-----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, P0KFnqnb+j3z0LDq30U28z187ToYrwcoZtf+i5cwYhid6vHehCPPypXv4+OnxlN2 VpZ2OnfCCKqKN5nE28sL/g== 0000931763-02-000575.txt : 20020415 0000931763-02-000575.hdr.sgml : 20020415 ACCESSION NUMBER: 0000931763-02-000575 CONFORMED SUBMISSION TYPE: T-3 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20020305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST ROYALTIES INC CENTRAL INDEX KEY: 0000821699 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751917432 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: T-3 SEC ACT: 1939 Act SEC FILE NUMBER: 022-28574 FILM NUMBER: 02567449 BUSINESS ADDRESS: STREET 1: 407 N BIG SPRING STREET SUITE 300 CITY: MIDLAND STATE: TX ZIP: 79701 BUSINESS PHONE: 9156869927 MAIL ADDRESS: STREET 1: 407 N BIG SPRING STREET SUITE 300 CITY: MIDLAND STATE: TX ZIP: 79701 T-3 1 dt3.txt FORM T-3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-3 APPLICATION FOR QUALIFICATION OF INDENTURE UNDER THE TRUST INDENTURE ACT OF 1939 SOUTHWEST ROYALTIES, INC. (Name of Applicant) 407 North Big Spring Midland, Texas 79701 (Address of Principal Executive Offices) SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED TITLE OF CLASS AMOUNT Senior Secured Notes due 2004 Up to $60,000,000 aggregate principal amount at maturity APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable following the qualification of the indenture covered hereby under the Trust Indenture Act of 1939, as amended. NAME AND ADDRESS OF AGENT FOR SERVICE: WITH COPIES SENT TO: Bill E. Coggin J. Porter Durham, Jr., Esq. Southwest Royalties, Inc. Baker, Donelson, Bearman & Caldwell 407 North Big Spring 1800 Republic Centre Midland, Texas 79701 633 Chestnut Street Chattanooga, Tennessee 37450-1800 The Applicant hereby amends this Application for Qualification on such date or dates as may be necessary to delay effectiveness until (i) the 20th day after the filing of an amendment which specifically states that it shall supersede this Application for Qualification or (ii) such date as the Securities and Exchange Commission, acting pursuant to Section 307(c) of the Trust Indenture Act of 1939, may determine upon the written request of the Applicant. 1. GENERAL INFORMATION (a) The applicant is a corporation. (b) The applicant is organized under the laws of the State of Delaware. 2. SECURITIES ACT EXEMPTION APPLICABLE Pursuant to the Offer to Exchange and Consent Solicitation Statement, dated March 4, 2002 (the "Statement"), a copy of which is filed as Exhibit T3E(1) hereto, and the related letter of transmittal and consent (the "Letter of Transmittal"), a copy of which is filed as Exhibit T3E(2) hereto (which, together with the Statement, constitute the "Exchange Offer"), Southwest Royalties, Inc. (the "Company") has proposed to exchange all of its outstanding 10 1/2% Senior Notes due 2004 (the "Old Notes") for up to 900,000 shares of Class A Common Stock ("Class A Common Stock") and up to $60,000,000 aggregate principal amount at maturity of Senior Secured Notes due 2004 (the "New Notes") to be issued by the Company under the indenture to be qualified hereby. As the New Notes are proposed to be offered for exchange by the Company with its existing securityholders exclusively and solely for outstanding securities of the Company, the transaction is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the provisions of Section 3(a)(9) thereof. There have not been, and there will not be, any sales of the New Notes or Class A Common Stock by the Company (other than sales pursuant to the Exchange Offer) or by or through an underwriter at or about the same time as the Exchange Offer. The Company has not retained any dealer-manager or similar agent in connection with the Exchange Offer. The Company has retained Friedman Billings & Ramsey ("FBR"), an investment banking firm, as its financial advisor in connection with the Exchange Offer. FBR has not been retained to solicit any holders pursuant to the Exchange Offer or to render any opinion as to the fairness of the Exchange Offer to the Company or to the holders of Old Notes. For its services as financial advisor, FBR is entitled to receive a fixed fee, regardless of whether or not the Exchange Offer is consummated. In addition, FBR is to be reimbursed for certain out-of-pocket expenses. The Company has appointed Wilmington Trust Company (the "Depositary") as the Depositary in connection with the Exchange Offer. The Company has agreed to reimburse the Depositary for their reasonable out-of-pocket expenses in connection therewith. The Company will pay remuneration to the legal advisors of the Company and those of certain holders of the Old Notes for the provision of legal services. The Company will also reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in forwarding copies of the Statement and related documents to the beneficial owners of Old Notes and in handling or forwarding tenders on behalf of their customers. Officers, directors and employees of the Company may engage in the solicitation of holders of Old Notes in connection with the Exchange Offer, but such employees will receive no additional compensation for such activities. No consideration has been, or will be given, directly or indirectly, to any broker, dealer, salesman or other person for soliciting exchanges of the Old Notes. No holder of the outstanding Old Notes has made or will be requested to make any cash payment to the Company in connection with the Exchange Offer other than payment of any applicable taxes, in accordance with the terms of the Statement and Letter of Transmittal. AFFILIATIONS 3. AFFILIATES (a) The Company, directly or indirectly, owns 100% of the voting stock of each of the following entities:
Name State of Incorporation ---- ---------------------- Blue Heel Corporation Delaware
For purposes of this Application, the officers and directors of the Company named in response to Item 4 hereof may be deemed affiliates of the Company by virtue of the positions held by such persons with the Company. In addition, Southwest Royalties Holdings, Inc. ("SRH"), listed in Item 5 of this Application, is an affiliate of the Company. H.H. Wommack, III, a director, president and chief executive offer of the Company, own approximately 73% of SRH. (b) To the Company's knowledge, upon consummation of the Exchange Offer, assuming 100% of the aggregate principal amount of the Old Notes is tendered, the following entities will be affiliates of the Company: Franklin Mutual Advisors, LLC, will be an affiliate of the Company with an ownership interest of approximately 24.9% of the Company; Alliance Capital Management Corporation will be an affiliate of the Company with an ownership interest of approximately 11.8% of the Company; Credit Suisse Asset Management, LLC will be an affiliate of the Company with approximately 13.04% ownership of the Company; Regiment Capital Management LLC, through itself and entities it controls, will be an affiliate of the Company with approximately 13.55% ownership of the Company; and Southwest Royalties Holdings, Inc. will be an affiliate of the Company with an ownership interest of approximately 25% of the Company. 2 MANAGEMENT AND CONTROL 4. DIRECTORS AND EXECUTIVE OFFICERS The following table lists the name of each director and executive officer of the Company and the office or offices held by each such person./1/ The address of each person listed below is c/o Southwest Royalties, Inc., 407 North Big Spring, Midland, Texas 79701.
NAME OFFICE H. H. Wommack, III President and Chief Executive Officer; Director Bill E. Coggin Vice President and Chief Financial Officer J. Steven Person Vice President, Marketing H. Allen Corey Secretary and Director Paul L. Morris Director
(1) Four members to be elected to the board by holders of shares of Class A Common Stock will be appointed as directors upon consummation of the Exchange Offer. 5. PRINCIPAL OWNERS OF VOTING SECURITIES (a) The following table sets forth certain information with respect to the ownership of the Company's voting securities by persons known by the Company to own 10% or more of any class of such voting securities as of February 20, 2002.
TITLE OF AMOUNT % OF VOTING NAME/ADDRESS CLASS OWNED OWNED SECURITIES OWNED Southwest Royalties Holdings, Inc. 407 North Big Spring Midland, Texas 79701 Common Stock 100 100%
(b) To the Company's knowledge, as of the date of consummation of the Exchange Offer, assuming 100% of the aggregate principal amount of the Old Notes is tendered, the following table sets forth certain information with respect to ownership of the Company's voting securities by persons whom the Company reasonably believes will own 10% or more of any class of voting securities.
TITLE OF AMOUNT % OF VOTING NAME/ADDRESS(1) CLASS OWNED OWNED SECURITIES OWNED Southwest Royalties Holdings, Inc. Common Stock 100,000 25% 407 North Big Spring Special Stock 200,000 Midland, Texas 79701 Franklin Mutual Advisers, LLC Class A Common Stock 299,116 24.9% 51 John F. Kennedy Parkway Short Hills, NJ 07078
3 Alliance Capital Management Class A Common Stock 141,882 11.8% Corporation 1345 Avenue of the Americas New York, NY 10105 Credit Suisse Asset Management, LLC Class A Common Stock 156,434 13.04% 466 Lexington Avenue New York, NY 10017 Regiment Capital Management, LLC Class A Common Stock 162,619/2/ 3.55% 70 Federal Street, 7th Floor Boston, MA 02110
(1) To the Company's knowledge, except as otherwise indicated herein, the persons named in the table have sole voting investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Includes shares held by entities of which Regiment Capital Management exercises control. 6. UNDERWRITERS (a) The name and complete mailing address of each person who, within three years prior to the date of filing this Application, acted as an underwriter of any securities of the Company which are outstanding on the date of filing this Application and the title of each class of the securities underwritten are as follows. None. (b) The New Notes are offered by the Company exclusively to its current noteholders in exchange for Old Notes pursuant to Section 3(a)(9) under the 1933 Act. Accordingly, the Company has not and will not retain an underwriter with respect to the issuance of the New Notes. CAPITAL SECURITIES 7. CAPITALIZATION (a) The authorized and outstanding capital stock and debt securities of the Company, as of February 20, 2002, were as follows:
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING Common Stock ................... 5,000,000 100 Preferred Stock ................ 5,000,000 None 10 1/2% Senior Notes due 2004... $200,000,000 $123,685,000/1/
(1) Reflects the aggregate principal amount at maturity of the outstanding Old Notes. (b) The authorized and outstanding capital stock and debt securities of the Company, upon the closing of the Exchange, will be as follows:
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING Common Stock................ 10,000,000 100,000 Class A Common Stock... 900,000 900,000
4 Special Stock............... 200,000 200,000 Preferred Stock............. 5,000,000 None Senior Subordinated Secured Notes due 2004.... $60,000,000/1/ $60,000,000/1/
(1) Reflects the aggregate principal amount at maturity of the outstanding New Notes. (c) Each share of Company common stock ("Common Stock") entitles its holder to one vote on all matters upon which the Company stockholders are entitled or permitted to vote, including the election of directors. There are no cumulative voting rights. The Common Stock has no preemptive rights or conversion rights nor are there any redemption or sinking fund provisions applicable to the Common Stock. There currently are no shares of Company preferred stock ("Preferred Stock") outstanding. The Company's Amended and Restated Certificate of Incorporation provides that the board of directors may authorize the issuance of one or more series of preferred stock having such rights, including voting, conversion and redemption rights, and such preferences, including dividend and liquidation preferences, as the board may determine without any further action by the stockholders of the Company. INDENTURE SECURITIES 8. ANALYSIS OF INDENTURE PROVISIONS The information set forth in the section of the Statement captioned "-- Terms of the New Notes" is incorporated herein by reference in response to this Item. A copy of the Statement is attached hereto as Exhibit T3E(1). 9. OTHER OBLIGORS The information set forth in the section of the Statement captioned "Guarantees and Collateral for Guarantees" is incorporated herein by reference in response to this Item. A copy of the Statement is attached hereto as Exhibit T3E(1). CONTENTS OF APPLICATION FOR QUALIFICATION. This Application for Qualification comprises: (a) Pages numbered 1 to 6 consecutively (b) The statement of eligibility and qualification on Form T-1 of Wilmington Trust, as trustee under the indenture to be qualified (c) The following exhibits in addition to those filed as part of the statement of eligibility and qualification of such trustee: Exhibit T3A- Amended and Restated Certificate of Incorporation of the Company Exhibit T3B- Amended and Restated By-Laws of the Company Exhibit T3C- Indenture between the Company and Wilmington Trust Company Exhibit T3D- Not applicable Exhibit T3E(1) Offer to Exchange and Consent Solicitation Statement, dated as of March 4, 2002. (2) Consent and Letter of Transmittal, accompanying the Offer to Exchange and Consent Solicitation Statement (3) Form of Note Exchange Agreement (4) Form of Stockholders Agreement (5) Form of New Note (6) Letter to Holders of Original Notes in Physical Form 5 (7) Letter to DTC Participants (8) Letter to Clients Exhibit T3F- Cross-reference sheet (included as part of Exhibit T3C) SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the applicant, Southwest Royalties, Inc., a corporation organized and existing under the laws of State of Delaware, has duly caused this Application to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Midland, and State of Texas on the 4th day of March, 2002. SOUTHWEST ROYALTIES, INC. By: /s/ H. H. Wommack, III -------------------------------------- Name: H. H. Wommack, III Title: President and Chief Executive Officer Attest: /s/ Bill E. Coggin - -------------------------------------- Name: Bill E. Coggin Title: Vice President and Chief Financial Officer 6 Registration No. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) WILMINGTON TRUST COMPANY (Exact name of trustee as specified in its charter) Delaware 51-0055023 (State of incorporation) (I.R.S. employer identification no.) Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 (Address of principal executive offices) Cynthia L. Corliss Vice President and Trust Counsel Wilmington Trust Company Rodney Square North Wilmington, Delaware 19890 (302) 651-8516 (Name, address and telephone number of agent for service) SOUTHWEST ROYALTIES, INC. (Exact name of obligor as specified in its charter) Delaware 75-1917432 (State of incorporation) (I.R.S. employer identification no.) 407 North Big Spring Midland, Texas 79701 (Address of principal executive offices) (Zip Code) Subordinated Secured Notes due 2004 (Title of the indenture securities) ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Deposit Insurance Co. State Bank Commissioner Five Penn Center Dover, Delaware Suite #2901 Philadelphia, PA (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each affiliation: Based upon an examination of the books and records of the trustee and upon information furnished by the obligor, the obligor is not an affiliate of the trustee. ITEM 16. LIST OF EXHIBITS. List below all exhibits filed as part of this Statement of Eligibility and Qualification. A. Copy of the Charter of Wilmington Trust Company, which includes the certificate of authority of Wilmington Trust Company to commence business and the authorization of Wilmington Trust Company to exercise corporate trust powers. B. Copy of By-Laws of Wilmington Trust Company. C. Consent of Wilmington Trust Company required by Section 321(b) of Trust Indenture Act. D. Copy of most recent Report of Condition of Wilmington Trust Company. Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wilmington Trust Company, a corporation organized and existing under the laws of Delaware, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Wilmington and State of Delaware on the 12th day of February, 2002. WILMINGTON TRUST COMPANY [SEAL] Attest: /s/ Steven M. Cimalore By: /s/ Bruce L. Bisson --------------------------------- ------------------------------ Assistant Secretary Name: Bruce L. Bisson Title: Vice President 2 EXHIBIT A AMENDED CHARTER Wilmington Trust Company Wilmington, Delaware As existing on May 9, 1987 Amended Charter or Act of Incorporation of Wilmington Trust Company Wilmington Trust Company, originally incorporated by an Act of the General Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which company was changed to "Wilmington Trust Company" by an amendment filed in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act of Incorporation of which company has been from time to time amended and changed by merger agreements pursuant to the corporation law for state banks and trust companies of the State of Delaware, does hereby alter and amend its Charter or Act of Incorporation so that the same as so altered and amended shall in its entirety read as follows: First: - The name of this corporation is Wilmington Trust Company. Second: - The location of its principal office in the State of Delaware is at Rodney Square North, in the City of Wilmington, County of New Castle; the name of its resident agent is Wilmington Trust Company whose address is Rodney Square North, in said City. In addition to such principal office, the said corporation maintains and operates branch offices in the City of Newark, New Castle County, Delaware, the Town of Newport, New Castle County, Delaware, at Claymont, New Castle County, Delaware, at Greenville, New Castle County Delaware, and at Milford Cross Roads, New Castle County, Delaware, and shall be empowered to open, maintain and operate branch offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market Street, and 3605 Market Street, all in the City of Wilmington, New Castle County, Delaware, and such other branch offices or places of business as may be authorized from time to time by the agency or agencies of the government of the State of Delaware empowered to confer such authority. Third: - (a) The nature of the business and the objects and purposes proposed to be transacted, promoted or carried on by this Corporation are to do any or all of the things herein mentioned as fully and to the same extent as natural persons might or could do and in any part of the world, viz.: (1) To sue and be sued, complain and defend in any Court of law or equity and to make and use a common seal, and alter the seal at pleasure, to hold, purchase, convey, mortgage or otherwise deal in real and personal estate and property, and to appoint such officers and agents as the business of the Corporation shall require, to make by-laws not inconsistent with the Constitution or laws of the United States or of this State, to discount bills, notes or other evidences of debt, to receive deposits of money, or securities for money, to buy gold and silver bullion and foreign coins, to buy and sell bills of exchange, and generally to use, exercise and enjoy all the powers, rights, privileges and franchises incident to a corporation which are proper or necessary for the transaction of the business of the Corporation hereby created. (2) To insure titles to real and personal property, or any estate or interests therein, and to guarantee the holder of such property, real or personal, against any claim or claims, adverse to his interest therein, and to prepare and give certificates of title for any lands or premises in the State of Delaware, or elsewhere. (3) To act as factor, agent, broker or attorney in the receipt, collection, custody, investment and management of funds, and the purchase, sale, management and disposal of property of all descriptions, and to prepare and execute all papers which may be necessary or proper in such business. (4) To prepare and draw agreements, contracts, deeds, leases, conveyances, mortgages, bonds and legal papers of every description, and to carry on the business of conveyancing in all its branches. (5) To receive upon deposit for safekeeping money, jewelry, plate, deeds, bonds and any and all other personal property of every sort and kind, from executors, administrators, guardians, public officers, courts, receivers, assignees, trustees, and from all fiduciaries, and from all other persons and individuals, and from all corporations whether state, municipal, corporate or private, and to rent boxes, safes, vaults and other receptacles for such property. (6) To act as agent or otherwise for the purpose of registering, issuing, certificating, countersigning, transferring or underwriting the stock, bonds or other obligations of any corporation, association, state or municipality, and may receive and manage any sinking fund therefor on such terms as may be agreed upon between the two parties, and in like manner may act as Treasurer of any corporation or municipality. (7) To act as Trustee under any deed of trust, mortgage, bond or other instrument issued by any state, municipality, body politic, corporation, association or person, either alone or in conjunction with any other person or persons, corporation or corporations. (8) To guarantee the validity, performance or effect of any contract or agreement, and the fidelity of persons holding places of responsibility or trust; to become surety for any person, or persons, for the faithful performance of 2 any trust, office, duty, contract or agreement, either by itself or in conjunction with any other person, or persons, corporation, or corporations, or in like manner become surety upon any bond, recognizance, obligation, judgment, suit, order, or decree to be entered in any court of record within the State of Delaware or elsewhere, or which may now or hereafter be required by any law, judge, officer or court in the State of Delaware or elsewhere. (9) To act by any and every method of appointment as trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity in the receiving, holding, managing, and disposing of any and all estates and property, real, personal or mixed, and to be appointed as such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian or bailee by any persons, corporations, court, officer, or authority, in the State of Delaware or elsewhere; and whenever this Corporation is so appointed by any person, corporation, court, officer or authority such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity, it shall not be required to give bond with surety, but its capital stock shall be taken and held as security for the performance of the duties devolving upon it by such appointment. (10) And for its care, management and trouble, and the exercise of any of its powers hereby given, or for the performance of any of the duties which it may undertake or be called upon to perform, or for the assumption of any responsibility the said Corporation may be entitled to receive a proper compensation. (11) To purchase, receive, hold and own bonds, mortgages, debentures, shares of capital stock, and other securities, obligations, contracts and evidences of indebtedness, of any private, public or municipal corporation within and without the State of Delaware, or of the Government of the United States, or of any state, territory, colony, or possession thereof, or of any foreign government or country; to receive, collect, receipt for, and dispose of interest, dividends and income upon and from any of the bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property held and owned by it, and to exercise in respect of all such bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property, any and all the rights, powers and privileges of individual owners thereof, including the right to vote thereon; to invest and deal in and with any of the moneys of the Corporation upon such securities and in such manner as it may think fit and proper, and from time to time to vary or realize 3 such investments; to issue bonds and secure the same by pledges or deeds of trust or mortgages of or upon the whole or any part of the property held or owned by the Corporation, and to sell and pledge such bonds, as and when the Board of Directors shall determine, and in the promotion of its said corporate business of investment and to the extent authorized by law, to lease, purchase, hold, sell, assign, transfer, pledge, mortgage and convey real and personal property of any name and nature and any estate or interest therein. (b) In furtherance of, and not in limitation, of the powers conferred by the laws of the State of Delaware, it is hereby expressly provided that the said Corporation shall also have the following powers: (1) To do any or all of the things herein set forth, to the same extent as natural persons might or could do, and in any part of the world. (2) To acquire the good will, rights, property and franchises and to undertake the whole or any part of the assets and liabilities of any person, firm, association or corporation, and to pay for the same in cash, stock of this Corporation, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired, and to exercise all the powers necessary or convenient in and about the conduct and management of such business. (3) To take, hold, own, deal in, mortgage or otherwise lien, and to lease, sell, exchange, transfer, or in any manner whatever dispose of property, real, personal or mixed, wherever situated. (4) To enter into, make, perform and carry out contracts of every kind with any person, firm, association or corporation, and, without limit as to amount, to draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments. (5) To have one or more offices, to carry on all or any of its operations and businesses, without restriction to the same extent as natural persons might or could do, to purchase or otherwise acquire, to hold, own, to mortgage, sell, convey or otherwise dispose of, real and personal property, of every class and description, in any State, District, Territory or Colony of the United States, and in any foreign country or place. (6) It is the intention that the objects, purposes and powers specified and clauses contained in this paragraph shall (except where otherwise expressed in 4 said paragraph) be nowise limited or restricted by reference to or inference from the terms of any other clause of this or any other paragraph in this charter, but that the objects, purposes and powers specified in each of the clauses of this paragraph shall be regarded as independent objects, purposes and powers. Fourth: - (a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is forty-one million (41,000,000) shares, consisting of: (1) One million (1,000,000) shares of Preferred stock, par value $10.00 per share (hereinafter referred to as "Preferred Stock"); and (2) Forty million (40,000,000) shares of Common Stock, par value $1.00 per share (hereinafter referred to as "Common Stock"). (b) Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors each of said series to be distinctly designated. All shares of any one series of Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends, if any, thereon shall be cumulative, if made cumulative. The voting powers and the preferences and relative, participating, optional and other special rights of each such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding; and, subject to the provisions of subparagraph 1 of Paragraph (c) of this Article Fourth, the Board of Directors of the Corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of a particular series of Preferred Stock, the voting powers and the designations, preferences and relative, optional and other special rights, and the qualifications, limitations and restrictions of such series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (2) The rate and times at which, and the terms and conditions on which, dividends, if any, on Preferred Stock of such series shall be paid, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other class of stock and whether such dividends shall be cumulative or non-cumulative; 5 (3) The right, if any, of the holders of Preferred Stock of such series to convert the same into or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock of the Corporation and the terms and conditions of such conversion or exchange; (4) Whether or not Preferred Stock of such series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, Preferred Stock of such series may be redeemed. (5) The rights, if any, of the holders of Preferred Stock of such series upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding-up, of the Corporation. (6) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such series; and (7) The voting powers, if any, of the holders of such series of Preferred Stock which may, without limiting the generality of the foregoing include the right, voting as a series or by itself or together with other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the Corporation if there shall have been a default in the payment of dividends on any one or more series of Preferred Stock or under such circumstances and on such conditions as the Board of Directors may determine. (c) (1) After the requirements with respect to preferential dividends on the Preferred Stock (fixed in accordance with the provisions of section (b) of this Article Fourth), if any, shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of section (b) of this Article Fourth), and subject further to any conditions which may be fixed in accordance with the provisions of section (b) of this Article Fourth, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amount, if any, (fixed in accordance with the provisions of section (b) of this Article Fourth), to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up, of the Corporation, the holders of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distribution to stockholders ratably in proportion 6 to the number of shares of Common Stock held by them respectively. (3) Except as may otherwise be required by law or by the provisions of such resolution or resolutions as may be adopted by the Board of Directors pursuant to section (b) of this Article Fourth, each holder of Common Stock shall have one vote in respect of each share of Common Stock held on all matters voted upon by the stockholders. (d) No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. (e) The relative powers, preferences and rights of each series of Preferred Stock in relation to the relative powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in section (b) of this Article Fourth and the consent, by class or series vote or otherwise, of the holders of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; provided, however, that the Board of Directors may provide in the resolution or resolutions as to any series of Preferred Stock adopted pursuant to section (b) of this Article Fourth that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock. (f) Subject to the provisions of section (e), shares of any series of Preferred Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the 7 Board of Directors. (g) Shares of Common Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (h) The authorized amount of shares of Common Stock and of Preferred Stock may, without a class or series vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon. Fifth: - (a) The business and affairs of the Corporation shall be conducted and managed by a Board of Directors. The number of directors constituting the entire Board shall be not less than five nor more than twenty-five as fixed from time to time by vote of a majority of the whole Board, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the whole Board shall be twenty-four until otherwise fixed by a majority of the whole Board. (b) The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. At the annual meeting of stockholders in 1982, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next annual election of directors. At such election, the stockholders shall elect a successor to such director to hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. (c) Notwithstanding any other provisions of this Charter or Act of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Charter or Act of Incorporation or the By-Laws of the Corporation), any director or the entire Board of Directors of the Corporation may be removed at any time without cause, but only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for 8 this purpose as one class) cast at a meeting of the stockholders called for that purpose. (d) Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Such nominations shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. Notice of nominations which are proposed by the Board of Directors shall be given by the Chairman on behalf of the Board. (e) Each notice under subsection (d) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of such nominee and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. (f) The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (g) No action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Sixth: - The Directors shall choose such officers, agents and servants as may be provided in the By-Laws as they may from time to time find necessary or proper. Seventh: - The Corporation hereby created is hereby given the same powers, rights and privileges as may be conferred upon corporations organized under the Act entitled "An Act Providing a General Corporation Law", approved March 10, 1899, as from time to time amended. Eighth: - This Act shall be deemed and taken to be a private Act. Ninth: - This Corporation is to have perpetual existence. 9 Tenth: - The Board of Directors, by resolution passed by a majority of the whole Board, may designate any of their number to constitute an Executive Committee, which Committee, to the extent provided in said resolution, or in the By-Laws of the Company, shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. Eleventh: - The private property of the stockholders shall not be liable for the payment of corporate debts to any extent whatever. Twelfth: - The Corporation may transact business in any part of the world. Thirteenth: - The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the By-Laws of the Corporation by a vote of the majority of the entire Board. The stockholders may make, alter or repeal any By-Law whether or not adopted by them, provided however, that any such additional By-Laws, alterations or repeal may be adopted only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class). Fourteenth: - Meetings of the Directors may be held outside of the State of Delaware at such places as may be from time to time designated by the Board, and the Directors may keep the books of the Company outside of the State of Delaware at such places as may be from time to time designated by them. Fifteenth: - (a) (1) In addition to any affirmative vote required by law, and except as otherwise expressly provided in sections (b) and (c) of this Article Fifteenth: (A) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder), which, after such merger or consolidation, would be an Affiliate (as hereinafter defined) of an Interested Stockholder, or (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $1,000,000 or more, or (C) the issuance or transfer by the Corporation or any Subsidiary (in one 10 transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $1,000,000 or more, or (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation, or (E) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder, or any Affiliate of any Interested Stockholder, shall require the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article Fifteenth as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (2) The term "business combination" as used in this Article Fifteenth shall mean any transaction which is referred to in any one or more of clauses (A) through (E) of paragraph 1 of the section (a). (b) The provisions of section (a) of this Article Fifteenth shall not be applicable to any particular business combination and such business combination shall require only such affirmative vote as is required by law and any other provisions of the Charter or Act of Incorporation or By-Laws if such business combination has been approved by a majority of the whole Board. (c) For the purposes of this Article Fifteenth: (1) A "person" shall mean any individual, firm, corporation or other entity. (2) "Interested Stockholder" shall mean, in respect of any business combination, any person (other than the Corporation or any Subsidiary) who or which as of the record date for the determination of stockholders entitled to notice of and to vote on such business combination, or immediately prior to the consummation of any such 11 transaction: (A) is the beneficial owner, directly or indirectly, of more than 10% of the Voting Shares, or (B) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than 10% of the then outstanding voting Shares, or (C) is an assignee of or has otherwise succeeded in any share of capital stock of the Corporation which were at any time within two years prior thereto beneficially owned by any Interested Stockholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (3) A person shall be the "beneficial owner" of any Voting Shares: (A) which such person or any of its Affiliates and Associates (as hereafter defined) beneficially own, directly or indirectly, or (B) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (C) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation. (4) The outstanding Voting Shares shall include shares deemed owned through application of paragraph (3) above but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options or otherwise. (5) "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 31, 1981. (6) "Subsidiary" shall mean any corporation of which a majority of any class of 12 equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 31, 1981) is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Investment Stockholder set forth in paragraph (2) of this section (c), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (d) majority of the directors shall have the power and duty to determine for the purposes of this Article Fifteenth on the basis of information known to them, (1) the number of Voting Shares beneficially owned by any person (2) whether a person is an Affiliate or Associate of another, (3) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in paragraph (3) of section (c), or (4) whether the assets subject to any business combination or the consideration received for the issuance or transfer of securities by the Corporation, or any Subsidiary has an aggregate fair market value of $1,000,000 or more. (e) Nothing contained in this Article Fifteenth shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Sixteenth: Notwithstanding any other provision of this Charter or Act of Incorporation or the By-Laws of the Corporation (and in addition to any other vote that may be required by law, this Charter or Act of Incorporation by the By-Laws), the affirmative vote of the holders of at least two-thirds of the outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) shall be required to amend, alter or repeal any provision of Articles Fifth, Thirteenth, Fifteenth or Sixteenth of this Charter or Act of Incorporation. Seventeenth: (a) a Director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Laws as the same exists or may hereafter be amended. (b) Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a Director of the Corporation existing hereunder with respect to any act or omission occurring prior to the time of such repeal or modification." 13 EXHIBIT B BY-LAWS WILMINGTON TRUST COMPANY WILMINGTON, DELAWARE As existing on February 20, 2000 BY-LAWS OF WILMINGTON TRUST COMPANY ARTICLE I Stockholders' Meetings Section 1. The Annual Meeting of Stockholders shall be held on the third Thursday in April each year at the principal office at the Company or at such other date, time, or place as may be designated by resolution by the Board of Directors. Section 2. Special meetings of all stockholders may be called at any time by the Board of Directors, the Chairman of the Board or the President. Section 3. Notice of all meetings of the stockholders shall be given by mailing to each stockholder at least ten (10) days before said meeting, at his last known address, a written or printed notice fixing the time and place of such meeting. Section 4. A majority in the amount of the capital stock of the Company issued and outstanding on the record date, as herein determined, shall constitute a quorum at all meetings of stockholders for the transaction of any business, but the holders of a small number of shares may adjourn, from time to time, without further notice, until a quorum is secured. At each annual or special meeting of stockholders, each stockholder shall be entitled to one vote, either in person or by proxy, for each share of stock registered in the stockholder's name on the books of the Company on the record date for any such meeting as determined herein. ARTICLE II Directors Section 1. The authorized number of directors that shall constitute the Board of Directors shall be fixed from time to time by or pursuant to a resolution passed by a majority of the Board within the parameters set by the Charter of the Bank. No more than two directors may also be employees of the Company or any affiliate thereof. Section 2. Except as provided in these Bylaws or as otherwise required by law, there shall be no qualifications for election or service as directors of the Company. In addition to any other provisions of these Bylaws, to be qualified for nomination for Election or appointment to the Board of Directors each person must have not attained the age of sixty nine years at the time of such election or appointment, provided however, the Nominating and Corporate Governance Committee may waive such qualification as to a particular candidate otherwise qualified to serve as a director upon a good faith determination by such committee that such a waiver is in the best interests of the Company and its stockholders. The Chairman of the Board of Directors shall not be qualified to continue to serve as a director upon the termination of his or her service in that office for any reason. Section 3. The class of Directors so elected shall hold office for three years or until their successors are elected and qualified. Section 4. The affairs and business of the Company shall be managed and conducted by the Board of Directors. Section 5. The Board of Directors shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members, or at the call of the Chairman of the Board of Directors or the President. Section 6. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors or by the President, and shall be called upon the written request of a majority of the directors. Section 7. A majority of the directors elected and qualified shall be necessary to constitute a quorum for the transaction of business at any meeting of the Board of Directors. Section 8. Written notice shall be sent by mail to each director of any special meeting of the Board of Directors, and of any change in the time or place of any regular meeting, stating the time and place of such meeting, which shall be mailed not less than two days before the time of holding such meeting. Section 9. In the event of the death, resignation, removal, inability to act, or disqualification of any director, the Board of Directors, although less than a quorum, shall have the right to elect the successor who shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred, and until such director's successor shall have been duly elected and qualified. Section 10. The Board of Directors at its first meeting after its election by the stockholders shall appoint an Executive Committee, a Trust Committee, an Audit Committee and a Compensation Committee, and shall elect from its own members a Chairman of the Board of Directors and a President who may be the same person. The Board of Directors shall also elect at such meeting a Secretary and a Treasurer, who may be the same person, may appoint at any time such other committees and elect or appoint such other officers as it may deem advisable. The Board of Directors may also elect at such meeting one or more Associate Directors. Section 11. The Board of Directors may at any time remove, with or without cause, any member of any Committee appointed by it or any associate director or officer elected by it 2 and may appoint or elect his successor. Section 12. The Board of Directors may designate an officer to be in charge of such of the departments or divisions of the Company as it may deem advisable. ARTICLE III Committees Section 1. Executive Committee (A) The Executive Committee shall be composed of not more than nine members who shall be selected by the Board of Directors from its own members and who shall hold office during the pleasure of the Board. (B) The Executive Committee shall have all the powers of the Board of Directors when it is not in session to transact all business for and in behalf of the Company that may be brought before it. (C) The Executive Committee shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members, or at the call of the Chairman of the Executive Committee or at the call of the Chairman of the Board of Directors. The majority of its members shall be necessary to constitute a quorum for the transaction of business. Special meetings of the Executive Committee may be held at any time when a quorum is present. (D) Minutes of each meeting of the Executive Committee shall be kept and submitted to the Board of Directors at its next meeting. (E) The Executive Committee shall advise and superintend all investments that may be made of the funds of the Company, and shall direct the disposal of the same, in accordance with such rules and regulations as the Board of Directors from time to time make. (F) In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Company by its directors and officers as contemplated by these By-Laws any two available members of the Executive Committee as constituted immediately prior to such disaster shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Company in accordance with the provisions of Article III of these By-Laws; and if less than three members of the Trust Committee is constituted immediately prior to such disaster shall be available for the transaction of its business, such Executive Committee shall also be empowered to exercise all of the powers reserved to the Trust Committee under Article III Section 2 hereof. In the 3 event of the unavailability, at such time, of a minimum of two members of such Executive Committee, any three available directors shall constitute the Executive Committee for the full conduct and management of the affairs and business of the Company in accordance with the foregoing provisions of this Section. This By-Law shall be subject to implementation by Resolutions of the Board of Directors presently existing or hereafter passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary Resolutions shall be suspended during such a disaster period until it shall be determined by any interim Executive Committee acting under this section that it shall be to the advantage of the Company to resume the conduct and management of its affairs and business under all of the other provisions of these By-Laws. Section 2. Audit Committee (A) The Audit Committee shall be composed of five members who shall be selected by the Board of Directors from its own members, none of whom shall be an officer of the Company, and shall hold office at the pleasure of the Board. (B) The Audit Committee shall have general supervision over the Audit Division in all matters however subject to the approval of the Board of Directors; it shall consider all matters brought to its attention by the officer in charge of the Audit Division, review all reports of examination of the Company made by any governmental agency or such independent auditor employed for that purpose, and make such recommendations to the Board of Directors with respect thereto or with respect to any other matters pertaining to auditing the Company as it shall deem desirable. (C) The Audit Committee shall meet whenever and wherever the majority of its members shall deem it to be proper for the transaction of its business, and a majority of its Committee shall constitute a quorum. Section 3. Compensation Committee (A) The Compensation Committee shall be composed of not more than five (5) members who shall be selected by the Board of Directors from its own members who are not officers of the Company and who shall hold office during the pleasure of the Board. (B) The Compensation Committee shall in general advise upon all matters of policy concerning the Company brought to its attention by the management and from time to time review the management of the Company, major organizational matters, including salaries and employee benefits and specifically shall administer the Executive Incentive Compensation Plan. 4 (C) Meetings of the Compensation Committee may be called at any time by the Chairman of the Compensation Committee, the Chairman of the Board of Directors, or the President of the Company. Section 4. Associate Directors (A) Any person who has served as a director may be elected by the Board of Directors as an associate director, to serve during the pleasure of the Board. (B) An associate director shall be entitled to attend all directors meetings and participate in the discussion of all matters brought to the Board, with the exception that he would have no right to vote. An associate director will be eligible for appointment to Committees of the Company, with the exception of the Executive Committee, Audit Committee and Compensation Committee, which must be comprised solely of active directors. Section 5. Absence or Disqualification of Any Member of a Committee (A) In the absence or disqualification of any member of any Committee created under Article III of the By-Laws of this Company, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. ARTICLE IV Officers Section 1. The Chairman of the Board of Directors shall preside at all meetings of the Board and shall have such further authority and powers and shall perform such duties as the Board of Directors may from time to time confer and direct. He shall also exercise such powers and perform such duties as may from time to time be agreed upon between himself and the President of the Company. Section 2. The Vice Chairman of the Board. The Vice Chairman of the ------------------------------- Board of Directors shall preside at all meetings of the Board of Directors at which the Chairman of the Board shall not be present and shall have such further authority and powers and shall perform such duties as the Board of Directors or the Chairman of the Board may from time to time confer and direct. Section 3. The President shall have the powers and duties pertaining to the office of the President conferred or imposed upon him by statute or assigned to him by the Board of Directors. In the absence of the Chairman of the Board the President shall have the powers 5 and duties of the Chairman of the Board. Section 4. The Chairman of the Board of Directors or the President as designated by the Board of Directors, shall carry into effect all legal directions of the Executive Committee and of the Board of Directors, and shall at all times exercise general supervision over the interest, affairs and operations of the Company and perform all duties incident to his office. Section 5. There may be one or more Vice Presidents, however denominated by the Board of Directors, who may at any time perform all the duties of the Chairman of the Board of Directors and/or the President and such other powers and duties as may from time to time be assigned to them by the Board of Directors, the Executive Committee, the Chairman of the Board or the President and by the officer in charge of the department or division to which they are assigned. Section 6. The Secretary shall attend to the giving of notice of meetings of the stockholders and the Board of Directors, as well as the Committees thereof, to the keeping of accurate minutes of all such meetings and to recording the same in the minute books of the Company. In addition to the other notice requirements of these By-Laws and as may be practicable under the circumstances, all such notices shall be in writing and mailed well in advance of the scheduled date of any other meeting. He shall have custody of the corporate seal and shall affix the same to any documents requiring such corporate seal and to attest the same. Section 7. The Treasurer shall have general supervision over all assets and liabilities of the Company. He shall be custodian of and responsible for all monies, funds and valuables of the Company and for the keeping of proper records of the evidence of property or indebtedness and of all the transactions of the Company. He shall have general supervision of the expenditures of the Company and shall report to the Board of Directors at each regular meeting of the condition of the Company, and perform such other duties as may be assigned to him from time to time by the Board of Directors of the Executive Committee. Section 8. There may be a Controller who shall exercise general supervision over the internal operations of the Company, including accounting, and shall render to the Board of Directors at appropriate times a report relating to the general condition and internal operations of the Company. There may be one or more subordinate accounting or controller officers however denominated, who may perform the duties of the Controller and such duties as may be prescribed by the Controller. Section 9. The officer designated by the Board of Directors to be in charge of the Audit Division of the Company with such title as the Board of Directors shall prescribe, shall 6 report to and be directly responsible only to the Board of Directors. There shall be an Auditor and there may be one or more Audit Officers, however denominated, who may perform all the duties of the Auditor and such duties as may be prescribed by the officer in charge of the Audit Division. Section 10. There may be one or more officers, subordinate in rank to all Vice Presidents with such functional titles as shall be determined from time to time by the Board of Directors, who shall ex officio hold the office Assistant Secretary of this Company and who may perform such duties as may be prescribed by the officer in charge of the department or division to whom they are assigned. Section 11. The powers and duties of all other officers of the Company shall be those usually pertaining to their respective offices, subject to the direction of the Board of Directors, the Executive Committee, Chairman of the Board of Directors or the President and the officer in charge of the department or division to which they are assigned. ARTICLE V Stock and Stock Certificates Section 1. Shares of stock shall be transferrable on the books of the Company and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 2. Certificates of stock shall bear the signature of the President or any Vice President, however denominated by the Board of Directors and countersigned by the Secretary or Treasurer or an Assistant Secretary, and the seal of the corporation shall be engraved thereon. Each certificate shall recite that the stock represented thereby is transferrable only upon the books of the Company by the holder thereof or his attorney, upon surrender of the certificate properly endorsed. Any certificate of stock surrendered to the Company shall be cancelled at the time of transfer, and before a new certificate or certificates shall be issued in lieu thereof. Duplicate certificates of stock shall be issued only upon giving such security as may be satisfactory to the Board of Directors or the Executive Committee. Section 3. The Board of Directors of the Company is authorized to fix in advance a record date for the determination of the stockholders entitled to notice of, and to vote at, any meeting of stockholders and any adjournment thereof, or entitled to receive payment of any dividend, or to any allotment or rights, or to exercise any rights in respect of any change, conversion or exchange of capital stock, or in connection with obtaining the consent of stockholders for any purpose, which record date shall not be more than 60 nor less than 10 days proceeding the date of any meeting of stockholders or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or 7 exchange of capital stock shall go into effect, or a date in connection with obtaining such consent. ARTICLE VI Seal Section 1. The corporate seal of the Company shall be in the following form: Between two concentric circles the words "Wilmington Trust Company" within the inner circle the words "Wilmington, Delaware." ARTICLE VII Fiscal Year Section 1. The fiscal year of the Company shall be the calendar year. ARTICLE VIII Execution of Instruments of the Company Section 1. The Chairman of the Board, the President or any Vice President, however denominated by the Board of Directors, shall have full power and authority to enter into, make, sign, execute, acknowledge and/or deliver and the Secretary or any Assistant Secretary shall have full power and authority to attest and affix the corporate seal of the Company to any and all deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes, mortgages and all other instruments incident to the business of this Company or in acting as executor, administrator, guardian, trustee, agent or in any other fiduciary or representative capacity by any and every method of appointment or by whatever person, corporation, court officer or authority in the State of Delaware, or elsewhere, without any specific authority, ratification, approval or confirmation by the Board of Directors or the Executive Committee, and any and all such instruments shall have the same force and validity as though expressly authorized by the Board of Directors and/or the Executive Committee. ARTICLE IX Compensation of Directors and Members of Committees Section 1. Directors and associate directors of the Company, other than salaried officers of the Company, shall be paid such reasonable honoraria or fees for attending meetings 8 of the Board of Directors as the Board of Directors may from time to time determine. Directors and associate directors who serve as members of committees, other than salaried employees of the Company, shall be paid such reasonable honoraria or fees for services as members of committees as the Board of Directors shall from time to time determine and directors and associate directors may be employed by the Company for such special services as the Board of Directors may from time to time determine and shall be paid for such special services so performed reasonable compensation as may be determined by the Board of Directors. ARTICLE X Indemnification Section 1. (A) The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person. The Corporation shall indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Corporation. (B) The Corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, -------- ------- that the payment of expenses incurred by a Director or officer in his capacity as a Director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Director or officer to repay all amounts advanced if it should be ultimately determined that the Director or officer is not entitled to be indemnified under this Article or otherwise. (C) If a claim for indemnification or payment of expenses, under this Article X is not paid in full within ninety days after a written claim therefor has been received by the Corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification of payment of expenses under applicable law. (D) The rights conferred on any person by this Article X shall not be exclusive of any other rights which such person may have or hereafter acquire under any 9 statute, provision of the Charter or Act of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (E) Any repeal or modification of the foregoing provisions of this Article X shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE XI Amendments to the By-Laws Section 1. These By-Laws may be altered, amended or repealed, in whole or in part, and any new By-Law or By-Laws adopted at any regular or special meeting of the Board of Directors by a vote of the majority of all the members of the Board of Directors then in office. 10 EXHIBIT C Section 321(b) Consent Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended, Wilmington Trust Company hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon requests therefor. WILMINGTON TRUST COMPANY Dated: February 12, 2002 By: /s/ Bruce L. Bisson ------------------------------ Name: Bruce L. Bisson Title: Vice President EXHIBIT D NOTICE This form is intended to assist state nonmember banks and savings banks with state publication requirements. It has not been approved by any state banking authorities. Refer to your appropriate state banking authorities for your state publication requirements. R E P O R T O F C O N D I T I O N Consolidating domestic subsidiaries of the WILMINGTON TRUST COMPANY of WILMINGTON - ---------------------------------------------------------- ------------------ Name of Bank City in the State of DELAWARE , at the close of business on September 30, 2001. ------------
ASSETS Thousands of dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coins ................................ 274,398 Interest-bearing balances .......................................................... 0 Held-to-maturity securities ................................................................. 15,956 Available-for-sale securities ............................................................... 1,177,116 Federal funds sold and securities purchased under agreements to resell ...................... 453,981 Loans and lease financing receivables: Loans and leases, net of unearned income............. 4,879,670 LESS: Allowance for loan and lease losses........... 73,439 LESS: Allocated transfer risk reserve............... 0 Loans and leases, net of unearned income, allowance, and reserve ................... 4,806,231 Assets held in trading accounts ............................................................. 0 Premises and fixed assets (including capitalized leases) .................................... 133,431 Other real estate owned ..................................................................... 668 Investments in unconsolidated subsidiaries and associated companies ......................... 1,605 Customers' liability to this bank on acceptances outstanding ................................ 0 Intangible assets: a. Goodwill ....................................................................... 217 b. Other intangible assets ........................................................ 4,230 Other assets ................................................................................ 161,671 Total assets ................................................................................ 7,029,504
CONTINUED ON NEXT PAGE LIABILITIES Deposits: In domestic offices ................................................................................... 5,443,431 Noninterest-bearing................. 1,067,087 Interest-bearing.................... 4,376,344 Federal funds purchased and Securities sold under agreements to repurchase ............................ 549,060 Trading liabilities (from Schedule RC-D) .............................................................. 0 Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases: ........ 390,810 Bank's liability on acceptances executed and outstanding .............................................. 0 Subordinated notes and debentures ..................................................................... 0 Other liabilities (from Schedule RC-G) ................................................................ 108,356 Total liabilities ..................................................................................... 6,491,657 EQUITY CAPITAL Perpetual preferred stock and related surplus ......................................................... 0 Common Stock .......................................................................................... 500 Surplus (exclude all surplus related to preferred stock) .............................................. 62,118 a. Retained earnings ................................................................................. 459,554 b. Accumulated other comprehensive income ............................................................ 15,675 Total equity capital .................................................................................. 537,847 Total liabilities, limited-life preferred stock, and equity capital ................................... 7,029,504
2 EX-99.(T3A) 3 dex99t3a.txt AMENDED & RESTATED CERTIFICATE OF INCORPORATION Exhibit T3A FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SOUTHWEST ROYALTIES, INC. Pursuant to the provisions of Section 242 of the Delaware General Corporation Law, the undersigned Corporation hereby adopts the following Amended and Restated Certificate of Incorporation. FIRST: The name of the Corporation is SOUTHWEST ROYALTIES, INC. SECOND: The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The Amended and Restated Certificate of Incorporation was approved by the Board of Directors of the Corporation on _________, 2002, and by written consent of the sole stockholder of the Corporation, dated ________, 2002. FIFTH: The aggregate number of shares of capital stock which the Corporation shall have authority to issue is 16,100,000 shares, of which (a) 10,000,000 shares shall be designated as common stock, $.01 par value per share ("Common Stock"), (b) 900,000 shares shall be designated as Class A common stock, $.01 par value per share ("Class A Common Stock"), (c) 200,000 shares shall be designated as special stock, $.01 par value per share ("Special Stock"), and (d) 5,000,000 shares shall be designated preferred stock, $1.00 par value per share ("Preferred Stock"). The manner in which the shares of common stock, $.10 par value per share (the "Old Common Stock"), issued and outstanding immediately prior to the filing (the "Filing") of this Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware shall be exchanged for the shares of Common Stock and Special Stock provided for in this Amended and Restated Certificate of Incorporation is as follows: All shares of Old Common Stock shall immediately after the Filing represent in the aggregate 100,000 shares of Common Stock and 200,000 shares of Special Stock and upon surrender of such certificate(s) representing such shares of issued and outstanding Old Common Stock to the Corporation, the Corporation shall issue to each holder of record a new certificate or certificates representing the appropriate number of shares of Common Stock and Special Stock. (a) The express terms and provisions of the Class A Common Stock are as follows: (1) Subject to the provisions of this ARTICLE FIFTH, each holder of shares of Class A Common Stock shall have one (1) vote for each share of such Class A Common Stock held by it and shall vote with the Common Stock with respect to all matters submitted to the stockholders for a vote; provided, however, in accordance with the terms of ARTICLE NINTH, holders of the Class A Common Stock shall be entitled to elect four of the seven members of the Corporation's Board of Directors but shall not be entitled to elect any other members to the board and shall not vote with the Common Stock with respect to the election of any of the three directors to be elected by the holders of the Common Stock and Special Stock; and provided, further, that in the event that the Special Stock of the Corporation is cancelled in accordance with this ARTICLE FIFTH, subsection (b)(3), then the holders of the Class A Common Stock shall be entitled to elect a fifth member to the Board of Directors, which director may be elected or appointed in accordance with the provisions of Article NINTH. (2) The shares of Class A Common Stock shall automatically convert into shares of Common Stock on the basis of one share of Common Stock for each share of Class A Common Stock issued and outstanding (a) immediately prior to (i) the closing of a firm commitment underwritten initial public offering by the Corporation of the Corporation's Common Stock resulting in the receipt by the Corporation of at least $10 million in net proceeds, pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, or (ii) any other transaction pursuant to which the Corporation's Common Stock becomes listed on a national securities exchange or authorized for quotation on an inter-dealer quotation system or (b) immediately after H.H. Wommack, III (i) no longer directly or indirectly has beneficial ownership of 50% or more of the outstanding shares of the Corporation's Common Stock and (ii) resigns, is removed or otherwise no longer serves as an executive officer of the Corporation (a "Wommack Control Event"). (3) Except as otherwise set forth herein, the rights, including voting rights, preferences and limitations of the shares of Class A Common Stock shall be identical to shares of Common Stock. (b) The express terms and provisions of the shares classified and designated as Special Stock are as follows: (1) Each holder of shares of Special Stock shall be entitled to one (1) vote per share of such Special Stock held by it and shall vote with the holders of the Common Stock with respect to all matters upon which the holders of Common Stock of the Corporation are entitled or permitted to vote; (2) If prior to or on October 3, 2003 the Corporation repurchases for cash all of its 10 1/2% senior secured notes due 2004 (the "New Notes"), shares of Special Stock then issued and outstanding shall automatically be converted into shares of Common Stock of the Corporation as of the closing of such repurchase on a basis of one share of Common Stock per each share of Special Stock issued and outstanding; 2 (3) In the event that prior to or on October 3, 2002 the Corporation either (i) fails to repurchase in full the New Notes or (ii) becomes subject to voluntary or involuntary bankruptcy, then, as of the earlier of such date or the date of filing of the voluntary or involuntary bankruptcy petition, the shares of Special Stock shall be deemed cancelled and shall be null and void and of no further effect. (c) The holders of shares of Special Stock and Class A Common Stock shall receive dividends, when and as declared by the Board of Directors, out of funds available for the payment of dividends, on a pro rata basis with the holders of shares of Common Stock. (d) In the event of the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the net assets of the Corporation shall be divided on a pro rata basis among the holders of Class A Common Stock and the Common Stock issued and outstanding as of such date, and the Special Stock shall not be entitled to any such distribution. (e) The Corporation may not split, divide or combine shares of Common Stock, Class A Common Stock or Special Stock unless, at the same time, the Corporation splits, divides or combines, as the case may be, the shares of the other classes of stock in the same proportion and manner. SIXTH: Subject to the limitations and in the manner provided by law, shares of Preferred Stock may be issued from time to time in series, and the Board of Directors of the Corporation is hereby authorized to establish and designate series of Preferred Stock, to fix the number of shares constituting each series, and to fix the designations and the relative rights, preferences and limitations of the shares of each series and the variations in the relative rights, preferences and limitations as between series, and to increase and to decrease the number of shares constituting each series. Subject to the limitations and in the manner provided by law, the authority of the Board of Directors of the Corporation with respect to each series shall include without limitation the authority to determine the following: (a) The designation of such series; (b) The number of shares initially constituting such series; (c) The increase, and the decrease to a number not less than the number of the outstanding shares of such series, of the number of shares constituting such series theretofore fixed; (d) The rate or rates and the times at which dividends on the shares of such series shall be paid, the form in which such dividends shall be paid or payable (which may include additional shares of capital stock of the Corporation) and whether or not such dividends shall be cumulative and, if such dividends shall be cumulative, the date or dates from and after which they shall accumulate; provided, however, that, if the stated dividends are not paid in full, the shares of all series of Preferred Stock ranking pari passu shall share ratably in the payment of dividends, including accumulations, if any, in accordance with the sums which would be payable on such shares if all dividends were declared and paid in full; 3 (e) Whether or not the shares of such series shall be redeemable and, if such shares shall be redeemable, the terms and conditions of such redemption, including but not limited to the date or dates upon or after which such shares shall be redeemable and the amount per share which shall be payable upon such redemption, which amount may vary under different conditions and at different redemption dates; (f) The amount payable on the shares of such series in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; (g) Whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law and, if such shares shall have such voting rights, the terms and conditions thereof, including but not limited to the right of the holders of such shares to vote as a separate class either alone or with the holders of shares of one or more other series of Preferred Stock and the right to have more than one vote per share; (h) Whether or not a sinking fund shall be provided for the redemption of the shares of such series and, if such a sinking fund shall be provided, the terms and conditions thereof; (i) Whether or not a purchase fund shall be provided for the shares of such series, and, if such a purchase fund shall be provided, the terms and conditions thereof; (j) Whether or not the shares of such series shall have conversion or exchange privileges, and, if such shares shall have conversion or exchange privileges, the terms and conditions of conversion or exchange, including but not limited to any provision for the adjustment of the conversion rate or the conversion price and whether conversion or exchange can be affected solely by the Corporation or the holder; and (k) Any other relative rights, preferences and limitations. SEVENTH: Election of directors need not be by written ballot. EIGHTH: Unless otherwise prohibited by law, in the event the Corporation has available funds to repurchase all of the New Notes for cash at par (the "Repurchase") from its Senior Credit Facility with Union Bank of California (the "Senior Credit Facility") and a new subordinated credit facility with a maturity date of June 30, 2005 or later (the "Subordinated Credit Facility") and the weighted average interest cost of the borrowed funds under the Senior Credit Facility and the Subordinated Credit Facility is 12% or less, then the Corporation must effect the Repurchase; provided, however, that the Board of Directors may by unanimous vote direct that the Corporation not effect the Repurchase, and, provided further, that the Corporation shall not effect the Repurchase if such Repurchase would cause the Corporation to become insolvent. Any repeal or modification to this ARTICLE EIGHTH shall require the vote of the holders of at least 66 2/3% of the outstanding shares of the Corporation's Common Stock and Class A Common Stock, voting as separate classes. 4 NINTH: (a) Subject to and in accordance with ARTICLE FIFTH, the Board of Directors shall consist of seven members. The initial members of the Board of Directors shall be __________, _______________, _______________ and _____________ [initial directors representing the Class A Common Shares will be inserted prior to the Closing of the Exchange] (who, along with their successors, are hereinafter designated as the "Class A Directors"), and H.H. Wommack, III, H. Allen Corey and Paul L. Morris (who, along with their successors, are hereinafter designated as the "Common Directors"). Class A Directors shall thereafter be elected by the holders of the Class A Common Stock and Common Directors shall thereafter be elected by the holders of the Common Stock and the Special Stock as set forth in the remainder of this ARTICLE NINTH; provided, however, that in the event that the shares of Class A Common Stock are converted into Common Stock, directors shall be elected or appointed in accordance with the provisions of this ARTICLE NINTH without regard to such designations. (b) In the event the Special Stock is cancelled pursuant to ARTICLE FIFTH (b)(3) and the holders of the Class A Common Stock become entitled to elect a fifth Class A Director in accordance with ARTICLE FIFTH (a)(1), then the number of members of the Board of Directors shall be increased to eight (8) and either the Class A Directors then serving may appoint or the holders of the Class A Common Stock may elect such fifth director as a Class A Director. (c) Any vacancy occurring in the Board of Directors by reason of the death, resignation, retirement, disqualification or removal from office of any Class A Director shall be filled by the remaining Class A Directors, and any vacancy occurring in the Board of Directors by reason of the death, resignation, retirement, disqualification or removal from office of any Common Director shall be filled by the remaining Common Directors. Each director elected to fill a vacancy shall serve until the expiration of the term of his predecessor or, if there is no predecessor, until the next succeeding annual meeting 5 and thereafter until his successor shall be duly elected and qualified, unless sooner displaced from office by resignation, removal or otherwise. (d) Notwithstanding any other provision of this Amended and Restated Certificate of Incorporation or the Amended and Restated By-Laws of the Corporation, any director of the Corporation may be removed at any time, but only by the affirmative vote of the holders of two-thirds of the outstanding shares of capital stock of the Corporation that were entitled to elect such director, cast at a meeting of the stockholders called for that purpose; provided, however, that within 120 days after the occurrence of a Wommack Control Event, any director or the entire Board of Directors of the Corporation may be removed with or without cause by the affirmative vote of the holders of a majority of the shares of outstanding capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class), cast at a meeting called for that purpose by the Board of Directors. TENTH: In furtherance of, and not in limitation of the powers conferred by statute, the Board of Directors is authorized to adopt, amend, or repeal bylaws of the Corporation by a majority vote at any regular or special meeting of the Board or by written consent. The stockholders of the Corporation may not adopt, amend or repeal any bylaw unless such action is approved by the affirmative vote of the holders of not less than two-thirds of the voting power of all of the outstanding shares of capital stock of the Corporation, voting as a single class. ELEVENTH: No director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article ELEVENTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. TWELFTH: The Corporation shall indemnify, to the fullest extent now or hereafter permitted by Delaware law, each officer, director or controlling person of the Corporation (any of the foregoing, an "indemnified person"), who was or is a party or is threatened to be made a party to, or is involved in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (any of the foregoing, a "proceeding"), by reason of the fact that the indemnified person, or a person of whom such indemnified person is the legal representative, is or was an officer, director or controlling person of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, 6 employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, partner, trustee, employee or agent or in any other capacity while serving as a director, officer, partner, trustee, employee or agent, against all expense, liability or loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the indemnified person in connection therewith, and such indemnification shall continue as to an officer, director, employee, agent or controlling person of the Corporation, and shall inure to the benefit of his or her heirs, executors and administrators. Expenses, including attorneys' fees incurred by an officer, director or controlling person of the Corporation, in defending any proceeding referred to in Article TWELFTH shall be paid by the Corporation, in advance of the final disposition of such proceeding, without requiring a preliminary determination of the ultimate entitlement to indemnification, upon the receipt of an undertaking by or on behalf of such indemnified person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article TWELFTH. This indemnification and advancement of expense provided under this Article TWELFTH shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, this Amended and Restated Certificate of Incorporation, any agreement, or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office. This Article TWELFTH shall be interpreted to allow indemnification, at the discretion of the Board of Directors, of employees and agents to the fullest extent allowable under Delaware law, as amended from time to time. The Corporation may maintain insurance, at its expense, to protect itself and each officer, director, employee, agent or controlling person of the Corporation, or any person serving at the request of the Corporation as the director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Delaware law. Neither the amendment nor repeal of this Article TWELFTH, nor the adoption or amendment of any other provision of this Certificate of Incorporation or the Bylaws of the Corporation inconsistent with this Article TWELFTH, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. Any amendment to this Article TWELFTH shall be valid only if approved by the unanimous vote of all of the members of the Board of Directors and by the affirmative vote of two-thirds of all of the votes entitled to be cast on the matter by stockholders. THIRTEENTH: This Amended and Restated Certificate of Incorporation may only be amended by the affirmative vote of the holders of at least two-thirds of the issued and 7 outstanding shares of capital stock of the Corporation entitled to vote thereon, voting as a single class. FOURTEENTH: This Amended and Restated Certificate of Incorporation shall become effective upon filing with the Secretary of State of Delaware. Southwest Royalties, Inc. has caused this Amended and Restated Certificate of Incorporation to be executed this _______ day of _____________, 2002. _____________________________________ H. H. Wommack, III President and Chief Executive Officer Attest: _____________________________________ H. Allen Corey, Secretary 8 EX-99.(T3B) 4 dex99t3b.txt AMENDED & RESTATED BY-LAWS EXHIBIT T3B FORM OF AMENDED AND RESTATED BY-LAWS OF SOUTHWEST ROYALTIES, INC. ARTICLE I OFFICES ------- Section 1. Registered Office. The registered office of Southwest Royalties, ----------------- Inc., a Delaware corporation (the "Corporation"), shall be located at 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. Section 2. Other Offices. The Corporation may also have offices and places ------------- of business at such other places, within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Time and Place. All meetings of stockholders shall be held at -------------- such time and place, whether within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. An annual meeting of stockholders shall be held -------------- on such date, not less than 60 nor more than 120 days after the end of the Corporation's last preceding fiscal year, or at such other time as the Board of Directors shall prescribe. At each annual meeting, the stockholders shall elect a Board of Directors in accordance with the Amended and Restated Certificate of Incorporation and transact such other business as may properly come before the meeting. Section 3. Special Meetings. Special meetings of the stockholders, for any ---------------- purpose or purposes, unless otherwise prescribed by statute or by the Amended and Restated Certificate of Incorporation, may be called by the Board of Directors, the Chairman of the Board, or the President. Special meetings of stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. The Secretary shall inform such stockholders of the reasonably estimated costs of preparing and mailing notice of the meeting and, upon payment to the Corporation by the stockholders of such costs, the Secretary shall give notice to each stockholder entitled to notice of the meeting. The business permitted to be conducted at any special meeting of stockholders is limited to the purpose or purposes specified by such order. Section 4. Notice of Meetings. Written notice of each meeting of ------------------ stockholders, stating the place, date and hour of the meeting, and in the case of a special meeting, specifying the purpose or purposes for which the meeting is called, and by or at whose direction such notice is being issued, shall be given in the manner prescribed by Article VI of these Amended and Restated By-laws to each stockholder entitled to vote thereat, not less than 10 nor more than 60 days prior to the meeting, unless a different period is prescribed by law. Section 5. Nominations and Proposals by Stockholders. ----------------------------------------- (a) Annual Meetings of Stockholders. ------------------------------- (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 5(a) and at the time of the annual meeting, who is entitled to vote at the meeting and, in the case of nominations of persons for election to the Board of Directors, who are entitled to vote for the election of the person nominated and who complied with the notice procedures set forth in this Section 5(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) (1) of this Section 5, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 45th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 45th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf 2 the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (b) Special Meetings of Stockholders. Only such business shall be -------------------------------- conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving notice provided for in this Section 5 (b) and at the time of the special meeting, who is entitled to vote at the meeting for the election of the person nominated and who complied with the notice procedures set forth in this Section 5 (b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a) (2) of this Section 5 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 45th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. (c) General. ------- (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 5 and, if any proposed nomination or business is not in compliance with this Section 5, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15 (d) of the Exchange Act. 3 (3) Notwithstanding the foregoing provisions of this Section 5, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 5. Nothing in this Section 5 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, nor the right of the Corporation to omit a proposal from, the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 6. Quorum. Except as otherwise provided by law or the Amended and ------ Restated Certificate of Incorporation, the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be necessary to and shall constitute a quorum for the transaction of business at all meetings of the stockholders. A quorum which is present to organize a meeting shall not be broken by the subsequent withdrawal of one or more stockholders. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than an announcement at the meeting of the place, date and hour of the adjourned meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted at the meeting which might have been transacted at the meeting as originally noticed; provided, that if any meeting if so adjourned for more than 30 days, or if after any such adjournment, a new record date is fixed for the adjourned meeting, a notice of the adjournment shall be given to each stockholder entitled to vote thereat. Section 7. Vote Required. At any meeting of stockholders at which a quorum ------------- is present, all elections of directors shall be determined by a plurality of the votes cast and all other matters shall be determined by the vote of the holders of a majority of the shares present in person or represented at such meeting and entitled to vote, unless the matter is one which by express provision of statute, the Amended and Restated Certificate of Incorporation or these Amended and Restated By-Laws a different vote is required, in which case such express provision shall govern and control the determination of such matter. Section 8. Voting. At any meeting of the stockholders every stockholder ------ having the right to vote shall be entitled to vote in person or by proxy. Except as otherwise provided by law or the Amended and Restated Certificate of Incorporation, each stockholder of record shall be entitled to one vote for every share of stock standing in his name on the books of the Corporation as of the record date for determining the stockholders entitled to notice of and to vote at such meeting. Section 9. Proxies. Every proxy must be executed in writing by the ------- stockholder or his duly authorized attorney-in-fact. No proxy shall be valid after the expiration of three years from the date thereof, unless a longer period is provided for in the proxy. Every proxy shall be revocable at the pleasure of the person executing it, or his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by law has been given. Section 10. List of Stockholders. A list of stockholders entitled to vote --------------------- at any meeting of stockholders shall be compiled and made available for examination by any stockholder at least 4 ten days before such meeting. The list shall be in alphabetical order and show the address of each stockholder and the number of shares by class registered in his name. Section 11. Inspectors. In advance of any meeting of stockholders, the ---------- Board of Directors shall appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. ARTICLE III DIRECTORS --------- Section 1. Board of Directors. The business and affairs of the Corporation ------------------ shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things on its behalf as are not, by statute or by the Amended and Restated Certificate of Incorporation or by these Amended and Restated By-laws, directed or required to be exercised or done by the stockholders. Section 2. Number; Election and Tenure. The number, election and tenure of --------------------------- members on the Board of Directors shall be set and established in accordance with the Amended and Restated Certificate of Incorporation. Section 3. Resignation and Removal. Any director may resign at any time by ----------------------- written notice to the Corporation. Subject to the rights of the holders of any one or more classes or 5 series of Preferred Stock issued by the Corporation, any director, or the entire Board of Directors of the Corporation may be removed in accordance with the terms of the Amended and Restated Certificate of Incorporation. Section 4. Vacancies. Any vacancy occurring in the Board of Directors by --------- reason of the death, resignation, retirement, disqualification or removal from office of any director shall be filled in accordance with the terms of the Amended and Restated Certificate of Incorporation. Section 5. Interested Directors. To the extent and under the circumstances -------------------- permitted by law of the State of Delaware, no contract or other transaction between the Corporation and one or more of its directors, or between the Corporation and any other corporation, firm, association or other entity in which one or more of its directors are directors or officers, or are financially interested, shall be either void or voidable for this reason alone, or by reason that such director or directors are present at the meeting of the Board, or of a committee thereof, which authorizes such contract or transaction, or that his or their votes are counted for such purpose. Except as otherwise provided by statute, common or interested directors may be counted in determining the presence of a quorum or at a meeting of the Board, or of a committee, which authorizes any such contract or transaction. Section 6. Compensation. The Board of Directors may from time to time fix ------------ the compensation of directors for their services in that capacity. The compensation of a director may consist of an annual fee or a fee for attendance at each regular or special meeting of the Board of which such director is a member or a combination of fees of both types; provided, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. The Board may also provide for the reimbursement to any director of expenses incurred in attending any meeting of the Board or any committee of the Board of which he is a member. ARTICLE IV MEETINGS OF THE BOARD --------------------- Section 1. Time and Place. The Board of Directors of the Corporation may -------------- hold meetings, both regular and special, at such time and place, within or without the State of Delaware, as shall be determined in accordance with these Amended and Restated By-laws. 6 Section 2. Annual Meeting. The annual meeting of the Board of Directors -------------- shall be held for the election of officers and any other business as soon as practicable after the adjournment of the annual meeting of stockholders, and no notice of such meeting to the newly elected directors (other than these Amended and Restated By-Laws) shall be necessary in order to constitute the meeting, provided a quorum shall be present. Section 3. Regular Meetings. Regular meetings of the Board of Directors may ----------------- be held without notice at such time and at such place as shall from time to time be determined in advance by the Board. Section 4. Special Meetings. Special meetings of the Board of Directors may ---------------- be called by the President, and, at the request of at least three directors, shall be called by the President or the Secretary. Notice of each special meeting of directors stating the time and place, and, if deemed appropriate by the person or persons by whom or at whose request the meeting is being called, the purpose or purposes thereof, shall be given to each director, in the manner provided in Article VI of these Amended and Restated By-Laws, at least 48 hours before such meeting. The time and place of any special meeting of directors may also be fixed by a duly executed waiver of notice thereof. Section 5. Quorum. At all meetings of the Board of Directors or of any ------ committee of the Board a majority of the whole Board then in office or a majority of the whole membership of the committee shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors or members of the committee present at the time of the vote if a quorum is present shall be the act of the Board of Directors or such committee, except as may be otherwise specifically provided by law, or by the Amended and Restated Certificate of Incorporation or these Amended and Restated By-Laws. If a quorum shall not be present at any meeting of the Board of Directors or any committee of the Board the members of the Board or any committee of the Board present thereat may adjourn the meeting from time to time, until a quorum shall be present. Section 6. Participation in Meetings by Telephone. Any one or more members -------------------------------------- of the Board of Directors or of any committee of the Board may participate in a meeting of the Board or committee by means of conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 7. Consents. Whenever by any provision of law or of the Amended and -------- Restated Certificate of Incorporation the vote of the Board of Directors or any committee thereof at any meeting thereof is required or permitted to be taken in connection with any corporate action, the meeting and the vote of the Board of Directors or such committee may be dispensed with, if all of the members of the Board of Directors or such committee who would have been entitled to vote upon the action if such meeting were held, shall consent in writing to such corporate action being taken. 7 ARTICLE V COMMITTEES OF THE BOARD ----------------------- Section 1. Designation. The Board of Directors, by resolution adopted by a ----------- majority of the whole Board, may designate from among its members one or more committees each consisting of one or more directors and having such title as the Board may consider to be properly descriptive of its function, each of which, to the extent provided in such resolution, shall have all the authority of the Board in the management of the business and affairs of the Corporation. However, no such committee shall have power or authority to: (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by law to be submitted to the stockholders for approval or (ii) adopt, amend or repeal any By-law. A majority of any such committee shall constitute a quorum and may determine its action, and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board may designate one or more directors as alternate members of any such committee who may replace any absent member or members of any meeting of such committee. Section 2. Tenure; Reports. Each such committee shall serve at the pleasure --------------- of the Board. It shall keep minutes of its meetings and report the same to the Board, and it shall observe such other procedures with respect to its meetings as are prescribed in these Amended and Restated By-Laws or, to the extent not prescribed herein, as may be prescribed by the Board in the resolution appointing such committee. ARTICLE VI NOTICES ------- Section 1. Form; Delivery. Notices to directors and stockholders shall be -------------- in writing and may be delivered personally or by mail. Notice by mail shall be deemed to be given at the time when deposited in the post office or a letter box, in a post-paid sealed wrapper, and addressed to directors or stockholders at their respective addresses appearing on the books or stock transfer records of the Corporation, unless any such director or stockholder shall have filed with the Secretary of the Corporation a written request that notices intended for him be mailed or delivered to some other address designated in such request. Notice to directors may also be given by telegram or by leaving the notice at the residence or usual place of business of a director. Section 2. Waiver of Notice. Whenever a notice is required to be given by ---------------- statute, the Amended and Restated Certificate of Incorporation or these Amended and Restated By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. Attendance of a person at a meeting of stockholders, directors or any committee of directors, as the case may be, shall constitute a waiver of notice of such meeting, except where the person is attending for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to 8 be transacted at, nor the purpose of, any regular meeting of stockholders, directors or committee of directors need be specified in any written waiver of notice. ARTICLE VII OFFICERS -------- Section 1. Executive Officers. The executive officers of the Corporation ------------------ shall be a President and a Secretary. The Corporation may also have a Chairman of the Board, Treasurer and one or more Vice Presidents, in which case the Chairman of the Board, the Treasurer and each Vice President shall also be an executive officer. Two or more offices, except those of President and Vice President and those of President and Secretary, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. The executive officers of the Corporation shall be elected annually by the Board of Directors at its first meeting following the meeting of stockholders at which the Board was elected. Section 2. Other Officers and Agents. The Board of Directors may also elect ------------------------- or may delegate to the President authority to appoint and remove, and to fix the duties, compensation and terms of office of one or more Assistant Vice Presidents, Assistant Treasurers and Assistant Secretaries, and such other officers and agents as the Board may at any time or from time to time determine to be advisable. Section 3. Tenure; Resignation; Removal; Vacancies. Each officer of the --------------------------------------- Corporation shall hold office until his successor is elected or appointed or until his earlier displacement from office by resignation, removal or otherwise; provided, that if the term of office of any officer elected or appointed pursuant to Section 2 of this Article shall have been fixed by the Board of Directors or by the President acting under authority delegated to him by the Board of Directors, he shall cease to hold such office no later than the date of expiration of such term, regardless of whether any other person shall have been elected or appointed to succeed him. Any officer may resign by written notice to the Corporation and may be removed for cause or without cause by the Board of Directors or by the President acting under authority delegated to him by the Board of Directors pursuant to Section 2 of this Article; provided, that any such removal shall be without prejudice to the rights, if any, of the officer so removed under any employment contract or other agreement with the Corporation. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors or by the President acting under authority delegated to him by the Board of Directors pursuant to Section 2 of this Article. Section 4. Compensation. The compensation of all officers of the ------------ Corporation shall be fixed by the Board of Directors or by the President acting under authority delegated to him by the Board of Directors pursuant to Section 2 of this Article. Section 5. Authority and Duties. All officers as between themselves and the -------------------- Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these Amended and Restated By-Laws, or, to the extent not 9 provided, as may be prescribed by the Board of Directors or by the President acting under authority delegated to him by the Board of Directors pursuant to Section 2 of this Article. Section 6. Chairman of the Board. The Chairman of the Board, if any, shall --------------------- preside at all meetings of the stockholders and directors. He shall also have such other powers and duties as may be assigned from time to time by the Board. Section 7. President. The President shall be the chief executive officer of --------- the of the Corporation. He shall have general and active management and control of the overall business and affairs of the Corporation, subject to the control of the Board. He shall see that all orders and resolutions of the Board are carried into effect and, in connection therewith, shall be authorized to delegate to other executive officers such of his powers and duties as he may deem advisable. In the absence or disability of the Chairman, he shall preside at all meetings of the stockholders and Board. He shall perform such other duties as the Board or Chairman may from time to time prescribe. Section 8. Vice-Presidents. The Vice-Presidents, in order of their --------------- seniority or in any other order determined by the Board of Directors shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall severally assist the President in the management of the business of the Corporation and the implementation of resolutions of the Board, and in the performance of such other duties as the President may from time to time prescribe. The duties of any assistant vice presidents shall be as set by the President. Section 9. Secretary. The Secretary shall attend all meetings of the Board --------- and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for any committees of the Board when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, Chairman of the Board or President, under whose supervision he shall act. He shall keep in safe custody the certificate books and stockholder records and such other books and records as the Board may direct and shall perform all other duties incident to the office of Secretary. Section 10. Assistant Secretaries. The Assistant Secretaries, if any, in --------------------- order of their seniority or in any other order determined by the Board shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors or the Secretary may from time to time prescribe. Section 11. Treasurer. The Treasurer shall have the care and custody of the --------- corporate funds, and other valuable effects, including securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as 10 may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board, President and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for such term, in such sum and with such surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 12. Assistant Treasurers. The Assistant Treasurers if any, in the -------------------- order of their seniority or in any other order determined by the Board, shall in the absence or disability of the Treasurer, perform the duties and exercise the power of the Treasurer and shall perform such other duties as the Board of Directors or the Treasurer shall prescribe. ARTICLE VIII STOCK CERTIFICATES ------------------ Section 1. Form and Signature of Stock Certificates. The certificates for ---------------------------------------- stock of the Corporation shall be in such form as shall be determined by the Board of Directors, and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall exhibit the registered holder's name and number and class of shares of stock, and shall be signed by the President or Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. Where any such certificate is countersigned by a transfer agent or registered by a registrar, the signature of any such officer may be a facsimile signature. In case any one or more of the officers who have signed, or whose facsimile signature or signatures were placed on any such certificate shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate is issued and delivered, it may nevertheless be issued and delivered by the Corporation with the same effect as if such officer or officers had continued in office. Section 2. Lost Certificates. The Board of Directors may direct that a new ------------------ stock certificate or certificates be issued in place of any certificate or certificates theretofore issued by the Corporation which have been mutilated or which are alleged to have been lost, stolen or destroyed, upon presentation of each such mutilated certificate or upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Registration of Transfer. Upon surrender to the Corporation or ------------------------- any transfer agent of the Corporation of a certificate for stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue or 11 cause its transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Stockholders. Except as otherwise provided by law, ----------------------- the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of stock to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of stock, and shall not be bound to recognize any equitable or legal claim to or interest in such stock on the part of any other person. Section 5. Record Date. For the purpose of determining the stockholders ----------- entitled to notice of, or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or to receive notice that any such corporate action was taken without a meeting or for the purpose of determining the stockholders entitled to receive payment of any dividend or the allotment of any rights, or to exercise any rights in respect of any conversion or exchange of stock or for the purpose of any other lawful action affecting the interests of stockholders, the Board of Directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall be not be more than 60 nor less than 10 days before the date of any such meeting nor more than 60 days before any such other actions. If no record date is fixed, (1) the record date for determining the stockholders entitled to notice of or to vote at a meeting shall be at the close of business on the day next preceding the date on which notice is given, or, if no notice is given, on the day next preceding the day on which the meeting is held; (2) the record date for determining the stockholders entitled to express written consent to the taking of any corporate action without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (3) the record date for determining stockholders for any purpose other than those specified in (1) and (2) shall be the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. ARTICLE IX INDEMNIFICATION --------------- The Corporation shall indemnify, to the fullest extent now or hereafter permitted by Delaware law, each officer, director, employee, agent or controlling person of the Corporation (any of the foregoing, an "indemnified person"), in accordance with the terms set forth in the Amended and Restated Certificate of Incorporation. 12 ARTICLE X GENERAL PROVISIONS ------------------ Section 1. Dividends and Distributions. Subject to all applicable --------------------------- requirements of law and to any applicable provisions of the Amended and Restated Certificate of Incorporation, these Amended and Restated By-Laws and any indenture or other agreement to which the Corporation is a party or by which it is bound, the Board of Directors may declare to be payable, in cash, in other property or in shares of the Corporation's stock of any class or series, such dividends and distributions upon or in respect of outstanding stock of the Corporation of any class or series as the Board may at any time or from time to time deem to be advisable. Before declaring any such dividend or distribution, the Board of Directors may cause to be set aside, out of any funds or other property or assets of the Corporation legally available for the payment of dividends or distributions, such sum or sums as the Board, in the absolute discretion of its members, may consider to be proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board may deem conducive to the interest of the Corporation, and the Board may modify or abolish any such reserve in the manner in which it was created. Section 2. Checks, Notes, etc. All checks or other orders for payment of ------------------ money and notes or other instrument evidencing indebtedness or obligations of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed ----------- and may from time to time be changed by resolution of the Board of Directors. Section 4. Seal. The Corporation shall not have a seal. ---- Section 5. Securities of other Corporations; Acting as General Partner. ----------------------------------------------------------- Unless otherwise ordered by the Board of Directors, the Chairman of the Board or President shall have full power and authority on behalf of the Corporation: (i) to attend and to act and to vote, or to execute proxies to vote, at any meetings of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock; and (ii) to exercise all rights of the general partner in any partnership of which the Corporation shall be a general partner. The Board of Directors may, by resolution, from time to time, confer like powers upon any other person or persons. Section 6. Power to Amend. These Amended and Restated By-Laws may be -------------- amended or repealed, and new by-laws may be adopted, in accordance with the terms of the Amended and Restated Certificate of Incorporation. 13 EX-99.(T3C) 5 dex99t3c.txt FORM OF INDENTURE Exhibit T3C SOUTHWEST ROYALTIES, INC. as Issuer $60,000,000 Senior Notes due 2004 THE GUARANTORS NAMED HEREIN _______________________________________ INDENTURE dated as of April _____, 2002 WILMINGTON TRUST COMPANY, as Trustee CROSS-REFERENCE TABLE
TIA Section Indenture Section 310(a)(1)........................................................7.10 (a)(2)................................................. 1.01, 7.10 (a)(3)........................................................N.A. (a)(4)........................................................N.A. (a)(5)..................................................7.08, 7.10 (b)...........................................7.08, 7.10, 10.02 (c)........................................................N.A. 3.11(a)........................................................7.11 (b)........................................................7.11 (c)........................................................N.A. 312(a)........................................................2.05 (b).......................................................10.03 (c).......................................................10.03 313(a)........................................................7.06 (b)(1)........................................................7.06 (b)(2)........................................................7.06 (c).................................................7.06, 10.02 (d)........................................................7.06 314(a)...........................................4.06, 4.08, 10.02 (b).......................................................11.02 (c)(1).......................................................10.04 (c)(2).......................................................10.04 (c)(3)........................................................N.A. (d)....................................................11.03(c) (e).......................................................10.05 (f)........................................................N.A. 315(a).....................................................7.01(b) (b).................................................7.05, 10.02 (c).....................................................7.01(a) (d).....................................................7.01(c) (e)........................................................6.11 3.16(a) (last sentence)...................................................2.09 (a)(1)(A)........................................................6.05 (a)(1)(B)........................................................6.04 (a)(2)........................................................N.A. (b)........................................................6.07 (c)........................................................9.04
i 317(a)(1)....................................................... 6.08 (a)(2)....................................................... 6.09 (b)....................................................... 2.04 318(a)....................................................... 10.01 (c)....................................................... 10.01
- -------------------------------------------------------------------------------- N.A. means Not Applicable Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS
Page ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions............................................................... 1 Section 1.02 Incorporation by Reference of TIA......................................... 18 Section 1.03 Rules of Construction..................................................... 19 ARTICLE TWO THE SENIOR NOTES Section 2.01 Form and Dating........................................................... 19 Section 2.02 Execution and Authentication; Aggregate Principal Amount.................. 20 Section 2.03 Registrar and Paying Agent................................................ 20 Section 2.04 Paying Agent to Hold Assets in Trust...................................... 21 Section 2.05 Holder Lists.............................................................. 21 Section 2.06 Transfer and Exchange..................................................... 21 Section 2.07 Replacement Notes......................................................... 22 Section 2.08 Outstanding Notes......................................................... 22 Section 2.09 Notes Deemed Not Outstanding.............................................. 23 Section 2.10 Temporary Notes........................................................... 23 Section 2.11 Cancellation.............................................................. 23 Section 2.12 Defaulted Interest........................................................ 23 Section 2.13 CUSIP Numbers............................................................. 24 Section 2.14 Deposit of Monies......................................................... 24 ARTICLE THREE REDEMPTION AND CONVERSION Section 3.01 Notices to Trustee........................................................ 25
Section 3.02 Selection of Notes to Be Redeemed..................................... 25 Section 3.03 Optional Redemption................................................... 25 Section 3.04 Mandatory Redemption.................................................. 26 Section 3.05 Notice of Redemption.................................................. 26 Section 3.06 Effect of Notice of Redemption........................................ 27 Section 3.07 Deposit of Redemption Price........................................... 27 Section 3.08 Notes Redeemed in Part................................................ 27 ARTICLE FOUR COVENANTS Section 4.01 Payment of Senior Notes; Authentication............................... 28 Section 4.02 Maintenance of Office or Agency....................................... 28 Section 4.03 Corporate Existence................................................... 28 Section 4.04 Payment of Taxes and Other Claims..................................... 29 Section 4.05 Maintenance of Properties and Insurance............................... 29 Section 4.06 Compliance Certificate; Financial Statements; Notice of Default....... 30 Section 4.07 Compliance with Laws.................................................. 31 Section 4.08 Reports to Holders.................................................... 32 Section 4.09 Waiver of Stay, Extension or Usury Laws............................... 32 Section 4.10 Limitation on Restricted Payments..................................... 32 Section 4.11 Limitation on Transactions with Affiliates............................ 34 Section 4.12 Limitation on Incurrence of Additional Indebtedness and Issuances of Disqualified Capital Stock............................... 35 Section 4.13 Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries................................................ 36 Section 4.14 Reserved.............................................................. 37 Section 4.15 Change of Control..................................................... 37
Section 4.16 Limitation on Asset Sales............................................ 39 Section 4.17 Limitation on Sale or Issuance of Capital Stock of Subsidiaries...... 41 Section 4.18 Limitations on Liens................................................. 41 Section 4.19 Limitation on Lines of Business...................................... 41 Section 4.20 Guarantees of Subsidiaries........................................... 42 ARTICLE FIVE SUCCESSOR CORPORATION Section 5.01 Merger, Consolidation and Sale of Assets............................. 42 Section 5.02 Successor Corporation Substituted.................................... 43 ARTICLE SIX REMEDIES Section 6.01 Events of Default.................................................... 44 Section 6.02 Acceleration......................................................... 45 Section 6.03 Other Remedies....................................................... 46 Section 6.04 Waiver of Past Defaults.............................................. 47 Section 6.05 Control by Majority.................................................. 47 Section 6.06 Limitation on Suits.................................................. 47 Section 6.07 Right of Holders to Receive Payment.................................. 48 Section 6.08 Collection Suit by Trustee........................................... 48 Section 6.09 Trustee May File Proofs of Claim..................................... 48 Section 6.10 Priorities........................................................... 49 Section 6.11 Undertaking for Costs................................................ 49 Section 6.12 Restoration of Rights and Remedies................................... 49 Section 6.13 Collateral Trust Agreement; Limitation Rights........................ 50
ARTICLE SEVEN TRUSTEE Section 7.01 Duties of Trustee.................................................... 50 Section 7.02 Rights of Trustee.................................................... 51 Section 7.03 Individual Rights of Trustee......................................... 52 Section 7.04 Trustee's Disclaimer................................................. 52 Section 7.05 Notice of Default.................................................... 53 Section 7.06 Reports by Trustee to Holders........................................ 53 Section 7.07 Compensation and Indemnity........................................... 53 Section 7.08 Replacement of Trustee............................................... 54 Section 7.09 Successor Trustee by Merger, Etc..................................... 55 Section 7.10 Eligibility; Disqualification........................................ 55 Section 7.11 Preferential Collection of Claims Against Company.................... 55 ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE Section 8.01 Satisfaction and Discharge of the Indenture; Legal Defeasance........ 56 Section 8.02 Application of Trust Money........................................... 58 Section 8.03 Repayment to the Issuer.............................................. 58 Section 8.04 Reinstatement........................................................ 58 ARTICLE NINE MODIFICATION OF THE INDENTURE Section 9.01 Without Consent of Holders........................................... 59 Section 9.02 With Consent of Holders.............................................. 59 Section 9.03 Compliance with TIA.................................................. 60 Section 9.04 Revocation and Effect of Consents.................................... 60 Section 9.05 Notation on or Exchange of Notes..................................... 60 Section 9.06 Trustee.............................................................. 61
ARTICLE TEN MISCELLANEOUS Section 10.01 TIA Controls............................................. 61 Section 10.02 Notices.................................................. 61 Section 10.03 Communications by Holders with Other Holders............. 63 Section 10.04 Certificate and Opinion as to Conditions Precedent....... 63 Section 10.05 Statements Required in Certificate or Opinion............ 63 Section 10.06 Rules by Trustee, Paying Agent, Registrar................ 64 Section 10.07 Legal Holidays........................................... 64 Section 10.08 Governing Law............................................ 64 Section 10.09 No Adverse Interpretation of Other Agreements............ 64 Section 10.10 No Personal Liability.................................... 65 Section 10.11 Successors............................................... 65 Section 10.12 Duplicate Originals...................................... 65 Section 10.13 Severability............................................. 65 Section 10.14 Independence of Covenants................................ 65 ARTICLE ELEVEN SECURITY Section 11.01 Security Documents....................................... 65 Section 11.02 Recording and Opinions................................... 66 Section 11.03 Release of Collateral.................................... 67 Section 11.04 Specified Releases of Collateral......................... 67 Section 11.05 Form and Sufficiency of Release.......................... 68 Section 11.06 Purchaser Protected...................................... 68 Section 11.07 Authorization of Actions to be Taken by the Collateral Agent and the Trustee Under the Security Documents....... 68
Section 11.08 Authorization of Receipt of Funds by the Trustee Under the Security Documents.................................. 69 ARTICLE TWELVE GUARANTEES Section 12.01 Unconditional Guarantees................................ 69 Section 12.02 Limitations on Guarantees............................... 71 Section 12.03 Execution and Delivery of Guarantees.................... 72 Section 12.04 Release of a Subsidiary Guarantor....................... 72 Section 12.05 Waiver of Subrogation................................... 73 Section 12.06 Immediate Payment....................................... 73 Section 12.07 No Set-Off.............................................. 73 Section 12.08 Obligations Absolute.................................... 74 Section 12.09 Obligations Continuing.................................. 74 Section 12.10 Obligations Not Reduced................................. 74 Section 12.11 Obligations Reinstated.................................. 74 Section 12.12 Obligations Not Affected................................ 74 Section 12.13 Waiver.................................................. 76 Section 12.14 No Obligation to Take Action Against the Issuer......... 76 Section 12.15 Dealing with the Issuer and Others...................... 76 Section 12.16 Default and Enforcement................................. 77 Section 12.17 Amendment, Etc.......................................... 77 Section 12.18 Acknowledgment.......................................... 77 Section 12.19 Costs and Expenses...................................... 77 Section 12.20 No Merger or Waiver; Cumulative Remedies................ 77 Section 12.21 Survival of Obligations................................. 77 Section 12.22 Guarantee in Addition to Other Obligations.............. 78
Section 12.23 Severability ............................................ 78 Section 12.24 Successors and Assigns .................................. 78
