized last in April 1992, by WellTech in its California operations, is subject to limited reclamation activities. While WellTech has not acknowledged any liability or responsibility, approximately $15,000 has been contributed towards efforts with the representative of the property owners to satisfy the Santa Maria County Environmental Agency. There is an understanding that the efforts will be pursued jointly to avoid litigation with the property owners. WellTech owns and operates the following above-ground and underground storage tanks: 1. Mid-Continent Region - Fuel Tanks There are only two underground tanks on property owned or leased by the Company at the El Reno, Oklahoma facility in El Reno, Oklahoma. These tanks were in the ground at the time WellTech acquired the El Reno, Oklahoma property and have not been used by the Company since the acquisition. At the time of the acquisition, the soils around the tanks were tested and no contamination was found as documented in an environmental assessment delivered to the Company. Above the ground storage tanks are located in: Canadian, Texas Countyline, Oklahoma Guthrie, Oklahoma Lindsay, Oklahoma Oklahoma City, Oklahoma Northeastern Region - Fuel Tanks There are no underground tanks A single above the ground storage tank is located at WellTech's well servicing yard in Kalkaska, Michigan. SCHEDULE 6.12 1. Key has guaranteed the obligations of Odessa to Norwest Bank Texas, Midland. 2. Key will pay the bonuses due to Francis D. John under Mr. John's Employment Agreement with Key. 3. Key will guarantee WellTech's obligations relating to the Nub's acquisition and note balance: $200,000 - $250,000 4. WellTech leases from Hidco Development Corporation, which is owned by Kenneth C. Hill and his spouse, real property used for well servicing yards in Mt. Pleasant, Michigan and Ripley, West Virginia. Lease terms, including rental rates, are deemed by management to be competitive. 5. WellTech leases from Talon Development Corporation real property used for its servicing yard in Indiana, Pennsylvania. Kenneth C. Hill owns a 33 1/3 interest in Talon Development Corporation. Lease terms including rental rates are deemed by management to be competitive. 6. WellTech initiated a management incentive compensation plan which requires the payment of sums of money to various parties contingent upon the attainment of a stipulated level of profitability. No payments have been made pursuant to this plan since its adoption. SCHEDULE 10.6(e) EX-10.13 14 ASSET PURCHASE AGREEMENT BETWEEN ARCH AND ODESSA ASSET PURCHASE AGREEMENT DATED AS OF APRIL 18, 1996, BY AND BETWEEN ARCH PETROLEUM INC., AS SELLER, AND ODESSA EXPLORATION INCORPORATED, AS BUYER ASSET PURCHASE AGREEMENT TABLE OF CONTENTS Page ARTICLE I. CERTAIN DEFINITIONS Section 1.1 Certain Defined Terms.......................................1 Section 1.2 References, Gender, Number..................................1 ARTICLE II. SALE AND PURCHASE ARTICLE III. CONSIDERATION AND PAYMENT Section 3.1 Consideration...............................................1 Section 3.2 Payment.....................................................2 Section 3.3 Adjustment Period Cash Flow.................................2 Section 3.4 Post Closing Review.........................................3 Section 3.5 Gas Imbalance Credits.......................................3 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller....................4 Section 4.2 Representations and Warranties of Buyer.....................5 ARTICLE V. INVESTIGATION OF ASSETS: CONFIDENTIALITY Section 5.1 Investigation of Assets.....................................6 Section 5.2 Confidential Information....................................7 ARTICLE VI. TITLE ADJUSTMENTS. Section 6.1 No Warranty or Representation...............................7 Section 6.2 Buyer's Title Review........................................7 Section 6.3 Determination of Title Defects.............................10 Section 6.4 Seller Title Credit........................................10 - i - Section 6.5 Exclusion of Defect Properties..............................11 Section 6.6 Deferred Claims and Disputes................................11 Section 6.7 No Duplication..............................................12 ARTICLE VII. PREFERENCE RIGHTS AND CONSENTS Section 7.1 Compliance.................................................12 Section 7.2 Effect of Preference Rights................................12 Section 7.3 Transfer Requirements......................................13 ARTICLE VIII. COVENANTS OF SELLER AND BUYER Section 8.1 Conduct of Business Pending Closing.........................13 Section 8.2 Qualifications on Seller's Conduct..........................15 Section 8.3 Conveyance..................................................16 Section 8.4 Public Announcements........................................16 Section 8.5 Further Assurances..........................................16 Section 8.6 Removal.....................................................16 Section 8.7 Records.....................................................16 ARTICLE IX. CLOSING CONDITIONS Section 9.1 Seller's Closing Conditions.................................17 Section 9.2 Buyer's Closing Conditions..................................18 ARTICLE X. CLOSING Section 10.1 Closing.....................................................19 Section 10.2 Seller's Closing Obligations................................19 Section 10.3 Buyer's Closing Obligations.................................19 ARTICLE XI. EFFECT OF CLOSING Section 11.1 Revenues...................................................19 Section 11.2 Expenses...................................................19 Section 11.3 Payments and Obligations...................................20 Section 11.4 Survival...................................................20 - ii - ARTICLE XII. CASUALTY AND CONDEMNATION Section 12.1 No Termination.............................................20 Section 12.2 Proceeds and Awards........................................20 ARTICLE XIII ASSUMPTION AND INDEMNIFICATION Section 13.1 Indemnification By Buyer...................................20 Section 13.2 Indemnification by Seller..................................21 Section 13.3 Third Party Claims.........................................21 ARTICLE XIV. TERMINATION; REMEDIES; LIMITATIONS Section 14.1 Termination................................................22 Section 14.2 Remedies. ................................................22 Section 14.3 Limitations................................................23 ARTICLE XV. MISCELLANEOUS Section 15.1 Counterparts...............................................24 Section 15.2 Governing Law..............................................24 Section 15.3 Entire Agreement. ........................................25 Section 15.4 Expenses...................................................25 Section 15.5 Notices....................................................25 Section 15.6 Successors and Assigns.....................................26 Section 15.7 Amendments and Waivers.....................................26 Section 15.8 Schedules and Exhibits.....................................26 Section 15.9 Purchase Price Allocation for Tax Purposes.................26 Section 15.10 Ad Valorem Tax Proration...................................26 Section 15.11 Agreement for the Parties' Benefit Only....................26 Section 15.12 Attorneys' Fees............................................26 Section 15.13 Severability...............................................27 Section 15.14 No Recordation.............................................27 Section 15.15 Time of Essence............................................27 Section 15.16 Hardy Agreement............................................27 Section 15.17 Like Kind Exchange.........................................27 - iii - EXHIBITS Exhibit 8.3 -- Conveyance Exhibit 10.2(c) -- Affidavit of Non-Foreign Status Exhibit A-1 -- Arbitration Procedures Exhibit A-2 -- Property Schedule Exhibit B -- Forecast of Costs and Expenses SCHEDULES Schedule 4.1(d) -- Seller's Conflicts or Violations Schedule 4.1(e) -- Seller's Consents Schedule 4.1(f) -- Seller's Actions Schedule 4.1(g) -- Non-Compliance with Laws Schedule 4.2(d) -- Buyer's conflicts or Violations Schedule 4.2(e) -- Buyer's Consents Schedule 4.2(f) -- Buyer's Actions Schedule 7.1 - Part I -- Preference Rights Schedule 7.1 - Part II -- Transfer Requirements Schedule 8.1 -- Conduct of Business Schedule 15.9 -- Purchase Price Allocation for Tax Purposes Schedule A-1 -- Certain Excluded Assets Schedule A-2 -- Certain Permitted Encumbrances Schedule A-3 -- Scheduled Imbalances Schedule A-4 - -- Royalty Accounts - iv - ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of April 18, 1996, is by and between ARCH PETROLEUM INC., a Delaware corporation ("Seller"), and ODESSA EXPLORATION INCORPORATED, a Delaware corporation ("Buyer"). WHEREAS, Seller owns certain oil and gas properties and related assets and has agreed to exercise its preferential purchase right to acquire additional interests in such oil and gas properties (the "Hardy Properties") under the terms of that Asset Purchase Agreement by and between Hardy Oil & Gas USA, Inc. ("Hardy") and Seller, which will be executed after the date hereof according to the terms of such preferential purchase right (the "Hardy Agreement"); WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, such oil and gas properties and related assets, specifically including the Hardy Properties, upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I. CERTAIN DEFINITIONS Section 1.1 Certain Defined Terms. Unless the context otherwise requires, the respective terms defined in Appendix A attached hereto and incorporated herein shall, when used herein, have the respective meanings therein specified, with each such definition to be equally applicable both to the singular and the plural forms of the term so defined. Section 1.2 References, Gender, Number. All references in this Agreement to an "Article," "Section," or "subsection" shall be to an Article, Section, or subsection of this Agreement, unless the context requires otherwise. Unless the context otherwise requires, the words "this Agreement," "hereof," "hereunder," "herein," "hereby," or words of similar import shall refer to this Agreement as whole and not to a particular Article, Section, subsection, clause or other subdivision hereof. Whenever the context requires, the words used herein shall include the masculine, feminine and neuter gender, and the singular and the plural. ARTICLE II. SALE AND PURCHASE Subject to the terms and conditions of this Agreement, Seller agrees to sell and convey to Buyer, and Buyer agrees to purchase from Seller, the Assets. ARTICLE III. CONSIDERATION AND PAYMENT Section 3.1 Consideration. The consideration for the sale and conveyance of the Assets to Buyer is $9,610,000.00, as adjusted in accordance with the terms of this Agreement (the "Purchase Price"). The "Adjusted Purchase Price" shall be the Purchase Price (I) as adjusted by the Initial Adjustment Amount determined pursuant to Section 3.3, (ii) as adjusted for Title Defects, if any, in accordance with Section 6.2, (iii) as may be adjusted for excluded Title Defect Properties, if any, in accordance with Section 6.5, (iv) as may be adjusted for undisclosed gas imbalances, if any, pursuant to Section 3.5, (v) as may be adjusted for payments of portions of the Purchase Price received by Seller from holder of Preference Right contemporaneously with Closing in accordance with and as contemplated by Section 7.2, and (vi) as may be adjusted on account of Retained Assets as contemplated by Section 7.3. Section 3.2 Payment. Contemporaneously with the execution of this Agreement, Buyer has deposited an amount equal to twenty percent (20%) of the Purchase Price with Seller as a deposit hereunder (the "Deposit"). At the Closing, Buyer shall wire transfer the Adjusted Purchase Price minus the Deposit in immediately available funds to Bank One, Texas, N. A. (Fort Worth), ABA No. 111000614 for the account of Seller, Account No.9740426379, with notification to Brad Bartek at (817) 884-5707 or Fred Cantu at (817) 332- 9209, extension 125, or such other account specified by Seller to Buyer on or prior to the business day immediately preceding the Closing Date. Section 3.3 Adjustment Period Cash Flow. (a) The Purchase Price shall be increased or decreased, as the case may be, by an amount equal to the Net Cash Flow with respect to the Assets for the time period (the "Adjustment Period") beginning at the Effective Time and ending at 7:00 a.m. (local time) on the Closing Date. The Seller shall deliver to Buyer on or prior to the business day immediately preceding the Closing Date a statement (the "Adjustment Statement") setting forth the Seller's preliminary determination (the "Initial Adjustment Amount") of the Net Cash Flow. If the Initial Adjustment Amount shown on the Adjustment statement is a positive number, then the Purchase Price shall be increased by such amount. If the Initial Adjustment Amount shown on the Adjustment Statement is a negative number, then the Purchase Price shall be decreased by such amount. (b) The Adjustment Statement shall be based upon actual information available to the Seller at the time of its preparation and upon the Seller's good faith estimates and assumptions. There shall be attached to the Adjustment Statement such supporting documentation and other data as is reasonably necessary to provide a basis for the Net Cash Flow shown therein. (c) The "Net Cash Flow" shall be the algebraic sum of (i) a positive amount equal to the aggregate amount paid by Seller as Seller's share of the costs and expenses of exploration, maintenance, development, production and operation of the Assets incurred with respect to the Adjustment Period (including prepayments of any such costs or expenses), (ii) a positive amount equal to the sum of (A) all overhead charges paid by Seller to any operator of any of the Assets, and (B) with respect to any properties operated by Seller or any affiliate of Seller, the overhead charges payable to Seller or such affiliated operator on account of the Subject Interests in such properties under existing operating agreements or, if no overhead charge is applicable to a Subject Interest under an existing operating agreement, an overhead charge to such Subject Interest equal to the Average Drilling and Producing Well Rates in 2 the area as indicated in the most recent Survey of Combined Fixed Rate Overhead Charges for Oil and Gas Producers conducted by Ernst & Young or the prevailing rate in the area if the foregoing survey is not available, and (iii) a negative amount equal to the aggregate gross proceeds received by Seller from the sale or disposition of oil, gas and other hydrocarbons produced from the Assets during the Adjustment Period or from the rental, sale, salvage or other disposition of any other Assets during the Adjustment Period. Section 3.4 Post Closing Review. After the Closing, Seller shall review the Adjustment Statement and determine the actual Net Cash Flow. On or prior to the ninetieth day after the Closing Date, Seller shall present Buyer with a statement of the actual Net Cash Flow and such supporting documentation as is reasonably necessary to support the Net Cash Flow shown therein (the "Final Adjustment Statement"). Buyer will give representatives of Seller reasonable access to its premises and to its books and records for purposes of preparing the Final Adjustment Statement and will cause appropriate personnel of Buyer to assist Seller and Seller's representatives, at no cost to Seller, in the preparation of the Final Adjustment Statement. Seller will give representatives of Buyer reasonable access to its premises and to its books and records for purposes of reviewing the calculation of Net Cash Flow and will cause appropriate personnel of Seller to assist Buyer and its representatives, at no cost to Buyer, in verification of such calculation. The Final Adjustment Statement shall become final and binding on Seller and Buyer as to the Net Cash Flow ninety (90) days following the date the Final Adjustment Statement is received by Buyer, except to the extent that prior to the expiration of such ninety (90) day period Buyer shall deliver to Seller notice, as hereinafter required, of its disagreement with the contents of the Final Adjustment Statement. Such notice shall be in writing and set forth all of Buyer's disagreements with respect to any portion of the Final Adjustment Statement, together with Buyer's proposed changes thereto, and shall include an explanation in reasonable detail of, and such supporting documentation as is reasonably necessary to support, such changes. If Buyer has timely delivered such a notice of disagreement to Seller, then, upon written agreement between Buyer and Seller resolving all disagreements of Buyer set forth in such notice, the Final Adjustment Statement will become final and binding upon Buyer and Seller as to the Net Cash Flow. If the Final Adjustment Statement has not become final and binding by the one hundred twentieth (120th) day following its receipt by Buyer, then Buyer and Seller may submit any unresolved disagreements of Buyer set forth in such notice to final and binding arbitration in accordance with the Arbitration Procedures. Upon resolution of such unresolved disagreements of Buyer, the Final Adjustment Statement shall be final and binding upon Buyer and Seller as to the Net Cash Flow. Within three (3) business days after the Final Adjustment Statement becomes final and binding, Seller or Buyer, as appropriate, shall pay to the other party the amount, if any, by which the Net Cash Flow as shown in the Final Adjustment Statement is less than or exceeds the Initial Adjustment Amount. Section 3.5 Gas Imbalance Credits. The Purchase Price shall be (a) reduced by an amount equal to (1) Unscheduled (Negative) Imbalances multiplied by (2) $1.00 per Mcf and (b) increased by an amount equal to (1) Unscheduled (Positive) Imbalances multiplied by (2) $1.00 per Mcf. 3 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: (a) Organization and Qualification. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to carry on its business as it is now being conducted. Seller is duly qualified to do business, and is in good standing, in each jurisdiction in which the Assets owned or leased by it makes such qualification necessary. (b) Authority. Seller has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of Seller. (c) Enforceability. This Agreement constitutes a valid and binding agreement of Seller enforceable against Seller in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application with respect to creditors, (ii) general principles of equity and (iii) the power of a court to deny enforcement of remedies generally based upon public policy. (d) No Conflict or Violation. Neither the execution and delivery of this Agreement nor the consummation of the transactions and performance of the terms and conditions contemplated hereby by Seller will (i) conflict with or result in any breach of any provisions of the certificate of incorporation or by-laws or other governing documents of Seller; (ii) be rendered void or ineffective by or under the terms, conditions or provisions of any agreement, instrument or obligation to which Seller is a party or is subject; (iii) result in a default under the terms, conditions or provisions of any Asset (or of any agreement, instrument or obligation relating to or burdening the Asset); or (iv) subject to the limitations contained in Section 4.1(c), violate or be rendered void or ineffective under any Law; provided that, the representations and warranties contained in clauses (ii), (iii) and (iv) of this Section 4.1(d) are subject to the matters expressly described and set forth in Schedule 4.1(d). (e) Consents. Except for (i) Preference Rights and Transfer Requirements and (ii) the consents, filings or notices expressly described and set forth in Schedule 4.1(e), no consent, approval, authorization or permit of, or filing with or notification to, any Person is required for or in connection with the execution and delivery of this Agreement by Seller or for or in connection with the consummation of the transactions and performance of the terms and conditions contemplated hereby by Seller. 4 (f) Actions. Except as set forth on Schedule 4.1(f), there are no Actions pending against Seller or, to the knowledge of Seller, threatened against Seller which relate to the Assets or the transactions contemplated by this Agreement. (g) Compliance With Laws. Except as set forth on Schedule 4.1(g), Seller has no knowledge of any violation by Seller of any Law applicable to the Assets which affects in any material respect the value of the Assets taken as a whole. (h) Brokerage Fees and Commissions. Neither Seller nor any affiliate of Seller has incurred any obligation or entered into any agreement for any investment banking, brokerage or finder's fee or commission in respect of the transactions contemplated by this Agreement for which Buyer shall incur any liability. (i) Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or, to the knowledge of Seller, threatened against Seller. Section 4.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: (a) Organization and Qualification. Buyer is in good standing under the laws of the State of Delaware and has the requisite power to carry on its business as it is now being conducted. Buyer is duly qualified to do business and is in good standing in each jurisdiction in which the Assets to be acquired by it makes such qualification necessary. (b) Authority. Buyer has all requisite power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by Buyer. (c) Enforceability. This Agreement constitutes a valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application with respect to creditors; (ii) general principles of equity and (iii) the power of a court to deny enforcement of remedies generally based upon public policy. (d) No Conflict or Violation. Neither the execution and delivery of this Agreement nor the consummation of the transactions and performance of the terms and conditions contemplated hereby by Buyer will (i) be rendered void or ineffective by or under the terms, conditions or provisions of any agreement, instrument or obligation to which Buyer is a party or is subject; or (ii) subject to the limitations contained in Section 4.2(c), violate or be rendered void or ineffective under any Law; provided that, the representations and warranties contained in clauses (i) and (ii) of this Section 4.2(d) are subject to the matters expressly described and set forth in Schedule 4.2(d). 5 (e) Consents. Except for (i) Preference Rights and Transfer Requirements, and (ii) the consents, filings or notices expressly described and set forth in Schedule 4.2(e), no consent, approval, authorization or permit of, or filing with or notification to, any Person is required for or in connection with the execution and delivery of this Agreement by Buyer or for or in connection with the consummation of the transaction and performance of the terms and conditions contemplated hereby by Buyer. (f) Actions. Except as set forth on Schedule 4.2(f), there are no Actions pending against Buyer or, to the knowledge of Buyer, threatened against Buyer which relate to the transactions contemplated by this Agreement. (g) Brokerage Fees and Commissions. Neither Buyer nor any affiliate of Buyer has incurred any obligation or entered into any agreement for any investment banking, brokerage or finder's fee or commission in respect of the transactions contemplated by this Agreement for which Seller shall incur any liability. (h) Funds. Buyer has sufficient funds available to enable Buyer to consummate the transactions contemplated hereby and to pay all related fees and expenses of Buyer. (i) Buyer's Knowledge. Buyer has no knowledge of any fact which results in any representations or warranty of Seller in Section 4.1 being breached. (j) No Distribution. Buyer is an experienced and knowledgeable investor in the oil and gas business. Prior to entering into this Agreement, Buyer was advised by its counsel and such other persons it has deemed appropriate concerning this Agreement and has relied solely on an independent investigation and evaluation of, and appraisal and judgment with respect to, the geologic and geophysical characteristics of the Subject Interests, the estimated reserves recoverable therefrom, and the price and expense assumptions applicable thereto. Buyer is not acquiring any interests in the Assets in connection with a distribution thereof in violation of the Securities Act of 1933 and the rules and regulations thereunder or any applicable state blue sky laws. (k) Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or to the knowledge of Buyer, threatened against Buyer. ARTICLE V. INVESTIGATION OF ASSETS: CONFIDENTIALITY Section 5.1 Investigation of Assets. Promptly following the execution of this Agreement and until the Closing Date (or earlier termination of this Agreement), Seller (i) shall permit Buyer and its representatives at reasonable times to examine, in Seller's offices, all abstracts of title, title opinions, title files, ownership maps, lease files, assignments, division orders, and documents relating to the Assets insofar as the same are in Seller's possession and insofar as Seller may do so without (a) violating legal constraints or any 6 legal obligation or (b) waiving any attorney/client privilege and (ii), subject to any required consent of any third Person, shall permit Buyer and its representatives at reasonable times and at Buyer's sole risk, cost and expenses, to conduct reasonable inspections of the Assets; provided, however, Buyer shall repair any damage to the Assets resulting from such inspections and Buyer does hereby indemnify and hold harmless Seller from and against any and all losses, costs, damages, obligations, claims, liabilities, expenses and causes of action arising from Buyer's inspection of the Assets, including, without limitation, claims for personal injuries, property damage and reasonable attorney's fees. Section 5.2 Confidential Information. Unless and until the Closing occurs, Buyer agrees to maintain all information made available to it pursuant to Section 5.1 confidential and to cause its officers, employees, representatives, consultants and advisors to maintain all information made available to them pursuant to Section 5.1 confidential. ARTICLE VI. TITLE ADJUSTMENTS. Section 6.1 No Warranty or Representation. Without limiting Buyer's right to adjust the Purchase Price by operation of Section 6.2 and except for the special warranty of title which is contained in the Conveyance, Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to Seller's title to any of the Assets and Buyer hereby acknowledges and agrees that Buyer's sole remedy for any defect of title, including any Title Defect, with respect to any of the Assets shall be pursuant to the procedures set forth in this Article VI, which remedies shall cease, and be deemed to be finally and conclusively satisfied, in all respects, upon the Closing. Furthermore, Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to the accuracy or completeness of the information, records and data now, heretofore or hereafter made available to Buyer in connection with this Agreement (including, without limitation, any description of the Assets, pricing assumptions, potential for production of oil, gas or other hydrocarbons from the Subject Interests or any other matters contained in or related to any other material furnished to Buyer by Seller or by Seller's agents or representatives). Section 6.2 Buyer's Title Review. (a) Buyer's Assertion of Title Defects. Prior to the expiration of the fourteen (14) day period commencing on the execution of this Agreement (the "Title Examination Period"), Buyer shall notify Seller in writing of any matters which, in Buyer's reasonable opinion, constitute Title Defects and which Buyer intends to assert as a Title Defect with respect to any portion of a Property Subdivision pursuant to this Article VI. For all purposes of this Agreement, Buyer shall be deemed to have waived any Title Defect which Buyer fails to assert as a Title Defect by written notice given to Seller on or before the expiration of the Title Examination Period. To be effective, Buyer's written notice of a Title Defect must include (i) a brief description of the matter constituting the asserted Title Defect, (ii) the claimed Title Defect Amount attributable thereto, and (iii) supporting documents reasonably necessary for 7 Seller (as well as any title attorney or examiner hired by Seller) to verify the existence of such asserted Title Defect. Buyer shall promptly furnish Seller with written notice of any Seller Title Credit which is discovered by any of Buyer's employees or representatives while conducting Buyer's title review, due diligence or investigation with respect to the Subject Interests and Property Subdivisions. (b) Purchase Price Allocations. A portion of the Purchase Price has been allocated to the various Subject Interests in Property Subdivisions in the manner and in accordance with the respective values set forth in the Property Schedule. If any adjustment is made to the Purchase Price pursuant to this Section 6.2, a corresponding adjustment shall be made to the portion of the Purchase Price allocated to the affected Property Subdivision in the Property Schedule. (c) Seller's Opportunity to Cure. Seller shall have until two (2) days prior to the Closing Date, at its cost and expense, if it so elects but without obligation, to cure all or a portion of such asserted Title Defects. Any asserted Title Defects which are waived by Buyer or cured within such time shall be deemed "Permitted Encumbrances" hereunder. If Seller within such time fails to cure any Title Defect of which Buyer has given timely written notice as required above and Buyer has not and does not waive same on or before the day immediately preceding the Closing Date, the Property Subdivision affected by such uncured and unwaived Title Defect shall be a "Title Defect Property". (d) Buyer's Title Adjustments. Subject to Section 6.5, as Buyer's sole and exclusive remedy with respect to Title Defects, Buyer shall be entitled to reduce the Purchase Price by the amount, if any, by which the aggregate amount of Title Defect Amounts with respect to all Title Defect Properties exceeds the sum of $400,000.00 (the "Title Defect Deductible") plus the aggregate amount of Seller Title Credits with respect to all Property Subdivisions. "Title Defect Amount" shall mean, with respect to a Title Defect Property, the amount by which the value of such Title Defect Property is impaired as a result of the existence of one or more Title Defects, which amount shall be determined as follows: (1) If the Title Defect results from Seller having a lesser Net Revenue Interest in such Title Defect Property than the Net Revenue Interest specified therefor in the Property Schedule, the Title Defect Amount shall be equal to the product obtained by multiplying the portion of the Purchase Price allocated to such Title Defect Property in the Property Schedule by a fraction, the numerator or which is the reduction in the Net Revenue Interest and the denominator of which is the Net Revenue Interest specified for such Title Defect Property in the Property Schedule. (2) If the Title Defect results from Seller having a greater Working Interest in a Title Defect Property than the Working Interest specified therefor in the Property Schedule, the Title Defect Amount shall be equal to the present value (discounted at 10% compounded annually) of the increase in the costs and expenses forecasted in Exhibit B hereto with respect to such Title Defect Property for the period from and after the Effective Time which is attributable to such increase in the Seller's Working Interest. 8 (3) If the Title Defect results from the existence of a lien, the Title Defect Amount shall be an amount sufficient to discharge such lien. (4) If the Title Defect results from any matter not described in paragraphs (1), (2) or (3) above, the Title Defect Amount shall be an amount equal to the difference between the value of the Title Defect Property affected by such Title Defect with such Title Defect and the value of such Title Defect Property without such Title Defect (taking into account the portion of the Purchase Price allocated in the Property Schedule to such Title Defect Property); provided, that if such Title Defect is reasonably susceptible of being cured, the Title Defect Amount shall be the reasonable cost and expense of curing such Title Defect, if less. (5) If a Title Defect is not effective or does not affect a Title Defect Property throughout the entire productive life of such Title Defect Property, such fact shall be taken into account in determining the Title Defect Amount. (6) The Title Defect Amount with respect to a Title Defect Property shall be determined without duplication of any costs or losses included in another Title Defect Amount hereunder. For example, but without limitation, if a lien affects more than one Title Defect Property or the curative work with respect to one Title Defect results (or is reasonably expected to result) in the curing of any other Title Defect affecting the same or another Title Defect Property, the amount necessary to discharge such lien or the cost and expense of such curative work shall only be included in the Title Defect Amount for one Title Defect Property and only once in such Title Defect Amount. (7) If a Title Defect affects only a portion of a Property Subdivision (as contrasted with an undivided interest in the entirety of such Property Subdivision) and a portion of the Purchase Price has not been allocated specifically to such portion of a Property Subdivision in the Property Schedule, then for purposes of computing the Title Defect Amount, the portion of the Purchase Price allocated to such Property Subdivision shall be further allocated among the portions of such Property Subdivision in the proportion that the portion of the Property Subdivision affected by such Title Defect bears to the entire Property Subdivision. (8) The Title Defect Amount attributable to a Title Defect Property or any portion thereof shall not exceed the portion of the Purchase Price allocated to such Title Defect Property or such portion in Section 6.2(b) and paragraph (7) above. For example, but without limitation, if the Seller does not own fifty percent (50%) of the Net Revenue Interest specified in the Property Schedule for a Title Defect Property and such unowned fifty percent (50%) interest is also burdened by a lien, the Title Defect Amount for such Title Defect Property shall not exceed the portion of the Purchase Price allocable to such fifty percent (50%) interest notwithstanding that it may be affected by multiple Title Defects. 9 (9) No Title Defect Amount shall be allowed on account of and to the extent that an increase in the Seller's Working Interest in a Property Subdivision has the effect of proportionately increasing the Seller's Net Revenue Interest in such Property Subdivision. (10) With respect to any Subject Interest in a Property Subdivision in which Buyer likewise owned an undivided interest at the Effective Time, no Title Defect Amount shall be allowed on account of a Title Defect affecting such Subject Interest that also affected Buyer's interest in such Property Subdivision at the Effective Time. Section 6.3 Determination of Title Defects. A portion of a Property Subdivision shall be deemed to have a "Title Defect" if any one or more of the following statements is untrue with respect to such portion of a Property Subdivision as of the Effective Time and as of the Closing Date: (a) The Seller has Defensible Title thereto. (b) All royalties, rentals, Pugh clause payments, shut-in gas payments and other payments due with respect to such portion of a Property Subdivision have been properly and timely paid, except for payments held in suspense for title or other reasons which are customary in the industry and which will not result in grounds for cancellation of the Seller's rights in such portion of a Property Subdivision. (c) The Seller is not in default under the material terms of any leases, farm-out agreements or other contracts or agreements respecting such portion of a Property Subdivision which could (1) prevent the Seller from receiving the proceeds of production attributable to the Seller's interest therein, or (2) result in cancellation of the Seller's interest therein. Section 6.4 Seller Title Credit. A "Seller Title Credit" shall mean, with respect to a Property Subdivision, the amount by which the value of such Property Subdivision is enhanced by virtue of (a) Seller having a greater Net Revenue Interest in such Property Subdivision than the Net Revenue specified therefor in the Property Schedule, or (b) Seller having a lesser Working Interest in such Property Subdivision than the Working Interest specified therefor in the Property Schedule, which amount shall be determined as follows: (1) If the Seller Title Credit results from Seller having a greater Net Revenue Interest in such Property Subdivision than the Net Revenue Interest specified therefor in the Property Schedule, the Seller Title Credit shall be equal to the product obtained by multiplying the portion of the Purchase Price allocated to such Property Subdivision in the Property Schedule by a fraction, the numerator of which is the increase in the Net Revenue Interest and the denominator of which is the Net Revenue Interest specified for such Property Subdivision in the Property Schedule. 