THIS INDENTURE, dated as of April ___, 2002, among SOUTHWEST ROYALTIES HOLDINGS, INC. (the "Company"), a Delaware corporation, as guarantor, MRO HOLDINGS, INC. ("MRO") a Delaware corporation, as guarantor, BLUE HEEL COMPANY ("Blue Heel"), a Delaware corporation, as guarantor, SOUTHWEST ROYALTIES, INC. (the "Issuer"), a Delaware corporation, as issuer, and WILMINGTON TRUST COMPANY (the "Trustee"), as Trustee. R E C I T A L S The Issuer has duly authorized the creation of an issue of Senior Notes due June 30, 2004, and, to provide therefor, the Company, the Issuer, Blue Heel and MRO have duly authorized the execution and delivery of this Indenture and the Guarantees contained herein. The Senior Notes, as defined, shall be secured by a lien and security interest in the Collateral, junior in priority only to Liens securing the Permitted Credit Facility and, solely with respect to the securities pledged pursuant to the MRO Pledge Agreement and the Company Pledge Agreement (as those terms are defined below), junior in priority to Liens securing the Junior Notes, subject to release of such Collateral as provided herein. The Guarantees, as defined, shall be supported by certain collateral, as well as a secondary pledge of Red Oak, Basic and Issuer Stock. All things necessary to make the Senior Notes, when duly issued and executed by the Issuer, authenticated and delivered hereunder, the valid obligations of the Issuer, and to make this Indenture a valid and binding agreement of the Issuer, the Company, Blue Heel and MRO have been done. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Senior Notes. ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions. As used in this Indenture (including the ----------- Recitals), the following terms have the following meanings: "Adjusted Consolidated Net Income" of the Issuer for any period means the Net Income (Loss) of the Issuer and its Subsidiaries for such period, determined in accordance with GAAP. "Adjusted Consolidated Net Tangible Assets" means (without duplication), as of the date of determination, (a) the sum of (i) discounted future net revenue from proved oil and gas reserves of the Issuer and its Subsidiaries calculated in accordance with Commission guidelines before any state or federal income taxes, as estimated or audited by independent petroleum engineers in one or more Reserve Reports prepared as of the date of determination, increased by the discounted future net revenue of (A) estimated proved oil and gas reserves of the Issuer and its Subsidiaries attributable to any acquisition consummated since the effective date of such year-end Reserve Reports and (B) estimated oil and gas reserves of the Issuer and its Subsidiaries attributable to extensions, discoveries and other additions and upward revisions of estimates of proved oil and gas reserves due to exploration, development or exploitation, production or other activities conducted or otherwise occurring since the effective date of such year-end Reserve Reports which, in the case of sub-clauses (A) and (B), would, in accordance with standard industry practice, result in such increases, in each case calculated in accordance with Commission guidelines (utilizing the prices utilized in such year-end Reserve Reports), and decreased by, as of the date of determination, the discounted future net revenue of (C) estimated proved oil and gas reserves of the Issuer and its Subsidiaries produced or disposed of since the effective date of such year-end Reports and (D) reductions in the estimated oil and gas reserves of the Issuer and its Subsidiaries since the effective date of such year-end Reserve Reports attributable to downward revisions of estimates of proved oil and gas reserves due to exploration, development or exploitation, production or other activities conducted or otherwise occurring since the effective date of such year-end Reserve Reports which would, in accordance with standard industry practice result in such reductions, in each case calculated in accordance with Commission guidelines (utilizing the prices utilized in such year-end Reserve Reports); provided that, in the case of each of the determinations made pursuant to sub-clauses (A) through (D) above, such increases and decreases shall be as estimated by the Issuer's engineers, except that if there is a Material Change and in connection with the incurrence of Indebtedness for which the Consolidated Fixed Charge Coverage Ratio must be determined, all or any part of an increase in discounted future net revenue resulting from the matters described in sub-clauses (A) and (B) above is needed to permit the incurrence of such Indebtedness, then the discounted future net revenue utilized for purposes of this clause (a)(i) shall be confirmed in writing by independent petroleum engineers, provided further that, if the events referred to in sub-clauses (C) and (D) above, when taken alone, would not cause a Material Change, then such written confirmation need only cover the incremental additions to discounted future net revenue resulting from the determinations made pursuant to sub-clauses (A) and (B) above to the extent needed to permit the incurrence of such Indebtedness, (ii) the capitalized costs that are attributable to oil and gas properties of the Issuer and its Subsidiaries to which no proved oil and gas reserves are attributed, based on the Issuer's books and records as of a date no earlier than the date of the Issuer's latest annual or quarterly financial statements, (iii) the Net Working Capital on a date no earlier than the date of the Issuer's latest annual or quarterly financial statements and (iv) the greater of (A) the net book value on a date no earlier than the date of the Issuer's latest annual or quarterly financial statements and (B) the appraised value, as estimated by independent appraisers, of other tangible assets (including the amount of Investments in unconsolidated Subsidiaries, Affiliates or other Persons) of the Issuer and its Subsidiaries, as of a date no earlier than the date of the Issuer's latest audited financial statements, minus (b) the sum of (i) minority interests, (ii) any non-current portion of gas balancing liabilities of the Issuer and its Subsidiaries reflected in the Issuer's latest annual or quarterly financial statements, (iii) the discounted future net revenue, calculated in accordance with Commission guidelines (utilizing the prices utilized in the Issuer's year-end Reserve Reports), attributable to reserves which are required to be delivered to third parties to fully satisfy the obligations of the Issuer and its Subsidiaries with respect to Production Payments on the schedules specified with respect thereto, (iv) the discounted future net revenue, calculated in accordance with Commission guidelines (utilizing the same prices utilized in the Issuer's initial or year-end Reserve Reports), attributable to reserves subject to participation interests, overriding royalty interests or other interests of third parties, pursuant to participation, partnership, vendor financing or other agreements then in effect, or which otherwise are required to be delivered to third parties and (v) the amount of environmental liabilities payable by the Issuer or any Subsidiary. If the Issuer changes its method of accounting from the full cost method to the successful efforts method or a similar method of accounting, 2 Adjusted Consolidated Net Tangible Assets will continue to be calculated as if the Issuer was still using the full cost method of accounting. "Affiliate" means, with respect to any Person, (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such Person or any officer, director, or employee of such Person or such other Person, (ii) the spouse, any immediate family member, or any other relative who has the same principal residence of any Person described in clause (i) above, and any Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with, such spouse, family member or other relative, and (iii) any trust in which any Person described in clause (i) or (ii), above, is a fiduciary or has a beneficial interest. For purposes of this definition, the term "control" means the beneficial ownership of 15% or more of the total voting power of the outstanding Voting Stock of such Person (on a fully diluted basis) or of warrants or other rights to acquire such equity (whether or not presently exercisable). For purposes of determining "control" with respect to the Issuer, all of the Issuer's common stock, Class A common stock and special stock shall be considered identical with respect to voting power. "Agent" means any Registrar, Paying Agent or co-Registrar. "Asset Sale" means (i) any direct or indirect conveyance, sale, transfer or other disposition (including through damage or destruction for which Insurance Proceeds are paid or by condemnation), in one transaction or a series of related transactions, of any of the properties, businesses or assets of the Issuer or any Subsidiary of the Issuer, whether owned on the Issue Date or thereafter acquired or (ii) any sale or other disposition by the Issuer of any Capital Stock of any Affiliate or any Subsidiary of the Issuer or its Subsidiaries. Notwithstanding the foregoing, the following will not be deemed to be an Asset Sale: (a) the conveyance, sale, lease, transfer or other disposition by any of the Issuer's Subsidiaries of any or all of its assets (upon voluntary liquidation or otherwise) to the Issuer; (b) the conveyance, sale, lease, transfer or other disposition by any Subsidiary of any or all of its assets (upon voluntary liquidation or otherwise) to another Subsidiary; (c) non-material dispositions of assets in the ordinary course of business; (d) Asset Sales not otherwise permitted by clauses (a) through (c) or (f) and (g) of this sentence, provided that the aggregate proceeds from all such Asset Sales do not exceed $2.5 million in any twelve-month period; (e) the disposition of all or substantially all of the assets of (i) the Issuer and its Subsidiaries, taken as a whole, or (ii) the Issuer, if such disposition is governed by Section 4.15 or Section 5.01; (f) a conveyance, sale, assignment, lease, license, transfer, abandonment or other disposal by the Issuer and its Subsidiaries of (i) damaged, worn out, unserviceable or other obsolete property in the ordinary course of business or (ii) other property no longer necessary for the proper conduct of their business; and (g) the conveyance, sale, transfer or otherwise disposition by the Issuer and its Subsidiaries of crude oil and natural gas production and refined products in the ordinary course of business. "Authenticating Agent" has the meaning provided in Section 2.02. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or foreign law for the relief of debtors. "Basic" means Basic Energy Services, Inc., a Delaware corporation. 3 "Blue Heel" means Blue Heel Company, a Delaware corporation. "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than a day on which commercial banks are authorized or required to close in New York, New York. "Capital Expenditures" of a Person means expenditures (whether paid in cash or accrued as a liability) by such Person or any of its Subsidiaries that, in conformity with GAAP, are or would be included in "capital expenditures," "additions to property, plant, or equipment" or comparable items in the consolidated financial statements of such Person consistent with prior accounting practices. "Capital Stock" means, with respect to any Person, any capital stock of such Person and shares, interests, participations, or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into corporate stock), warrants or options to purchase any of the foregoing, including without limitation, each class of common stock and preferred stock of such Person, if such Person is a corporation, and each general or limited partnership interest or other equity interest of such Person, if such Person is a partnership or limited liability company. "Capitalized Lease Obligation" means obligations under a lease that are required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations, as determined in accordance with GAAP. "Cash Equivalents" means (a) U.S. Legal Tender, (b) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (c) certificates of deposit with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year, and overnight bank deposits, in each case, with any Eligible Institution, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any Eligible Institution, (e) commercial paper rated "P-1," "A-1" or the equivalent thereof by Moody's or S&P, respectively, and in each case maturing within 180 days after the date of acquisition, (f) shares of money market funds, including those of the Trustee, that invest solely in U.S. Legal Tender and securities of the types described in clauses (a) through (e), and (g) demand and time deposits and certificates of deposit with an Eligible Institution. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Issuer and its 4 Subsidiaries, taken as a whole, to any person (as such term is used in Section 13(d)(3) of the Exchange Act) other than to the Issuer or a Subsidiary of the Issuer; (ii) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Issuer to any person (as such term is used in Section 13(d)(3) of the Exchange Act) other than to a Subsidiary; (iii) the Issuer consolidates with or merges into another Person or any Person consolidates with, or merges into, the Issuer, in any such event pursuant to a transaction in which the then outstanding Voting Stock of the Issuer is changed into or exchanged for cash, securities or other property, other than any such transaction where (a) the then outstanding Voting Stock of the Issuer is changed into or exchanged for Voting Stock of the surviving or resulting Person that is Qualified Capital Stock and (b) the holders of the Voting Stock of the Issuer immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving or resulting Person immediately after such transaction; (iv) the adoption of a plan relating to the liquidation or dissolution of the Issuer not involving a merger or consolidation or a sale or other disposition of assets described in clause (i) or (ii) above; or (v) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any person (as defined above), excluding the Permitted Holders, becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the Issuer's then outstanding Voting Stock; provided that the sale of Voting Stock of the Issuer to a Person or Persons acting as underwriters in connection with a firm commitment underwriting shall not constitute a Change of Control. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring Voting Stock of the Issuer shall be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. "Change of Control Offer" has the meaning provided in Section 4.15. "Change of Control Payment Date" has the meaning provided in Section 4.15. "Change of Control Purchase Price" has the meaning provided in Section 4.15. "Collateral" means all property in which a Lien has been granted under the Security Documents as security for the obligations of the Company, the Issuer and the Guarantors under this Indenture, the Guarantees and the Senior Notes. "Collateral Trust Agreement" means that certain Collateral Trust Agreement among the Issuer, the Subsidiary Guarantors, the Trustee, the Holders and the several lenders from time to time party to the Permitted Credit Facility, which, inter alia, establishes the relative rights of the Holders and lenders party to the Permitted Credit Facility in and to the Collateral directly owned by the Issuer and Blue Heel. "Collateral Trustee" means the party named as such in the Collateral Trust Agreement until a successor replaces it in accordance with the provisions of the Collateral Trust Agreement, and thereafter means such successor. "Commission" means the Securities and Exchange Commission. 5 "Company" means Southwest Royalties Holdings, Inc., a Delaware corporation, until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor, provided, that with respect to any financial information identified or defined as "Company" financial information, such information will be deemed to exclude Red Oak financial information. "Company Pledge Agreement" means that certain Pledge Agreement, in substantially the form of Exhibit A, from the Company in favor of the Trustee --------- pursuant to which the capital stock in Basic shall be pledged to the Collateral Trustee for the benefit of the Trustee and the Holders of the Senior Notes. "Consolidated Fixed Charge Coverage Ratio" on any date means, with respect to the Issuer, the ratio, on a pro forma basis, of (i) the aggregate amount of EBITDA attributable to continuing operations and businesses and exclusive of the amounts attributable to operations and businesses discontinued or disposed of, on a pro forma basis as if such operations and businesses were discontinued or disposed of on the first day of the Reference Period, for the Reference Period to (ii) the aggregate Consolidated Interest Expense (exclusive of amounts attributable to discontinued operations and businesses on a pro forma basis as if such operations and businesses were discontinued or disposed of on the first day of the Reference Period, but only to the extent that the obligations giving rise to such Consolidated Interest Expense would no longer be obligations contributing to Consolidated Interest Expense subsequent to the date of discontinuation or disposal) during the Reference Period; provided, that for purposes of such computation, in calculating EBITDA and Consolidated Interest Expense, (a) the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio shall be assumed to have occurred on the first day of the Reference Period, (b) the incurrence of any Indebtedness or issuance of Disqualified Capital Stock or the retirement of any Indebtedness or Capital Stock during the Reference Period or subsequent thereto shall be assumed to have occurred on the first day of such Reference Period, and (c) Consolidated Interest Expense attributable to any Indebtedness (whether existing or being incurred) bearing a floating interest rate shall be computed as if the rate in effect on the date of determination had been the applicable rate for the entire period, unless the Issuer or any of its Subsidiaries is a party to a Swap Obligation (that remains in effect for the 12-month period after the date of determination) that has the effect of fixing the interest rate on the date of computation, in which case such rate (whether higher or lower) shall be used. "Consolidated Interest Expense" of the Issuer means, for any period, the aggregate interest expense (without duplication), during such period in respect of all Indebtedness of the Issuer and its Subsidiaries (including all commissions, discounts, other fees and charges owed with respect to letters of credit and banker's acceptance financing and costs associated with Swap Obligations, but excluding any interest accrued on intercompany payables among the Issuer and its Subsidiaries) determined on a consolidated basis in accordance with GAAP. For purposes of this definition, (x) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and (y) any interest with respect to Indebtedness guaranteed by the Issuer or any Subsidiary of the Issuer other than with respect to 6 Indebtedness of the Issuer or a Subsidiary of the Issuer shall be included in the computation of Consolidated Interest Expense. "Consolidation" or "consolidated" means, with respect to any Person, the consolidation of the accounts of the Subsidiaries of such Person with those of such Person, all in accordance with GAAP. The term "consolidated" has a correlative meaning to the foregoing. "Corporate Trust Office" means the office of the Trustee at which at any particular time the trust created by this Indenture shall be principally administered, which office at the date of execution of this Indenture is located at 1100 North Market Street, Wilmington, Delaware 19890. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Default Interest Payment Date" has the meaning provided in Section 2.12. "Depository" means The Depository Trust Company, its nominees and successors. "Disqualified Capital Stock" means, with respect to any Person any Capital Stock of such Person or its Subsidiaries that, by its terms or by the terms of any security into which 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 by such Person or its Subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Stated Maturity Date. "EBITDA" means for any period the sum of the Adjusted Consolidated Net Income of the Issuer for such period, plus the sum, without duplication (and only to the extent such amounts are deducted from net revenues in determining such Adjusted Consolidated Net Income of the Issuer), of (i) the provision for income taxes for such period for the Issuer, (ii) depreciation, depletion, and amortization of the Issuer for such period and (iii) Consolidated Interest Expense for such period, determined, in each case, on a consolidated basis for the Issuer and its consolidated Subsidiaries otherwise in accordance with GAAP. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million and has long-term debt that is rated "A" (or higher) according to Moody's or S&P at the time as of which any investment or rollover therein is made. "Event of Default" has the meaning provided in Section 6.01. "Excess Cash" has the meaning given to it in Section 4.16. "Excess Cash Acceptance Amount" has the meaning given to it in Section 4.16. "Excess Cash Offer" has the meaning given to it in Section 4.16. 7 "Excess Cash Offer Amount" has the meaning given to it in Section 4.16. "Excess Cash Offer Price" has the meaning given to it in Section 4.16. "Excess Cash Purchase Date" has the meaning given to it in Section 4.16. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "Exchange Assets" means assets acquired by the Issuer or any Subsidiary of the Issuer in exchange for assets of the Issuer or any Subsidiary of the Issuer in connection with an Asset Sale, which acquired assets include proved reserves with a value that, together with the cash or Cash Equivalents received from the assets disposed of by the Issuer or such Subsidiary, is equal to or greater than the value of the proved reserves included in the assets disposed of by the Issuer or such Subsidiary in connection with such Asset Sale; provided, that (i) ownership of such assets does not violate Section 4.19 and (ii) during any fiscal year, the Issuer and its Subsidiaries can collectively acquire assets (other than proved reserves, cash or Cash Equivalents) with a Fair Market Value of up to $500,000 in exchange for assets of the Issuer and the Subsidiaries with proved reserves, and such assets acquired by such Person shall constitute "Exchange Assets" hereunder. "Fair Market Value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between an informed and willing seller and an informed and willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value shall be determined by the Board of Directors of the Issuer acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Issuer delivered to the Trustee. "GAAP" means generally accepted accounting principles as in effect in the United States on the Issue Date applied on a consistent basis. "guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generally of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statements conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part) (but if in part, only to the extent thereof); provided, however, that the term "guarantee" shall not include (a) endorsements for collection or deposit in the ordinary course of business and (b) guarantees (other than guarantees of Indebtedness) by the Issuer in respect of assisting one or more Subsidiaries in the ordinary course of their respective businesses, including without limitation guarantees of trade obligations and operating leases, on ordinary business terms. The term "guarantee" used as a verb has a corresponding meaning. 8 "Guarantees" means the unconditional guarantee of the Senior Notes given by the Company, MRO, Blue Heel or any Subsidiary Guarantor pursuant to the terms of this Indenture. "Guarantors" means the Company, MRO, Blue Heel and each Subsidiary Guarantor. "Holders" means any Person from time to time in whose name any Senior Note is registered on the Senior Note Register. "Hydrocarbons" means oil, natural gas, condensate, and natural gas liquids. "incur" and "incurrence" have the meanings set forth in Section 4.12. "Indebtedness" means, with respect to any Person, without duplication (i) all liabilities, contingent or otherwise, of such Person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property acquired by such Person or services received by such Person, but excluding trade account payables and accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or being contested in good faith by appropriate proceedings, promptly instituted and diligently pursued, (c) evidenced by bankers' acceptances or similar instruments issued or accepted by banks or Swap Obligations, (d) for the payment of money relating to a Capitalized Lease Obligation or (e) for Production Payments that such Person or any of its Subsidiaries elect to treat as Indebtedness; (ii) reimbursement obligations of such Person with respect to letters of credit; (iii) all liabilities of others of the kind described in the preceding clause (i) or (ii) that such Person has guaranteed or that is otherwise its legal liability (to the extent of such guaranty or other legal liability) other than for endorsements, with recourse, of negotiable instruments in the ordinary course of business; and (iv) all obligations secured by a Lien (other than Permitted Liens, except to the extent the obligations secured by such Permitted Liens are otherwise included in clause (i), (ii) or (iii) of this definition and are obligations of such Person) to which the property or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such Person are subject, regardless of whether the obligations secured thereby shall have been assumed by or shall otherwise be such Person's legal liability (but, if such obligations are not assumed by such Person or are not otherwise such Person's legal liability, the amount of such Indebtedness shall be deemed to be limited to the Fair Market Value of such property or assets determined as of the end of the preceding fiscal quarter). "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "Insurance Proceeds" means the interest in and to all proceeds (net of costs of collection, including attorneys' fees) which now or hereafter may be paid under any insurance policies now or hereafter obtained by or on behalf of the Issuer or any Subsidiary in connection with any assets thereof, together with interest payable thereon and the right to collect and receive the same, including, without limitation, proceeds of casualty insurance, title insurance, business interruption insurance and any other insurance now or hereafter maintained with respect to such assets. 9 "Interest" when used with respect to any Senior Note means the amount of all interest accruing on such Senior Note, including applicable defaulted interest pursuant to Section 2.12, in accordance with the following schedule: 10 1/2% per annum from February 1, 2002 (as if the Senior Notes were issued on such date) through December 31, 2002, 11 1/2% per annum from January 1, 2003 through December 31, 2003 and from January 1, 2004 until the Stated Maturity Date. "Interest Payment Date" means April 15 and October 15 of each year, commencing on April 15, 2002. "Interest Rate or Currency Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars, puts and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. "Investment" by any Person in any other Person means (i) the acquisition (whether for cash, property, services, securities or otherwise) of Capital Stock, bonds, notes, debentures, partnership, or other ownership interests or other securities of such other Person or any agreement to make any such acquisition; (ii) the making by such Person of any deposit with, or advance, loan or other extension of credit to, such other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other Person) and (without duplication) any amount committed to be advanced, loaned or extended to such other Person; (iii) the entering into of any guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of such other Person; (iv) the entering into of any Swap Obligation with such other Person; or (v) the making of any capital contribution by such Person to such other Person. "Investment Grade Rating" means with respect to any Person or issue of debt securities or preferred stock, a rating in one of the four highest letter rating categories (without regard to "+" or "-" or other modifiers) by Moody's or S&P or if any such rating agency has ceased using letter rating categories or the four highest of such letter rating categories are not considered to represent "investment grade" ratings, then the comparable "investment grade" ratings (as designated by any such rating agency). "Issue Date" means the date of first issuance of the Senior Notes under this Indenture. "Issuer" means Southwest Royalties, Inc., a Delaware corporation, until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Junior Notes" means those 10 1/2% Senior Notes due 2004, Series A and B, issued by the Issuer as of October 15, 1997. "Legal Defeasance" has the meaning set forth in Section 8.01. 10 "Legal Holiday" has the meaning provided in Section 10.07. "Lien" means any mortgage, lien, pledge, charge, security interest, or other encumbrance of any kind, regardless of whether filed, recorded, or otherwise perfected under applicable law (including any conditional sale or other title retention agreement and any lease deemed to constitute a security interest and any option or other agreement to give any security interest). "Material Change" means an increase or decrease (excluding changes that result solely from changes in prices) of more than either (i) 10% from the end of the immediately preceding fiscal quarter in the estimated discounted future net revenue from proved oil and gas reserves of the Issuer and its Subsidiaries, or (ii) 20% from the end of the immediately preceding fiscal year in the estimated discounted future net revenue from proved oil and gas reserves of the Issuer and its Subsidiaries, in each case calculated in accordance with clause (a) (i) of the definition of Adjusted Consolidated Net Tangible Assets; provided, however, that the following shall be excluded from the calculation of Material Change: (a) any acquisitions of oil and gas reserves made after the end of the immediately preceding year for which the discounted future net revenues have been estimated by independent petroleum engineers since the end of the preceding year and on which a Reserve Report or Reserve Reports exist and (b) any disposition of properties existing at the beginning of the current quarter or current year, as the case may be, for purposes of clause (i) or clause (ii) above, that have been disposed of in accordance with Section 4.16. "MRO" means MRO Holdings, Inc., a Delaware corporation. "MRO Pledge Agreement" means that certain Pledge Agreement, in substantially the form of Exhibit B, issued by MRO in favor of the Collateral --------- Trustee pursuant to which the Capital Stock in Red Oak directly owned by MRO has been pledged to the Collateral Trustee for the benefit of the Trustee and the Holders of the Senior Notes. "Moody's" means Moody's Investors Service, Inc. and its successors. "Mortgages" means collectively all those certain mortgages and deeds of trust, in substantially the form of Exhibit C, from the Issuer and Blue Heel for --------- the benefit of the Collateral Trustee, as trustee for the benefit of the Holders of the Senior Notes and the lenders under the Permitted Credit Facility, as their interests may appear, pursuant to which the Issuer and Blue Heel shall grant a Lien on their respective interests in real property and fixtures. "Net Cash Proceeds" means an amount equal to the aggregate amount of cash and Cash Equivalents received by the Issuer or any Subsidiary of the Issuer in respect of an Asset Sale (including cash and Cash Equivalents received by Issuer or any of its Subsidiaries pursuant to any notes or other evidence of indebtedness received by the Issuer or any of its Subsidiaries in respect of an Asset Sale), less the sum of (i) all reasonable and customary out-of-pocket fees, commissions, and other expenses incurred in connection with such Asset Sale, including the amount (estimated in good faith by the Issuer) of income, franchise, sales and other applicable taxes to be paid, payable or accrued by the Issuer or such Subsidiary (in each case as estimated in good faith by the Issuer without giving effect to tax attributes unrelated to such Asset Sale) in connection with such Asset Sale, and (ii) the aggregate amount of cash and Cash Equivalents so 11 received which is used to retire any then existing Indebtedness of the Issuer or such Subsidiary (other than the Senior Notes), as the case may be, which is secured by a Lien on the property subject of the Asset Sale or which is required by the terms of such Indebtedness to be repaid in connection with such Asset Sale. "Net Income (Loss)" of any Person for any period means the net income (loss) of such Person for such period, determined on a consolidated basis in accordance with GAAP, excluding (without duplication) (i) all extraordinary, unusual and nonrecurring gains, (ii) the net income, if positive, of any other Person, in which such Person or any of its consolidated Subsidiaries has an interest, except to the extent of the amount of any dividends or distributions actually paid in cash to such Person or a consolidated Subsidiary of such Person during such period, (iii) the net income, if positive, of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition and (iv) the net income, if positive, of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule, or governmental regulation applicable to such Subsidiary. "Net Proceeds" means (i) in the case of any sale by a Person of Qualified Capital Stock or other securities, the aggregate Net Cash Proceeds received by such Person from the sale of such securities (other than to a Subsidiary) after payment of reasonable and customary out-of-pocket expenses, commissions and discounts incurred in connection therewith, and (ii) in the case of any exchange, exercise, conversion or surrender of any then outstanding securities or Indebtedness of such Person for or into shares of Qualified Capital Stock of such Person, the net book value of such outstanding securities as adjusted on the books of such Person or Indebtedness of such Person to the extent recorded in accordance with GAAP, in each case, on the date of such exchange, exercise, conversion or surrender (plus any additional amount required to be paid by the holder of such Indebtedness or securities to such Person upon such exchange, exercise, conversion or surrender and less (a) any and all payments made to the holders of such Indebtedness or securities and (b) all other expenses incurred by such Person in connection therewith, in each case, in so far as such payments or expenses are incident to such exchange, exercise, conversion, or surrender). "Net Working Capital" of any Person means (i) all current assets of such Person and its consolidated Subsidiaries, minus (ii) all current liabilities of such Person and its consolidated Subsidiaries other than the current portion of long term Indebtedness, each item to be determined on a consolidated basis in conformity with GAAP. "Net Worth" of any Person means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of such Person and its consolidated Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation), less any amounts included therein attributable to Disqualified Capital Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock (not otherwise deducted from stockholder's equity), and the principal amount of any promissory notes receivable from the sale of the Capital Stock of such Person or any of its consolidated Subsidiaries each item to be determined in conformity with GAAP. "Non-U.S. Person" means a Person who is not a U.S. person, as defined in Regulation S. 12 "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of such Person, or any other officer designated by the Board of Directors serving in a similar capacity. "Officers' Certificate" from a Person means a certificate signed by two Officers of such Person at least one of whom shall be the principal executive officer, principal accounting officer or principal financial officer of such Person. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of Sections 10.04 and 10.05, as they relate to the giving of an Opinion of Counsel. "Paying Agent" has the meaning provided in Section 2.03. "Payment Default" has the meaning set forth in Section 6.01. "Permitted Credit Facility" means, with respect to the Issuer, the revolving credit facility with Union Bank of California dated as of April ____, 2002,, the proceeds of which are to be used for working capital and other general corporate purposes, as the same may be amended, extended or refinanced from time to time. "Permitted Hedging Transactions" means non-speculative transactions in futures, forwards, swaps or option contracts (including both physical and financial settlement transactions) engaged in by the Issuer and its Subsidiaries as part of their normal business operations as a risk-management strategy or hedge against adverse changes in the prices of natural gas, feedstock or refined products; provided, that such transactions do not in the case of the Issuer and its Subsidiaries, on a monthly basis, relate to more than 90% of their combined average net oil and natural gas production per month for the most recent 3-month period measured at the time of such transaction; provided, further, that, at the time of such transaction (i) the counter party to any such transaction is an Eligible Institution or a Person that has an Investment Grade Rating or has an issue of debt securities or preferred stock then outstanding with an Investment Grade Rating or (ii) such counter party's obligation pursuant to such transaction is unconditionally guaranteed in full by, or secured by a letter of credit issued by, an Eligible Institution or a Person that has an Investment Grade Rating or that has an issue of debt securities or preferred stock then outstanding with an Investment Grade Rating. "Permitted Holders" means H.H. Wommack III (or his heirs, his estate or any trust in which he or his immediate family members own, directly or indirectly, a beneficial interest in excess of 50%), the Company or any Person who was a Holder on the Issue Date or any of their respective Affiliates. "Permitted Indebtedness" means, without duplication, each of the following, as may be refinanced if permitted hereunder from time to time: (i) the Indebtedness evidenced by the Senior 13 Notes or the Guarantees; (ii) Indebtedness owed by any Subsidiary of the Issuer to the Issuer or any other Subsidiary of the Issuer or Indebtedness owed by the Issuer to any Subsidiary of the Issuer; provided that, such Indebtedness is Subordinated Indebtedness; (iii) Indebtedness then outstanding under the Permitted Credit Facility so long as the aggregate principal amount of all Indebtedness then outstanding under the Permitted Credit Facility does not exceed $80,000,000; provided, however, that all indebtedness under the Permitted Credit Facility shall not exceed $60,000,000 except as provided in Section 4.12 hereof; (iv) Swap Obligations of the Issuer or its Subsidiaries; (e) Indebtedness then outstanding on the Issue Date; and (v) other Indebtedness owed by the Issuer or its Subsidiaries in an aggregate principal amount then outstanding not to exceed $1,000,000 at any one time. "Permitted Investment" means, when used with reference to the Issuer or any Subsidiary of the Issuer, (i) trade credit extended to Persons in the ordinary course of business; (ii) purchases of Cash Equivalents; (iii) Investments by the Issuer or its Subsidiaries in Persons which are Wholly-Owned Subsidiaries and are engaged in the oil and gas exploration and production business; (iv) Swap Obligations; (v) advances to officers and employees of the Issuer or any Subsidiary in connection with the performance of their duties in the ordinary course of business in an amount not to exceed $500,000 in the aggregate outstanding at any time; (vi) margin deposits in connection with Permitted Hedging Transactions; (vii) any Investments outstanding on the Issue Date; (viii) repurchases of the Senior Notes on the open market with the prior approval of the Board of Directors; (ix) Investments and expenditures made in the ordinary course of business by the Issuer or its Subsidiaries, and of a nature that is or shall have become customary in the oil and gas business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil or gas through agreements, transactions, interests or arrangements which permit a Person to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the oil and gas business jointly with third parties, including, without limitation, (a) ownership interests in oil and gas properties or gathering systems including the repurchase of interests in Issuer-sponsored partnerships owning oil and gas properties and (b) Investments and expenditures in the form of or pursuant to operating agreements, processing agreements, farm-in agreements, farm-out agreements, development agreements, area of mutual interest agreements, unitization agreements, pooling arrangements, joint bidding agreements, service contracts, joint venture agreements, partnership agreements (whether general or limited), subscription agreements, stock purchase agreements and other similar agreements with third parties; provided that in the case of any joint venture engaged in processing, gathering, marketing or transporting oil or gas (i) all Indebtedness of such joint venture that would not otherwise constitute Indebtedness of the Issuer or a Subsidiary shall be deemed Indebtedness of such Person in proportion to its direct or indirect ownership interest in such joint venture and (ii) such joint venture shall be reasonably calculated to enhance the value of the reserves of such Person or marketability of production from such reserves; (x) other Investments not in excess of $2,000,000 at any time outstanding; and (xi) loans made to officers, directors and employees of the Issuer or any of its Subsidiaries approved by the applicable Board of Directors (or by an authorized officer), the proceeds of which are used solely to purchase stock or to exercise stock options received pursuant to an employee stock option plan or other incentive plan, in a principal amount not to exceed the purchase price of such stock or the exercise price of such stock options, as applicable. 14 "Permitted Liens" with respect to any Person means (i) Liens imposed by governmental authorities for taxes, assessments, or other charges not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of any of such Person in accordance with GAAP; (ii) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen, mineral interest owners, or other like Liens arising by operation of law in the ordinary course of business provided that (a) the underlying obligations are not overdue for a period of more than 30 days, or (b) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of any of such Person in accordance with GAAP; (iii) deposits of cash or Cash Equivalents to secure the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety bonds, performance bonds, and other obligations of a like nature incurred in the ordinary course of business (or to secure reimbursement obligations or letters of credit issued to secure such performance or other obligations); (iv) easements, rights-of-way, zoning, similar restrictions and other similar encumbrances or title defects incurred in the ordinary course of business which, in the aggregate, are not material in amount and which do not, in any case, materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of such Person; (v) Liens securing the Senior Notes, the Junior Notes, the Guarantees or the Permitted Credit Facility that were in place on the Issue Date; (vi) pledges or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, other types of social security legislation, property insurance and liability insurance; (vii) Liens on the assets of any Person existing at the time such assets are acquired by such Person, whether by merger, consolidation, purchase of assets or otherwise so long as such Liens (a) are not created, incurred or assumed in contemplation of such assets being acquired by such Person and (b) do not extend to any other assets of such Person whether prior to or after such merger, consolidation, purchase of assets or otherwise; (viii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of such Person, and (a) any extension, renewal or replacement of the Liens created pursuant to any of clauses (i) through (viii); provided that such Liens would have otherwise been permitted under such clauses, and provided further that the Liens permitted by this clause (a) do not secure any additional Indebtedness or encumber any additional property. "Person" means any corporation, individual, joint stock company, joint venture, partnership, limited liability company, unincorporated association, governmental regulatory entity, country, state, or political subdivision thereof, trust, municipality, or other entity. "Preferred Stock" means, with respect to any Person, any class or classes (however designated) of Capital Stock of such Person that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person over shares of Capital Stock of any other class of such Person. "Principal" of any Indebtedness (including the Senior Notes) means the principal amount of such Indebtedness plus the premium, if any, on such Indebtedness. "Production Payment" means any volumetric or dollar-denominated production payment or other similar burden on the property of the Issuer or any of its Subsidiaries. 15 "Pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act, as determined by the Board of Directors of the Issuer in consultation with its independent public accountants. "Public Equity Offering" means an underwritten public offering by a nationally recognized member of the National Association of Securities Dealers (or any other member of the National Association of Securities Dealers if the Issuer will receive at least $10 million of Net Proceeds from such offering) of Qualified Capital Stock of the Issuer pursuant to an effective registration statement filed with the Commission pursuant to the Securities Act. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock. "Record Date" means the Record Dates specified in the Senior Notes. "Redemption Date" when used with respect to any Senior Note to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Senior Notes. "Redemption Price" when used with respect to any Senior Note to be redeemed, means the price fixed for such redemption, including principal, without premium or penalty, pursuant to this Indenture and the Senior Notes. "Red Oak" means Midland Red Oak Realty, Inc., a Delaware corporation. "Reference Period" with regard to any Person means the four full fiscal quarters of such Person ended on or immediately preceding any date upon which any determination is to be made pursuant to the terms of the Senior Notes or this Indenture. "Registrar" has the meaning provided in Section 2.03. "Regulation S" means Regulation S under the Securities Act. "Released Interests" has the meaning provided in Section 11.04(b). "Reserve Report" means a report prepared by independent petroleum engineers with respect to Hydrocarbon reserves in accordance with guidelines published by the Commission. "Reserved Rights" has the meaning set forth in Section 8.01. "Restricted Investment" means any Investment other than a Permitted Investment. "Restricted Payment" has the meaning set forth in Section 4.10. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Security Agreement" means collectively those certain security agreements, in substantially the form of Exhibit D, from the Issuer and Blue --------- Heel pursuant to which the Issuer and Blue Heel shall grant a security interest in all of their respective personal property to the 16 Collateral Trustee for the benefit of the Holders of the Senior Notes and the lenders under the Permitted Credit Facility, as their interests may appear. "Security Documents" means the Security Agreement, the Company Pledge Agreement, the MRO Pledge Agreement, the Mortgages, the Collateral Trust Agreement, the Tri-Party Agreement and each other agreement granting or evidencing a lien or security interest in, or the pledge of, assets to secure and support the Senior Notes and the Guarantees that may be entered into on or after the Issue Date pursuant to the terms of this Indenture. "Senior Note Register" means the register maintained by or for the Issuer in which the Issuer shall provide for the registration of the Senior Notes and the transfer of the Senior Notes. "Senior Notes" means notes, treated as a single class of securities, as amended or supplemented from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture. "S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. and its successors. "Stated Maturity Date" means June 30, 2004. "Subordinated Indebtedness" means Indebtedness of the Issuer or a Subsidiary of the Issuer that (i) requires no payment of principal prior to or on the Stated Maturity Date and (ii) is expressly subordinate and junior in right of payment to the Senior Notes or the Guarantees. "Subsidiary" with respect to any Person means (i) a corporation with respect to which such Person or its Subsidiaries own, directly or indirectly, at least 50% of such corporation's Voting Stock, or (ii) a partnership other than the Issuer-sponsored oil and gas partnerships, in which such Person or a Subsidiary of such Person is, at the time, a general partner of such partnership and has more than 50% of the total voting power of partnership interests, or (iii) any other Person (other than a corporation or a partnership) in which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof has (x) at least a 50% ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such other Person. "Subsidiary Guarantee" has the meaning set forth in Section 12.01(b). "Subsidiary Guarantor" means each of the Issuer's Subsidiaries that in the future executes a supplemental indenture in which such Subsidiary agrees to be bound by the terms of this Indenture as a Subsidiary Guarantor; provided, however, that any Person constituting a Subsidiary Guarantor as described above shall cease to constitute a Subsidiary Guarantor when its Subsidiary Guarantee is released in accordance with this Indenture. "Super-Affiliate" means, with respect to the Issuer, any Holder which, directly or indirectly, owns 15% or more of the total voting power of the outstanding Voting Stock of the Issuer. 17 "Swap Obligation" of any Person means any Interest Rate or Currency Agreement entered into with one or more financial institutions or one or more futures exchanges in the ordinary course of business and not for purposes of speculation that is designed to protect such Person against fluctuations in (x) interest rates with respect to Indebtedness incurred and which shall have a notional amount no greater than 100% of the principal amount of the Indebtedness being hedged thereby or (y) currency exchange rate fluctuations. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S)77aaa-77bbbb), as amended, as in effect on the date of this Indenture, except as otherwise provided in Section 9.03. "Tri-Party Agreement means the agreement to specify certain arrangements between the Company, MRO, the Trustee and State Street Bank and Trust Company, the trustee of holders of the Junior Notes, with respect to the Collateral pledged under the Company Pledge Agreement and MRO Pledge Agreement. "Trust Officer" means any officer or assistant officer of the Trustee assigned by the Trustee to administer this Indenture, or in the case of a successor trustee, an officer assigned to the department, division or group performing the corporate trust work of such successor and assigned to administer this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "United States" means the United States of America. "U.S. Government Obligations" means direct obligations of, and obligations guaranteed by, the United States for the payment of which the full faith and credit of the United States of America is pledged. "U.S. Legal Tender" means such coin or currency of the United States (which if paid by wire transfer, shall be in the form of immediately available funds) as at the time of payment shall be legal tender for the payment of public and private debts. "Voting Stock" means Capital Stock of a Person having generally the right to vote in the election of such Person's directors, managers, trustees or other persons performing comparable functions to a corporation's board of directors. "Wholly-Owned Subsidiary" means any Subsidiary of which all the then outstanding Voting Stock is owned by the Issuer or another Wholly-Owned Subsidiary. Section 1.02 Incorporation by Reference of TIA. --------------------------------- Whenever this Indenture refers to a provision of the TIA, such 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 Senior Notes. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. 18 "obligor" on the indenture securities means the Issuer, the Company or any other Guarantor or any other obligor on the Senior Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule and not otherwise defined herein have the meanings assigned to them therein. Section 1.03 Rules of Construction. --------------------- Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) words in the singular include the plural, and words in the plural include the singular; (i) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular article, section or other subdivision; and (ii) any reference to a statute, law or regulation means that statute, law or regulation as amended and in effect from time to time and includes any successor statute, law or regulation; provided, however, that any reference to the Bankruptcy Law shall mean the Bankruptcy Law as applicable to the relevant case. ARTICLE TWO THE SENIOR NOTES Section 2.01 Form and Dating. --------------- The Senior Notes, the notations thereon relating to the Guarantees and the Trustee's certificate of authentication shall be substantially in the form of Exhibit E. The Senior Notes may have notations, legends or endorsements --------- required by law, stock exchange rule or usage. Subject to the foregoing, the Issuer and the Trustee shall approve the form of the Senior Notes and any notation, legend or endorsement on them. Each Senior Note shall be dated the date of its authentication. The terms and provisions contained in the Senior Notes and the Guarantees shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Issuer, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. 19 However, to the extent any provision of any Senior Note, the Security Agreements or Guarantee conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. Section 2.02 Execution and Authentication; Aggregate Principal Amount. -------------------------------------------------------- Two Officers, or an Officer and an Assistant Secretary of the Issuer, shall sign, or one Officer shall sign and one Officer or an Assistant Secretary (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to, the Senior Notes for the Issuer by manual or facsimile signature. If any Officer or Assistant Secretary of the Issuer whose signature is on a Senior Note was an Officer or Assistant Secretary of the Issuer at the time of such execution but no longer holds that office or position at the time the Trustee authenticates the Senior Note, the Senior Note shall nevertheless be valid. A Senior Note shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Senior Note. Such signature shall be conclusive evidence that such Senior Note has been authenticated under this Indenture. The Trustee shall authenticate Senior Notes for original issue in the aggregate principal amount of up to $60,000,000 upon a written order of the Issuer in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of Senior Notes to be authenticated and the date on which the Senior Notes are to be authenticated. The aggregate principal amount of Senior Notes outstanding at any time may not exceed $60,000,000, except as otherwise provided herein. Upon the written order of the Issuer in the form of an Officers' Certificate, the Trustee shall authenticate Senior Notes in substitution of Senior Notes originally issued to reflect any name change of the Issuer. The Trustee may appoint an authenticating agent reasonably acceptable to the Issuer to authenticate Senior Notes. Unless otherwise provided in the appointment, an authenticating agent may authenticate Senior Notes 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 Issuer and Affiliates of the Issuer. The Senior Notes shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. Section 2.03 Registrar and Paying Agent. -------------------------- The Issuer shall maintain an office or agency in New York, New York, where Senior Notes may be presented or surrendered for payment ("Paying Agent"), and the Issuer shall also maintain an office or agency, either in New York, New York or elsewhere in the United States, where (a) Senior Notes may be presented or surrendered for registration of transfer or for exchange ("Registrar") and (b) notices and demands to or upon the Issuer in respect of the Senior Notes and this Indenture may be served. The Registrar shall keep the Senior Note Register. The Issuer, upon prior written notice to the Trustee, may have one or more co-Registrars and one or 20 more additional Paying Agents reasonably acceptable to the Trustee. The term "Paying Agent" includes any additional Paying Agent. The Issuer may act as its own Paying Agent, except that for the purposes of payments on the Senior Notes pursuant to Sections 4.15 and 4.16, neither the Issuer nor any Affiliate of the Issuer may act as Paying Agent. The Issuer shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall incorporate the provisions of the TIA and implement the provisions of this Indenture that relate to such Agent. The Issuer shall notify the Trustee, in advance, of the name and address of any such Agent. If the Issuer fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such. The Issuer initially appoints the Trustee as Registrar, Paying Agent and agent for service of demands and notices in connection with the Senior Notes, until such time as the Trustee has resigned or a successor has been appointed. Any of the Registrar, the Paying Agent or any other Agent may resign upon 30 days' notice to the Issuer. Section 2.04 Paying Agent to Hold Assets in Trust. ------------------------------------ The Issuer shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, premium, if any, or interest on, the Senior Notes (whether such assets have been distributed to it by the Issuer or any other obligor on the Senior Notes), and the Issuer and the Paying Agent shall notify in writing the Trustee of any Default by the Issuer in making any such payment. The Issuer at any time may require a Paying Agent to distribute all assets held by it pursuant hereto to the Trustee and account for any assets disbursed, and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it pursuant hereto to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Issuer to the Paying Agent, the Paying Agent shall have no further liability for such assets. Section 2.05 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 the Holders. If the Trustee is not the Registrar, the Issuer shall furnish or cause the Registrar to furnish to the Trustee before each Record Date and at such other times as the Trustee may request in writing a list as of such date and in such form as the Trustee may reasonably require of the names and addresses of the Holders, which list may be conclusively relied upon by the Trustee. Section 2.06 Transfer and Exchange. --------------------- When Senior Notes are presented to the Registrar or a co-Registrar with a request to register the transfer of such Senior Notes or to exchange such Senior Notes for an equal principal amount of Senior Notes of other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the Senior Notes presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in 21 form satisfactory to the Issuer, the Trustee and the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registration of transfers and exchanges, the Issuer shall execute and the Trustee, upon written demand of the Issuer in the form of an Officers' Certificate of the Issuer, shall authenticate Senior Notes at the Registrar's or co-Registrar's request. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require repayment 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 Section 2.10, 4.15, 4.16 or 9.05, in which event the Issuer shall be responsible for the payment of such tax or charge). The Registrar or co-Registrar shall not be required to register the transfer or exchange of any Senior Note (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Senior Notes and ending at the close of business on the day of such mailing and (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Senior Note being redeemed in part. Section 2.07 Replacement Notes. ----------------- If a mutilated Senior Note is surrendered to the Trustee or the Holder of a Senior Note claims that the Senior Note has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee, upon written demand of the Issuer in the form of an Officers' Certificate of the Issuer, shall authenticate a replacement Senior Note if the Trustee's requirements are met. If required by the Trustee or the Issuer, such Holder must provide an indemnity bond or other indemnity of reasonable tenor, sufficient in the reasonable judgment of the Issuer or the Trustee, as the case may be, to protect the Issuer, the Trustee or any Agent from any loss which any of them may suffer if a Senior Note is replaced. Every replacement Senior Note shall constitute an additional obligation of the Issuer. Section 2.08 Outstanding Notes. ----------------- Senior Notes outstanding at any time are all the Senior Notes that have been authenticated by the Trustee except those canceled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. Subject to the provisions of Section 2.09, a Senior Note does not cease to be outstanding because the Issuer or any of its Affiliates holds the Senior Note. If a Senior Note is replaced pursuant to Section 2.07 (other than a mutilated Senior Note surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Senior Note is held by a bona fide purchaser. A mutilated Senior Note ceases to be outstanding upon surrender of such Senior Note and replacement thereof pursuant to Section 2.07. If (i) by 11:00 a.m. New York City time on a Redemption Date or the Stated Maturity Date the Paying Agent holds U.S. Legal Tender or (ii) the Issuer has exercised Legal Defeasance and deposited U.S. Government Obligations, in either case, sufficient to pay all of the principal, premium, if any, and interest due on the Senior Notes payable on that date and is not prohibited 22 from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Senior Notes shall be deemed not to be outstanding and interest on them shall cease to accrue. Section 2.09 Notes Deemed Not Outstanding. ---------------------------- In determining whether the Holders of the required principal amount of Senior Notes have concurred in any direction, waiver, consent or notice, Senior Notes owned by the Issuer or a Super-Affiliate of the Issuer shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Senior Notes which a Trust Officer of the Trustee actually knows are so owned shall be so considered. The Issuer shall notify the Trustee, in writing, when it or, to its knowledge, any of its Super-Affiliates repurchases or otherwise acquires Senior Notes, of the aggregate principal amount of such Senior Notes so repurchased or otherwise acquired and such other information as the Trustee may reasonably request and the Trustee shall be entitled to rely thereon. Section 2.10 Temporary Notes. --------------- Until definitive Senior Notes are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Senior Notes upon receipt of a written order of the Issuer in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of temporary Senior Notes to be authenticated and the date on which the temporary Senior Notes are to be authenticated. Temporary Senior Notes shall be substantially in the form of definitive Senior Notes but may have variations that the Issuer considers appropriate for temporary Senior Notes and so indicates in the Officers' Certificate. Without unreasonable delay, the Issuer shall prepare, and the Trustee shall authenticate upon receipt of a written order of the Issuer pursuant to Section 2.02, definitive Senior Notes in exchange for temporary Senior Notes. Section 2.11 Cancellation. ------------ The Issuer at any time may deliver Senior Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Senior Notes surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent, and no one else, shall cancel and shall dispose, in its customary manner, of all Senior Notes surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.07, the Issuer may not issue new Senior Notes to replace Senior Notes that have been paid or delivered to the Trustee for cancellation. If the Issuer shall acquire any of the Senior Notes, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Senior Notes unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11. Section 2.12 Defaulted Interest. ------------------ If the Issuer shall default in the payment of any installment of interest, or the principal of or premium, if any, on any Senior Notes, when the same becomes due and payable, at maturity, upon redemption, by acceleration or otherwise (including the failure to make a payment to purchase Senior Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer), 23 then interest on the Senior Notes and all amounts then due thereunder shall accrue interest at the rate of 18% per annum (the "Default Rate") until the Senior Notes are paid in full or the Default in payment is cured. The Issuer shall pay interest on all such overdue amounts (including installments of interest, to the extent lawful) on demand without regard to any applicable grace periods. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months, and, in the case of a partial month, the actual number of days elapsed. If the Issuer defaults in a payment of interest on the Senior Notes, it shall pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which special record date shall be the fifteenth day next preceding the date fixed by the Issuer for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. The Issuer shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Senior Note and the date of the proposed payment (a "Default Interest Payment Date"), and at the same time the Issuer shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such defaulted interest as provided in this Section; provided, however, that in no event shall the Issuer deposit monies proposed to be paid in respect of defaulted interest later than 11:00 a.m. New York City time of the proposed Default Interest Payment Date. At least 15 days before the subsequent special record date, the Issuer shall mail (or cause to be mailed) to each Holder, as of a recent date selected by the Issuer, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. Notwithstanding the foregoing, any interest which is paid prior to the expiration of the 30-day period set forth in Section 6.01(a) shall be paid to those Holders who are the Holders as of the regular Record Date for the Interest Payment Date for which interest has not been paid. Notwithstanding the foregoing, the Issuer may make payment of any defaulted interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Senior Notes may be listed, and upon such notice as may be required by such exchange. Section 2.13 CUSIP Numbers. ------------- The Issuer in issuing the Senior Notes of each series may use a "CUSIP" number, and, if so, the Trustee shall use the appropriate CUSIP number in notices of redemption or exchange as a convenience to Holders; provided, however, that no representation is hereby deemed to be made by the Trustee as to the correctness or accuracy of the CUSIP number printed in the notice or on the Senior Notes, and that reliance may be placed only on the other identification numbers printed on the Senior Notes. The Issuer shall promptly notify the Trustee of any change in a CUSIP number. Section 2.14 Deposit of Monies. ----------------- Prior to 11:00 a.m. New York City time on each Interest Payment Date, Stated Maturity Date, Redemption Date, Change of Control Payment Date and Excess Cash Purchase Date, the Issuer shall have deposited with the Paying Agent in immediately available funds U.S. Legal 24 Tender sufficient to make the cash payments, if any, due on such Interest Payment Date, Stated Maturity Date, Redemption Date, Change of Control Payment Date and Excess Cash Purchase Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such Interest Payment Date, Stated Maturity Date, Redemption Date, Change of Control Payment Date and Excess Cash Purchase Date, as the case may be. At the option of the Issuer, payment of interest on Senior Notes may be made by wire transfer or by check mailed to the Holders on or before the relevant Interest Payment Date at their respective addresses as shown in the Senior Note Register as of the relevant Interest Payment Date. ARTICLE THREE REDEMPTION AND CONVERSION Section 3.01 Notices to Trustee. ------------------ If the Issuer elects to redeem Senior Notes pursuant to Section 3.03 or Section 3.04, it shall notify the Trustee and the Paying Agent in writing of the Redemption Date and the principal amount of the Senior Notes to be redeemed. The Issuer shall give each notice provided for in this Section 3.01 at least 60 but not more than 75 days before the Redemption Date with respect to redemption to Section 3.03 and at least 30 days, but no more than 45 days, before the Redemption Date with respect to redemption pursuant to Section 3.04 (unless a shorter notice period shall be satisfactory to the Trustee, as evidenced in a writing signed on behalf of the Trustee), together with an Officers' Certificate stating that such redemption shall comply with the conditions contained herein and in the Senior Notes. Section 3.02 Selection of Notes to Be Redeemed. --------------------------------- In the event that less than all of the Senior Notes are to be redeemed at any time, selection of such Senior Notes, or portions thereof, for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Senior Notes are listed or, if the Senior Notes are not then listed on a national securities exchange, on a pro-rata basis or on as nearly a pro-rata basis as is practicable, unless such method is otherwise prohibited, in which case the Trustee shall select Senior Notes for redemption by lot or by such other method as the Trustee shall deem fair and appropriate; provided, however, that no Senior Notes of a principal amount of $1,000 or less shall be redeemed in part. Section 3.03 Optional Redemption. ------------------- At any time or from time to time or prior to maturity, the Issuer may, at its option, redeem, without premium or penalty, all or a portion of the Senior Notes for a redemption price equal to 100% of the principal amount of the Senior Notes so redeemed, plus accrued but unpaid interest, if any, thereon to the Redemption Date. 25 Section 3.04 Mandatory Redemption. -------------------- Subject to any restrictions on payment of the Senior Notes contained in the Collateral Trust Agreement, in the event the Issuer has available funds to repurchase all of the Senior Notes at par from the Permitted Credit Facility and a new subordinated credit facility with a maturity date of June 30, 2005 or later (the "Subordinated Credit Facility") and the weighted average interest cost of the Permitted Credit Facility and the Subordinated Credit Facility is 12% or less, then the Issuer shall redeem, and the holders shall tender, without premium or penalty, all of the Senior Notes for a redemption price equal to 100% of the principal amount of the Senior Notes so redeemed, plus accrued but unpaid interest, if any, thereon to the Redemption Date; provided, however, that the Board of Directors may, by unanimous vote, direct the Issuer not to effect such repurchase; and provided further, that the Issuer shall not effect a repurchase if such repurchase would cause the Issuer to become insolvent. Section 3.05 Notice of Redemption. -------------------- At least 30 days but not more than 60 days before a Redemption Date, the Issuer shall mail or cause to be mailed a notice of redemption by first class mail to each Holder of Senior Notes to be redeemed at its last address as then shown on the Senior Note Register, with a copy to the Trustee and any Paying Agent. At the Issuer's request, the Trustee shall give the notice of redemption in the Issuer's name and at the Issuer's expense. The Issuer shall provide such notices of redemption to the Trustee at least five days before the intended mailing date. Each notice of redemption shall identify (including the CUSIP number) the Senior Notes to be redeemed and shall state: (a) the Redemption Date; (b) the Redemption Price and the amount of accrued interest, if any, to be paid; (c) the name and address of the Paying Agent; (d) the subparagraph of the Senior Notes pursuant to which such redemption is being made; (e) that any Senior Notes called for redemption must be surrendered to the Paying Agent to collect the Redemption Price plus accrued interest, if any; (f) that, unless the Issuer defaults in making the redemption payment, interest on Senior Notes (or applicable portions thereof) called for redemption ceases to accrue, on and after the Redemption Date, and the only remaining right of the Holders of such Senior Notes is to receive payment of the Redemption Price plus accrued interest as of the Redemption Date, if any, upon surrender to the Paying Agent of the Senior Notes redeemed; (g) if any Senior Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the Redemption Date, and upon surrender of such Senior Note, a new Senior Note or Senior Notes in the aggregate principal amount equal to the unredeemed portion thereof will be issued; and 26 (h) if fewer than all the Senior Notes are to be redeemed, the identification of any particular Senior Notes (or portions thereof) to be redeemed, as well as the aggregate principal amount of Senior Notes to be redeemed and the aggregate principal amount of Senior Notes to be outstanding after such partial redemption. The Company and the Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the purchase of Senior Notes. Section 3.06 Effect of Notice of Redemption. ------------------------------ Once notice of redemption is mailed in accordance with Section 3.05, such notice of redemption shall be irrevocable and Senior Notes called for redemption become due and payable on the Redemption Date at the Redemption Price plus accrued interest as of such date, if any. Upon surrender to the Trustee or Paying Agent, such Senior Notes called for redemption shall be redeemed at the Redemption Price plus accrued interest thereon to the Redemption Date, but installments of interest, the maturity of which is on or prior to the Redemption Date, shall be payable to Holders of record at the close of business on the relevant Record Dates referred to in the Senior Notes. Interest shall accrue on or after the Redemption Date and shall be payable only if the Issuer defaults in payment of the Redemption Price on the Redemption Date. Section 3.07 Deposit of Redemption Price. --------------------------- On or before 11:00 a.m. (New York time) on the Redemption Date and in accordance with Section 2.14, the Issuer shall deposit with the Paying Agent, U.S. Legal Tender sufficient to pay the Redemption Price plus accrued interest, if any, on all Senior Notes to be redeemed. The Paying Agent shall promptly return to the Issuer any U.S. Legal Tender so deposited which is not required for that purpose, except with respect to monies owed as obligations to the Trustee pursuant to Article Seven. Unless the Issuer fails to comply with the preceding paragraph and defaults in the payment on or before the Redemption Date of such Redemption Price plus accrued interest, if any, interest on the Senior Notes to be redeemed will cease to accrue, as the case may be, on and after the applicable Redemption Date, whether or not such Senior Notes are presented for payment. Section 3.08 Notes Redeemed in Part. ---------------------- Upon surrender of a Senior Note that is to be redeemed in part, the Trustee shall authenticate for the Holder a new Senior Note or Senior Notes equal in principal amount to the unredeemed portion of the Senior Note surrendered. 27 ARTICLE FOUR COVENANTS Section 4.01 Payment of Senior Notes; Authentication. --------------------------------------- (a) The Issuer shall pay the principal of, premium, if any, and interest on the Senior Notes on the dates and in the manner provided in the Senior Notes and this Indenture. (b) An installment of principal of, premium, if any, or interest on the Senior Notes shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Issuer or any of its Affiliates) holds, on or before 11:00 a.m. New York City time on that date, U.S. Legal Tender designated for and sufficient to pay the installment in full and is not prohibited from paying such money to the Holders pursuant to the terms of this Indenture or the Senior Notes. (c) Notwithstanding anything to the contrary contained in this Indenture, the Issuer or the Trustee, as the case may be, may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed on the Holders of the Senior Notes by the United States from principal or interest payments hereunder. (d) The Issuer shall promptly make demand upon the Trustee, in the form of an Officers' Certificate, to authenticate and deliver Senior Notes as contemplated in Sections 2.06 and 2.07 of this Indenture. Section 4.02 Maintenance of Office or Agency. ------------------------------- The Issuer shall maintain the offices or agencies required under Section 2.03. The Issuer shall give prior written notice to the Trustee of the location, and any change in the location, of such offices or agencies. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 10.02. Section 4.03 Corporate Existence. ------------------- Except as otherwise provided in Article Five, the Issuer shall do or cause to be done, at its own cost and expense, all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each of its Subsidiaries in accordance with the organizational documents of the Issuer and each such Subsidiary and the material rights (charter and statutory) and franchises of each such Person; provided, however, that the Issuer shall not be required to preserve, with respect to itself and any of its Subsidiaries, any such existence, material right or franchise, if the Board of Directors of the Issuer shall determine in good faith that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and its Subsidiaries, taken as a whole. Except as otherwise provided in Article Five, each of the Guarantors shall do or cause to be done, at its own cost and expense, all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each of its Subsidiaries in accordance 28 with the organizational documents of the Guarantor and each of its Subsidiaries and the material rights (charter and statutory) and franchises of the Guarantor and its Subsidiaries; provided, however, that each such Guarantor shall not be required to preserve any such existence, material right or franchise, if the Board of Directors of such Guarantor shall determine in good faith that the preservation thereof is no longer desirable in the conduct of the business of such Guarantor and its Subsidiaries taken as a whole. Section 4.04 Payment of Taxes and Other Claims. --------------------------------- The Issuer shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon the Issuer or any of its Subsidiaries or the properties of the Issuer or any of its Subsidiaries and (b) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of the Issuer or any of its Subsidiaries; provided, however, that the Issuer shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate negotiations or proceedings properly instituted and diligently conducted for which adequate reserves, to the extent required under GAAP, have been taken. Each of the Guarantors shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon such Guarantor or any of its Subsidiaries or the properties of such Guarantor or any of its Subsidiaries and (b) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of such Guarantor or its Subsidiary; provided, however, that such Guarantor or any of its Subsidiaries shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate negotiations or proceedings properly instituted and diligently conducted for which adequate reserves, to the extent required under GAAP, have been taken. Section 4.05 Maintenance of Properties and Insurance. --------------------------------------- (a) The Issuer shall, and shall cause each of its Subsidiaries to, maintain all properties used or useful in the conduct of its business in good working order and condition (subject to ordinary wear and tear) and make all necessary repairs, renewals, replacements, additions, betterments and improvements thereto and actively conduct and carry on its business; provided, however, that nothing in this Section 4.05 shall prevent the Issuer or any of its Subsidiaries from discontinuing the operation and maintenance of any of its properties, if such discontinuance is (i) in the ordinary course of business pursuant to customary business terms or (ii) in the good faith judgment of the Board of Directors of the Issuer, desirable in the conduct of its or its Subsidiaries' businesses and is not disadvantageous in any material respect to the Holders. (b) Each of the Guarantors shall, and shall cause each of its Subsidiaries to, maintain all properties used or useful in the conduct of its business in good working order and 29 condition (subject to ordinary wear and tear) and make all necessary repairs, renewals, replacements, additions, betterments and improvements thereto and actively conduct and carry on its business; provided, however, that nothing in this Section 4.05 shall prevent any such Guarantor or any of its Subsidiaries from discontinuing the operation and maintenance of any of its properties, if such discontinuance is (i) in the ordinary course of business pursuant to customary business terms or (ii) in the good faith judgment of the Board of Directors of such Guarantor, desirable in the conduct of its or its Subsidiaries' business and is not disadvantageous in any material respect to the Holders. (c) The Issuer shall provide or cause to be provided, for itself and each of its Subsidiaries insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the good faith judgment of the Issuer, are adequate and appropriate for the conduct of the business of the Issuer and its Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be customary, in the good faith judgment of the Issuer, for companies similarly situated in the same industry. The Issuer shall cause the Trustee to be named as a mortgagee and a loss payee on any policies of casualty insurance covering any tangible Collateral pledged by the Issuer or any of its Subsidiaries under the Security Documents. (d) Each of the Guarantors shall provide or cause to be provided for itself and for its Subsidiaries insurance (including appropriate self-insurance) against loss or damage of the kind that, in the good faith judgment of such Guarantor, are adequate and appropriate for the conduct of the business of such Guarantor and its Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be customary, in the good faith judgment of such Guarantor, for companies similarly situated in the same industry. Such Guarantor shall cause the Trustee to be named as a mortgagee and a loss payee on any policies of casualty insurance covering any tangible Collateral pledged by such Guarantor under the Security Documents. Section 4.06 Compliance Certificate; Financial Statements; Notice of ------------------------------------------------------- Default. ------- (a) In addition to the delivery requirements of Section 11.02, the Issuer and each Guarantor shall deliver to the Trustee, within 60 days after the end of each fiscal quarter that is not also the fiscal year end and 90 days after the end of the fiscal quarter that is also the end of a fiscal year an Officers' Certificate stating that a review of the activities of the Issuer and its Subsidiaries and each Guarantor, as the case may be, during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Issuer, its Subsidiaries and each Guarantor, as the case may be, have kept, observed, performed and fulfilled their obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge the Issuer and each of its Subsidiaries or the Guarantor, as the case may be, 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 the Issuer is taking or proposes to take with respect thereto) and that, to the best of 30 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 Senior Notes are prohibited or if such event has occurred, a description of the event and what action the Issuer or the Guarantor, as the case may be, is taking or proposes to take with respect thereto. The Issuer shall also notify the Trustee of any changes in the composition of the Board of Directors of the Issuer or any of its Subsidiaries or of any amendment to the charter or bylaws of the Issuer or any of its Subsidiaries (b) So long as the Issuer is required under the Permitted Credit Facility to cause the report described in this Section 4.06(b) to be furnished to the provider of the Permitted Credit Facility and so long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the annual financial statements delivered pursuant to Section 4.08 shall be accompanied by a written report of the Issuer's independent certified public accountants (who shall be a firm of established national reputation) stating (A) that their audit examination has included a review of the terms of this Indenture and the form of the Senior Notes as they relate to accounting matters, and (B) that the calculation by the Issuer of the financial ratios required to be calculated under this Indenture are numerically accurate and that the amounts contained in such ratios and such ratios have been calculated in accordance with the definitions contained in this Indenture; provided, however, that, without any restriction as to the scope of the audit examination, such independent certified public accountants shall not be liable by reason of any failure to obtain knowledge of any such Default or Event or Default that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards. (c) The Issuer shall, so long as any of the Senior Notes are outstanding, deliver to the Trustee, as soon as possible and in any event within five days after any Officer of the Issuer becoming aware of any Default or Event of Default an Officers' Certificate specifying such Default or Event of Default what action the Issuer is taking or proposes to take with respect thereto. Section 4.07 Compliance with Laws. -------------------- (a) The Issuer shall comply, and shall cause each of its Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliance as could not singly or in the aggregate; reasonably be expected to have a material adverse effect on the financial condition, business, prospects or results of operations of the Issuer and its Subsidiaries taken as a whole. (b) Each of the Guarantors shall, and shall cause the Subsidiaries to, comply with all applicable statutes, rules, regulations, orders and restrictions of the United States, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect to the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliance as could not, singly or in the aggregate, reasonably be expected to have a 31 material adverse effect on the financial condition, business, prospects or results of operations of such Guarantor and its Subsidiaries taken as a whole. Section 4.08 Reports to Holders. ------------------ The Issuer and each of its Subsidiaries, as applicable, shall deliver to the Trustee copies of quarterly and annual reports and of the information, documents and other reports, if any, which the Issuer or such Subsidiary is required to file or would file, if so required, with the Commission pursuant to Section 13 or 15(d) of the Exchange Act within 15 days following the date such filing is or would be required. Notwithstanding that the Issuer may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Issuer shall file with the Commission, to the extent permitted, and provide the Trustee with such annual and quarterly reports and such information, documents and other reports specified in Section 13 of the Exchange Act. The Company and the Issuer shall also comply with the other provisions of Section 314(a) of the TIA. Each of the Company and MRO shall deliver to the Trustee copies of unaudited quarterly and annual reports within 105 days following the end of the fiscal year of the Company or MRO or 60 days following the end of the quarter of the Company and MRO, as the case may be. If requested in writing by a Holder, any beneficial holder of the Senior Notes or a prospective purchaser of the Senior Notes designated by such Holder, the Issuer shall deliver to such Person annual and quarterly financial statements of the Issuer or such other information required to be delivered pursuant to Rule 144A(d)(4) of the Securities Act. Section 4.09 Waiver of Stay, Extension or Usury Laws. --------------------------------------- The Issuer and each of the Guarantors covenant (to the extent that it 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 or extension law or any usury law or other law that would prohibit or forgive the Issuer from paying all or any portion of the principal of, premium, if any, or interest on the Senior Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Issuer and each of the Guarantors hereby expressly waives all benefit or advantage of any such law and covenants that it shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit execution of every such power as though no such law had been enacted. Section 4.10 Limitation on Restricted Payments. --------------------------------- (a) The Issuer shall not, and shall not cause or permit any of its Subsidiaries, to, directly or indirectly, (i) declare or pay any dividend on, or make any other distribution to holders of, any shares of Capital Stock of the Issuer or any Subsidiary (other than dividends or distributions payable solely in shares of Qualified Capital Stock of the Issuer or any Subsidiary or dividends or distributions payable to the Issuer or any Wholly-Owned Subsidiary of the Issuer or warrants, rights or options to acquire Qualified Capital Stock of the Issuer or any Subsidiary), 32 (ii) purchase, redeem or otherwise acquire or retire for value any such shares of Capital Stock of the Issuer or any Affiliate (other than any Capital Stock owned by the Issuer or any of its Wholly-Owned Subsidiaries) or any options, warrants or other rights to acquire such Capital Stock, (iii) make any principal payment on or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, scheduled sinking fund payment or maturity, any Subordinated Indebtedness, or (iv) make any Restricted Investment, (such payments or other actions described in clauses (i) through (iv) being collectively referred to as a "Restricted Payment"), unless at the time of and after giving effect to the proposed Restricted Payment (the amount of any such Restricted Payment, if other than cash, shall be the amount determined by the Board of Directors of the Issuer, whose determination shall be conclusive and evidenced by a Board Resolution) (1) no Default or Event of Default shall have occurred and be continuing, (2) the Issuer could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) in accordance with Section 4.12(a), and (3) the aggregate amount of all Restricted Payments declared or made after the Issue Date shall not exceed the sum (without duplication) of the following: (A) 50% of the Adjusted Consolidated Net Income of the Issuer accrued on a cumulative basis during the period commencing with the first full quarter after the Issue Date and ending on the last day of the Issuer's last fiscal quarter ending prior to the date of such proposed Restricted Payment (or if Adjusted Consolidated Net Income is a loss, minus 100% of such loss), plus (B) the aggregate Net Proceeds received after the Issue Date by the Issuer from the issuance or sale (other than to any of its Subsidiaries) of shares of Qualified Capital Stock of the Issuer or any options, warrants or rights to purchase such shares of Qualified Capital Stock of the Issuer, plus (C) the aggregate Net Proceeds received after the Issue Date by the Issuer (other than from any of its Subsidiaries) upon the exercise of any options, warrants or rights to purchase shares of Qualified Capital Stock of the Issuer, plus (D) the aggregate Net Proceeds received after the Issue Date by the Issuer from the issuance or sale (other than to any of its Subsidiaries) of Indebtedness or shares of Disqualified Capital Stock that have been converted into or exchanged for Qualified Capital Stock of the Issuer, together with the aggregate cash received by the Issuer at the time of such conversion or exchange, minus (E) the amount of any write-downs, writeoffs, other negative revaluations, and other negative extraordinary charges not otherwise reflected in Adjusted Consolidated Net Income of the Issuer during such period. 