10 (2) If the Seller Title Credit results from Seller having a lesser Working Interest in a Property Subdivision than the Working Interest specified therefor in the Property Schedule, the Seller Title Credit shall be equal to the present value (discounted at 10% compounded annually) of the decrease in the costs and expenses forecasted in Exhibit B hereto with respect to such Property Subdivision for the period from and after the Effective Time which is attributable to such decrease in Seller's Working Interest. (3) In determining the amount of Seller Title Credits, the principles and methodology set forth in paragraphs (5), (6) and (7) of Section 6.2(d) shall be applied, mutatis mutandis. (4) No Seller Title Credit shall be allowed on account of and to the extent that a decrease in Seller's Working Interest in a Property Subdivision has the effect of proportionately decreasing Seller's Net Revenue Property Interest in such Property Subdivision. The Title Defect Deductible shall be restored to the extent that any portion thereof is applied as a credit against a Title Defect Amount attributable to a Title Defect which is subsequently cured by Seller or determined not to constitute a Title Defect. Section 6.5 Exclusion of Defect Properties. On or before the Closing Date, Seller may elect to retain and exclude from the Assets to be conveyed to Seller by Buyer pursuant to the terms hereof any Title Defect Property so long as the Purchase Price is reduced by the portion of the Purchase Price allocated to such Title Defect Property in the Property Schedule. Upon such election by Seller, said Title Defect Property, together with a pro rata share of all incidental rights, oil, gas and other hydrocarbons and other assets attributable or appurtenant thereto, shall be retained by Seller and excluded from the Assets which are conveyed by Seller to Buyer pursuant to the Conveyance. Section 6.6 Deferred Claims and Disputes. In the event that Buyer and Seller have not agree upon one or more adjustments, credits or offsets claimed by Buyer or Seller pursuant to and in accordance with the requirements of this Article VI, any such claim (a "Deferred Adjustment Claim") shall be settled pursuant to this Section 6.6 and, except as provided in Sections 9.1(e) and 9.2(e), shall not prevent or delay Closing. With respect to each potential Deferred Adjustment Claim, Buyer and Seller shall deliver to the other a written notice describing each such potential Deferred Adjustment Claim, the amount in dispute and a statement setting forth the facts and circumstances that support such party's position with respect to such Deferred Adjustment Claim. At Closing the Purchase Price shall not be adjusted on account of, and, except as provided in Sections 9.1(e) and 9.2(e), no effect shall be given to, the Deferred Adjustment Claim. On or prior to the thirtieth (30th) consecutive calendar day following the Closing Date (the "Deferred Matters Date"), the Seller and Buyer shall attempt in good faith to reach agreement on the Deferred Adjustment Claims and, ultimately, to resolve by written agreement all disputes regarding the Deferred Adjustment Claims. Any Deferred Adjustment Claims which are not so 11 resolved on or before the Deferred Matters Date shall be submitted to final and binding arbitration in accordance with the Arbitration Procedures; provided, however, that the Seller may elect at any time to resolve the disputes relating to the Deferred Adjustment Claims by the payment to Buyer of the amount by which the Purchase Price would have been reduced at Closing on account of the Title Defects which constitute Deferred Adjustment Claims if same did not constitute Deferred Adjustment Claims. Notwithstanding anything herein provided to the contrary, including Section 6.2(c), Seller shall be entitled to cure any Title Defect which constitutes a Deferred Adjustment Claim at any time prior to the point in time when a final and binding written decision of the board of arbitrators is made with respect thereto in accordance with the Arbitration Procedures. The amount of any reduction in the Purchase Price to which Buyer becomes entitled under the final and binding written decision of the board of arbitrators shall be promptly refunded by Seller to Buyer. Section 6.7 No Duplication. Notwithstanding anything herein provided to the contrary, if a Title Defect results from a matter which could also result in the breach of any representation or warranty of Seller set forth in Section 4.1, then Buyer shall only be entitled to assert such matter as a Title Defect pursuant to this Article VI and shall be precluded from also asserting such matter as the basis of the breach of any such representation or warranty. ARTICLE VII. PREFERENCE RIGHTS AND CONSENTS Section 7.1 Compliance. To Seller's knowledge, all agreements containing a (i) Preference Right are set forth in Part I of Schedule 7.1 and (ii) Transfer Requirement are set forth in Part II of Schedule 7.1 (except such agreements with respect to which all Preference Rights and Transfer Requirements applicable to the sale contemplated by this Agreement have been complied with or waived). Prior to the Closing Date, Seller shall initiate all procedures required to comply with or obtain the waiver of all Preference Rights and Transfer Requirements set forth in Schedule 7.1 with respect to the transactions contemplated by this Agreement. Section 7.2 Effect of Preference Rights. If a third party who has been offered a Preference Property pursuant to Section 7.1 elects prior to Closing to purchase such Preference Property in accordance with the terms of such Preference Right, and Seller and Buyer receive written notice of such election prior to the Closing Date, such Preference Property will be eliminated from the Assets and the Purchase Price shall be reduced by the portion of the Purchase Price allocated to such Preference Property pursuant to the immediately following sentence. The portion of the Purchase Price to be allocated to any Asset or portion thereof affected by a Preference Right (a "Preference Property") shall be the portion of the Purchase Price allocated thereto in the Property Schedule. If a Preference Right affects only a portion of a Property Subdivision and a portion of the Purchase Price has not been allocated specifically to such portion of a Property Subdivision in the Property Schedule, then the portion of the Purchase Price to be allocated to such Preference Property shall be determined in the same manner as provided in Section 6.2(d)(7) when a Title Defect affects only a portion of a Property Subdivision. If a third party who has been offered a Preference Property or who has been requested to waive its Preference Right pursuant to Section 7.1 does not elect to purchase 12 such Preference Property or waive such Preference Right with respect to the transactions contemplated by this Agreement prior to the Closing Date, such Preference Property shall be conveyed to Buyer at Closing subject to such Preference Right, unless such Preference Property has been otherwise eliminated from the Assets in accordance with other provisions of this Agreement. If a third party elects to purchase a Preference Property subject to a Preference Right and Closing has already occurred with respect to such Preference Property, Buyer shall be obligated to convey said Preference Property to such third party and shall be entitled to the consideration for the sale of such Preference Property. Section 7.3 Transfer Requirements. If a Transfer Requirement applicable to the transactions contemplated by this Agreement is not obtained, complied with or otherwise satisfied prior to the Closing Date; then, unless otherwise mutually agreed by Seller and Buyer, any Asset or portion thereof affected by such Transfer Requirement (a "Retained Asset") shall be held back from the Assets to be transferred and conveyed to Buyer at Closing and the Purchase Price to be paid at Closing shall be reduced by the portion of the Purchase Price which would be allocated to such Retained Asset pursuant to Section 7.2 if such Retained Asset were a Preference Property. Any Retained Asset so held back at the initial Closing will be conveyed to Buyer within ten (10) days following the date on which Seller obtains, complies with or otherwise satisfies all Transfer Requirements with respect to such Retained Assets for a purchase price equal to the amount by which the Purchase Price was reduced on account of the holding back of such Retained Asset; provided, however, if all Transfer Requirements with respect to any Retained Asset so held back at the initial Closing are not obtained, complied with or otherwise satisfied within one hundred twenty (120) days following the Closing Date, then such Retained Asset shall be eliminated from the Assets and this Agreement unless Seller and Buyer mutually agreed to proceed with a closing on such Retained Asset in which case Buyer shall be deemed to have waived any objection with respect to non-compliance with such Transfer Requirements. In connection with any subsequent conveyance of a Retained Asset, appropriate adjustments in Net Cash Flow and proration of revenues and expenses will be made to account for any delayed Closing with respect to a Retained Asset. ARTICLE VIII. COVENANTS OF SELLER AND BUYER Section 8.1 Conduct of Business Pending Closing. Subject to Section 8.2 and the constraints of applicable operating and other agreements from the date hereof through the Closing, except as disclosed in Schedule 8.1, or as otherwise consented to or approved by Buyer in writing (which consent or approval shall not be unreasonably withheld or delayed), Seller covenants and agrees that: (a) Sales. Sellers shall not sell, transfer, assign, convey, farmout, release, abandon or otherwise dispose of any Assets, or enter into any transaction the effect of which would be to cause Seller's ownership interest in any of the Assets to be altered from Seller's ownership interest as of the date of this Agreement, other than (i) oil, gas and other hydrocarbons produced, saved and sold in the ordinary course of business, and (ii) personal property 13 and equipment which is replaced with personal property and equipment of comparable or better value and utility in the ordinary and routine maintenance and operation of the Assets. (b) Encumbrances. Sellers shall not create or permit the creation of any lien, security interest or encumbrance on any Assets, except to the extent required or permitted incident to the operation of the Assets pursuant to this Section 8.1. (c) Operation of Assets. Seller shall: (1) cause the Assets to be maintained and operated in the ordinary course of business, in accordance with Law, maintain insurance now in force with respect to the Assets, and pay or cause to be paid all costs and expenses in connection therewith promptly when due; (2) not commit to participate in the drilling or any new well or other new operations on the Assets the cost of which (net to Seller's interest) is in excess of $15,000.00 in any single instance, without the advance written consent of Buyer, which consent or non-consent must be given by Buyer within the lesser of (x) ten (10) days of Buyer's receipt of the notice from Seller or (y) one-half (1/2) of the applicable notice period within which Seller is contractually obligated to respond to third parties to avoid a deemed election by Seller regarding such operation, as specified in Seller's notice to Buyer requesting such consent; (3) maintain and keep the Assets in full force and effect, except where such failure is due to (i) the failure to pay a delay rental, royalty, shut in royalty or other payment by mistake or oversight (including Seller's negligence) unless caused by Seller's gross negligence or willful misconduct, or (ii) the failure to participate in an operation which Buyer does not timely approve; and (4) resign as operator of any and all of the Assets and use its best efforts to ensure election of Buyer as successor operator of those Assets for which Seller presently serves as operator. (d) Contracts and Agreements. Seller shall not: (1) grant or create any Preference Right or Transfer Requirement with respect to the Assets except in connection with the performance by Seller or an obligation or agreement existing on the date hereof or pursuant to this Agreement; (2) enter into any oil, gas or other hydrocarbon sales, supply, exchange, processing or transportation contract with respect to the Assets which is not terminable without penalty or detriment on notice of ninety (90) days or less; or 14 (3) voluntarily relinquish any Seller's position as operator with respect to the Assets. (e) Notice of Defaults. Seller shall give prompt written notice to Buyer of any notice of default (or threat of default, whether disputed or denied) received or given by Seller under any material instrument or agreement affecting the Assets to which Seller is a party or by which Seller or any of the Assets are bound. Section 8.2 Qualifications on Seller's Conduct. (a) Emergencies; Legal Requirements. Seller may take (or not take, as the case may be) any of the actions mentioned in Section 8.1 above if reasonably necessary under emergency circumstances (or if required or prohibited (as the case may be) pursuant to Law and provided Buyer is notified as soon thereafter as practicable. (b) Non-Operated Properties. If Seller is not the operator of a particular portion of the Assets, the obligations of Seller in Section 8.1 above with respect to such portion of the Assets, which have reference to operations or activities which pursuant to existing contracts are carried out or performed by the operator, shall be construed to require only that Seller use its best efforts (without being obligated to incur any expense or institute any cause of action) to cause the operator of such portion of the Assets to take such actions or render such performance within the constraints of the applicable operating agreements and other applicable agreements. (c) Certain Operations. Should Seller not wish to pay any lease rental or other payment or participate in any reworking, deepening, drilling, completion, equipping or other operation on or with respect to any well or other Property Subdivision which may otherwise be required by Section 8.1 above, Seller shall give Buyer written notice thereof at least fifteen (15) days prior to the date such rental or other payment is due or, in the case of an operation, promptly after Seller receives notice of such proposed operation from the operator of such property (or if Seller is the operator, at the same time Seller gives or is required to give notice of such proposed operation to the non-operators of such property); and Seller shall not be obligated to make any such payment or to elect to participate in any such operation which Seller does not wish to make or participate in unless Seller receives from Buyer, within a reasonable time prior to the date when such payment or election is required to be made by Seller, the written election and agreement of Buyer (i) to require Seller to take such action and (ii) to pay all costs and expenses of Seller with respect to such lease rental or other payment or such operation. Notwithstanding the foregoing, Seller shall not be obligated to pay any lease rental or other payment or to elect to participate in any operation if the operator of the property involved recommends that such action not be taken. If Buyer advances any funds pursuant to this Section 8.2(c) with respect to a particular portion of the Assets, such portion of the Assets is not conveyed to Buyer at Closing or Closing does not occur, and such funds are not reimbursed to Buyer within thirty (30) days after the earlier of Closing or termination of this Agreement, then with respect to such particular portion of the Assets, (i) Buyer shall own and be entitled to any interest of Seller that would have lapsed but for such payment or (ii) in the case of operations, Buyer shall be entitled to receive 15 the penalty, if any, that Seller, as nonconsenting party, would have suffered under the applicable operating or other agreement with respect to such operations as if Buyer were a consenting party thereunder; in each case, subject to and after deduction of any damages or other relief to which Seller may be entitled with respect to any breach by Buyer of this Agreement. Section 8.3 Conveyance. Upon the terms and subject to the conditions of this Agreement, at or prior to the Closing, Seller and Buyer shall execute and deliver or cause the execution and delivery of the General Conveyance, in substantially the form attached hereto as Exhibit 8.3 (the "Conveyance"). Section 8.4 Public Announcements. Without the prior written approval of the other party hereto, no party hereto will issue, or permit any agent or affiliate of it to issue, any press releases or otherwise make, or cause any agent or affiliate of it to make, any public statements with respect to this Agreement and the transactions contemplated hereby, except where such release or statement is deemed in good faith by the releasing party to be required by Law or any national securities exchange, in which case the party will use its best efforts to provide a copy to the other party prior to any release or statement. Section 8.5 Further Assurances. Seller and Buyer each agrees that, from time to time, whether before, at or after the Closing Date, each of them will execute and deliver or cause their respective affiliates to execute and deliver such further instruments of conveyance and transfer and take such other action as may be necessary to carry out the purposes and intents of this Agreement. Any separate or additional assignment of the Assets or any portion thereof required pursuant to this Section 8.5 (i) shall evidence the conveyance and assignment of the Assets made or intended to be made in the Conveyance, (ii) shall not modify or be deemed to modify any of the terms, covenants and conditions set forth in the Conveyance, and (iii) shall be deemed to contain all of the terms and provisions of the Conveyance, as fully as though the same were set forth at length in such separate or additional assignment. Section 8.6 Removal. Within a reasonable period of time following the Closing, Buyer shall remove the name and mark of Seller and any of its affiliates and any variations and derivatives thereof and logos relating thereto from the Assets. Section 8.7 Records. Within a reasonable period of time following the Closing, Seller shall make all Records available for delivery to Buyer in Houston, Midland or Fort Worth, Texas, as appropriate. Buyer agrees to maintain the Records that are acquired pursuant to this Agreement until the fifth anniversary of the Closing Date (or for such longer period of time as Seller shall advise Buyer is necessary in order to have Records available with respect to open years for tax audit purposes), or, if any of such Records pertain to any claim or dispute pending on the fifth anniversary of the Closing Date, Buyer shall maintain any of such Records designated by Seller until such claim or dispute is finally resolved and the time for all appeals has been exhausted. Buyer shall provide Seller and its representatives reasonable access to and the right to copy such Records, at Seller's expense, for the purposes of (i) preparing and delivering any accounting provided for in this Agreement, (ii) 16 complying with any law, rule or regulation affecting Seller's interest in the Assets prior to the Closing Date, (iii) preparing any audit of the books and records of any third party relating to Seller's interest in the Assets prior to the Closing Date, or responding to any audit prepared by such third parties, (iv) preparing tax returns, (v) responding to or disputing any tax audit or (vi) asserting, defending or otherwise dealing with any claim or dispute under this Agreement or with respect to the Assets. In no event shall Buyer destroy any such Records without giving Seller sixty (60) days' advance written notice thereof and the opportunity, at Seller's expense, to obtain such Records prior to their destruction. Buyer shall have no liability to Seller regarding this Section 8.7 in the event of any destruction of the Records which may occur due to no fault of Buyer as a result of an act of God. ARTICLE IX. CLOSING CONDITIONS Section 9.1 Seller's Closing Conditions. The obligation of Seller to consummate the transactions contemplated hereby is subject, at the option of Seller, to the satisfaction on or prior to the Closing Date of all of the following conditions: (a) Representations, Warranties and Covenants. The (1) representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, and (2) covenants and agreements of Buyer to be performed on or before the Closing Date in accordance with this Agreement shall have been duly performed in all material respects. (b) Officer's Certificate. Seller shall have received a certificate dated as of the Closing Date, executed by a duly authorized officer of Buyer, to the effect that to such officer's knowledge the conditions set forth in paragraph (a) of this Section 9.1 have bene satisfied. (c) Conveyance. Buyer shall have executed and delivered the Conveyance prior to or on the Closing Date. (d) No Action. On the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by Seller or any of its affiliates) shall be pending or threatened before any court or governmental agency or body of competent jurisdiction seeking to enjoin or restrain the consummation of this Agreement or recover damages from Seller resulting therefrom. (e) Title Adjustments. The sum of (i) the reduction in the Purchase Price on account of the aggregate amount of all Title Defect Amounts and the exclusion of Title Defect Properties pursuant to Section 6.5, and (ii) the aggregate amount of Title Defect Amounts claimed by Buyer with respect to unresolved Deferred Adjustment Claims, and (iii) the reduction in the Purchase Price on account of the exclusion of Retained Assets pursuant to Section 7.3 shall not exceed $1,200,000.00. 17 (f) Purchase Price Funding. On or before 5:00 P.M. on the business day preceding Closing, Seller shall have received written notification from Norwest Bank Texas, Midland, N. A. ("Norwest"), by telecopy, telefax or other electronic transmission service, that Norwest holds as of that date any and all funds necessary to finance the Purchase Price and is under irrevocable escrow agreement executed by Buyer and Seller to release those funds to Seller as of the date of Closing. Time being of essence hereof, Buyer shall be deemed to be in default hereunder if written notification called for herein is not timely received by Seller, in which case Seller shall be entitled to retain Buyer's deposit as liquidated damages and: (i) close the Hardy Agreement and acquire the Hardy Properties for its own account with no further obligation to convey the properties to Buyer; or (ii) not close the Hardy Agreement and exercise any other remedies available to Seller under this agreement or at law or in equity. (g) Hardy Closing. Closing shall have occurred under the Hardy Agreement, and Seller shall hold title to all of the Hardy Properties for conveyance into Buyer. Section 9.2 Buyer's Closing Conditions. The obligation of Buyer to consummate the transactions contemplated hereby is subject, at the option of Buyer, to the satisfaction on or prior to the Closing Date of all of the following conditions: (a) Representations, Warranties and Covenants. The (1) representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, and (2) covenants and agreements of Seller to be performed on or before the Closing Date in accordance with this Agreement shall have been duly performed in all material respects. (b) Officer's Certificate. Buyer shall have received a certificate dated as of the Closing Date, executed by a duly authorized officer of Seller, to the effect that to such officer's knowledge the conditions set forth in paragraph (a) of this Section 9.1 have bene satisfied. (c) Conveyance. Seller shall have executed and delivered the Conveyance prior to or on the Closing Date. (d) No Action. On the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by Buyer or any of its affiliates) shall be pending or threatened before any court or governmental agency or body of competent jurisdiction seeking to enjoin or restrain the consummation of this Agreement or recover damages from Buyer resulting therefrom. (e) Title Adjustments. The sum of (i) the reduction in the Purchase Price on account of the aggregate amount of all Title Defect Amounts and the exclusion of Title Defect Properties pursuant to Section 6.5, and (ii) the aggregate amount of Title Defect Amounts claimed by Buyer with respect to unresolved Deferred Adjustment Claims, and (iii) the reduction in the Purchase Price on account of the exclusion of Retained Assets pursuant to Section 7.3 shall not exceed $1,200,000.00. (f) Hardy Closing. Closing shall have occurred under the Hardy Agreement, and Seller shall hold title to all of the Hardy Properties for conveyance into Buyer. 18 ARTICLE X. CLOSING Section 10.1 Closing. The Closing shall be held on the Closing Date at 10:00 a.m., Houston time, at the offices of Hardy at 1600 Smith Street, Suite 1400, Houston, Texas, or at such other time or place as Seller and Buyer may otherwise agree in writing. Section 10.2 Seller's Closing Obligations. At Closing, Seller shall execute and deliver, or cause to be executed and delivered, to Buyer the following: (a) The Conveyance; (b) The officer's certificate referred to in Section 9.2(b); (c) An affidavit of Non-Foreign Status, substantially in the form attached hereto as Exhibit 10.2(c); and (d) Letters in lieu of division and transfer orders executed by Seller relating to the Subject Interests in form reasonably necessary to reflect the conveyances contemplated hereby. Section 10.3 Buyer's Closing Obligations. At Closing, Buyer shall (i) deliver or cause to be delivered, the Adjusted Purchase Price minus the Deposit to Seller in immediately available funds to the bank account as provided in Section 3.2 and (ii) execute and deliver, or cause to be executed and delivered, to Seller the following: (a) The Conveyance; and (b) The officer's certificate of Buyer referred to in Section 9.1(b). ARTICLE XI. EFFECT OF CLOSING Section 11.1 Revenues. After Closing, all proceeds, accounts receivable, notes receivable, income, revenues, monies and other items included in or attributed to the Excluded Assets and all other Excluded Assets shall belong to and be paid over to Seller and all proceeds, accounts receivable, notes receivable, income, revenues, monies and other items included in or attributable to the Assets with respect to any period of time after the Effective Time shall belong to and be paid over to Buyer except to the extent credited to Buyer in calculating the Adjusted Purchase Price. Section 11.2 Expenses. After Closing, all accounts payable and other costs and expenses with respect to the Assets for which Seller is given credit in the determination of Net Cash Flow pursuant to Section 3.3, as adjusted pursuant to Section 3.4, shall be borne by Seller. 19 Section 11.3 Payments and Obligations. If monies are received by any party hereto which, under the terms of this Article XI, belong to another party, the same shall immediately be paid over to the proper party. If an invoice or other evidence of an obligation is received which under the terms of this Article XI is partially the obligation of Seller and partially the obligation of Buyer, then the parties shall consult each other and each shall promptly pay its portion of such obligation to the obligee. Section 11.4 Survival. No representation, warranty, covenant or agreement made herein shall survive the Closing except as provided in this Section 11.4. It is expressly agreed that the terms and provisions of (a) Article IV shall survive the Closing for a period of one hundred eighty (180) days from the Closing Date and (b) Sections 3.4, 6.1, 6.6, 6.7, 7.2, 7.3, 8.2(c), 8.4, 8.5, 8.6, 8.7 and 14.3 and Articles XI, XIII and XV shall survive the Closing indefinitely. In addition, the definitions set forth in Appendix A to this Agreement which are used in representations, warranties, covenants and agreements which survive the Closing pursuant to this Section 11.4 shall survive the Closing to the extent necessary to give operative effect to such surviving representations, warranties, covenants and agreements. ARTICLE XII. CASUALTY AND CONDEMNATION Section 12.1 No Termination. If after the Effective Time and prior to the Closing any part of the Assets shall be destroyed by fire or other casualty or if any part of the Assets shall be taken in condemnation or under the right of eminent domain or if proceedings for such purposes shall be pending or threatened, this Agreement shall remain in full force and effect notwithstanding any such destruction, taking or proceeding or the threat thereof. Section 12.2 Proceeds and Awards. To the extent insurance proceeds, condemnation awards or other payments are not committed, used or applied by Seller prior to the Closing Date to repair, restore or replace such damaged or taken Assets, Seller shall at the Closing pay to Buyer all sums paid to Seller by reason of such destruction or taking less any reasonable costs and expenses incurred by Seller in collecting same. ARTICLE XIII ASSUMPTION AND INDEMNIFICATION Section 13.1 Indemnification By Buyer. FROM AND AFTER THE CLOSING DATE, BUYER SHALL ASSUME AND PAY, PERFORM, FULFILL AND DISCHARGE ALL ASSUMED LIABILITIES, AND SHALL INDEMNIFY AND HOLD HARMLESS THE SELLER, ITS PRESENT AND FORMER DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, AND EACH OF THE DIRECTORS, OFFICERS, HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS OF ANY OF THE FOREGOING (COLLECTIVELY, THE "SELLER INDEMNIFIED PARTIES") FROM AND AGAINST ANY AND ALL (I) ASSUMED LIABILITIES INCURRED BY OR ASSERTED AGAINST ANY OF THE SELLER INDEMNIFIED PARTIES, INCLUDING, WITHOUT LIMITATION, ANY ASSUMED LIABILITY OF THE 20 SELLER INDEMNIFIED PARTY OR ANY OTHER THEORY OF LIABILITY, WHETHER IN LAW (WHETHER COMMON OR STATUTORY) OR EQUITY AND (II) ANY COVERED LIABILITY RESULTING FROM ANY MISREPRESENTATION, BREACH OF WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR AGREEMENT ON THE PART OF BUYER HEREUNDER. Section 13.2 Indemnification by Seller. FROM AND AFTER THE CLOSING DATE, SELLER SHALL INDEMNIFY AND HOLD HARMLESS THE BUYER, ITS PRESENT AND FORMER DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, AND EACH OF THE HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS OF ANY OF THE FOREGOING (COLLECTIVELY, THE "BUYER INDEMNIFIED PARTIES") FROM AND AGAINST ANY AND ALL (I) EXCLUDED LIABILITIES INCURRED BY OR ASSERTED AGAINST ANY OF THE BUYER INDEMNIFIED PARTIES, INCLUDING, WITHOUT LIMITATION, ANY EXCLUDED LIABILITY OF THE BUYER INDEMNIFIED PARTY OR ANY OTHER THEORY OF LIABILITY, WHETHER IN LAW (WHETHER COMMON OR STATUTORY) OR EQUITY AND (II) ANY COVERED LIABILITY RESULTING FROM ANY MISREPRESENTATION, BREACH OF WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR AGREEMENT ON THE PART OF SELLER HEREUNDER. Section 13.3 Third Party Claims. If a claim by a third party is made against a Seller Indemnified Party or a Buyer Indemnified Party (an "Indemnified Party"), and if such party intends to seek indemnity with respect thereto under this Article XIII, such Indemnified Party shall promptly notify Buyer or Seller, as the case may be (the "Indemnitor"), of such claims. The Indemnitor shall have thirty (30) days after receipt of such notice to undertake, conduct and control, through counsel of its own choosing and at its own expense, the settlement or defense thereof, and the Indemnified Party shall cooperate with it in connection therewith; provided that the Indemnitor shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by such Indemnified Party; however, the fees and expenses of such counsel shall be borne by such Indemnified Party. So long as the Indemnitor, at Indemnitor's cost and expense, (1) has undertaken the defense of, and assumed full responsibility for all Covered Liabilities with respect to, such claim, (2) is reasonably contesting such claim in good faith, by appropriate proceedings, and (3) has taken such action (including the posting of a bond, deposit or other security) as may be necessary to prevent any action to foreclose a lien against or attachment of the property of the Indemnified Party for payment of such claim, the Indemnified Party shall not pay or settle any such claim. Notwithstanding compliance by the Indemnitor with the preceding sentence, the Indemnified party shall have the right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefor by the Indemnitor for such claim. If, within thirty (30) days after the receipt of the Indemnified Party's notice of a claim of indemnity hereunder, the Indemnitor does not notify the Indemnified Party that it elects, at Indemnitor's cost and expense, to undertake the defense thereof and assume full responsibility for all Covered Liabilities with respect thereto, or gives such notice and thereafter fails to contest such claim in good faith or to prevent action to foreclose a lien against or 21 attachment of the Indemnified Party's property as contemplated above, the Indemnified Party shall have the right to contest, settle or compromise the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. ARTICLE XIV. TERMINATION; REMEDIES; LIMITATIONS Section 14.1 Termination. (a) Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated at any time prior to the Closing: (1) By the mutual consent of Seller and Buyer; or (2) If the Closing has not occurred by the close of business on the Closing Date, then (i) by Seller if any condition specified in Section 9.1 has not been satisfied on or before such close of business, and shall not theretofore have been waived by Seller, or (ii) Buyer if any condition specified in Section 9.2 has not been satisfied on or before such close of business, and shall not theretofore have been waived by Buyer; provided, in each case, that the failure to consummate the transactions contemplated hereby on or before such date did not result from the failure by the party or parties seeking termination of this Agreement to fulfill any undertaking or commitment provided for herein on the part of such party or parties that is required to be fulfilled on or prior to Closing. (b) Effect of Termination. In the event of termination of this Agreement by Seller, on the one hand, or Buyer, on the other hand, pursuant to Section 14.1, written notice thereof shall forthwith be given by terminating party or parties to the other party or parties hereto, Seller shall return to Buyer the Deposit, and this Agreement shall thereupon terminate; provided, however, that following such termination Buyer will continue to be bound by its obligations set forth in Article V. If this Agreement is terminated as provided herein all filings, applications and other submissions made to any Governmental Authority shall, to the extent practicable, be withdrawn from the Governmental Authority to which they were made and any notices or offers made pursuant to Section 7.1 shall become void. Section 14.2 Remedies. (a) Seller's Remedies. Notwithstanding anything herein provided to the contrary, upon the failure by Buyer to fulfill any undertaking or commitment provided for herein on the part of Buyer that is required to be fulfilled on or prior to the Closing Date, Seller, at its sole option, may (i) enforce specific performance of this Agreement or (ii) terminate this Agreement and retain the Deposit as liquidated damages, as Seller's sole and exclusive remedies for such default, all other remedies being expressly waived by Seller. Seller and Buyer agree upon the Deposit amount as liquidated damages due to the difficulty and 22 inconvenience of measuring actual damages and the uncertainty thereof, and Seller and Buyer agree that the Deposit amount is a reasonable estimate of Seller's loss in the event of any such default by Buyer. (b) Buyer's Remedies. Notwithstanding anything herein provided to the contrary, upon the failure by Seller to fulfill any undertaking or commitment provided for herein on the part of Seller that is required to be fulfilled on or prior to the Closing Date, Buyer, at its sole option, may (i) enforce specific performance of this Agreement or (ii) terminate this Agreement and retain the Deposit as liquidated damages, as Buyer's sole and exclusive remedies for such default, all other remedies being expressly waived by Buyer. Section 14.3 Limitations. (a) Disclaimer of Warranties. NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT SELLER IS NOT MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, BEYOND THOSE REPRESENTATIONS OR WARRANTIES EXPRESSLY GIVEN IN THIS AGREEMENT, AND IT IS UNDERSTOOD THAT BUYER TAKES THE ASSETS AS IS AND WHERE IS AND WITH ALL FAULTS. WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A) THE CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) OR (B) ANY INFRINGEMENT BY SELLER OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; AND (II) NEGATES ANY RIGHTS OF BUYER UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY BUYER FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF SELLER AND BUYER THAT THE ASSETS ARE TO BE ACCEPTED BY BUYER IN THEIR PRESENT CONDITION AND STATE OF REPAIR. (b) Texas Deceptive Trade Practices Act Waiver. BUYER (A) REPRESENTS AND WARRANTS TO SELLER THAT IT (i) IS ACQUIRING THE ASSETS FOR COMMERCIAL OR BUSINESS USE, (ii) IS REPRESENTED BY LEGAL COUNSEL, (iii) ACKNOWLEDGES THE CONSIDERATION PAID OR TO BE PAID FOR THE ASSETS WILL EXCEED $500,000, AND (iv) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS SUCH THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT AND IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH RESPECT TO THE SELLER; AND (B) HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY 23 AND ALL RIGHTS OR REMEDIES IT MAY HAVE UNDER THE DECEPTIVE TRADE PRACTICES CONSUMER PROTECTION ACT OF THE STATE OF TEXAS, TEX. BUS. & COM. CODE ss. 17.41 ET SEQ. TO THE MAXIMUM EXTENT IT CAN DO SO UNDER APPLICABLE LAW, IF SUCH ACT WOULD FOR ANY REASON BE DEEMED APPLICABLE TO THE TRANSACTIONS CONTEMPLATED HEREBY. WAIVER OF CONSUMER RIGHTS BUYER WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF BUYER'S OWN SELECTION, BUYER VOLUNTARILY CONSENTS TO THIS WAIVER. (c) Damages. NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, SELLER AND BUYER AGREE THAT, EXCEPT FOR LIQUIDATED DAMAGES SPECIFICALLY PROVIDED FOR IN SECTION 14.2, THE RECOVERY BY EITHER PARTY HERETO OF ANY DAMAGES SUFFERED OR INCURRED BY IT AS A RESULT OF ANY BREACH BY THE OTHER PARTY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED TO THE ACTUAL DAMAGES SUFFERED OR INCURRED BY THE NON- BREACHING PARTY AS A RESULT OF THE BREACH BY THE BREACHING PARTY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER AND IN NO EVENT SHALL THE BREACHING PARTY BE LIABLE TO THE NON-BREACHING PARTY FOR ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES SUFFERED OR INCURRED BY THE NON- BREACHING PARTY AS A RESULT OF THE BREACH BY THE BREACHING PARTY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER. ARTICLE XV. MISCELLANEOUS Section 15.1 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. Section 15.