33 (b) Notwithstanding the foregoing paragraph (a) of this Section 4.10, the Issuer and its Subsidiaries may take the following actions so long as (in the case of clauses (ii), (iii), (iv) and (v) below) no Default or Event of Default shall have occurred and be continuing: (i) the payment of any dividend on Capital Stock of the Issuer or any Subsidiary within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of Section 4.10(a); (ii) the repurchase, redemption or other acquisition or retirement of any shares of any class of Capital Stock of the Issuer or any Subsidiary, in exchange for, or out of the aggregate Net Proceeds from, a substantially concurrent issue and sale (other than to a Subsidiary) of shares of Qualified Capital Stock of the Issuer; (iii) the repurchase, redemption, repayment, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness in exchange for, or out of the aggregate Net Proceeds from, a substantially concurrent issue and sale (other than to a Subsidiary) of (A) Subordinated Indebtedness (provided such Indebtedness is on terms no less favorable to the Holders of the Senior Notes than the terms of the Subordinated Indebtedness being redeemed) or (B) shares of Qualified Capital Stock of the Issuer; (iv) the repurchase, redemption or other acquisition of any Capital Stock of any Affiliate organized as a limited partnership in which the Issuer is a general partner pursuant to a redemption which is mandatory under the terms of such partnership's limited partnership agreement; (v) the repurchase or other acquisition of any Capital Stock of any Subsidiary, whether in one or a series of substantially contemporaneous transactions, which causes such Person to become a Wholly-Owned Subsidiary of the Issuer; (vi) the payment on behalf of any Subsidiary or Affiliate of the Issuer of its allocated pro rata costs associated with the issuance of the Senior Notes and any Investment in Capital Stock of such Person taken by the Issuer in payment thereof. (c) The actions described in clause (i) of Section 4.10(b) shall be Restricted Payments that shall be permitted to be made in accordance with Section 4.10(b) but shall reduce the amount that would otherwise be available for Restricted Payments under clause (3) of Section 4.10(a), provided that any dividend paid pursuant to clause (i) of Section 4.10(b) shall reduce the amount that would otherwise be available under clause (iii) of Section 4.10(a) when declared, but not also when subsequently paid pursuant to clause (i) of Section 4.10(b), and provided that any Net Proceeds received under clause (ii) or (iii)(B) of Section 4.10(a) shall not be included in subclauses (B) or (C) of clause (iv) of Section 4.10(a). Section 4.11 Limitation on Transactions with Affiliates. ------------------------------------------ The Issuer and each Guarantor shall not, and shall not permit any of their respective Subsidiaries to, enter directly or indirectly into, or permit to exist, any transaction or series of related transactions with or for the benefit of any Affiliate of the Issuer, such Guarantor or any of their respective Subsidiaries as the case may be, except for transactions made in good faith, the terms of which are fair and 34 reasonable to the Issuer, such Guarantor or their respective Subsidiaries, as the case may be, and are at least as favorable as the terms which could be obtained by the Issuer, Guarantor or their respective Subsidiaries, as the case may be, in a comparable transaction made on an arm's length basis with Persons who are not Affiliates of the Issuer, such Guarantor or their respective Subsidiaries, as the case may be, and the Issuer, such Guarantor or their respective Subsidiaries, as the case may be, delivers to the Trustee: (i) with respect to any transaction or series of transactions with an Affiliate of the Issuer, Guarantor or their respective Subsidiaries involving aggregate consideration in excess of $1,000,000, an Officers' Certificate from the Issuer, such Guarantor or their respective subsidiaries certifying that such transaction or transactions comply with this Section 4.11, (ii) with respect to any transaction or series of transactions with an Affiliate of the Issuer, Guarantor or their respective Subsidiaries involving aggregate consideration in excess of $2,000,000, a resolution of the Board of Directors set forth in an Officers' Certificate from the Issuer, such Guarantor or their respective subsidiaries certifying that such transaction or transactions comply with this Section 4.11 and that such transaction or transactions have been approved in good faith by a majority of the members of the Board of Directors who are independent (which resolution shall be conclusive evidence of compliance with this provision), provided that if there is not a majority of independent directors able to approve such transaction, the Issuer, such Guarantor or their respective Subsidiaries shall also deliver an opinion as to the fairness to the Issuer, such Guarantor or their respective Subsidiaries of such transaction or transactions from a financial point of view issued by an investment banking firm of recognized national standing, which opinion shall be conclusive evidence of compliance with this provision; and (iii) with respect to any transaction or series of transactions with an Affiliate of the Issuer, Guarantor or their respective Subsidiaries involving aggregate consideration in excess of $5,000,000, an Officers' Certificate as described in subclause (ii) above and an opinion as to the fairness to the Issuer, Guarantor or their respective Subsidiaries of such transaction or transactions from a financial point of view issued by an investment banking firm of recognized national standing, which resolution and opinion shall be conclusive evidence of compliance with this provision; provided, however, that this Section 4.11 shall not restrict: (1) transactions between the Issuer or Guarantor and any of their respective Subsidiaries or transactions between Subsidiaries of the Issuer or Subsidiaries of any Guarantor, (2) transactions pursuant to the Security Documents, (3) Restricted Payments permitted by Section 4.10, (4) any employee compensation arrangements by the Issuer or any of its Subsidiaries or by any Guarantor or any of its Subsidiaries which has been approved by a majority of such Person's disinterested directors and found in good faith by such directors to be in the best interests of the Issuer, Guarantor or any of its Subsidiaries, as the case may be; (5) customary directors' fees and indemnification and similar arrangements; and (6) purchases of the Senior Notes as permitted hereunder. Section 4.12 Limitation on Incurrence of Additional Indebtedness and ------------------------------------------------------- Issuances of Disqualified Capital Stock. - --------------------------------------- The Issuer shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or otherwise become liable for, contingently or otherwise (to "incur" or, as appropriate, an "incurrence"), any Indebtedness, including, for this purpose, borrowings in excess of $60,000,000 in aggregate principal amount under the Permitted Credit Facility, or issue any Disqualified Capital Stock, except that the Issuer or a Subsidiary may incur Indebtedness and the Issuer may issue shares of Disqualified Capital Stock if: 35 (a) the Consolidated Fixed Charge Coverage Ratio for the Issuer's Reference Period for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Capital Stock is issued would have been at least 1.75 to 1.0 if such additional Indebtedness is incurred or such Disqualified Capital Stock is issued; (b) no Default or Event of Default shall have occurred and be continuing at the time such additional Indebtedness is incurred or such Disqualified Capital Stock is issued or would occur as the result of such incurrence of such additional Indebtedness or the issuance of such Disqualified Capital Stock; and (c) the Issuer's Adjusted Consolidated Net Tangible Assets are equal to or greater than 150% of the consolidated Indebtedness of the Issuer and its Subsidiaries. Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of such Indebtedness, the Issuer and any Subsidiary of the Issuer may incur Permitted Indebtedness. Any Indebtedness incurred or Disqualified Capital Stock issued by any Person that is not a Subsidiary of the Issuer or any of its Subsidiaries, as the case may be, which Indebtedness or Disqualified Capital Stock is outstanding at the time such Person becomes a Subsidiary of, or is merged into, or consolidated with the Issuer or such Subsidiary, as the case may be, shall be deemed to have been incurred or issued, as the case may be, at the time such Person becomes a Subsidiary of, or is merged into, or consolidated with the Issuer or such Subsidiary. For purposes of determining any particular amount of Indebtedness under this Section 4.12, guarantees of Indebtedness otherwise included in the determination of such amount shall not also be included. Section 4.13 Limitation on Dividend and Other Payment Restrictions ----------------------------------------------------- Affecting Subsidiaries. - ---------------------- The Issuer shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, or permit or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Issuer to (i) pay dividends or make other distributions on its Capital Stock to the Issuer or any of its other Subsidiaries, (ii) make loans or advances or pay any Indebtedness or other obligations owed to the Issuer or to any other Subsidiary, or (iii) transfer any of its properties or assets to the Issuer or to any other Subsidiary, except encumbrances and restrictions existing under (a) this Indenture, any of the Security Documents, any credit agreement or other documents relating to the Permitted Credit Facility as in effect on the Issue Date, the indenture and all security documents relating to the Junior Notes and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive with respect to such dividend and other payment or transfer restrictions than those contained in the Permitted Credit Facility and the indenture and security documents relating to the Junior Notes as in effect on the Issue Date and (b) any agreement of a Person 36 acquired by the Issuer or a Subsidiary of the Issuer, which restrictions existed at the time of acquisition, were not put in place in anticipation of such acquisition, and are not applicable to any Person or property, other than the Person or any property of the Person so acquired. Section 4.14 Reserved. -------- Section 4.15 Change of Control. ----------------- (a) Subject to any restrictions on payment of the Senior Notes contained in the Collateral Trust Agreement, upon the occurrence of a Change of Control, each Holder shall have the right, at such Holder's option, subject to the terms and conditions of this Indenture, to require the Issuer to repurchase all or any part of such Holder's Senior Notes pursuant to an irrevocable, unconditional offer (a "Change of Control Offer") as described below at a cash purchase price equal to 101% of the principal amount thereof (the "Change of Control Purchase Price"), plus accrued and unpaid interest thereon to a date that is no later than 60 Business Days after the occurrence of such Change of Control (the date on which the repurchase is effected being referred to herein as the "Change of Control Payment Date"). (b) The Issuer shall notify the Trustee within five Business Days after each date upon which a Change of Control has occurred. Within 20 Business Days after the occurrence of each Change of Control, the Issuer shall make a Change of Control Offer to the Holders of Senior Notes to purchase all of the Notes at the Change of Control Purchase Price, plus accrued and unpaid interest thereon to the Change of Control Payment Date, by sending written notice of a Change of Control Offer, by first class mail, to each Holder at its registered address, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. The notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Change of Control Offer. Such notice shall state: (i) that the Change of Control Offer is being made pursuant to this Section 4.15, that all Senior Notes tendered and not withdrawn will be accepted for payment and that the Change of Control Offer shall remain open for a period of 20 Business Days or for such longer period as may be required by law; (ii) the Change of Control Purchase Price (including the amount of any accrued interest) and the Change of Control Purchase Date; (iii) that any Senior Note not tendered will continue to accrue interest; (iv) that, unless the Issuer defaults in making payment therefor, any Senior Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest, after the Change of Control Payment Date; (v) that Holders electing to have a Senior Note purchased pursuant to a Change of Control Offer will be required to surrender the Senior Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Senior Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Change of Control Payment Date; 37 (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the second Business Day prior to the Change of Control Payment Date, a telegram, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Senior Notes the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Senior Notes purchased; (vii) that Holders whose Senior Notes are purchased only in part will be issued new Senior Notes in a principal amount equal to the unpurchased portion of the Senior Notes surrendered; provided, however, that each Senior Note purchased and each new Senior Note issued shall be in an original principal amount of $1,000 or integral multiples thereof; and (viii) the circumstances and relevant facts regarding such Change of Control. (c) On or before the Change of Control Payment Date, the Issuer shall, to the extent lawful, (i) accept for payment Senior Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent in accordance with Section 2.14 U.S. Legal Tender sufficient to pay the purchase price plus accrued interest, if any, of all Senior Notes so tendered and (iii) deliver to the Trustee any Senior Notes so accepted together with an Officers' Certificate stating the Senior Notes or portions thereof being purchased by the Issuer. Upon receipt by the Paying Agent of the monies specified in clause (ii) above and a copy of the Officers' Certificate specified in clause (iii) above, the Paying Agent shall promptly mail to the Holders of Senior Notes so accepted payment in an amount equal to the purchase price plus accrued interest, if any; the Trustee shall promptly cancel all Senior Notes so accepted by the Issuer pursuant to the Change of Control Offer; and the Trustee, upon written demand of the Issuer in the form of an Officer's Certificate of the Issuer, shall promptly authenticate and mail to the Holders of any Senior Notes so accepted new Senior Notes equal in principal amount to any unpurchased portion of the Senior Notes surrendered. Any Senior Notes not so accepted shall be promptly mailed by the Paying Agent to the Holder thereof. For purposes of this Section 4.15, the Trustee shall act as the Paying Agent. The Issuer shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Purchase Date. The Issuer shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Issuer and repurchases all Senior Notes validly tendered and not withdrawn under such Change of Control Offer. Neither the Board of Directors of the Issuer nor the Trustee may waive the provisions of this Section 4.15 relating to the Issuer's obligation to make a Change of Control Offer. To the extent applicable and if required by law, the Issuer shall comply with Section 14 of the Exchange Act, the provisions of Regulation 14E and any other tender offer rules under the Exchange Act and other securities laws, rules, and regulations which may then be applicable to any offer by the Issuer to repurchase the Senior Notes at the option of Holders upon a Change of Control; and, if such laws, rules, and regulations require or prohibit any action inconsistent with the provisions of this Section 4.15, compliance by the Issuer with such laws, rules, and 38 regulations will not constitute a breach of the Issuer's obligations with respect to the provisions of this Section 4.15 by virtue thereof. Section 4.16 Limitation on Asset Sales. ------------------------- (a) The Issuer shall not, and shall not permit any Subsidiary to, consummate an Asset Sale without the consent of the Holders of not less than 66% in aggregate principal amount of the then outstanding Senior Notes unless: (i) the Issuer or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value (as determined in good faith by resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee, which determination shall be conclusive evidence of compliance with this provision) of the assets or Capital Stock being sold or issued or otherwise disposed of; and (ii) at least 75% of the value of the consideration for such Asset Sales consists of cash, Cash Equivalents or Exchange Assets or any combination thereof; provided that the amount of any liabilities (as shown on the Issuer's or such Subsidiary's most recent balance sheet) of the Issuer or any Subsidiary (other than contingent liabilities and liabilities that are Subordinated Indebtedness or otherwise by their terms subordinated to the Senior Notes or the Guarantees) that are assumed by the transferee of such assets pursuant to a customary novation agreement that releases the Issuer and such Subsidiary from further liability shall also be deemed to be cash for purposes of this provision. (b) Within 180 days after the receipt of any Net Cash Proceeds from an Asset Sale, the Issuer or such Subsidiary may only apply such Net Cash Proceeds: (i) to repay and permanently reduce the maximum amount that can be borrowed under the Permitted Credit Facility, (ii) to make Capital Expenditures or (iii) to make other acquisitions of assets to be used in the Issuer's and its Subsidiaries' oil and gas business, provided, however, that if a Default or Event of Default shall have occurred and is continuing under this Indenture before or at the time application of such Net Cash Proceeds would be made under this subsection (b), then the Issuer or such Subsidiary shall apply such Net Cash Proceeds: (x) to cure any Default or Event of Default that is a default in the payment of any Obligation hereunder, or (y) to repay and permanently reduce the maximum amount that can be borrowed under the Permitted Credit Facility. Pending the final application of any such Net Cash Proceeds, the Issuer or such Subsidiary may temporarily invest such Net Cash Proceeds in any manner that is not prohibited by the terms of this Indenture. Any Net Cash Proceeds from Asset Sales that are not applied as provided in clauses (i) through (iii) of this subsection (b) will (after expiration of the relevant periods) be deemed to constitute "Excess Cash." (c) Subject to any restrictions in payment of the Senior Notes contained in the Collateral Trust Agreement, when the amount of Excess Cash exceeds $10,000,000, the Issuer shall make an irrevocable, unconditional offer (an "Excess Cash Offer") to the Holders to purchase the maximum amount of Senior Notes which could be acquired by application of such amount of Excess Cash as described herein (the "Excess Cash Offer Amount"), in cash at the purchase price equal to 100% of the principal amount thereof (the "Excess Cash Offer Price"), together with accrued and unpaid interest to the Excess Cash Purchase Date. 39 (d) Notice of an Excess Cash Offer will be sent at least 20 and not more than 30 Business Days prior to the Excess Cash Purchase Date, by first-class mail, by the Issuer to each Holder at the address on the Note Register, with a copy to the Trustee. Such notice will set forth a date on which the Senior Notes tendered shall be accepted (the "Excess Cash Purchase Date") and the Excess Cash Offer shall remain open for at least 20 Business Days and close no later than 30 Business Days after the date such notice is given. The notice shall contain all instructions and materials necessary to enable such Holders to tender Senior Notes pursuant to the Excess Cash Offer and shall state the following terms: (i) that the Excess Cash Offer is being made pursuant to this Section 4.16 and that all Senior Notes or portions thereof properly tendered will be accepted for payment; provided, however, that if the aggregate principal amount of Senior Notes tendered in an Excess Cash Offer plus any accrued interest at the expiration of such offer exceeds the aggregate amount of the Excess Cash Offer, the offeror shall select the Senior Notes to be purchased on a pro rata basis with such adjustments as may be deemed appropriate by the Issuer (so that only Senior Notes in denominations of $1,000 or multiples thereof shall be purchased) and that the Excess Cash Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law; (ii) the Excess Cash Offer Price (including the amount of any accrued interest) and the Excess Cash Purchase Date; (iii) that any Senior Note not tendered will continue to accrue interest; (iv) that, unless the Issuer defaults in making payment therefor, any Senior Note accepted for payment pursuant to the Excess Cash Offer shall cease to accrue interest, after the Excess Cash Purchase Date; (v) that Holders electing to have a Senior Note purchased pursuant to a Excess Cash Offer will be required to surrender the Senior Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Senior Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Excess Cash Purchase Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the second Business Day prior to the Excess Cash Purchase Date, a telegram, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Senior Notes the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Senior Note purchased; and (vii) that Holders whose Senior Notes are purchased only in part will be issued new Senior Notes in a principal amount equal to the unpurchased portion of the Senior Notes surrendered; provided, however, that each Senior Note purchased and each new Senior Note issued shall be in an original principal amount of $1,000 or integral multiples thereof. (e) On or before the Excess Cash Purchase Date, the offeror shall (i) accept for payment Senior Notes or portions thereof tendered pursuant to the Excess Cash Offer which are to be purchased in accordance with clause (d)(i) above, (ii) deposit with the Paying Agent in 40 accordance with Section 2.14 U.S. Legal Tender sufficient to pay the purchase price plus accrued but unpaid interest thereon to the Excess Cash Purchase Date, if any, of all Senior Notes to be purchased and (iii) deliver to the Trustee any Senior Notes so accepted together with an Officers' Certificate stating the Senior Notes or portions thereof being purchased by the offeror. Upon receipt by the Paying Agent of the monies specified in clause (ii) above and a copy of the Officers' Certificate specified in clause (iii) above, the Paying Agent shall promptly mail to the Holders of Senior Notes so accepted payment in an amount equal to the purchase price plus accrued interest, if any; the Trustee shall promptly cancel all Senior Notes accepted by the offeror pursuant to the Excess Cash Offer; and the Trustee shall promptly authenticate and mail to the Holders of any Senior Notes so accepted new Senior Notes equal in principal amount to any unpurchased portion of the Senior Notes surrendered. Any Senior Notes not so accepted shall be promptly mailed by the Paying Agent to the Holder thereof. For purposes of this Section 4.16, the Trustee shall act as the Paying Agent. The Issuer shall publicly announce the results of the Excess Cash Offer on or as soon as practicable after the Excess Cash Purchase Date. (f) If the amount required to acquire all Senior Notes tendered by Holders pursuant to the Excess Cash Offer (the "Excess Cash Acceptance Amount") shall be less than the aggregate Excess Cash Offer Amount, then the excess of the Excess Cash Offer Amount over the Excess Cash Acceptance Amount may be used by the Issuer or any Subsidiary in any manner permitted by this Indenture. Upon consummation of any Excess Cash Offer made in accordance with the terms of this Indenture, the amount of Excess Cash shall be reduced to zero. (g) To the extent applicable and if required by law, the Issuer shall comply with Section 14 of the Exchange Act, the provisions of Regulation 14E and any other tender offer rules under the Exchange Act and other securities laws, rules, and regulations which may then be applicable to any Excess Cash Offer by the Issuer; and, if such laws, rules, and regulations require or prohibit any action inconsistent with the foregoing, compliance by the Issuer with such laws, rules, and regulations will not constitute a breach of its obligations with respect to the foregoing. Section 4.17 Limitation on Sale or Issuance of Capital Stock of -------------------------------------------------- Subsidiaries. - ------------ The Issuer shall not sell or otherwise dispose of any shares of Capital Stock of any Subsidiary and shall not permit any Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock except (a) to the Issuer or a Wholly-Owned Subsidiary, or (b) if all shares of Capital Stock of such Subsidiary are sold or otherwise disposed of, or (c) if such sale is a Public Equity Offering. Section 4.18 Limitations on Liens. -------------------- The Issuer shall not, and shall not permit any Subsidiary to, directly or indirectly, incur, or suffer to exist any Lien upon any of their respective properties or assets, whether now owned or hereafter acquired, other than Permitted Liens. Section 4.19 Limitation on Lines of Business. ------------------------------- The Issuer shall not engage in, and shall not permit any Subsidiaries of the Issuer to engage in, any line of business other than the oil and gas exploration and production business 41 and such business activities as are reasonably related or incidental thereto and any other business activities of the Issuer and its Subsidiaries conducted as of the Issue Date. Section 4.20 Guarantees of Subsidiaries. -------------------------- The Issuer shall cause each Subsidiary of the Issuer hereafter formed or acquired, to (a) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Subsidiary shall unconditionally guarantee all of the Issuer's obligations under the Senior Notes and this Indenture on the terms set forth in this Indenture and (b) deliver to the Trustee an Opinion of Counsel and an Officers' Certificate, stating that such supplemental indenture has been duly authorized, executed and delivered by such Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Subsidiary. Thereafter, such Subsidiary shall be a Guarantor for all purposes of this Indenture. ARTICLE FIVE SUCCESSOR CORPORATION Section 5.01 Merger, Consolidation and Sale of Assets. ---------------------------------------- No Guarantor shall consolidate with or merge with or into any other Person or, directly or indirectly, sell, lease, assign, transfer, or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Persons acting in concert, whether in a single transaction or through a series of related transactions, unless (i) either (a) the Guarantor is the continuing Person or (b) the resulting, surviving, or transferee entity is a corporation organized under the laws of the United States, any state thereof, or the District of Columbia, and shall expressly assume all of the obligations of the Guarantor under this Indenture, the Guarantees and the Security Documents by appropriate documents supplemental hereto and thereto, executed and delivered to the Trustee on or prior to the consummation of such transaction, in form satisfactory to the Trustee and in either such case the priority of the Liens created by this Indenture and the Security Documents in the Collateral are unaffected; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect to such transaction; and (iii) immediately after giving effect to such transaction on a pro forma basis, the Net Worth of the resulting, surviving or transferee entity is at least equal to the Net Worth of the Guarantor immediately prior to such transaction. The Issuer shall not consolidate with or merge with or into any other Person, or, directly or indirectly, sell, lease, assign, transfer, or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Persons acting in concert, whether in a single transaction or through a series of related transactions, unless (i) either (a) the Issuer is the continuing Person or (b) the resulting, surviving, or transferee entity is a corporation organized under the laws of the United States, any state thereof, or the District of Columbia, and shall expressly assume all of the obligations of the Issuer under this Indenture and the Senior Notes by a supplemental indenture, executed and delivered to the Trustee on or prior to the consummation of such transaction, in form satisfactory to the Trustee and in either such case the priority of the Liens created by this Indenture and the Security Documents in the Collateral are unaffected; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect to such transaction; (iii) immediately after giving effect to such transaction on a pro forma basis, the Net Worth of the resulting, surviving or transferee entity is at least equal to the Net Worth of the Issuer immediately prior to such transaction; (iv) except for a consolidation or merger of the Issuer with or into any Wholly-Owned Subsidiary, the resulting, surviving or transferee entity would immediately 42 thereafter be permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12(a); (v) each Guarantor shall have executed and delivered to the Trustee, in form satisfactory to the Trustee, a supplemental indenture confirming its obligation to pay the principal of, premium, if any, and interest on the Senior Notes pursuant to their respective Guarantees and to perform all their respective covenants hereunder and under the Guarantees; (vi) the Trustee shall have received an Opinion of Counsel to the effect that such consolidation, merger, sale, assignment, conveyance, transfer or lease will not result in the Issuer being required to make any deduction for or on account of taxes from payments made under or in respect of the Senior Notes. For purposes of this Section 5.01, the Consolidated Fixed Charge Coverage Ratio shall be determined on a pro forma consolidated basis (giving effect to the transaction) for the Reference Period immediately preceding such transaction. The Issuer shall not permit or allow any Subsidiary to consolidate with or merge with or into any other Person or, directly or indirectly, sell, lease, assign, transfer, or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Persons acting in concert, whether in a single transaction or through a series of related transactions, unless (i) the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary) or the transferee entity (A) is a corporation organized and existing under the laws of the United States, any state thereof, or the District of Columbia and (B) expressly assumes all the obligations of such Subsidiary pursuant to a supplemental indenture, in a form satisfactory to the Trustee, under the Senior Notes and this Indenture, (ii) immediately before and after giving effect to such transaction, no Default or Event of Default exists and immediately after giving effect to such transaction, the resulting, surviving or transferee entity could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12(a), and (iii) such Subsidiary or the Person formed by or surviving any such consolidation or merger or the transferee entity on a pro forma basis will have Net Worth (immediately after the transaction) equal to or greater than the Net Worth of such Subsidiary immediately preceding the transaction; provided that, the foregoing shall not apply to a merger, consolidation, sale or other such transaction between Subsidiaries and between the Issuer and any Subsidiary. In connection with any consolidation, merger, sale, lease, assignment, transfer or conveyance that is subject to the provisions of this Section 5.01, the Issuer shall deliver to the Trustee, in form and substance satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction, the supplemental indenture and any other supplemental document delivered pursuant to this Section 5.01 comply with this Section 5.01 and that all conditions precedent in this Indenture provided for in relation to such transaction have been complied with. Section 5.02 Successor Corporation Substituted. --------------------------------- Upon any consolidation, combination or merger, sale, assignment, conveyance, lease or transfer in accordance with Section 5.01, in which either the Issuer or the applicable Guarantor, as the case may be, is not the continuing corporation, the resulting surviving or transferee entity shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer or the Guarantor, as the case may be, under this Indenture, the Guarantees and the Senior Notes, as applicable, with the same effect as if such resulting, surviving or transferee entity had been 43 named as the Issuer or the Guarantors, as the case may be, herein and therein, as applicable, and thereafter (except in the case of a lease) the predecessor corporation shall be relieved of all further obligations and covenants under this Indenture, the Guarantees and the Senior Notes. ARTICLE SIX REMEDIES Section 6.01 Events of Default. ----------------- An "Event of Default" means any of the following events: (a) the failure to pay interest on any Senior Notes when the same becomes due and payable and such default continues for a period of 30 days: (b) the failure to pay the principal of or premium, if any, on any Senior Notes, when the same becomes due and payable, at maturity, upon redemption, by acceleration or otherwise (including the failure to make a payment to purchase Senior Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer); (c) a default in the performance or breach of the provisions of Section 5.01, failure to make or consummate a Change of Control Offer in accordance with Section 4.15, or failure to make or consummate an Excess Cash Offer in accordance with Section 4.16; (d) a default in the observance or performance of any covenant or agreement contained in this Indenture, the Senior Notes or any Guarantee which default continues for a single period of 30 days after the Issuer receives written notice specifying the default (and demanding that such default be remedied) from the Trustee, or the Issuer and the Trustee receive such a notice from the Holders of at least 25% of the then outstanding principal amount of the Senior Notes; provided, however, that such 30-day cure period shall be extended for an additional 30-day period if it is possible for the Issuer to cure such default within such additional 30-day period and the Issuer is diligently pursuing such cure; (e) a default in the observance or performance of any covenant or agreement contained in any Security Document which default continues after notice of such default is given, if such notice is required therein, and beyond the expiration of any applicable grace or cure period provided for therein; (f) a default which extends beyond any stated period of grace applicable thereto (including any extension thereof) under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Issuer or of any Subsidiary of the Issuer, having a principal amount in excess of $1 million, whether such Indebtedness now exists or is created after the Issue Date, or a failure to pay any such Indebtedness at its stated maturity; (g) one or more judgments in an aggregate amount in excess of $1,000,000 (unless covered by insurance by a reputable insurer as to which the insurer has acknowledged coverage) shall have been rendered against the Issuer or any of its Subsidiaries and such 44 judgments remain undischarged, unvacated, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; (h) the Senior Notes, this Indenture or any the Security Documents shall, at any time, cease to be in full force and effect (unless released by the Trustee or where no material adverse effect on the Holders would result) or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Issuer, any Guarantor or any of their Affiliates, or any of the Liens intended to be created by the Security Documents shall cease to be or shall not be a valid and perfected Lien having the priority contemplated thereby (other than by reason of release in accordance with the terms of this Indenture); (i) the Issuer or any Subsidiary of the Issuer, pursuant to or under or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding; (ii) consents to the entry of an order for relief against it in an involuntary case or proceeding; (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property; (iv) makes a general assignment for the benefit of its creditors; or (v) shall generally not pay its debts when such debts become due or shall admit in writing its inability to pay its debts generally; or (j) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Issuer or any Subsidiary of the Issuer, in an involuntary case or proceeding; (ii) appoints a Custodian of the Issuer or any Subsidiary of the Issuer, for all or substantially all of its properties; or (iii) orders the liquidation of the Issuer or any Subsidiary of the Issuer; (k) any of the Guarantees ceases to be in full force and effect or any of the Guarantees is declared to be null and void or invalid and unenforceable or any Guarantor denies or disaffirms its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of this Indenture). Section 6.02 Acceleration. ------------ Upon the happening of any Event of Default specified in Section 6.01 (other than an Event of Default specified in Section 6.01(i) or (j)), the Trustee may, or the Holders of at least 25% in aggregate principal amount of the then outstanding Senior Notes may, declare the 45 principal of, premium, if any, and accrued and unpaid interest on all the Senior Notes to be due and payable by notice in writing to the Issuer (and the Trustee if given by the Holders) specifying the respective Event of Default and that it is a "notice of acceleration," and the same shall become immediately due and payable. If an Event of Default of the type described in Section 6.01(i) or (j) occurs, then such 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. At any time after a declaration of acceleration with respect to the Senior Notes as described in the preceding paragraph, the Holders of a majority in aggregate principal amount of the Senior Notes then outstanding by written notice to the Issuer and the Trustee may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal of, premium, if any, or interest that has become due solely because of such acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal and premium, if any, which have become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Issuer has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in Section 6.01(i) or (j), the Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Event of Default has been cured or waived; provided, however, that such counsel may rely, as to matters of fact, on a certificate or certificates of Officers of the Issuer. No such rescission shall affect any subsequent Default or impair any right consequent thereto. Notwithstanding the foregoing, if an Event of Default specified in Section 6.01(f) hereof shall have occurred and be continuing, such Event of Default and any consequential acceleration shall be automatically rescinded if the Indebtedness that is the subject of such Event of Default has been repaid, or if the default relating to such Indebtedness is waived or cured and if such Indebtedness has been accelerated, then the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness (provided, in each case, that such repayment, waiver, cure or rescission is effected within a period of 10 days from the continuation of such default beyond the applicable grace period (including any extension thereof) or the occurrence of such acceleration), and written notice of such repayment or cure or waiver and rescission, as the case may be, shall have been given to the Trustee by the Issuer and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders or other evidence satisfactory to the Trustee of such events is provided to the Trustee, within 30 days after any such acceleration in respect of the Senior Notes and so long as such rescission of any such acceleration of the Senior Notes does not conflict with any judgment or decree as certified to the Trustee by the Issuer. Section 6.03 Other Remedies. -------------- If an Event of Default occurs and is continuing, the Trustee may, and upon the written request of not less than the Holders of at least a majority in aggregate principal amount of the then outstanding Senior Notes shall, pursue any available right or remedy by proceeding at law or in equity to collect the payment of the principal of, premium, if any, or interest on the Senior Notes, to realize upon any Collateral under the Security Documents, or to exercise any right or 46 remedy under or enforce the performance of any provision of the Senior Notes, this Indenture or the Security Documents. All rights of action, remedies and claims under this Indenture, the Senior Notes or the Security Documents may be enforced by the Trustee even if it does not possess any of the Senior Notes 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 accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. Section 6.04 Waiver of Past Defaults. ----------------------- Prior to the declaration of acceleration of the Senior Notes, the Holders of not less than a majority of the principal amount of the Senior Notes then outstanding by notice to the Trustee may, on behalf of the Holders of all the Senior Notes, waive any existing Default or Event of Default and its consequences under this Indenture, except a Default or Event of Default specified in Section 6.01(a) or (b) or in respect of any provision hereof which cannot be modified or amended without the consent of the Holders of a greater percentage of the principal amount of the Senior Notes then outstanding pursuant to Section 9.02. When a Default or Event of Default is so waived, it shall be deemed cured and shall cease to exist. This Section 6.04 shall be in lieu of Section 316(a)(1)(B) of the TIA and such Section 316(a)(1)(B) of the TIA is hereby expressly excluded from this Indenture and the Senior Notes, as permitted by the TIA. Section 6.05 Control by Majority. ------------------- Holders of the Senior Notes may not enforce this Indenture, the Senior Notes or the Security Documents except as provided in this Article Six or under the TIA. The Holders of not less than a majority of the principal amount of the then outstanding Senior Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided, however, that the Trustee may refuse to follow any direction (a) that conflicts with any rule of law or this Indenture, (b) that the Trustee determines may be unduly prejudicial to the rights of another Holder, or (c) that may expose the Trustee to personal liability for which reasonable indemnity provided to the Trustee against such liability shall be inadequate; provided, further, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction or this Indenture. This Section 6.05 shall be in lieu of Section 316(a)(1)(A) of the TIA, and such Section 316(a)(1)(A) of the TIA is hereby expressly excluded from this Indenture and the Senior Notes, as permitted by the TIA. Section 6.06 Limitation on Suits. ------------------- No Holder of any Senior Notes shall have any right to institute any proceeding with respect to this Indenture or the Senior Notes or any remedy hereunder, unless (i) the Holders of at least 25% in aggregate principal amount of the then outstanding Senior Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee under the Senior Notes and this Indenture, (ii) the Trustee has failed to institute such 47 proceeding within 30 days after receipt of such notice, request and offer of indemnity and (iii) the Trustee, within such 30-day period, has not received directions inconsistent with such written request by Holders of not less than a majority in aggregate principal amount of the then outstanding Senior Notes. The foregoing limitations shall not apply to a suit instituted by a Holder of a Senior Note for the enforcement of the payment of the principal of, premium, if any, or interest on, such Senior Notes on or after the respective due dates expressed or provided for in such Senior Note. A Holder may not use this Indenture to prejudice the rights of any other Holders or to obtain priority or preference over such other Holders. Section 6.07 Right of Holders to Receive Payment. ----------------------------------- Notwithstanding any other provision in this Indenture, and except as otherwise agreed by the Holder, the right of any Holder of a Senior Note to receive payment of the principal of, premium, if any, and interest on such Senior Note, on or after the respective due dates expressed or provided for in such Senior Note, or to bring suit for the enforcement of any such payment on or after the respective due dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. Section 6.08 Collection Suit by Trustee. -------------------------- If an Event of Default specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuer, or any other obligor on the Senior Notes, for the whole amount of the principal of, premium, if any, and accrued interest, remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum then provided for by the Senior Notes and this Indenture 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 6.09 Trustee May File Proofs of Claim. -------------------------------- The Trustee may 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, counsel, accountants and experts) and the Holders allowed in any judicial proceedings relative to the Issuer or any of its Subsidiaries, or any other obligor upon the Senior Notes, their creditors or their property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that 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 7.07. 