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 24 Section 15.3 Entire Agreement. This Agreement and the Schedules and Exhibits hereto contain the entire agreement between the parties with respect to the subject matter hereof and there are no agreements, understandings, representations or warranties between the parties other than those set forth or referred to herein. The headings herein are for convenience only and shall have no significance in the interpretation hereof. Section 15.4 Expenses Buyer shall be responsible for (i) any sales Taxes which may become due and owing by reason of the sale of the Assets hereunder, (ii) all transfer, stamp, documentary and similar Taxes imposed on the parties hereto with respect to the property transfer contemplated pursuant to this Agreement and (iii) all recording fees relating to the filing of instruments transferring title to Buyer from Seller. Seller shall be responsible for (i) all recording and other fees relating to title curative documents and (ii) all income and other Taxes incurred by or imposed on Seller with respect to the transactions contemplated hereby. All other costs and expenses incurred by each party hereto in connection with all things required to be done by it hereunder, including attorney's fees, accountant fees and the expense of title examination, shall be borne by the party incurring same. Section 15.5 Notices. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, by United States Mail, telecopy, telefax or other electronic transmission service to the appropriate address or number as set forth below. Notices to Seller shall be addressed as follows: Arch Petroleum Inc. 777 Taylor Street, Suite II-A Fort Worth, Texas 76102 Attention: Larry Kalas Telecopy No.: (817) 332-9249 or at such other address and to the attention of such other Person as Seller may designate by written notice to Buyer. Notices to Buyer shall be addressed to: Odessa Exploration Incorporated 191 Professional Center 6010 Highway 191, Suite 210 Odessa, Texas 79762 Attention: D. Kirk Edwards Telecopy No.: (915) 550-0544 or at such other address and to the attention of such other Person as Buyer may designate be written notice to Seller. 25 Section 15.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the respective rights and obligations of the parties hereto shall not be assignable or delegable by any party hereto without the express written consent of the non-assigning or nondelegating party. Section 15.7 Amendments and Waivers. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by another party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. Section 15.8 Schedules and Exhibits. All Schedules and Exhibits hereto which are referred to herein are hereby made a part hereof and incorporated herein by such reference. Section 15.9 Purchase Price Allocation for Tax Purposes. Seller and Buyer agree that the Purchase Price shall be allocated to the various Assets for federal and state income tax purposes only in the manner set forth in Schedule 15.9. The parties agree not to take a federal or state income tax reporting position inconsistent with the allocations set forth on Schedule 15.9. The parties further agree that the allocations set forth on Schedule 15.9 represent reasonable estimates of the fair market values of the Assets described herein. Section 15.10 Ad Valorem Tax Proration. Ad valorem taxes related to the Assets will be prorated as of the Effective Time. For ad valorem taxes for a period which the Effective Time splits which have been paid by Seller, Buyer shall reimburse Seller for the portion thereof equal to the percentage of such period represented by the portion of such period beginning at the Effective Time. For ad valorem taxes for a period which the Effective Time splits which have not been paid by Seller, Buyer shall pay such taxes and Seller shall reimburse Buyer for a percentage of such taxes equal to the portion of such period which ends on the day immediately preceding the Effective Time. Section 15.11 Agreement for the Parties' Benefit Only. Except as specified in Article XIII, which is also intended to benefit and to be enforceable by any of the Indemnified Parties, this Agreement is not intended to confer upon any Person not a party hereto any rights or remedies hereunder, and no Person, other than the parties hereto or the Indemnified Parties, is entitled to rely on any representation, warranty, covenant or agreement contained herein. In each case, such third party beneficiary may only bring suit against the defaulting party or parties. Section 15.12 Attorneys' Fees. The prevailing party in any legal proceeding brought under or to enforce this Agreement shall be additionally entitled to recover court costs and reasonable attorneys' fees from the nonprevailing party. 26 Section 15.13 Severability. If any term or other provision of this Agreement is 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 adverse manner to any party. Upon such determination that any term or other provision is invalid, illegal or incapable or being enforced, the parties hereto 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. Section 15.14 No Recordation. Without limiting any party's right to file suit to enforce its rights under this Agreement, Buyer and Seller expressly covenant and agree not to record or place of record this Agreement or any copy or memorandum hereof. Section 15.15 Time of Essence. Time is of the essence in this Agreement. Section 15.16 Hardy Agreement Seller is entering into the Hardy Agreement for the sole purpose of accommodating Buyer as to its intention to acquire the Hardy Properties from Seller pursuant to the terms of this Agreement. Buyer hereby agrees to assume all obligations, duties, and responsibilities of Seller as set forth in the Hardy Agreement to the same extent and with like effect as if Buyer had been a party to the Hardy Agreement in lieu of Seller. In the event that Buyer fails to perform its obligations under this Agreement, and as a result, Seller is unable to close the Hardy Agreement, Buyer shall indemnify and hold harmless Seller from and against any and all claims and liabilities incurred by or asserted against Seller by Hardy on account of or in connection with Seller's failure to close the Hardy Agreement. If the Hardy Agreement is amended or modified to contain any terms, conditions or provisions that are materially different than the terms, conditions or provisions of this Agreement, then this Agreement shall likewise be modified and amended to conform to the modification and amendments made to the Hardy Agreement. Promptly upon Seller's receipt of an executed copy of the Agreement and the payment of the Deposit, Seller shall exercise its preferential right to purchase by giving Hardy written notice of such election, and shall request Hardy to provide Seller with the Hardy Agreement for execution by Seller. If the due diligence period and the Closing Date provided under the Hardy Agreement are extended beyond the dates provided in this Agreement, the dates in this Agreement shall be concomitantly extended to accord to those later dates. Section 15.17 Like Kind Exchange Buyer shall cooperate fully in the event that Seller elects to effectuate a like kind exchange under IRC Section 1031 and Seller shall reimburse Buyer for any additional costs incurred in connection therewith. 27 IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties as of the day first above written. SELLER: ARCH PETROLEUM INC. By: ___________________________________ Larry Kalas President BUYER: ODESSA EXPLORATION INCORPORATED By: ____________________________________ D. Kirk Edwards President 28 APPENDIX A TO ASSET PURCHASE AGREEMENT DEFINITIONS "Action" shall mean any action, claim, suit, arbitration, inquiry, proceeding, investigation, condemnation or audit by or before any court or other Governmental Authority. "Adjustment Period" shall be as defined in Section 3.3(a). "Adjusted Purchase Price" shall be as defined in Section 3.1. "Adjustment Statement" shall be as defined in Section 3.3(a). "Arbitration Procedures" shall mean the arbitration procedures set forth in Exhibit A-1. "Assets" shall mean the following described assets and properties (except to the extent constituting Excluded Assets): (a) the Subject Interests; (b) the Lands; (c) the Incidental Rights; (d) the Claims; (e) the Royalty Accounts; and (f) all (i) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods subsequent to the Effective Time and (ii) proceeds from or of such oil, gas and other hydrocarbons. "Assumed Liabilities" shall mean (i) all Covered Liabilities of Seller with respect to the Royalty Accounts and the Claims, and (ii) all Covered Liabilities to the extent arising out of or attributable to the ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time. "Buyer Indemnified Parties" shall be as defined in Section 13.2. "Claims" shall mean all right, title and interest of Seller to any claims to the extent attributable to ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time, including, without limitation, past, present or future claims, whether or not previously asserted by Seller. "Closing" shall be the consummation of the transaction contemplated by Article X. "Closing Date" shall mean (a) April 30, 1996, or (b) such other date as may be mutually agreed to by Seller and Buyer. "Conveyance" shall be as defined in Section 8.3. "Covered Liabilities" shall mean any and all debts, losses, liabilities, duties, claims (including, without limitation, those arising out of any demand, assessment, settlement, judgment or compromise relating to any actual or threatened Action), Taxes, costs and expenses (including, without limitation, any attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending any Action), matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown, including, without limitation, any of the foregoing arising under, out of or in connection with any Action, any order or consent decree of any Governmental Authority, any award of any arbitrator, or any Law, contract, commitment or undertaking. "Defensible Title" shall mean, respectively as to the Subject Interest or Subject Interests related to a particular Property Subdivision, title to such Property Subdivision and the Subject Interest or Subject Interests related to such Property Subdivision that: (i) entitles Seller to receive not less than the applicable Net Revenue Interest or Net Revenue Interests specified for such Property Subdivision in the Property Schedule; (ii) obligates Seller to bear the costs and expenses attributable to the maintenance, development, and operation of such Property Subdivision in an amount not greater than the applicable Working Interest or Working Interests specified for such Property Subdivision in the Property Schedule; and (iii), except for Permitted Encumbrances, is free and clear of all liens and encumbrances. "Deferred Adjustment Claim" shall be defined in Section 6.6. "Deferred Matters Date" shall be as defined in Section 6.6. "Deposit" shall be as defined in Section 3.2. "Disputed Issues" shall be as defined in the Arbitration Procedures. "Effective Time" shall mean 7:00 a.m., Central Daylight Time, on January 1, 1996. "Excluded Assets" shall mean the following: (a) copies of all Records; (b) except to the extent constituting the Royalty Accounts, all deposits, cash, checks, funds and accounts receivable attributable to Seller's interest in the Assets with respect to any period of time prior to the Effective Time; Page - 2 - of Appendix A (c) all (i) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, (ii) oil, gas and other hydrocarbons attributable to the Subject Interests which, at the Effective Time, are in storage, within processing plants, in pipelines or otherwise held in inventory, and (iii) proceeds from or of such oil, gas and other hydrocarbons; (d) such assets as Seller elects to exclude from the Assets pursuant to the terms hereof; (e) all receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of Net Cash Flow pursuant to Section 3.3, as adjusted pursuant to Section 3.4; (f) claims of Seller for refund of or loss carry forwards with respect to (i) Taxes attributable to any period prior to the Effective time or (ii) any Taxes attributable to the Excluded Assets; (g) all corporate, financial, tax and legal records of Seller; and (h) all rights, interests, assets and properties described in Schedule A-1. "Excluded Liabilities" shall mean, except to the extent constituting an Assumed Liability, any Covered Liabilities to the extent arising out of or attributable to the ownership, use, construction, maintenance or operation of the Assets by Seller prior to the Effective Time. "Final Adjustment Statement" shall be as defined in Section 3.4. "Governmental Authority" shall mean (i) the United States of America, (ii) any state, county, municipality or other governmental subdivision within the United States of America, and (iii) any court or any governmental department, commission, board, bureau, agency or other instrumentality of the United States of America or of any state, county, municipality or other governmental subdivision within the United States of America. "Hydrocarbon Interests" shall mean (a) leases affecting, relating to or covering any oil, gas and other hydrocarbons and the leasehold interests and estates in the nature of working or operating interests under such leases, as well as overriding royalties, net profits interests, production payments, carried interests, rights of recoupment and other interests in, under or relating to such leases; (b) fee interests in oil, gas or other hydrocarbons; (c) royalty interests in oil, gas or other hydrocarbons; (d) any other interest in oil, gas or other hydrocarbons in place, (e) any economic or contractual rights, options or interests in and to any of the foregoing, including, without limitation, any farmout or farmin agreement or production payment affecting any interest or estate in oil, gas or other hydrocarbons; and (f) any and all rights and interests attributable or allocable thereto by virtue of any pooling, unitization, communitization, production sharing or similar agreement, order or declaration. Page - 3 - of Appendix A "Incidental Rights" shall mean all right, title and interest of Seller in and to or derived from the following insofar as the same are attributable to the Subject Interests: (a) all rights with respect to the use and occupancy of the surface of and the subsurface depths under the Lands; (b) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof; (c) all agreements and contracts, easements, rights-of-way, servitudes and other estates; and (d) all real and personal property located upon the Lands and used in connection with the exploration, development or operation of the Subject Interests; and (e) the Records. "Indemnified Party" shall be as defined in Section 13.3. "Indemnitor" shall be as defined in Section 13.3. "Initial Adjustment Amount" shall be as defined in Section 3.3(a). "Knowledge" shall mean the actual knowledge of any fact, circumstance or condition by the officers (if the party involved is a corporation), partners (if the party involved is a partnership) or employees at a supervisory or higher level of the party involved. "Lands" shall mean, except to the extent constituting Excluded Assets, all right, title, and interest of Seller in and to the lands covered by or subject to the Subject Interests. "Law" shall mean any applicable statute, law, ordinance, regulation, rule, ruling, order, restriction, requirement, writ, injunction, decree or other official act of or by any Governmental Authority. "Net Cash Flow" shall be as defined in Section 3.3(c). "Net Revenue Interest" shall mean an interest (expressed as a percentage or decimal fraction) in and to all oil and gas produced and saved from or attributable to a Property Subdivision. "Permitted Encumbrances" shall mean any of the following matters: (a) all agreements, instruments, documents, liens, encumbrances, and other matters which are described in Schedule A-2; (b) any (i) undetermined or inchoate liens or charges constituting or securing the payment of expenses which were incurred incidental to maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing oil, gas or other hydrocarbons therefrom or therein and (ii) materialman's, mechanics', repairman's, employees', contractors', operators' or other similar liens, security interests or charges for liquidated amounts arising in the ordinary course of business incidental to construction, maintenance, development, production or operation Page - 4 - of Appendix A of the Assets or the production or processing of oil, gas or other hydrocarbons therefrom, that are not delinquent and that will be paid in the ordinary course of business, or if delinquent, that are being contested in good faith; (c) any liens for Taxes not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business; (d) any liens or security interests created by Law or reserved in oil, gas and/or mineral leases for royalty, bonus or rental or for compliance with the terms of the Subject Interests; (e) all Preference Rights and Transfer Requirements; (f) any easements, rights-of-way, servitudes, permits, licenses, surface leases and other rights with respect to surface operations to the extent such matters do not interfere in any material respect with Buyer's operation of the portion of the Assets burdened thereby; (g) any prohibitions or restrictions similar to those contained in Article VIII.D. of the A.A.P.L. Form 610-1982 Model Form Operating Agreement and any contribution obligations under provisions similar to Article VII.B. of said Model Form Operating Agreement; (h) all agreements and obligations relating to imbalances with respect to the production, transportation or processing of gas or calls or purchase options on oil or gas production; (i) all royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other burdens to the extent that the net cumulative effect of such burdens, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Seller in such Property Subdivision as specified in the Property Schedule; (j) all obligations by virtue of a prepayment, advance payment or similar arrangement under any contract for the sale of gas production, including by virtue of "take-or-pay" or similar provisions, to deliver gas produced from or attributable to the Subject Interests after the Effective Time without then or thereafter being entitled to receive full payment therefor; (k) all liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects, irregularities and other matters affecting any Asset which individually or in the aggregate are not such as to interfere materially with the operation, value or use of such Asset; Page - 5 - of Appendix A (l) any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Buyer pursuant to Article VI; (m) rights reserved to or vested in any Governmental Authority to control or regulate any of the wells or units included in the Assets and all applicable laws, rules, regulations and orders of such authorities so long as the same do not decrease Seller's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; (n) the terms and conditions of all contracts and agreements relating to the Subject Interests, including, without limitation, exploration agreements, gas sales contracts, processing agreements, farmins, farmouts, operating agreements, and right-of-way agreements, to the extent such terms and conditions do not decrease Seller's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; and (o) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest. "Person" shall mean any Governmental Authority or any individual, firm, partnership, corporation, joint venture, trust, unincorporated organization or other entity or organization. "Preference Property" shall be as defined in Section 7.2. "Preference Right" shall mean any right or agreement that enables or may enable any Person to purchase or acquire any Asset or any interest therein or portion thereof as result of or in connection with (i) the sale, assignment, encumbrance or other transfer of any Asset or any interest therein or portion thereof or (ii) the execution or delivery of this Agreement or the consummation or performance of the terms and conditions contemplated by this Agreement. "Property Schedule" means Exhibit A-2 attached to and made a part of this Agreement. "Property Subdivision" means each well location, well, well completion, multiple well completion, unit, lease, or other subdivision of property described or referenced in the Property Schedule. "Purchase Price" shall be as defined in Section 3.1. "Records" shall mean, except to the extent constituting Excluded Assets, and except to the extent the transfer thereof may not be made without violating legal constraints or legal obligations or waiving any attorney/client privilege, any and all lease files, land files, division order files, production marketing files, well files, production records, seismic, geological, geophysical and engineering data, litigation files, and all other files, maps and data (in whatever form) arising out of or relating to the Subject Interests or the ownership, use, maintenance or operation of the Assets. Page - 6 - of Appendix A "Retained Assets" shall be defined in Section 7.3. "Royalty Accounts" shall mean those separately indentifiable accounts which are expressly identified and set forth in Schedule A-4 in which Seller or any third party operator is holding as of the Effective Time monies which (i) are owing to third party owners of royalty, overriding royalty, working or other interests in respect of past production of oil, gas or other hydrocarbons attributable to the Assets or (ii) may be subject to refund by royalty owners or other third parties to purchasers of past production of oil, gas or other hydrocarbons attributable to the Assets. "Seller Indemnified Parties" shall be as defined in Section 13.1. "Seller Title Credit" shall be as defined in Section 6.4. "Subject Interests" shall mean and include (i) the undivided interests specified in the Property Schedule in, to or under the Hydrocabon Interests specifically described in the Property Schedule, and (ii) all other interests of Seller in, to or under any Hydrocarbon Interests in, to or under or derived from any lands covered by or subject to any of the Hydrocarbon Interests described in the Property Schedule, even though such interests of the Seller may be incorrectly described or referred to in, or a description thereof may be omitted from, the Property Schedule. "Taxes" shall mean all federal, state and local taxes or similar assessments or fees, together with all interest, fines, penalties and additions thereto. "Title Defect" shall be as defined in Section 6.3. "Title Defect Amount" shall be as defined in Section 6.2(d). "Title Defect Deductible" shall be as defined in Section 6.2(d). "Title Defect Property" shall be as defined in Section 6.2(c). "Title Examination Period" shall be as defined in Section 6.2(a). "Transfer Requirement" shall mean any consent, approval, authorization or permit of, or filing with or notification to, any Person which must be obtained, made or complied with for or in connection with any sale, assignment, transfer or encumbrance of any Asset or any interest therein in order (a) for such sale, assignment, transfer or encumbrance to be effective, (b) to prevent any termination, cancellation, default, acceleration or change in terms (or any right thereof from arising) under any terms, conditions or provisions of any Asset (or of any agreement, instrument or obligation relating to or burdening any Asset) as a result of such sale, assignment, transfer or encumbrance, or (c) to prevent the creation or imposition of any lien, charge, penalty, restriction, security interest or encumbrance on or with respect to any Asset (or any right thereof from arising) as a result of such sale, assignment, transfer or encumbrance. Page - 7 - of Appendix A "Unscheduled (Negative) Imbalance" shall mean, respectively as to each Property Subdivision to which the Subject Interests are attributable and without duplication, the sum (expressed in Mcfs) of (i) the aggregate make-up, prepaid or other volumes of oil, gas or other hydrocarbons, not described on Schedule A-3, that Seller was obligated as of the Effective time, on account of prepayment, advance payment, take-or-pay, gas balancing or similar obligations, to deliver from the Subject Interests attributable to such Property Subdivision after the Effective time without then or thereafter begin entitled to receive full payment therefor and (ii), to the extent such obligations burden the Assets or Buyer could incur any liability therefor as a result of the transaction contemplated hereby and the same are not described on Schedule A-3 or covered by clause (i) above, the aggregate pipeline or processing plant imbalances or overdeliveries for which Seller is obligated to pay or deliver oil, gas or other hydrocarbons or cash to any pipeline, gatherer, transporter, processor, co-owner or purchaser in connection with any other oil, gas or other hydrocarbons attributable to the Subject Interests. "Unscheduled (Negative) Imbalance" shall mean, respectively as to each Property Subdivision to which the Subject Interests are attributable and without duplication, the sum (expressed in Mcfs) of (i) the aggregate make-up, prepaid or other volumes of oil, gas or other hydrocarbons, not described on Schedule A-3, that Seller was obligated as of the Effective Time, on account of prepayment, advance payment, take-or-pay, gas balancing or similar obligations, to deliver from the Subject Interests attributable to such Property Subdivision after the Effective Time without then or thereafter being entitled to receive full payment therefor and (ii), to the extent such obligations burden the Assets or Buyer could incur any liability therefor as a result of the transaction contemplated hereby and the same are not described on Schedule A-3 or covered by clause (i) above, the aggregate pipeline or processing plant imbalances or overdeliveries for which Seller is obligated to pay or deliver oil, gas or other hydrocarbonds or cash to any pipeline, gatherer, transporter, processor, co-owner or purchaser in connection with any other oil, gas or other hydrocarbons attributable to the Subject Interests. "Unschedule (Positive) Imbalances" shall mean, respectively as to each Property Subdivision to which the Subject Interests are attributable and without duplication, the sum (expressed in Mcfs) of (i) the aggregate make-up, prepaid or other volumes of oil, gas or other hydrocarbons, not described on Schedule A-3, that Seller was entitled as of the Effective Time, on account of prepayment, advance payment, take-or-pay, gas balancing or similar obligations, to receive from the Subject Interests attributable to such Property Subdivision after the Effective Time without then and thereafter being obligated to make any payment therefor and (ii) to the extent such entitlements run with the Assets and the same are not described on Schedule A-3 or covered by clause (i) above, the aggregate pipeline or processing plant imbalances or underdeliveries for which Seller is entitled to receive oil, gas or other hydrocarbons or cash from any pipeline, gatherer, transporter, processor, co-owner or purchaser in connection with any oil, gas or other hydrocarbons attributable to the Subject Interests. "Working Interest" shall mean the percentage of costs and expenses attributable to the maintenance, development and operation of a Property Settlement. Page - 8 - of Appendix A EXHIBIT 8.3 GENERAL CONVEYANCE THIS GENERAL CONVEYANCE (this "Conveyance") executed by ARCH PETROLEUM INC., a Delaware corporation, whose address is 777 Taylor Street, Suite II-A, Fort Worth, Texas 76102 (hereinafter called "Assignor"), to ODESSA EXPLORATION INCORPORATION, whose address is 191 Professional Center, 6010 Highway 191, Suite 210, Odessa, Texas 79762, (hereinafter called "Assignee"), dated effective at 7:00 a.m., Central Daylight Time, on January 1, 1996 (said hour and day hereinafter called the "Effective Time"). Capitalized terms used but not otherwise defined herein shall have the meanings set forth in that certain Asset Purchase Agreement dated April 18, 1996 (the "Agreement"), by and between Assignor, as "Seller", and Assignee, as "Buyer". ARTICLE I Conveyance of Assets Assignor, for Ten and No/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignee, the receipt and sufficiency of which consideration are hereby acknowledged and confessed, by these presents does hereby GRANT, BARGAIN, SELLER, CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER unto Assignee, effective as of the Effective time, the following described assets and properties (except to the extent constituting "Excluded Assets" (hereinafter defined)) (collectively, the "Assets"): (i) (a) The undivided interests specified in Exhibit A hereto (the "Property Schedule") in, to or under the Hydrocarbon Interests (hereinafter defined) specifically described in the Property Schedule, and (b) all other interests of Assignor in, to or under any Hydrocarbon Interests in, to or under or derived from any lands covered by or subject to any of the Hydrocarbon Interests described in the Property Schedule, even though such interests of the Assignor may be incorrectly described or referred to in, or a description thereof may be omitted from, the Property Schedule (collectively, the "Subject Interests"); (ii) All right, title, and interest of Assignor in and to the lands covered by or subject to the Subject Interests (the "Lands"); (iii) All right, title and interest of Assignor in and to or derived from the following insofar as the same are attributable to the Subject Interests: (a) all rights with respect to the use and occupancy of the surface of and the subsurface depths under the Lands; (b) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof; (c) all agreements and contracts, easements, rights-of-way, servitudes and other estates; (d) all real and personal property Page - 1 - of Exhibit 8.3 located upon the Lands and used in connection with the exploration, development or operation of the Subject Interests; and (e) the Records; (iv) All right, title and interest of Assignor to any claims to the extent attributable to ownership, use, construction, maintenance or operation of the Assets subsequent to the Effective Time, including, without limitation, past, present or future claims, whether or not previously asserted by Assignor; (v) Those separate identifiable accounts (the "Royalty Accounts") which are expressly identified and set forth in Schedule A-1 hereto in which Assignor or any third party operator is holding as of the Effective Time monies which (a) are owing to third party owners of royalty, overriding royalty, working or other interests in respect of past production of oil, gas or other hydrocarbons attributable to the Assets or (b) may be subject to refund by royalty owners or other third parties to purchasers of past production of oil, gas or other hydrocarbons attributable to the Assets; and (vi) All (a) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods subsequent to the Effective time and (b) proceeds from or of such oil, gas and other hydrocarbons. As used in this Conveyance, the term "Hydrocarbon Interests" shall mean (a) leases affecting, relating to or covering any oil, gas and other hydrocarbons and the leasehold interests and estates in the nature of working or operating interests under such leases, as well as overriding royalties, net profits interests, production payments, carried interests, rights of recoupment and other interests in, under or relating to such leases, (b) fee interests in oil, gas or other hydrocarbons, (c) royalty interests in oil, gas or other hydrocarbons, (d) any other interest in oil, gas or other hydrocarbons in place, (e) any economic or contractual rights, options or interests in and to any of the foregoing, including, without limitation, any farmout or farmin agreement or production payment affecting any interest or estate in oil, gas or other hydrocarbons, and (f) any and all rights and interests attributable or allocable thereto by virtue of any pooling, unitization, communitzation, production sharing or similar agreement, order or declaration. There is excluded from this Conveyance and the Assets and reserved unto Assignor the following described interests, rights and properties (collectively, the "Excluded Assets"): (i) Copies of all Records; (ii) Except to the extent constituting the Royalty Accounts, all deposits, cash, checks, funds and accounts receivable attributable to Assignor's interest in the Assets with respect to any period of time prior to the Effective Time; (iii) All (a) oil, gas and other hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, (b) oil, gas Page - 2 - of Exhibit 8.3 and other hydrocarbons attributable to the Subject Interests which, at the Effective Time, are in storage and are above pipeline connections within processing plants, in pipelines or otherwise held in inventory, and (c) proceeds from or of such oil, gas and other hydrocarbons; (iv) Such assets as Assignor elects to exclude from the Assets pursuant to the terms of the Agreement; (v) All receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of Net Cash Flow pursuant to Section 3.3 of the Agreement, as adjusted pursuant to Section 3.4 of the Agreement; (vi) Claims of Assignor for refund of or loss carry forwards with respect to (i) Taxes attributable to any period prior to the Effective Time or (ii) any Taxes attributable to the Excluded Assets; (vii) All corporate, financial, tax and legal records of Assignor; and (viii) All rights, interests, assets and properties described in Exhibit B hereto. TO HAVE AND TO HOLD the Assets unto Assignee, its successors and assigns, forever; subject, however, to the matters set forth herein. ARTICLE II Limitation of Warranties; Permitted Encumbrances Section 2.1 Limitation of Warranties. (a) Assignor does hereby bind itself, Assignor's successors and assigns, to warrant and forever defend all and singular Defensible Title (hereinafter defined) to the Subject Interests, unto Assignee, its successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under Assignor, but not otherwise, subject, however, to the Permitted Encumbrances (hereinafter defined). As used herein, the term "Defensible Title" shall mean, respectively, as to the Subject Interest or Subject Interests related to a particular Property Subdivision, title to such Property Subdivision and the Subject Interest or Subject Interests related to such Property Subdivision, that: (i) entitles Assignor to receive not less than the applicable Net Revenue Interest or Net Revenue Interests specified for such Property Subdivision in the Property Schedule; (ii) obligates Assignor to bear the costs and expenses relating to the maintenance, development and operation of such Property Subdivision in an amount not greater than the applicable Working Interest or Working Interests specified for such Property Subdivision in the Property Schedule unless Assignor's Net Revenue Interest therein is proportionately increased; and (iii) except for Permitted Encumbrances, is free and clear of liens and encumbrances. Recourse for breach Page - 3 - of Exhibit 8.3 of the foregoing special warranty of title shall be limited to a return of the purchase price allocated to the Subject Interest with respect to which such warranty has been breached in accordance with Section 6.2(b) of the Agreement, without interest thereon. (b) EXCEPT FOR THE SPECIAL WARRANTY OF TITLE SET FORTH HEREIN, THE ASSETS ARE ASSIGNED TO ASSIGNEE "AS IS AND WHERE IS" AND WITH ALL FAULTS AND WITHOUT WARRANTY OR REPRESENTATION OF ANY KIND OR CHARACTER, EITHER EXPRESS OR IMPLIED. ASSIGNOR FURTHER HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A) THE CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) OR (B) ANY INFRINGEMENT BY ASSIGNOR OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; AND (II) NEGATES ANY RIGHTS OR ASSIGNEE UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY ASSIGNEE FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF ASSIGNOR AND ASSIGNEE THAT THE ASSETS ARE ACCEPTED BY ASSIGNEE IN THEIR PRESENT CONDITION AND STATE OF REPAIR. (c) To the extent transferable, Assignee shall be and is hereby subrogated to all covenants and warranties of title by parties (other than Assignor) heretofore given or made to Assignor or its predecessors in title in respect to any of the Assets. Section 2.2 Permitted Encumbrances. The Assets are assigned and conveyed by Assignor and accepted by Assignee expressly subject to the following (the "Permitted Encumbrances"): (a) all agreements, instruments, documents, liens, encumbrances, and other matters which are described in Schedule A-2; (b) any (i) undetermined or inchoate liens or charges constituting or securing the payment of expenses which were incurred incidental to maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing oil, gas or other hydrocarbons therefrom or therein and (ii) materialman's, mechanics', repairman's, employees', contractors', operators' or other similar liens, security interests or charges for liquidated amounts arising in the ordinary course of business incidental to construction, maintenance, development, production or operation of the Assets or the production or processing of oil, gas or other hydrocarbons therefrom, that are not delinquent and that will be paid in the ordinary course of business or, if delinquent, that are being contested in good faith; Page - 4 - of Exhibit 8.3 (c) any liens for Taxes not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business; (d) any liens or security interest created by Law or reserved in oil, gas and/or mineral leases for royalty, bonus or rental or for compliance with the terms of the Subject Interests; (e) all Preference Rights and Transfer Requirements; (f) any easements, rights-of-way, servitudes, permits, licenses, surface leases and other rights with respect to surface operations to the extent such matters do not interfere in any material respect with Assignee's operation of the portion of the Assets burdened thereby; (g) any prohibitions or restrictions similar to those contained in Article VIII.D. of the A.A.P.L. Form 610-1982 Model Form Operating Agreement and any contribution obligations under provisions similar to Article VII.B. of said Model Form Operating Agreement; (h) all agreements and obligations relating to imbalances with respect to the production, transportation or processing of gas or calls or purchase options on oil or gas production; (i) all royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other burdens to the extent that the net cumulative effect of such burdens, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Assignor in such Property Subdivision as specified in the Property Schedule; (j) all obligations by virtue of a prepayment, advance payment or similar arrangement under any contract for the sale of gas production, including by virtue of "take-or-pay" or similar provisions, to deliver gas produced from or attributable to the Subject