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 48 plan of reorganization, arrangement, adjustment or composition affecting the Senior Notes 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 Six, it shall pay out such money in the following order: First: to the Trustee for amounts due under Section 7.07; Second: to Holders for interest accrued on the Senior Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Senior Notes for interest; Third: to Holders for the principal amounts (including any premium) owing under the Senior Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Senior Notes for the principal thereof (including any premium); and Fourth: the balance, if any, to the Issuer or to any other Person as may be directed by any court of competent jurisdiction. The Trustee, upon prior written notice to the Issuer, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. 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 Trustee, a court may in its discretion 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 6.11 does not apply to any suit by the Trustee, any suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% of the principal amount of the then outstanding Senior Notes. Section 6.12 Restoration of Rights and Remedies. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture, any Senior Note or any Security Documents and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Issuer, the other Guarantors, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. 49 Section 6.13 Collateral Trust Agreement; Limitation Rights. --------------------------------------------- (a) Each Holder of the Senior Notes, by acceptance thereof, specifically consents to the terms of the Collateral Trust Agreement and agrees to be a party to same as fully as if each such Holder executed a counterpart thereof. Notwithstanding anything to the contrary contained in this Article Six, Article Eleven, or elsewhere in this Indenture, by acceptance of the Senior Notes, each Holder acknowledges that (i) the Mortgages and Security Agreement have been and will be made and entered into by the Issuer and Blue Heel in favor of the Collateral Trustee which, pursuant to the Collateral Trust Agreement, shall hold the liens and security interests created by the Mortgages and Security Agreement for the benefit of the Trustee and the Holder and the lenders under the Permitted Credit Facility, and (ii) for as long as Indebtedness exists or can be incurred under the Permitted Credit Facility, the Collateral Trust Agreement, by its express terms, limits the rights of the Trustee and the Holders to take certain actions and to exercise certain rights granted to the Trustee and the Holders under this Indenture, the Mortgages and the Security Agreement, including, without limitation, the rights of the Trustee and the Holders to: (a) accelerate the Indebtedness evidenced by the Senior Notes and the Indenture under Section 6.02; (b) pursue or direct the pursuit of remedies under Section 6.03 or 6.05; (c) institute proceedings under Section 6.06; and (d) receive payment under Section 6.07. (b) Whenever a provision of this Article Six or elsewhere in this Indenture provides for or requires any action to be taken (including any action to direct or instruct the Trustee hereunder) by any percentage of Holders of Senior Notes or any majority of Holders of Senior Notes, such percentage of such majority, as the case may be, shall constitute the "Required Percentage" of the Holders of such Senior Notes, as such term is used in the Collateral Trust Agreement. ARTICLE SEVEN TRUSTEE Section 7.01 Duties of 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 under the Security Documents and use the same degree of care and skill in its exercise thereof as a prudent man 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 Trustee need perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to 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. However, in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the 50 requirements of this Indenture, but need not verify the truth or accuracy of the statements made therein. (c) Notwithstanding anything to the contrary herein contained, the Trustee may not be relieved from liability 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 Section 7.01(b). (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (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 6.02, 6.03, 6.04 or 6.05. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to Section 7.01 (a), (b), (c) and (d) and Section 7.02. (f) The Trustee shall not be liable for interest on any money or assets received by it except as the Trustee may agree in writing with the Issuer. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. Section 7.02 Rights of Trustee. ----------------- Subject to Section 7.01: (a) The Trustee may rely and shall be fully protected in acting or refraining from acting 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 consult with counsel of its selection and may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 10.04 and 10.05. 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. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. 51 (d) The Trustee shall not be liable for any action that it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers conferred upon it by this Indenture. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may makes such further inquiry or investigation into such facts or matters as it may see fit; and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled, upon reasonable notice to the Issuer or the Guarantors, as the case may be, to examine the books, records, and premises of the Issuer, the Guarantors and any of their Subsidiaries, personally or by agent or attorney and to consult with the Officers and representatives of the Issuer, the Guarantors and any of their Subsidiaries, including the Issuer's accountants and attorneys. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture or the Security Documents at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred by it in compliance with such request, order or direction. (g) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. (h) Delivery of reports, information and documents to the Trustee under Section 4.08 is for informational purposes only, and the Trustee's receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuer's and each Guarantor's compliance with any of their respective covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). Section 7.03 Individual Rights of Trustee. ---------------------------- The Trustee and any Agent, and any Affiliate of the Trustee or Agent, in its individual or any other capacity, may become the owner or pledgee of Senior Notes and may otherwise deal with the Issuer and any of its Subsidiaries or Affiliates, with the same rights it would have if it were not the Trustee or Agent, provided, however, such dealing with the Issuer or any of its Subsidiaries does not create a conflict of interest for such Trustee or Agent in the performance of its duties and obligations under this Indenture. The Trustee must, in any event, comply with Sections 7.10 and 7.11. Section 7.04 Trustee's Disclaimer. -------------------- The Trustee makes no representation as to the validity or adequacy of this Indenture, the Senior Notes or the Security Documents, and it shall not be accountable for the Issuer's use of the proceeds from the Senior Notes, and it shall not be responsible for any statement of the Issuer in this Indenture or the Senior Notes or the Security Documents or any other document in connection with the issuance of the Senior Notes other than the Trustee's certificate of authentication. 52 Section 7.05 Notice of Default. ----------------- If a Default or an Event of Default occurs and is continuing and if it is known to a Trust Officer, the Trustee shall mail to each Holder notice of the uncured Default or Event of Default within 60 days after the Event of Default occurs. Except in the case of a Default or an Event of Default in payment of principal of, premiums, if any, or interest on, any Senior Note, including an accelerated payment or a Default in payment on the Change of Control Payment Date pursuant to a Change of Control Offer or on the Excess Cash Purchase Date pursuant to a Excess Cash Offer, the Trustee may withhold the notice if and so long as its Board of Directors, the executive committee of its Board of Directors or a committee of its directors and/or Trust Officers in good faith determines that withholding the notice is in the interest of the Holders. The foregoing sentence of this Section 7.05 shall be in lieu of the proviso to Section 315(b) of the TIA and such proviso to Section 315(b) of the TIA is hereby expressly excluded from this Indenture and the Senior Notes, as permitted by the TIA. Section 7.06 Reports by Trustee to Holders. ----------------------------- Within 60 days after May 15 of each year beginning with 2002, the Trustee shall, to the extent that any of the events described in TIA Section 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief report dated as of such date that complies with TIA Section 313(a). The Trustee also shall comply with TIA Sections 313(b), (c) and (d). A copy of each report at the time of its mailing to Holders shall be mailed to the Issuer and filed with the Commission and each stock exchange, if any, on which the Senior Notes are listed. The Issuer shall promptly notify the Trustee if the Senior Notes become listed on any stock exchange and the Trustee shall comply with TIA Section 313(d). The Trustee shall provide the Holders, upon request by any such Holder, with any notice provided to the Trustee under Section 4.02. Section 7.07 Compensation and Indemnity. -------------------------- The Issuer shall pay to the Trustee from time to time such compensation for its services as has been agreed to in writing signed by the Issuer and the Trustee. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it (including costs and expenses of enforcing the Indenture and defending itself against any claim, whether asserted by the Issuer, any Guarantor, a Holder or any other person, or liability in connection with the exercise of its powers hereunder) in connection with the performance of its duties under this Indenture. Such expenses shall include the reasonable fees and expenses of the Trustee's agents, counsel, accountants and experts. The Issuer shall indemnify each of the Trustee (or any predecessor Trustee) and its agents, employees, stockholders, Affiliates and directors and officers for, and hold them each harmless against, any and all loss, liability, damage, claim or expense (including reasonable fees and expenses of counsel), including taxes (other than taxes based on the income of the Trustee) incurred by them, except for such actions to the extent caused by any negligence, bad faith or willful misconduct on their part, arising out of or in connection with the acceptance of 53 administration of this trust including the reasonable costs and expenses of defending themselves against any claim or liability in connection with the exercise or performance of any of their rights, powers or duties hereunder or under any Security Document. The Trustee shall notify the Issuer promptly of any claim asserted against the Trustee for which it may seek indemnity. At the Trustee's sole discretion, the Issuer shall defend the claim and the Trustee shall cooperate and may participate in the defense, provided, however, that any settlement of a claim shall be approved in writing by the Trustee if such settlement would result in an admission of liability by the Trustee or if such settlement would not be accompanied by a full release of the Trustee for all liability arising out of the events giving rise to such claims. Alternatively, the Trustee may at its option have separate counsel of its own choosing and the Issuer shall pay the reasonable fees and expenses of such counsel. To secure the Issuer's payment obligations in this Section 7.07, the Trustee shall have a Lien prior to the Senior Notes on all assets or money held or collected by the Trustee, in its capacity as Trustee, except the Collateral and any other assets or money held in trust to pay principal of or premium, if any, or interest on particular Senior Notes. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(i) or (j) occurs, such expenses and the compensation for such services (including reasonable fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The provisions of this Section 7.07 shall survive the termination of this Indenture. Section 7.08 Replacement of Trustee. ---------------------- The Trustee may resign at any time by so notifying the Issuer. By notice to the Issuer and the Trustee, and with the consent of the Issuer, the Holders of a majority in aggregate principal amount of the then outstanding Senior Notes may remove the Trustee and appoint a successor Trustee provided that the Issuer's consent shall not be unreasonably withheld, provided further, that if a Default or Event of Default shall have occurred and is continuing, the consent of the Issuer shall not be required. The Issuer may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10; (b) the Trustee is adjudged bankrupt or insolvent; (c) a receiver or other 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 Issuer shall notify each Holder of such event and 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 Senior Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Issuer. 54 A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the Lien provided in Section 7.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The Issuer shall mail notice of such successor Trustee's appointment to each Holder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the Holders of at least 10% in principal amount of the then outstanding Senior Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding any resignation or replacement of the Trustee pursuant to this Section 7.08, the Issuer's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. Section 7.09 Successor Trustee by Merger, Etc. -------------------------------- If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee; provided, however, that such corporation shall be otherwise qualified and eligible under this Article Seven. Section 7.10 Eligibility; Disqualification. ----------------------------- This Indenture shall always have a Trustee who satisfies the requirement of TIA Sections 310(a)(1), (2) and (5). The Trustee (or, in the case of a Trustee that is a corporation included in a bank holding company system, the related bank holding company) shall have a combined capital and surplus of at least $75 million as set forth in its most recent published annual report of condition, and have an office or agency in The City of New York sufficient to permit payments on the Senior Notes in such City as required by Section 2.03. In addition, if the Trustee is a corporation included in a bank holding company system, the Trustee, independently of such bank holding company, shall meet the capital requirements of TIA Section 310(a)(2). The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer are outstanding, if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. The provisions of TIA Section 310 shall apply to the Issuer, as obligor of the Senior Notes. Section 7.11 Preferential Collection of Claims Against Company. ------------------------------------------------- The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to 55 the extent indicated therein. The provisions of TIA Section 311(a) shall apply to the Issuer, as obligor on the Senior Notes. ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE Section 8.01 Satisfaction and Discharge of the Indenture; Legal -------------------------------------------------- Defeasance. ---------- This Indenture, the Guarantees, and each of the Security Documents will cease to be of further effect as to all then outstanding Senior Notes, and the Trustee, at the Issuer's request and expense, shall execute and deliver proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either (i) all Senior Notes, theretofore authenticated and delivered (except lost, stolen or destroyed Senior Notes which have been replaced or paid and Senior Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust) have been delivered to the Trustee for cancellation or (ii) all Senior Notes not therefore delivered to the Trustee for cancellation have become due and payable and the Issuer has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Senior Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Senior Notes to the date of deposit together with irrevocable instructions from the Issuer directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (b) the Issuer has paid all other sums payable under this Indenture by the Issuer; and (c) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with; provided, however, that such counsel may rely, as to matters of fact, on a certificate or certificates of Officers of the Issuer. Notwithstanding the satisfaction and discharge of this Indenture pursuant to the preceding paragraph of this Section 8.01, the obligations of the Issuer to the Trustee under Section 7.07 and, if funds shall have been deposited with the Trustee pursuant to such paragraph, the obligations of the Trustee under Section 8.02 and 8.03 shall survive. The Issuer may, at its option and at any time, elect to have its obligations and the corresponding obligations of each Guarantor discharged with respect to the outstanding Senior Notes ("Legal Defeasance"). Such Legal Defeasance means that the Issuer shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Senior Notes and satisfied all of its obligations with respect to the Senior Notes (except as to (i) rights of registration of transfer, substitution, and exchange of Senior Notes and the Issuer's right of optional redemption, (ii) rights of Holders to receive payments of principal of premium, if any, and interest on the Senior Notes (but not the Change of Control Purchase Price or the Excess Cash Purchase Price), solely from the trust fund described in this Article Eight and as more fully set forth below, when such payments are due (or at such time as the Senior Notes would be subject to redemption at the option of the Issuer in accordance with this Indenture), (iii) the rights, obligations and immunities of the Trustee under this Indenture, and (iv) the rights and obligations of the Issuer under this Article Eight (the foregoing exceptions (i) through (iv) are collectively referred to as the "Reserved Rights"). 56 In order to exercise Legal Defeasance: (a) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders cash in U.S. Legal Tender, non-callable U.S. Government Obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants or investment bank, to pay the principal of, premium, if any, and interest on the Senior Notes on the stated date for payment thereof or on the applicable Redemption Date, as the case may be, and at such time the Issuer must specify to the Trustee whether the Senior Notes are being defeased to the Stated Maturity Date or to a particular Redemption Date; (b) the Issuer shall have delivered to the Trustee an Opinion of Counsel (who may be outside counsel to the Issuer but shall not be employed by the Issuer or any of its Affiliates) acceptable to the Trustee confirming that (i) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default under Section 6.01(i) or (j) from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit (or one day after such other greater period of time in which any such deposit may remain subject to set aside or avoidance under applicable Bankruptcy Law, e.g., one year after such deposit); (d) such Legal Defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other agreement or instrument to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any its Subsidiaries is bound; (e) the Issuer shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Issuer with the intent of preferring the Holders over any other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Issuer or others; (f) the Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance have been complied with; provided, however, that such counsel may rely, as to matters of fact, on a certificate or certificates of Officers of the Issuer; and (g) the Issuer shall have delivered to the Trustee an Opinion of Counsel (who may be outside counsel to the Issuer but shall not be employed by the Issuer or any if its Affiliates) to the effect that (i) after the passage of 90 days (or any greater period of time in which any such deposit of trust funds may remain subject to any Bankruptcy Law insofar as such law applies to the Issuer or any Guarantor) following such deposit, such funds will not be subject 57 to set aside or avoidance under any Bankruptcy Law or other similar laws affecting creditors' rights generally and (ii) such deposit will not result in the Issuer or any Guarantor, the trust or the Trustee being subject to regulation under the Investment Company Act of 1940, as amended. Section 8.02 Application of Trust Money. -------------------------- The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or U.S. Government Obligations deposited with it pursuant to Section 8.01, and shall apply the deposited U.S. Legal Tender and the money from U.S. Government Obligations in accordance with this Indenture to the payment of the principal of, premium, if any, and interest on the Senior Notes. The Trustee shall be under no obligation to invest said U.S. Legal Tender or U.S. Government Obligations except as it may agree in writing with the Issuer. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed or assessed against the U.S. Legal Tender or U.S. Government Obligations deposited pursuant to Section 8.01 or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of outstanding Senior Notes. Section 8.03 Repayment to the Issuer. ----------------------- Subject to Section 8.01, the Trustee and the Paying Agent shall promptly pay to the Issuer upon request any excess U.S. Legal Tender or U.S. Government Obligations held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Issuer upon request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for one year; provided, however, that the Trustee or such Paying Agent, before being required to make any payment, may at the expense of the Issuer cause to be published once in the national edition of The Wall Street Journal or mail to each Holder ----------------------- entitled to such money notice that such money remains unclaimed and that after a date specified therein which shall be at least 30 days from the date of such publication or mailing any unclaimed balance of such money then remaining will be repaid to the Issuer. After payment to the Issuer, Holders entitled to such money must look to the Issuer for payment as general creditors unless an applicable law designates another Person. Section 8.04 Reinstatement. ------------- If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender or U.S. Government Obligations in accordance with Section 8.01 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 Issuer's obligations under this Indenture and the Senior Notes, any Guarantor's obligations under its Guarantee and the obligations and Liens under the Security Documents shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01 until such time as the Trustee or Paying Agent is permitted to apply all such U.S. Legal Tender or U.S. Government Obligations in accordance with Section 8.01; provided, however, that if the Issuer has made any payment of interest or premium on or principal of any Senior Notes because of the reinstatement of its obligations, the Issuer shall be 58 subrogated to the rights of the Holders of such Senior Notes to receive such payment from the U.S. Legal Tender or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE NINE MODIFICATION OF THE INDENTURE Section 9.01 Without Consent of Holders. -------------------------- Subject to the provisions of Section 9.02, the Issuer, the Guarantors and the Trustee may modify or amend, waive or supplement the provisions of this Indenture (including the Senior Notes and any Guarantee) without notice to or consent of any Holder: (a) to cure any ambiguity, defect or inconsistency; (b) to comply with Section 5.01 of this Indenture, (c) to provide for uncertificated Senior Notes in addition to certificated Senior Notes; (d) to comply with any requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; (e) to make any change that would provide any additional benefits or rights in favor of the Holders; or (f) to make any other change with respect to matters or questions arising under this Indenture provided that such change shall not materially adversely affect the interests of the Holders. Section 9.02 With Consent of Holders. ----------------------- The provisions of this Indenture (including the Senior Notes and any Guarantee) and the Security Documents may be modified or amended with the consent of the Holders of not less than a majority of the principal amount of the then outstanding Senior Notes, provided that no such modification or amendment may, without the consent of the Holders of not less than 66% of the aggregate principal amount of the Senior Notes then outstanding, (i) prior to the date on which a Change of Control Offer is required to be made, reduce the Change of Control Purchase Price or alter the provisions of Section 4.15, or (ii) prior to the date upon which an Excess Cash Offer is required to be made, reduce the Excess Cash Offer Price or alter the provisions of Section 4.16 in a manner adverse to the Holders; provided further that no such modification or amendment may, without the consent of the Holders of all of the Senior Notes then outstanding, directly or indirectly, (i) change the Stated Maturity Date or the date any installment of principal of, or any installment of interest on, any Senior Note is due, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Senior Note or any premium or the interest thereon is payable or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity date thereof (or, in the case of redemption, on or after the Redemption Date), or, (x) after the date upon which a Change of Control Offer is required to be made, reduce the Change of Control Purchase Price or alter the provisions of Section 4.15 or (y) after the date upon which an Excess Cash Offer is required to be made, reduce the Excess Cash Offer Price or alter the provisions of Section 4.16 in a manner adverse to the Holders, (ii) reduce the percentage of the outstanding Senior Notes whose consent is required for any such amendment, supplemental indenture, or waiver provided for in this Indenture, (iii) modify the provisions of Section 6.04, except to increase any required percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of all Holders of the Notes, (iv) adversely affect the ranking of the Senior Notes or the Guarantees; or (v) release any Collateral 59 from the Liens created pursuant to the Security Documents or release any of the Guarantees, in any case otherwise than in accordance with the terms of this Indenture. Section 9.03 Compliance with TIA. ------------------- Every amendment, waiver or supplement of this Indenture shall comply with the TIA as then in effect; provided, however, that this Section 9.03 shall not of itself require that this Indenture or the Trustee be qualified under the TIA or constitute any admission or acknowledgment by any party hereto that any such qualification is required prior to the time this Indenture and the Trustee are required by the TIA to be so qualified. Section 9.04 Revocation and Effect of Consents. --------------------------------- Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Senior Note or portion of a Senior Note that evidences the same debt as the consenting Holder's Senior Note, even if notation of the consent is not made on any Senior Note. Subject to the following paragraph, any such Holder or subsequent Holder may revoke the consent as to such Holder's Senior Note or portion of such Senior Note by notice to the Trustee or the Company and the Issuer received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Senior Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. An amendment, supplement or waiver becomes effective upon receipt by the Trustee of such Officers' Certificate and evidence of consent by the Holders of the requisite percentage in aggregate principal amount of then outstanding Senior Notes. The Issuer may, but shall not be obligated to, fix a Record Date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which Record Date shall be at least 30 days prior to the first solicitation of such consent. If a Record Date is fixed, then notwithstanding the second sentence of the immediately preceding paragraph, those Persons who were Holders at such Record Date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such Record Date. No such consent shall be valid or effective for more than 90 days after such Record Date unless consents from Holders of the requisite percentage in principal amount of then outstanding Senior Notes required hereunder for the effectiveness of such consents shall have also been given and not revoked within such 90 day period. Section 9.05 Notation on or Exchange of Notes. -------------------------------- If an amendment, supplement or waiver to the provisions of this Indenture changes the terms of a Senior Note, the Trustee may require the Holder of such Senior Note to deliver it to the Trustee. The Trustee may place an appropriate notation on the Senior Note about the changed terms and return it to the Holder. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Senior Note shall issue and the Trustee shall authenticate a new Senior Note that reflects the changed terms. 60 Section 9.06 Trustee. ------- The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; provided, however, that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. In executing such amendment, supplement or waiver, the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and shall be fully protected in relying upon an Opinion of Counsel and an Officers' Certificate of the Issuer, each stating that no Event of Default shall occur as a result of such amendment, supplement or waiver and that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture, provided the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Officers' Certificates of the Issuer. Such Opinion of Counsel shall not be an expense of the Trustee. ARTICLE TEN MISCELLANEOUS Section 10.01 TIA Controls. ------------ If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control; provided, however, that this Section 10.01 shall not of itself require that this Indenture or the Trustee be qualified under the TIA or constitute any admission or acknowledgment by any party hereto that any such qualification is required prior to the time this Indenture and the Trustee are required by the TIA to be so qualified. Section 10.02 Notices. ------- Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Issuer: Southwest Royalties, Inc. 407 North Big Spring Midland, Texas 79701-4326 Telecopier Number: (915) 688-0191 Attn: Bill E. Coggin if to MRO: MRO Holdings, Inc. 400 West Wall Street Suite 3010 Midland, Texas 79701 Telecopier Number (915) 687-4058 Attn: Bill E. Coggin 61 if to Blue Heel: Blue Heel Company 407 North Big Spring Midland, Texas 79701-4326 Telecopier Number (915) 688-0191 Attn: Bill E. Coggin if to the Company: Southwest Royalties Holdings, Inc. 407 North Big Spring Midland, Texas 79701-4326 Telecopier Number: (915) 688-0191 Attn: Bill E. Coggin with a copy to: Baker, Donelson, Bearman & Caldwell, P.C. 1800 Republic Centre 633 Chestnut Street Chattanooga, TN 37450-1800 Telecopier Number: (423) 752-9560 Attn: J. Porter Durham, Jr. if to the Trustee: Wilmington Trust Company 1100 North Market Street Wilmington, DE 19890 Telecopier Number: (302) 427-4797 Attn: Corporate Trust Administration Ref: Southwest Royalties Indenture 2002 Each of the Company, the Issuer, Blue Heel, MRO and the Trustee by written notice to the other parties may designate additional or different addresses for notices to such Person. Any notice or communication to the Company, the Issuer, Blue Heel, MRO or the Trustee shall be deemed to have been given or made as of the date so delivered if hand delivered; when receipt is acknowledged, if faxed; and five calendar days after mailing, if sent by registered or certified mail, postage prepaid (except that a notice of change of address and notice to the Trustee shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar ten days prior to such mailing and shall be sufficiently given to him if so mailed within the time prescribed. 62 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, it is duly given, whether or not the addressee receives it. Section 10.03 Communications by Holders with Other Holders. -------------------------------------------- Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Senior Notes. The Company, the Issuer, the Trustee, the Registrar and any other Person shall have the protection of TIA (S) 312(c). Section 10.04 Certificate and Opinion as to Conditions Precedent. -------------------------------------------------- Upon any request or application by the Issuer to the Trustee to take any action under this Indenture, the Issuer shall furnish to the Trustee: (a) an Officers' Certificate, in form and substance satisfactory to the Trustee, stating that, in the opinion of the signers, all conditions precedent to be performed by the Issuer provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel, in form and substance satisfactory to the Trustee, stating that, in the opinion of such counsel, all such conditions precedent to be performed by the Issuer provided for in this Indenture relating to the proposed action have been complied with (which counsel, as to factual matters, may rely on an Officers' Certificate). Section 10.05 Statements Required in Certificate or Opinion. --------------------------------------------- Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers' Certificate required by Section 4.06, shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he has made such examination or investigation as is reasonably 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 each such Person, such condition or covenant has been complied with. 63 Section 10.06 Rules by Trustee, Paying Agent, Registrar. ----------------------------------------- The Trustee may make reasonable rules in accordance with the Trustee's customary practices for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. Section 10.07 Legal Holidays. -------------- A "Legal Holiday" used with respect to a particular place of payment is a Saturday, Sunday or a day on which banking institutions in New York, New York, or at such place of payment are not required to be open. If a payment date is a Legal Holiday at such other place, payment may be made at such place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 10.08 Governing Law. ------------- THIS INDENTURE, THE GUARANTEES AND THE SENIOR NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK. Each of the parties hereto agrees to submit to the non-exclusive jurisdiction of the competent courts of the State of New York sitting in The City of New York or the United States District Court for the Southern District of New York, in any action or proceeding arising out of or relating to this Indenture or the Senior Notes. The Company, the Issuer, Blue Heel and MRO each hereby irrevocably designates CT Corporation System, located at 1633 Broadway, New York, New York 10019, as its designee, appointee and agent to receive, for and on its behalf, service of process in the State of New York in any legal action or proceeding with respect to this Indenture, the Senior Notes, the Guarantees or the Security Documents to which any of them is a party. It is understood that a copy of such process served on such agent will be promptly forwarded by overnight courier to the Company, the Issuer, Blue Heel and/or MRO, as the case may be, at its respective address set forth in Section 10.02 hereof or such substitute address designated pursuant to Section 10.02, but the failure of such party, as the case may be, to receive such copy shall not affect in any way the service of such process. The Company, Issuer, Blue Heel and MRO further irrevocably consent to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it, as the case may be, at its said address, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Trustee or any Holder of a Senior Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company, the Issuer, Blue Heel or MRO in any other jurisdiction. Section 10.09 No Adverse Interpretation of Other Agreements. --------------------------------------------- This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company, the Issuer, Blue Heel, MRO or any of their respective Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. 