Interests after the Effective Time without then or thereafter being entitled to receive full payment therefor; (k) all liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects, irregularities and other matters affecting any Asset which individually or in the aggregate are not such as to interfere materially with the operation, value or use of such Asset; (l) any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Assignee pursuant to Article VI of the Agreement; Page - 5 - of Exhibit 8.3 (m) rights reserved to or vested in any Governmental Authority to control or regulate any of the wells or units included in the Assets and all applicable laws, rules, regulations and orders of such authorities so long as the same do not decrease Assignor's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; (n) the terms and conditions of all contracts and agreements relating to the Subject Interests, including, without limitation, exploration agreements, gas sales contracts, processing agreements, farmins, farmouts, operating agreements, and rights-of-way agreements, to the extent such terms and conditions do not decrease Assignor's Net Revenue Interest below the Net Revenue Interest shown in the Property Schedule; and (o) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest. By Assignee's acceptance of this Conveyance, Assignee assumes and agrees to keep and perform the obligations of Assignor under the Permitted Encumbrances which accrue from and after the Effective Time. ARTICLE III Miscellaneous Section 3.1 Further Assurances. Assignor covenants and agrees to execute and deliver to Assignee all such other and additional instruments and other documents and will do all such other acts and things as may be necessary to more fully assure to Assignee or its successor or assigns all of the respective properties, rights and interests herein and hereby granted or intended so to be. Section 3.2 Successors and Assigns. All of the provisions hereof shall inure to the benefit of and be binding upon Assignor and Assignee and their respective successors and assigns. All references herein to either Assignor or Assignee shall include their respective successors and assigns. Section 3.3 Counterparts. This Assignment is being executed in several original counterparts, all of which are identical, except that, to facilitate recordations, there are omitted from certain counterparts those property descriptions in the Property Schedule which contain descriptions of property located in recording jurisdictions other than the jurisdiction in which the particular counterpart is to be recorded. Each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts shall constitute but one and the same assignment. IN WITNESS WHEREOF, the Assignor and Assignee have caused this Conveyance to be executed on the date of their respective acknowledgments set forth below, to be effective, however, as of the Effective Time. Page - 6 - of Exhibit 8.3 ASSIGNOR: ARCH PETROLEUM INC. By: _____________________________________ Larry Kalas, President ASSIGNEE: ODESSA EXPLORATION INCORPORATED By: _____________________________________ D. Kirk Edwards, President STATE OF TEXAS ) ) COUNTY OF ___________ ) This instrument was acknowledged before me on April 18, 1996, by Larry Kalas, President of ARCH PETROLEUM INC., a Delaware corporation, on behalf of said corporation. - ------------------------------------------- Notary Public in and for the State of Texas My Commission Expires: ____________________ STATE OF TEXAS ) ) COUNTY OF MIDLAND ) This instrument was acknowledged before me on April 18, 1996, by D. Kirk Edwards, President of ODESSA EXPLORATION INCORPORATED, a Delaware corporation, on behalf of said corporation. - ------------------------------------------- Notary Public in and for the State of Texas My Commission Expires: ____________________ Page - 7 - of Exhibit 8.3 EXHIBIT "A" Page - 8 - of Exhibit 8.3 EXHIBIT 10.2(c) AFFIDAVIT STATE OF TEXAS ) ) COUNTY OF HARRIS ) Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a U.S. real property interest must withhold tax if the transferor (seller) is a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate. To inform the transferee (buyer) that the withholding of taxes is not required upon the disposition of a U.S. real property interest, before me, the undersigned authority, on this day personally appeared Larry Kalas, President of Arch Petroleum Inc., a Delaware corporation, well known to me to be the person whose name is subscribed hereto, who being first duly sworn by me, upon oath deposed and stated as follows: 1. Arch Petroleum Inc. is not a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations). 2. The U.S. employer's identification number of Arch Petroleum Inc. is ______________________. 3. The office address of Arch Petroleum Inc. is 777 Taylor Street, Suite II-A Fort Worth, Texas 76102. 4. I understand that this Affidavit may be disclosed to the Internal Revenue Service by the transferee and that any false statement contained herein could be punished by fine, imprisonment or both. 5. Under penalties of perjury, I declare that I have examined this Affidavit and to the best of my knowledge and belief, it is true, correct and complete. - --------------------------------------- Larry Kalas Page - 1 - of Exhibit 10.2(c) STATE OF TEXAS ) ) COUNTY OF HARRIS ) Subscribed, sworn to and acknowledged before me, in my presence, this the ___ day of __________, 1996. - ------------------------------------------- Notary Public in and for the State of Texas My Commission Expires: __________________ Page - 2 - of Exhibit 10.2(c) EXHIBIT A-1 ARBITRATION PROCEDURES The Arbitration Procedures referred to in the Asset Purchase Agreement (the "Agreement") to which this Exhibit A-1 is attached shall be as follows: 1. Capitalized terms used herein, and not otherwise herein defined, shall have the meaning ascribed to such terms in the Agreement. 2. (a) With respect to unresolved Deferred Adjustment Claims, on or before the Deferred Matters Date, Seller and Buyer shall each submit to the other the list of what such party considers to comprise the remaining unresolved Deferred Adjustment Claims. The two lists shall together comprise the "Disputed Issues" relating to Deferred Adjustment Claims which shall be resolved by the binding arbitration provided for herein. (b) If, pursuant to Section 3.4 of the Agreement, either Buyer or Seller elects to submit any Final Adjustment Statement disagreements to arbitration, such disagreements will also constitute "Disputed Issues" to be resolved by the binding arbitration provided for herein. 3. Seller and Buyer, each being duly authorized by all necessary corporate, partnership or other proceedings, if any are applicable, shall submit the Disputed Issues to binding arbitration by a board of arbitration to be selected by the following procedures. Notices hereunder shall be sufficient if sent in accordance with the terms of the Agreement. With respect to Disputed Issues involving Deferred Adjustment Claims, within five (5) days after the Deferred Matters Date, Seller shall by written notice name one arbitrator and Buyer shall by written notice name one arbitrator. With respect to Disputed Issues involving Final Adjustment Statement disagreements, within five (5) days after either Buyer or Seller provides the other party with written notice that such party desires to submit such Final Adjustment Statement disagreements to arbitration, Seller shall by written notice name one arbitrator and Buyer shall by written notice name one arbitrator. If a party fails to name an arbitrator, the other party shall by further written notice name the second arbitrator. The two arbitrators so appointed shall name the third arbitrator within ten (10) days after the selection of the second arbitrator. If they fail to do so, either arbitrator may request the judge of the United States District Court for the Southern District of Texas having greatest tenure; but not yet on retired or senior status, to appoint the third arbitrator. If that judge fails to do so within thirty (30) days, either party may request the judge of that court next senior to name the third arbitrator, and if that judge fails to do so after ten (10) days, either party may make the request of the judge of that court next senior, and so on, until the board of arbitration is constituted. With respect to Disputed Issues involving Deferred Adjustment Claims, each of the arbitrators shall be knowledgeable about matters affecting title to oil and gas properties in the state or other jurisdiction in which Page - 1 - of Exhibit A-1 such properties are located, by virtue of managerial, land property administration, legal or judicial experience. With respect to Disputed Issues involving Final Adjustment Statement disagreements, each of the arbitrators shall be knowledgeable about oil and gas related accounting matters. In addition, the third arbitrator, in each case, shall be required to meet the qualification requirements of the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules"), whether appointed by the arbitrators or by a judge as provided above. 4. If prior to rendering a decision an arbitrator resigns or becomes unable to serve, the arbitrator shall be replaced as follows. If that arbitrator was one of the two arbitrators appointed by the parties, the party that names him or her shall name a replacement; provided, however, that if that replacement is not named within five (5) days from notice of resignation or inability to serve, the other party shall name a replacement. If he or she was the third arbitrator, the other two arbitrators shall name a replacement; provided, however, that if they fail to agree on a replacement within ten (10) days, either arbitrator may follow the procedures specified in Paragraph 3 above and request judicial appoint of the replacement. 5. No party subject to these Arbitration Procedures will commence or prosecute any suit or action against another party subject to these Arbitration Procedures relating to the Disputed Issues, other than as may be necessary to compel arbitration under these Arbitration Procedures or to enforce the award of the board of arbitration. 6. The board of arbitration may in all matters act through a majority of its members on each matter if unanimity is not attained. It shall not be necessary that the same majority agree on each and every item; that is, the parties will be bound by majority rulings on each Disputed Issue even though the majority is not the same as to each Disputed Issue. In fulfilling their duties hereunder with respect to Deferred Adjustment Claims, each of the arbitrators shall be bound by the matters set forth in Article VI of the Agreement. The arbitrators shall not add any interest factor reflecting the time value of money to any title Defect Amount. 7. No matters whatsoever, other than the Disputed Issues, are subject to the agreement to arbitrate embodied in these Arbitration Procedures. The board of arbitration shall be empowered hereunder solely to resolve the Disputed Issues. The board of arbitration shall not have any authority to award punitive damages. The sole forum for the arbitration shall be Harris County, Texas and all hearings shall be conducted in Harris County, Texas. 8. The decision of the board of arbitration shall be rendered in writing and shall be final and binding upon the parties as to the Disputed Issues. The expenses of arbitration, including reasonable compensation to the third arbitrator, shall be borne equally by the parties. Each party shall bear the compensation and expenses of its own counsel, witnesses and employees and of any arbitrator it has appointed. If the Page - 2 - of Exhibit A-1 testimony of a witness is obtained by both parties, the costs associated with obtaining such testimony shall be borne equally between the parties. 9. Matters not specifically provided for in the Arbitration Procedures shall be governed by the AAA Rules. Page - 3 - of Exhibit A-1 EX-4.3 15 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT among KEY ENERGY GROUP, INC. MCMAHAN SECURITIES CO. L.P. and RAUSHER PIERCE REFSNES, INC. DATED AS OF JULY 3, 1996 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is entered into as of July 3, 1996, among KEY ENERGY GROUP, INC., a Maryland corporation (the "Company"), McMAHAN SECURITIES CO. L.P., a Delaware limited partnership ("McMahan"), and RAUSCHER PIERCE REFSNES, INC., a Delaware corporation ("RPRI"; RPRI and McMahan being hereinafter referred to as the "Initial Purchasers"), who have agreed to purchase the Company's 7% Convertible Debentures due 2003 (the "Debentures") pursuant to the Purchase Agreement dated as of June 27, 1996 among the Company and the Initial Purchasers (the "Purchase Agreement"). This Agreement is being executed pursuant to Section 3(i) of the Purchase Agreement. The Debentures are convertible into shares of the Company's common stock, par value $.10 per share (the "Common Stock"), under the terms and conditions set forth in an indenture dated as of July 3, 1996, between the Company and American Stock Transfer & Trust Company, as Trustee (the "Indenture"). The parties hereby agree as follows: 1. Definitions. As used in this Agreement, the following capitalized terms shall have the following meanings: Broker-Dealer. Any broker or dealer registered under the Exchange Act. Business Day. A day other than a Saturday or Sunday or any federal holiday. Closing Date. The date of this Agreement. Commission. The Securities and Exchange Commission. Damages Payment Date. Each Interest Payment Date. For purposes of this Agreement, if no Debentures are outstanding, "Damages Payment Date" shall mean each July 1 and January 1. Debentures. As defined in the preamble hereto. Effectiveness Target Date. As defined in Section 3 hereof. Exchange Act. The Securities Exchange Act of 1934, as amended. Holder. A Person who owns, beneficially or otherwise, Transfer Restricted Securities. Indemnified Holder. As defined in Section 6(a) hereof. Indenture. As defined in the preamble hereto. Initial Purchasers. As defined in the preamble hereto. Interest Payment Date. As defined in the Indenture. Liquidated Damages. As defined in Section 3 hereof. NASD. National Association of Securities Dealers, Inc. Person. An individual, partnership, corporation, unincorporated organization, limited liability company, trust, joint venture or a government or agency or political subdivision thereof. Prospectus. The prospectus included in a Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Record Holder. With respect to any Damages Payment Date, each Person who is a Holder on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur. In the case of a Holder of shares of Common Stock issued upon conversion of the Debentures, "Record Holder" shall mean each Person who is a Holder of shares of Common Stock which constitute Transfer Restricted Securities on the June 15 or December 15 immediately preceding the Damages Payment Date. Registration Default. As defined in Section 3(a) hereof. Registration Statement. The registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, which is filed pursuant to the provisions of this Agreement, in each case, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. Securities Act. The Securities Act of 1933, as amended. Shelf Filing Deadline. As defined in Section 2 hereof. Shelf Registration Statement. As defined in Section 2 hereof. TIA. The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Securities. Each share of Common Stock issued upon conversion of Debentures until the earlier of (a) the date on which such share of Common Stock issued upon conversion has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (b) the date on which such share of Common Stock issued upon conversion is distributed to the public pursuant to Rule 144 under the Securities Act or (c) the date on which such share of Common Stock issued upon conversion may be sold or transferred pursuant to Rule 144(k) (or any other similar provision then in force). 2 Underwritten Registration or Underwritten Offering. A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Shelf Registration. (a) The Company shall: (i) as soon as practicable, but not later than nine months after the date hereof (the "Shelf Filing Deadline"), cause to be filed a shelf registration statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration Statement"), which Shelf Registration Statement shall provide for resales of all Transfer Restricted Securities held by Holders that have provided the information required pursuant to Section 2(b) hereof; (ii) use its best efforts to cause such Shelf Registration Statement to be declared effective by the Commission on or before one year after the date hereof; and (iii) use its best efforts to keep such Shelf Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 4(b) hereof to the extent necessary to ensure that it is available for resales by the Holders of Transfer Restricted Securities entitled to the benefit of this Agreement, and to ensure that it conforms with the requirements of this Agreement, the Securities Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least three years following the Closing Date or such shorter period that will terminate when all Transfer Restricted Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. (b) No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 10 Business Days after receipt of a request therefor, such information as the Company may reasonably request for use in connection with such Shelf Registration Statement or Prospectus or preliminary Prospectus included therein and in any application to be filed with or under state securities laws. No Holder of Transfer Restricted Securities shall be entitled to Liquidated Damages pursuant to Section 3 hereof unless and until such Holder shall have provided all such reasonably requested information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. 3. Liquidated Damages. (a) If the Shelf Registration Statement required by this Agreement (i) is not filed with the Commission on or before the date specified for such filing in Section 2(a)(i) hereof, (ii) has not been declared effective by the Commission on or before the date specified for such effectiveness in Section 2(a)(ii) hereof (the "Effectiveness Target Date"), or (iii) subject to the provisions of Section 4(b)(i) below, is filed and declared effective but, during the period specified in Section 2(a)(ii) hereof, shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded within 15 Business Days by a post-effective amendment to such Registration Statement that cures such failure and that is itself immediately declared effective (each such event referred to in foregoing clauses (i) through (iii), a 3 "Registration Default"), the Company hereby agrees to pay liquidated damages ("Liquidated Damages") to (A) each holder of Debentures with respect to any period during which a Registration Default shall have occurred and be continuing, in an amount equal to one and one-half percent (150 basis points) per annum per $1,000 principal amount of Debentures held by such Holder; and (B) each Holder of shares of Common Stock issued upon conversion of Debentures with respect to any period in which a Registration Default shall have occurred and be continuing, in an amount equal to $.07 per annum per share of Common Stock, subject to adjustment in the event of stock splits, stock recombinations, stock dividends and the like. (b) All accrued Liquidated Damages shall be paid to holders of Debentures or Record Holders by the Company on each Damages Payment Date by wire transfer of immediately available funds or by federal funds check. Following the cure of all Registration Defaults relating to any particular Debenture or share of Common Stock, the accrual of Liquidated Damages with respect to such Debenture or share of Common Stock will cease. 4. Registration Procedures. (a) In connection with the Shelf Registration Statement, the Company shall comply with all the provisions of Section 4(b) below and shall use its best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and, pursuant thereto, the Company will as expeditiously as possible prepare and file with the Commission a Shelf Registration Statement relating to the registration on any appropriate form under the Securities Act. (b) In connection with the Shelf Registration Statement and any Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities, the Company shall: (i) Use its best efforts to keep such Registration Statement continuously effective during the period required by this Agreement; upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, in the case of clause (A), correcting any such misstatement or omission, and, in the case of either clause (A) or (B), use its reasonable best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purposes as soon as practicable thereafter. Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that it is in the best interests of the Company not to disclose the existence of or facts surrounding any proposed or pending material corporate transaction involving the Company, the Company may allow the Shelf Registration Statement to fail to be effective and usable as a result of such nondisclosure for (1) a period not to exceed 30 days in any three month period or (2) two periods not to exceed an aggregate of 60 days in any twelve month period. 4 (ii) Prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the period set forth in Section 2(a)(ii) hereof or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and to comply fully with the applicable provisions of Rules 424 and 430A under the Securities Act in a timely manner; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus. (iii) Advise the underwriter(s), if any, and selling holders promptly (but in any event within two Business Days) and, if requested by such Persons, to confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Securities Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (iv) Furnish to each of the selling holders and each of the underwriter(s), if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including, upon request in writing, all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review of such holders and underwriter(s), if any, for a period of at least three Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which a selling holder of Transfer Restricted Securities covered by such Registration Statement or the underwriter(s), if any, shall, upon advice of its counsel, reasonably object within three Business Days after the receipt thereof. 5 A selling holder or underwriter, if any, shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission. (v) Promptly before the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, (A) provide copies of such document to the selling Holders and to the underwriter(s), if any, (B) make the Company's representatives available for discussion of such document and other customary due diligence matters, and (C) include such information in such document before the filing thereof as such selling Holders or underwriter(s), if any, reasonably may request. (vi) Make available at reasonable times for inspection by the selling Holders, any underwriter participating in any distribution pursuant to such Registration Statement, and any attorney or accountant retained by such selling Holders or any of the underwriter(s), all financial and other records, pertinent corporate documents and properties of the Company and cause the Company's officers, directors, managers and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement after the filing thereof and before its effectiveness. (vii) If requested by any selling Holders or the underwriter(s), if any, promptly incorporate in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (viii) Furnish to each selling Holder and each of the underwriter(s), if any, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference). (ix) Deliver to each selling Holder and each of the underwriter(s), if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto. (x) Whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, the Company shall: (A) upon request, furnish to each selling Holder and each underwriter, if any, in such substance and scope as they may reasonably request and as are 6 customarily made by issuers to underwriters in primary underwritten offerings, upon the date of effectiveness of the Shelf Registration Statement: (1) a certificate, dated the date of effectiveness of the Shelf Registration Statement, signed by (y) the President and (z) the Chief Financial Officer of the Company confirming, as of the date thereof, the matters set forth in Section 5(b) of the Purchase Agreement and such other matters as such parties may reasonably request; (2) an opinion, dated the date of effectiveness of the Shelf Registration Statement, of counsel for the Company covering the matters set forth in Section 5(a)(1) of the Purchase Agreement; and (3) customary comfort letters, dated as of the date of effectiveness of the Shelf Registration Statement from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters by underwriters in connection with primary underwritten offerings; (B) set forth in full or incorporate by reference in the underwriting agreement, if any, the indemnification provisions and procedures of Section 6 hereof with respect to all parties to be indemnified pursuant to said Section; and (C) deliver such other documents and certificates as may be reasonably requested by such parties to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the pursuant to this clause (xi). (xi) Before any public offering of Transfer Restricted Securities, cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders or underwriter(s), if any, may reasonably request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the Shelf Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process, in any jurisdiction where they are not now so subject. (xii) Cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and enable such Transfer Restricted Securities to be in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request at least two Business Days before any sale of Transfer Restricted Securities made by such underwriter(s). (xiii) Use its reasonable best efforts to cause the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other U.S. governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Securities. (xiv) Subject to Section 4(b)(i) above, if any fact or event contemplated by Section 4(b)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue 7 statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (xv) Cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter that is required to be retained in accordance with the rules and regulations of the NASD. (xvi) Otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) for the twelve-month period (A) commencing at the end of any fiscal quarter in which Transfer Restricted Securities are sold to underwriters in a firm or best efforts Underwritten Offering or (B) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement. (xvii) If required, cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement, and, in connection therewith, cooperate, with the trustee and the holders of Debentures to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its reasonable best efforts to cause the trustee thereunder to execute all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner. (xviii) Cause all Transfer Restricted Securities covered by the Registration Statement to be listed on each securities exchange on which securities of the same class issued by the Company are then listed. (xix) Provide promptly to each Holder upon written request each document filed with the Commission pursuant to the requirements of Section 13 and Section 15 of the Exchange Act after the Effective Date of the Registration Statement. (c) Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of any notice from the Company of the existence of any fact of the kind described in Section 4(b)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(b)(xv) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of such notice. 8 5. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses (including filings made by any Initial Purchasers or Holders with the NASD (and, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel that may be required by the rules and regulations of the NASD)); (ii) all reasonable fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company and, subject to Section 5(b) below, the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing of the Common Stock issued upon conversion of the Debentures on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance), but specifically excluding (a) fees and expenses of counsel to the underwriter(s), if any (other than fees and expenses set forth in clauses (i) and (ii) above), (b) underwriting discounts and commissions and (c) transfer fees and taxes if any, relating to the sale and disposition of Transfer Restricted Securities by a selling Holder. The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with any Registration Statement required by this Agreement, the Company will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities being registered pursuant to the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel chosen by the Holders of a majority in principal amount of Debentures and in number of shares of Common Stock issued upon conversion thereof for whose benefit such Registration Statement is being prepared. 6. Indemnification and Contribution. (a) The Company and the Subsidiaries (as defined in the Purchase Agreement), jointly and severally, agree to indemnify and hold harmless: (i) each Holder; (ii) each person, if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) any Holder (any of the persons referred to in this clause (ii) being referred to as a "controlling person"); and (iii) the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii), or (iii) may hereinafter be referred to as an "Indemnified Holders"), against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Holder may become subject under the Securities Act, the Exchange Act or otherwise, insofar as any such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in (A) in any Registration Statement or Prospectus or in any amendment or supplement thereto or (B) any application or 9 other document, or any amendment or supplement thereto, executed by the Company or any Subsidiary or based upon written information furnished by or on behalf of the Company or any Subsidiary filed in any jurisdiction in order to qualify the Common Stock issued upon conversion of the Debentures under the securities or "Blue Sky" laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or (ii) the omission or alleged omission to state, in such Registration Statement or Prospectus or any amendment or supplement thereto, or in any Application, a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and will reimburse, as incurred, each Indemnified Holder for any legal or other expenses reasonably incurred by such Indemnified Holder or controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, neither the Company nor any of the Subsidiaries will be liable in any such case to the extent that any such loss, claim, damage, or liability is finally judicially determined to arise out of or be based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement or Prospectus or amendment or supplement thereto or Application in reliance upon and in conformity with written information furnished to the Company through the Holders by or on behalf of any Holder (or its related Indemnified Holder) specifically for use therein. This indemnity agreement will be in addition to any liability that the Company and the Subsidiaries may otherwise have to the Indemnified Holders. The Company and the Subsidiaries shall not be liable under this Section 6 for any settlement of any claim or action effected without their consent, which shall not be unreasonably withheld. (b) Each Holder, severally and not jointly, will indemnify and hold harmless each of the Company and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company or any such controlling person may become subject under the Securities Act, the Exchange Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or the Prospectus or any amendment or supplement thereto or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through the Holders by or on behalf of any Holder or its related Indemnified Holder specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses incurred by the Company or any controlling person in connection with investigating or defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability that any Holder may otherwise have to the indemnified parties. No Holder shall be liable under this Section 6 for any settlement of any claim or action effected without its consent, which shall not 10 be unreasonably withheld. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of Transfer Restricted Securities giving rise to such indemnification obligation. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action for which such indemnified party is entitled to indemnification under this Section 6, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party (i) will not relieve it from any liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraphs (a) and (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it and other indemnified parties that are different from or additional to those available to the indemnifying party or (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action, then, in each such case, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Holders in the case of paragraph (a) of this Section 6 or the Company in the case of paragraph (b) of this Section 6, representing the indemnified parties under such paragraph (a) or paragraph (b), as the case may be, who are parties to such action or actions) or (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such 11 indemnified party waived in writing its rights under this Section 6, in which case the indemnified party may effect such a settlement without such consent. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 6 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the Company and the Subsidiaries on the one hand and any Holder on the other from such Holder's sale of Transfer Restricted Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Company and the Subsidiaries on the one hand and such Holder on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative fault of the parties 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 information supplied by the Company or the Subsidiaries on the one hand or such Holder on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company, the Subsidiaries and each Holder of Transfer Restricted Securities agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). Notwithstanding the provisions of this Section 6(d), none of the Holders (or any of their related Indemnified Holders) shall be required to contribute any amount in excess of the amount by which the total discount received by such Holder with respect to the Common Stock issued upon conversion thereof exceeds the amount of any damages which such Holder 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. For purposes of this paragraph (d), each person, if any, who controls any Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Holder, and each person, if any, who controls the Company or any Subsidiary within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. 7. Rule 144A. The Company hereby agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding, to make available to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities from such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A. 12 8. Participation in Underwritten Registrations. No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lockup letters and other documents required under the terms of such underwriting arrangements. 9. Selection of Underwriters. The Holders of Transfer Restricted Securities covered by the Shelf Registration Statement who desire to do so may sell such Transfer Restricted Securities in an Underwritten Offering. In any such 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 number of shares of Common Stock included in such offering; provided, that such investment bankers and managers must be reasonably satisfactory to the Company. 10. Miscellaneous. (a) Remedies. The Company agrees that monetary damages (including the Liquidated Damages contemplated hereby) would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement other than with respect to Registration Defaults and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The Company has not previously entered into any agreement granting any registration rights with respect to their securities to any Person which rights conflict with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. This Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of a majority in number of shares of Common Stock as issuable upon conversion of the Debentures, as the case may be. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture or the transfer agent of the Common Stock, as the case may be; and 13 (ii) if to the Company: Key Energy Group, Inc. 255 Livingston Avenue New Brunswick, New Jersey 08901 With a copy to: Sullivan & Worcester, LLP One Post Office Square Boston, Massachusetts 02109 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered, five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. (a) 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 limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Securities from such Holder. (b) Counterparts. This Agreement may be executed in any number of counterparts 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. (c) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (d) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (e) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (f) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to 14 the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [SIGNATURE PAGE FOLLOWS] 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. KEY ENERGY GROUP, INC. By: MCMAHAN SECURITIES CO. L.P. By: RAUSCHER PIERCE REFSNES, INC. By: 16 EX-21 16 SUBSIDIARIES OF THE REGISTRANT Key Energy Group, Inc. Subsidiaries of the Registrant Yale E. Key, Inc. Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling Odessa Exploration, Inc. WellTech Eastern, Inc. EX-27 17 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1996 JUN-30-1996 4,211 0 20,570 0 1,957 27,481 96,127 (8,920) 126,222 24,339 0 1,041 0 0 32,763 126,222 4,175 66,478 1,350 60,903 0 0 2,477 5,575 1,888 3,586 0 0 0 3,586 0.45 0.44
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