64 Section 10.10 No Personal Liability. --------------------- No director, officer, employee or stockholder, as such, of the Company, MRO, the Issuer, Blue Heel or any of their respective Subsidiaries shall have any liability for any obligations of the Company, the Issuer, MRO, Blue Heel or any of their respective Subsidiaries under the Senior Notes, the Guarantees, this Indenture or the Security Documents or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Senior Notes by accepting a Senior Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Senior Notes. Section 10.11 Successors. ---------- All agreements of the Company, the Issuer and any Guarantor in this Indenture or the Senior Notes or under any Guarantee, as the case may be, shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. Section 10.12 Duplicate Originals. ------------------- All parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together shall represent the same agreement. Section 10.13 Severability. ------------ In case any one or more of the provisions in this Indenture or in the Senior Notes shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. Section 10.14 Independence of Covenants. ------------------------- All covenants and agreements in this Indenture and the Senior Notes shall be given independent effect so that if any particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or otherwise be within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. Section 10.15 Collateral Trust Agreement; Limitations. --------------------------------------- Each Holder of the Senior Notes, by acceptance thereof, specifically consents to the terms of the Collateral Trust Agreement and agrees to be a party to same as fully as if each such Holder executed a counterpart thereof. Notwithstanding anything to the contrary contained in Indenture, by acceptance of the Senior Notes, each Holder acknowledges that, for as long as Indebtedness exists or can be incurred under the Permitted Credit Facility, the Collateral Trust Agreement, by its express terms, limits the ability of the Issuer to make, and the rights of the Holders to receive, payment on the Senior Notes, including, without limitation, the rights and obligations of the Holders and the Issuer under Section 3.04 regarding Mandatory Redemption, Section 4.15 regarding a Change of Control Offer, and Section 4.16 regarding Excess Cash Offer. ARTICLE ELEVEN SECURITY Section 11.01 Security Documents. ------------------ The due and punctual payment of the principal of and interest on the Senior Notes when and as the same shall be due and payable, whether on an Interest Payment Date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of and interest (to the extent permitted by law), if any, on the Senior Notes and performance of all other obligations of the Issuer and the Guarantors to the Holders of Senior Notes or the Trustee under this Indenture, the Guarantees and the Senior Notes according to the terms hereunder or 65 thereunder, shall be secured as provided in the Security Documents which the Company, the Issuer, MRO and Blue Heel have entered into simultaneously with the execution of this Indenture. Each Holder of Senior Notes, by its acceptance thereof, consents and agrees to the terms of the Security Documents as the same may be in effect or may be amended from time to time in accordance with their terms and authorizes and directs the Trustee, to enter into the Security Documents and to perform its obligations and exercise its rights thereunder in accordance therewith. The Issuer and the Guarantors shall deliver to the Trustee copies of all documents delivered to the Collateral Trustee pursuant to any Security Agreement or Mortgage, and shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Security Documents, to assure and confirm to the Trustee and/or the Collateral Trustee the security interests in the Collateral, by the Security Documents or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Senior Notes secured thereby, according to the intent and purposes herein or therein expressed. The Issuer and the Guarantors shall take, and the Issuer and the Guarantors shall cause their Subsidiaries to take, upon request of the Trustee or the Collateral Trustee, any and all actions reasonably required to cause the Security Documents to create and maintain, as security for the obligations of the Issuer and the Guarantors under this Indenture, the Guarantees and the Senior Notes, a valid and enforceable Lien and Pledge in and on all the Collateral (junior only in right to payment to the Permitted Credit Facility and, in the case of collateral pledged under the MRO Pledge Agreement and the Company Pledge Agreement, junior only in priority to the Junior Notes), in favor of the Collateral Trustee and/or the Trustee, as the case may be, for the benefit of the Holders. Section 11.02 Recording and Opinions. ---------------------- (a) The Company, the Issuer, MRO or Blue Heel, as the case may be, shall take or cause to be taken all action required to perfect, maintain, preserve and protect the Lien in the Collateral granted by the Security Documents, including, without limitation, the filing of financing statements, continuation statements and any instruments of further assurance, in such manner and in such places as may be required by law fully to preserve and protect the rights of the Holders, the Trustee and/or the Collateral Trustee under this Indenture and the Security Documents to all property comprising the Collateral. The Company shall from time to time promptly pay all financing and continuation statement recording and/or filing fees, charges and taxes relating to this Indenture, the Security Documents, any amendments thereto and any other instruments of further assurance required pursuant to the Security Documents. (b) The Issuer shall furnish to the Trustee, at closing and at such other time as required by Section 314(b) of the TIA, Opinions of Counsel either (a) substantially to the effect that, in the opinion of such counsel, this Indenture and the grant of a Lien in the Collateral intended to be made by the Security Documents and all other instruments of further assurance, including, without limitation, financing statements, have been properly recorded and filed to the extent necessary to perfect the Lien in the Collateral created by the Security Documents and reciting the details of such action, and stating that as to the Lien created pursuant to the Security Documents, such recordings and filings are the only recordings and filings necessary to give notice thereof and that no re-recordings or refilings are necessary to maintain such notice (other than as stated in such opinion), or (b) to the effect that, in the opinion of such counsel, no such action is necessary to perfect such Lien. 66 (c) The Issuer shall furnish to the Trustee on September 1 in each year, beginning with 2002, an Opinion of Counsel, dated as of such date, either (i)(A) stating that, in the opinion of such counsel, action has been taken with respect to the recording, filing, re-recording and refiling of all supplemental indentures, Security Documents, financing statements, continuation statements and other documents as is necessary to maintain the Lien of the Security Documents and reciting with respect to the Lien in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given, and (B) stating that, based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements, continuation statements and other documents have been executed and filed that are necessary as of such date to maintain the Lien of the Holders, the Trustee and any agent for the Collateral hereunder and under the Security Documents with respect to the Collateral, or (ii) stating that, in the opinion of such counsel, no such action is necessary to maintain such Lien. Section 11.03 Release of Collateral. --------------------- (a) The Trustee shall not at any time release Collateral from any Lien created by any Security Document unless such release is in accordance with the provisions of this Indenture and the Security Documents. (b) At any time when an Event of Default shall have occurred and be continuing, no release of Collateral pursuant to the provisions of this Indenture and the Security Documents shall be permitted or shall be effective as against the Holders of the Senior Notes. (c) The release of any Collateral from the terms of the Security Documents shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to this Indenture and the Security Documents. To the extent applicable, the Company shall cause TIA Section 314(d) relating to the release of property from the Lien of the Security Documents and relating to the substitution therefor of any property to be subjected to the Lien of the Security Documents to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an Officer of the Issuer, except in cases where TIA Section 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected or approved by the Trustee in the exercise of reasonable care. A Person is "independent" if such Person (a) is in fact independent, (b) does not have any direct financial interest or any material indirect financial interest in the Issuer or in any Affiliate of the Issuer and (c) is not an officer, employee, promoter, underwriter, trustee, partner or director or person performing similar functions to any of the foregoing for the Issuer or any Affiliate of the Issuer. The Trustee shall be entitled to receive and rely upon a certificate provided by any such Person confirming that such Person is independent within the foregoing definition. Section 11.04 Specified Releases of Collateral. -------------------------------- (a) The Issuer shall be entitled to obtain a full release of all of the Liens evidenced by the Company Pledge Agreement and MRO Pledge Agreement upon compliance with the conditions precedent set forth in Section 8.01 for satisfaction and discharge of this Indenture or for Legal Defeasance pursuant to Section 8.01. The Issuer shall be entitled to obtain a full release of all of the Collateral from the Lien of this Indenture and of the Security Documents upon (i) complinace with the conditions precedent set forth in Section 8.01 for satisfaction and discharge of this Indenture or for Legal Defeasance pursuant to Section 8.01 and (ii) payment in full of all Indebtedness under the Permitted Credit Facility. Upon delivery by the Issuer to the Trustee of an 67 Officers' Certificate and an Opinion of Counsel, each to the effect that such conditions precedent have been complied with (and which may the same Officers' Certificate and Opinion of Counsel required by Article Eight), the Trustee shall forthwith take all necessary action (as the request of and the expense of the Issuer) to release and reconvey to the Issuer all of the Collateral on which it then holds any Lien, and shall deliver such Collateral then in its possession to the Issuer, including, without limitation, the execution and delivery of releases and satisfactions wherever required. (b) Upon compliance with the conditions and requirements set forth in Section 4.16, 11.03(a), 11.03(b), and this subsection 11.04(b) regarding the delivery of an Officers' Certificate and an Opinion of Counsel, the Issuer shall be entitled to obtain a release or the Trustee's consent to a release of any Liens on Collateral disposed of in an Asset Sale or the proceeds of such Collateral held in any cash collateral account pursuant to the Collateral Trust Agreement or otherwise. The Trustee shall take all necessary action (at the request of and the expense of the Issuer) to consent to a release or to release the Liens on such Collateral, inclduing delivering such Collateral in its possession to the Issuer, only after the Issuer delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each to the effect that all of the conditions for the sale or disposition of, or the release of Liens on, the Collateral set forth under Sections 4.16, 11.30(a) and 11.03(b) have been complied with. The Issuer covenants and agrees that it shall not give the Collateral Trustee (i) a Release Notice under Section 2.4 of the Collateral Trust Agreement or (ii) a Release Notice under Section 4.4(c) of the Collateral Trust Agreement until all conditions and requirements set forth in Section 4.16, 11.03(a), 11.03(b) and this subsection 11.04(b) of this Indenture have been met. Section 11.05 Authorization of Actions to Be Taken by the Trustees ---------------------------------------------------- Under the Security Documents. - ---------------------------- (a) Subject to the provisions of the applicable Security Documents and Article Six hereof, (a) the Trustee may take all actions it deems necessary or appropriate in order to (i) enforce any of the terms of the Security Documents and (ii) collect and receive any and all amounts payable in respect of the Obligations of the Guarantors and/or the Issuer hereunder and (b) the Trustee shall have power to institute and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any act that may be unlawful or in violation of the Security Documents or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including the power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with such enactment, rule or order would impair the security interest thereunder or be prejudicial to the interests of the Holders or of the Trustee). (b) Subject to the provisions of the applicable Security Documents regarding the appointment of a successor Collateral Trustee, the Trustee is hereby authorized to become the Collateral Trustee under the Mortgages, the Security Agreement and Collateral Trust Agreement. Section 11.06 Authorizaiton of Receipt of Funds by the Trustee Under ------------------------------------------------------ the Security Documents. - ---------------------- The Trustee is authorized to receive any funds for the benefit of the Holders distributed under the Security Documents, and to make further distributions of such funds to the Holders in accordance with the provisions of Section 6.10 and the other provisions of this Indenture. 68 ARTICLE TWELVE GUARANTEES Section 12.01 Unconditional Guarantees. ------------------------ (a) The Company, MRO and Blue Heel hereby jointly and severally unconditionally and irrevocably guarantee to each Holder of a Senior Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Senior Notes and the Obligations of the Issuer or any Guarantors to the Holders or the Trustee hereunder or thereunder, that: (i) the principal and interest on the Senior Notes shall be duly and punctually paid in full when due, whether at maturity, upon redemption at the option of Holders pursuant to the provisions of the Senior Notes relating thereto, by acceleration or otherwise, and interest (to the extent permitted by law) on the overdue principal, premium, if any, and interest, if any, on the Senior Notes and all other Obligations of the Issuer to the Holders or the Trustee thereunder or hereunder (including amounts due the Trustee under Section 7.07 hereof) and all other Obligations shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Senior Notes or any of such other Obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other Obligation of the Issuer to the Holders under this Indenture or under the Senior Notes, for whatever reason, the Company, MRO and Blue Heel shall be obligated to pay, or to perform or 69 cause the performance of, the same immediately. An Event of Default under this Indenture or the Senior Notes shall constitute an event of default under this Guarantee and shall entitle the Holders of Senior Notes to accelerate the Obligations of the Company, MRO and Blue Heel in the same manner and to the same extent as the Obligations of the Issuer. (b) Subject to the provisions of this Article Twelve, each future Subsidiary of the Issuer (a "Subsidiary Guarantor"), if any, shall, jointly and severally, unconditionally and irrevocably guarantee, on a senior basis (such guarantee to be referred to herein as a "Subsidiary Guarantee"), to each Holder of a Senior Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Senior Notes or the Obligations of the Issuer, the Company, Blue Heel, MRO or any other Subsidiary Guarantors to the Holders or the Trustee hereunder or thereunder, that: (i) the principal of, premium, if any, and interest on the Senior Notes shall be duly and punctually paid in full when due, whether at maturity, upon redemption at the option of Holders pursuant to the provisions of the Senior Notes relating thereto, by acceleration or otherwise, and interest (to the extent permitted by law) on the overdue principal, premium, if any, and interest, if any, on the Senior Notes and all other Obligations of the Issuer to the Holders or the Trustee hereunder (including amounts due the Trustee under Section 7.07 hereof) and all other Obligations shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Senior Notes or any of such other Obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other Obligation of the Issuer to the Holders under this Indenture or under the Senior Notes, for whatever reason, each Subsidiary Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. An Event of Default under this Indenture or the Senior Notes shall constitute an event of default under each such Subsidiary Guarantee, and shall entitle the Holders of Senior Notes to accelerate the Obligations of the Subsidiary Guarantors in the same manner and to the same extent as the Obligations of the Issuer. (c) Each Guarantor agrees that its Obligations under its Guarantee are and shall be unconditional, irrespective of the validity, regularity or enforceability of the Senior Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Senior Notes with respect to any provisions thereof, any release of any other Guarantor, the recovery of any judgment against the Issuer, any action to enforce the same, whether or not a notation of any Guarantee is affixed to any particular Senior Note, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Guarantor waives the benefit of diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever and covenants that its Guarantee shall not be discharged except by complete performance of the Obligations contained in the Senior Notes, this Indenture, the Guarantees and the Subsidiary 70 Guarantees. Each Guarantee is and shall be a guarantee of payment and not of collection. If any Holder or the Trustee is required by any court or otherwise to return to the Issuer or to any Guarantor, or any Custodian acting in relation to the Issuer or such Guarantor, any amount paid by the Issuer or such Guarantor to the Trustee or such Holder, the Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees that, as between it, on the one hand, and the Holders of Senior Notes and the Trustee, on the other hand, (i) subject to this Article Twelve, the maturity of the Obligations guaranteed may be accelerated as provided in Article Six hereof for the purposes of its Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed thereby, and (ii) in the event of any acceleration of such Obligations as provided in Article Six hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by each Guarantor for the purpose of its Guarantee. (d) Subject to the terms of Section 12.04, each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount, based on the net assets of each Guarantor, determined in accordance with GAAP, but nothing in this Section shall limit any Guarantor's obligations hereunder. Section 12.02 Limitations on Guarantees. ------------------------- (a) The obligations of the Company, MRO, Blue Heel and each Subsidiary Guarantor under the Guarantees will be limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such Guarantor under its Guarantee or pursuant to its contribution obligations under this Indenture, will result in the obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. (b) Notwithstanding any other provision of the Indenture or the Security Documents and Guarantees to the contrary, the Guarantee of MRO shall be with recourse only to the Red Oak Capital Stock and any distributions to MRO by Red Oak because of its status as a stockholder of Red Oak, as described in the MRO Pledge Agreement. 71 Section 12.03 Execution and Delivery of Guarantees. ------------------------------------ To further evidence each Guarantee referred to in Section 12.01, each Guarantor agrees that a notation of such Guarantee, substantially in the form of Exhibit F herein, may be endorsed on each Senior Note authenticated and - --------- delivered by the Trustee. Such notation shall be executed on behalf of each Guarantor by either manual or facsimile signature of two Officers of each Guarantor, each of whom, in each case, shall have been duly authorized to so execute by all requisite corporate action. The validity and enforceability of any Guarantee shall not be affected by the fact that a notation thereof is not affixed to any particular Senior Note. Each Guarantor agrees that its Guarantee set forth in Section 12.01 shall remain in full force and effect notwithstanding any failure to endorse on each Senior Note a notation of such Guarantee. If an Officer of a Guarantor whose signature is on a notation no longer holds that office at the time the Trustee authenticates the Senior Note on which such notation is endorsed or at any time thereafter, such Guarantor's Guarantee of such Senior Note shall be valid nevertheless. The delivery of any Senior Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the applicable Guarantee set forth in this Indenture on behalf of each Guarantor. Section 12.04 Release of a Subsidiary Guarantor. --------------------------------- (a) If no Default exists or would exist under this Indenture, in the event of (i) a sale or other disposition of all or substantially all of the properties or assets of any Subsidiary Guarantor to a third party, by way of merger, consolidation or otherwise with or into any Person in compliance with Article Five (in each case, other than to a Guarantor, the Issuer or a Subsidiary of the Issuer or any Guarantor), or (ii) a sale or other disposition of all of the Capital Stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of such a designation or a sale or other disposition, by way of such a merger, consolidation or otherwise, or a disposition of all of the Capital Stock of such Subsidiary Guarantor) or the Person acquiring such properties or assets (in the event of a sale or other disposition of all or substantially all of the properties or assets of such Subsidiary Guarantor) will be released from all Obligations under this Article Twelve and its Subsidiary Guarantee without any further action required on the part of the Trustee or any Holder; provided that any Net Cash Proceeds of such sale or other disposition are applied in accordance with the covenant described under Section 4.16, and provided, further, however, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests that secure, any other Indebtedness of the Issuer or its Subsidiaries shall also terminate upon such release, sale or disposition. Any Subsidiary Guarantor not so released or the entity surviving such Subsidiary Guarantor, as applicable, shall remain or be liable under its Subsidiary Guarantee as provided in this Article Twelve. (b) The Trustee shall deliver an appropriate instrument evidencing the release of a Subsidiary Guarantor upon receipt of a request by the Issuer or such Subsidiary Guarantor accompanied by an Officers' Certificate and an Opinion of Counsel certifying as to the 72 compliance with this Section 12.04, provided the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Officers' Certificates of the Issuer. Except as set forth in Articles Four and Five and this Section 12.04, nothing contained in this Indenture or in any of the Senior Notes shall prevent any consolidation or merger of a Subsidiary Guarantor with or into the Issuer or another Subsidiary Guarantor or shall prevent any sale or conveyance of the property of a Subsidiary Guarantor as an entirety or substantially as an entirety to the Issuer or another Subsidiary Guarantor. Section 12.05 Waiver of Subrogation. --------------------- Until this Indenture is discharged and all of the Senior Notes are discharged and paid in full, each Guarantor irrevocably waives and agrees not to exercise any claim or other rights which it may hereafter acquire against the Issuer that arise from the existence, payment, performance or enforcement of the Issuer's Obligations under the Senior Notes or this Indenture and such Guarantor's Obligations under its Guarantee and this Indenture, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, and any right to participate in any claim, remedy or right arising in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Issuer, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and any amounts owing to the Trustee or the Holders of Senior Notes under the Senior Notes, this Indenture, or any other document or instrument delivered under or in connection with such agreements or instruments, shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Trustee or the Holders and shall forthwith be paid to the Trustee for the benefit of itself or such Holders to be credited and applied to the obligations in favor of the Trustee or the Holders, as the case may be, whether matured or unmatured, in accordance with the terms of this Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 12.05 is knowingly made in contemplation of such benefits. Section 12.06 Immediate Payment. ----------------- Each Guarantor agrees to make immediate payment to the Trustee on behalf of the Holders of all Obligations owing or payable to the respective Holders upon receipt of a demand for payment therefor by the Trustee to such Guarantor in writing. Section 12.07 No Set-Off. ---------- Each payment to be made by a Guarantor hereunder in respect of the Obligations shall be payable in the currency or currencies in which such Obligations are denominated, and shall be made without set-off, counterclaim, reduction or diminution of any kind or nature. 73 Section 12.08 Obligations Absolute. -------------------- The Obligations of each Guarantor are absolute and unconditional and any monies or amounts expressed to be owing or payable by each Guarantor which may not be recoverable from such Guarantor on the basis of a Guarantee shall be recoverable from such Guarantor as a primary obligor and principal debtor in respect thereof. Section 12.09 Obligations Continuing. ---------------------- The Obligations of each Guarantor are and shall be continuing and shall remain in full force and effect until all the Obligations have been paid and satisfied in full or until earlier released. Each Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of this continued liability hereunder and under any other instrument or instruments in such form as counsel to the Trustee may advise and as will prevent any action brought against it in respect of any default hereunder being barred by any statute of limitations now or hereafter in force and, in the event of the failure of a Guarantor so to do, it hereby irrevocably appoints the Trustee the attorney and agent of such Guarantor to make, execute and deliver such written acknowledgment or acknowledgments or other instruments as may from time to time become necessary or advisable, in the judgment of the Trustee on the advice of counsel, to fully maintain and keep in force the liability of such Guarantor under its Guarantee. Section 12.10 Obligations Not Reduced. ----------------------- The Obligations of each Guarantor shall not be satisfied, reduced or discharged solely by the payment of such principal, premium, if any, interest, fees and other monies or amounts as may at any time prior to discharge of this Indenture pursuant to Article Eight be or become owing or payable under or by virtue of or otherwise in connection with the Senior Notes or this Indenture. Section 12.11 Obligations Reinstated. ---------------------- The Obligations of each Guarantor shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment which would otherwise have reduced the Obligations of any Guarantor (whether such payment shall have been made by or on behalf of the Issuer or by or on behalf of a Guarantor) is rescinded or reclaimed from any of the Holders upon the insolvency, bankruptcy, liquidation or reorganization of the Company, the Issuer or any Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Issuer is stayed upon the insolvency, bankruptcy, liquidation or reorganization of the Issuer, all such indebtedness otherwise subject to demand for payment or acceleration shall nonetheless by payable by each Guarantor as provided herein. Section 12.12 Obligations Not Affected. ------------------------ The Obligations of each Guarantor shall not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring before, upon or after any demand for payment (and whether or not known or consented to by any Guarantor or any of the Holders) which, but for this provision, might constitute a whole or partial defense to a claim 74 against any Guarantor under its Guarantee or might operate to release or otherwise exonerate any Guarantor from any of its Obligations or otherwise affect such Obligations, whether occasioned by default of any of the Holders or otherwise, including, without limitation: (a) any limitation of status or power, disability, incapacity or other circumstance relating to the Issuer or any other Person, including any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, winding-up or other proceeding involving or affecting either Issuer or any other Person; (b) any irregularity, defect, unenforceability or invalidity in respect of any indebtedness or other Obligation of the Issuer or any other Person under this Indenture, the Senior Notes or any other document or instrument; (c) any failure of the Issuer, whether or not without fault on its part, to perform or comply with any of the provisions of this Indenture or the Senior Notes, or to give notice thereof to a Guarantor; (d) the taking or enforcing or exercising or the refusal or neglect to take or enforce or exercise any right or remedy from or against the Issuer or any other Person or their respective assets or the release or discharge of any such right or remedy; (e) the granting of time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Issuer or any other Person; (f) any change in the time, manner or place of payment of, or in any other term of, any of the Senior Notes, or any other amendment, variation, supplement, replacement or waiver of, or any consent to departure from, any of the Senior Notes or this Indenture, including, without limitation, any increase or decrease in the principal amount of or premium, if any, or interest on any of the Senior Notes; (g) any change in the ownership, control, name, objects, businesses, assets, capital structure or constitution of the Issuer or a Guarantor; (h) any merger or amalgamation of the Issuer or a Guarantor with any Person or Persons; (i) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Obligations of the Issuer under this Indenture or the Senior Notes or the Obligations of a Guarantor under its Guarantee; and (j) any other circumstance, including release of any Guarantor pursuant to Section 12.04 (other than by complete, irrevocable payment) that might otherwise constitute a legal or equitable discharge or defense of the Issuer under this Indenture or the Senior Notes or of a Guarantor in respect of its Guarantee. 75 Section 12.13 Waiver. ------ Without in any way limiting the provisions of Section 12.01 hereof, each Guarantor waives notice of acceptance hereof, notice of any liability of any Guarantor under its Guarantee, notice or proof of reliance by the Holders upon the Obligations of any Guarantor, and diligence, presentment, demand for payment on the Issuer, protest, notice of dishonor or non-payment of any of the Issuer's Obligations under this Indenture or the Senior Notes, or other notice or formalities to the Issuer or any Guarantor of any kind whatsoever. Section 12.14 No Obligation to Take Action Against the Issuer. ----------------------------------------------- Neither the Trustee nor any other Person shall have any obligation to enforce or exhaust any rights or remedies or to take any other steps under any security for the Issuer's Obligations under this Indenture or the Senior Notes, or against the Issuer or any other Person or any property of the Issuer or any other Person before the Trustee is entitled to demand payment and performance by any or all Guarantors of their liabilities and obligations under their Guarantees or under this Indenture. Section 12.15 Dealing with the Issuer and Others. ---------------------------------- The Holders, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Guarantor hereunder and without the consent of or notice to any Guarantor, may (a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Issuer or any other Person; (b) take or abstain from taking security or collateral from the Issuer or from perfecting security or collateral of the Company; (c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or without consideration) any and all collateral, mortgages or other security given by the Issuer or any third party with respect to the Issuer's Obligations under, or matters contemplated by, this Indenture or the Senior Notes; (d) accept compromises or arrangements from the Issuer; (e) apply all monies at any time received from the Issuer or from any security upon such part of the Issuer's Obligations under this Indenture or the Senior Notes as the Holders may see fit or change any such application in whole or in part from time to time as the Holders may see fit; and (f) otherwise deal with, or waive or modify their right to deal with, the Issuer and all other Persons and any security as the Holders or the Trustee may see fit. 76 Section 12.16 Default and Enforcement. ----------------------- If any Guarantor fails to pay in accordance with Section 12.06 hereof, the Trustee may proceed in its name as trustee hereunder in the enforcement of its Guarantee and such Guarantor's Obligations thereunder and hereunder by any remedy provided by law, whether by legal proceedings or otherwise, and to recover from such Guarantor the Issuer's Obligations under this Indenture and the Senior Notes. Section 12.17 Amendment, Etc. -------------- No amendment, modification or waiver of any provision of this Indenture relating to any Guarantor or consent to any departure by any Guarantor or any other Persons from any such provision will in any event be effective unless it is signed by such Guarantor and the Trustee. Section 12.18 Acknowledgment. -------------- Each Guarantor acknowledges communication of the terms of this Indenture and the Senior Notes and consents to and approves of the same. Section 12.19 Costs and Expenses. ------------------ Each Guarantor agrees to pay on demand by the Trustee any and all costs, fees and expenses (including, without limitation, legal fees) incurred by the Trustee, its agents, advisors and counsel or any of the Holders in enforcing any of their rights under any Guarantee. Section 12.20 No Merger or Waiver; Cumulative Remedies. ---------------------------------------- No Guarantee shall operate as a waiver by way of merger or otherwise, of any of the obligations of a Guarantor under any other agreement, including, without limitation, this Indenture. No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, remedy, power or privilege hereunder or under the Senior Notes, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or the Senior Notes preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges in each Guarantee and under this Indenture, the Senior Notes and any other document or instrument between a Guarantor and/or the Issuer and the Trustee are cumulative and not exclusive of any rights, remedies, powers and privilege provided by law. Section 12.21 Survival of Obligations. ----------------------- Without prejudice to the survival of any of the other obligations of each Guarantor, the obligations of each Guarantor under Section 12.01 shall survive the payment in full of the Issuer's Obligations under this Indenture and the Senior Notes and shall be enforceable against such Guarantor without regard to and without giving effect to any defense, right of offset or counterclaim available to or which may be asserted by the Issuer or any Guarantor. 77 Section 12.22 Guarantee in Addition to Other Obligations. ------------------------------------------ The obligations of each Guarantor under its Guarantee and this Indenture are in addition to and not in substitution for any other obligations to the Trustee or to any of the Holders in relation to this Indenture or the Senior Notes and any other guarantees or security at any time held by or for the benefit of any of them. Section 12.23 Severability. ------------ Any provision of this Article Twelve which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any jurisdiction unless its removal would substantially defeat the basic intent, spirit and purpose of this Indenture and this Article Twelve. Section 12.24 Successors and Assigns. ---------------------- Each Guarantee shall be binding upon and inure to the benefit of each Guarantor and the Trustee and the Holders and their respective successors and permitted assigns, except that no Guarantor may assign any of its obligations hereunder or thereunder except as expressly permitted by the terms of this Indenture. 78 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. SOUTHWEST ROYALTIES HOLDINGS, INC. By:___________________________________ Name:_________________________________ Title:________________________________ SOUTHWEST ROYALTIES, INC. By:___________________________________ Name:_________________________________ Title:________________________________ MRO HOLDINGS, INC. By:___________________________________ Name:_________________________________ Title:________________________________ BLUE HEEL COMPANY By:___________________________________ Name:_________________________________ Title:________________________________ WILMINGTON TRUST COMPANY By:___________________________________ Name:_________________________________ Title:________________________________ 79 EX-99.(T3E1) 6 dex99t3e1.txt OFFER TO EXCHANGE & CONSENT SOLICITATION STATEMENT Exhibit T3E(1) OFFER TO EXCHANGE AND CONSENT SOLICITATION STATEMENT By Southwest Royalties, Inc. Dated as of March 4, 2002 With Respect To Its 10 1/2% Senior Notes Due 2004 Southwest Royalties, Inc., a Delaware corporation ("Southwest"), hereby offers to the holders (the "Holders") of Southwest's outstanding 10 1/2% Senior Notes Due 2004 (the "Original Notes"), upon the terms and subject to the conditions set forth in this Offer to Exchange and Consent Solicitation Statement (as it may be amended or supplemented from time to time, the "Statement"), in the accompanying Consent and Letter of Transmittal (the "Consent and Letter of Transmittal"), and in the attached Note Exchange Agreement (the "Note Exchange Agreement" and, together with the Statement and the Consent and Letter of Transmittal, the "Offer"), to exchange (the "Exchange") at least $115 million (the "Minimum Tender") of its Original Notes, and any interest accrued but not paid thereon, for $60 million of Senior Secured Notes Due 2004 (the "New Notes") and 900,000 shares (the "Class A Common Shares" and, together with the New Notes, the "Exchange Consideration") of Southwest's Class A common stock, par value $.01 per share, which will represent 75% of Southwest's issued and outstanding share capital upon consummation of the Exchange. In the event Southwest receives more than the Minimum Tender, the Exchange Consideration will not be proportionately increased upon receipt of such additional Original Notes in the Exchange. Thus, in the event Southwest receives the Minimum Tender, for each $1,000,000 principal amount of Original Notes tendered, the Holders will receive $521,740 principal amount of New Notes and 7,826 Class A Common Shares. If, however, the Holders tender all of the Original Notes outstanding, which equal $123.685 million in principal, then for each $1,000,000 principal amount of Original Notes tendered, the Holders will receive $485,100 principal amount of New Notes and 7,276 Class A Common Shares. The New Notes will mature on June 30, 2004 and bear interest at the rate of 10 1/2% per annum beginning on February 1, 2002 (as if the New Notes were issued on such date) through December 31, 2002, 11 1/2% per annum from January 1, 2003 through December 31, 2003 and 12 1/2% thereafter until the maturity date. Interest is payable semi-annually on April 15 and October 15 of each year in cash (with the first payment on April 15, 2002). In the event Southwest defaults on the New Notes, interest will accrue at 18% per annum. Each Class A Common Share has one vote on all matters on which Southwest's stockholders are entitled or permitted to vote, except that holders of Class A Common Shares are entitled to appoint four of the seven members of the Board of Directors in accordance with the terms of the Amended and Restated Certificate of Incorporation. The holder of Common Stock and Special Shares is entitled to appoint the three remaining members to the Board of Directors. The terms of the Exchange Consideration are described in more detail below in "-- Terms of the New Notes" and "--Terms of the Class A Common Shares." Certain terms used in this Statement have the meanings set forth under the heading "Certain Defined Terms" and under the subheading "--Certain Definitions in the New Indenture." - -------------------------------------------------------------------------------- THIS OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002, OR SUCH LATER DATE AS MAY BE ANNOUNCED BY SOUTHWEST IN ACCORDANCE WITH THE TERMS OF THE OFFER (THE "EXPIRATION DATE"). UNTIL THE OFFER IS ACCEPTED BY SOUTHWEST IN ACCORDANCE WITH ITS TERMS, THE EXPIRATION DATE MAY BE EXTENDED BY SOUTHWEST IN ITS DISCRETION. TO BE CONSIDERED FOR EXCHANGE, ORIGINAL NOTES MUST BE VALIDLY TENDERED FOR EXCHANGE BY NO LATER THAN 5:00 P.M., NEW YORK, NEW YORK TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- The Depositary for this Offer and Consent Solicitation is Wilmington Trust Company In connection with the Exchange, Southwest will issue to Southwest Royalties Holdings, Inc., Southwest's current sole stockholder ("SRH"), 200,000 shares of Special Stock $.01 par value per share ("Special Shares"). Combined with the 100,000 shares of Common Stock which will be held by SRH upon consummation of the Exchange, SRH will own 25% of Southwest's issued and outstanding share capital. If, prior to or on October 3, 2003, Southwest pays in cash in full the New Notes, Special Shares held by SRH will automatically on the date of such payment be converted into shares of Southwest's Common Stock, $.01 par value per share (the "Common Stock"), on a basis of one share of Common Stock per each share of Special Stock issued and outstanding. If on or prior to October 3, 2003, either (i) the New Notes are not paid in cash in full or (ii) there is a voluntary or involuntary bankruptcy filing by or against Southwest, then, upon the earlier of such event, the Special Shares will be deemed canceled, shall be null and void and of no further effect. Upon cancellation of the Special Shares, SRH would then own only 10% of Southwest's issued and outstanding share capital. See "Terms of the Special Shares To Be Issued to SRH." In connection with the Exchange, Southwest is soliciting the consents (the "Consents") of Holders (the "Consent Solicitation"): (i) to amend certain provisions of the Original Indenture which govern the Original Notes, (ii) to amend and waive certain provisions of the Original Pledge Agreement under which SRH has pledged certain collateral to the Holders to secure Southwest's obligations under the Original Indenture, (iii) to remove most of the covenants from the Original Indenture and (iv) to permit certain transactions involving SRH (collectively, the "Proposed Waivers and Amendments"). These undertakings require the consent of Holders under the terms of the Original Indenture and the Original Pledge Agreement. In particular, Southwest intends to: . Form MRO Holdings, Inc. ("MRO Holdings"), a new holding company subsidiary of SRH, transfer the shares of another subsidiary of SRH, Midland Red Oak Realty, Inc. ("Red Oak"), to MRO Holdings and then distribute the shares of MRO Holdings to the stockholders of SRH; and . Remove most of the covenants from the Original Indenture. This Statement discusses the above transactions in greater detail and identifies the specific provisions of the Original Indenture and the Original Pledge Agreement that are affected by the Proposed Waivers and Amendments. See "The Distribution and Proposed Waivers and Amendments." IF THE PROPOSED WAIVERS AND AMENDMENTS BECOME EFFECTIVE, THEY WILL APPLY TO ALL ORIGINAL NOTES, IF ANY, THAT REMAIN OUTSTANDING, AND EACH HOLDER OF ORIGINAL NOTES THAT HAS NOT PROPERLY TENDERED FOR EXCHANGE ORIGINAL NOTES WILL BE BOUND BY THE PROPOSED WAIVERS AND AMENDMENTS, REGARDLESS OF WHETHER THAT HOLDER CONSENTED TO THE PROPOSED WAIVERS AND AMENDMENTS. In connection with the Exchange, Southwest is also requesting that Holders confer upon the Depositary a power of attorney to execute any instruments which Southwest may deem necessary or advisable to accomplish the purpose of the Offer now or in the future, including, but not limited to, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement (the "Power of Attorney"). Notwithstanding any other provision of the Offer, Southwest's obligation to accept for exchange Original Notes validly tendered pursuant to the Offer is conditioned upon, in part, the receipt of the Minimum Tender, or the waiver of the Minimum Tender by the unanimous consent of the Participating Holders who are parties to the Participation Agreement, and, in the event any Original Notes remain outstanding upon consummation of the Exchange, the execution and delivery of a Supplemental Indenture, substantially in the form attached hereto as Exhibit E (the "Supplemental Indenture"), the Pledge Agreement Waiver, substantially in the form attached hereto as Exhibit F (the "Pledge Agreement Waiver"), and the Amended and Restated Pledge Agreement, substantially in the form attached hereto as Exhibit G (the "Amended and Restated Pledge Agreement"). Southwest reserves the right to withdraw the Offer and the Consent Solicitation for any reason until the closing of the Exchange. In the event that the Offer and the Consent Solicitation are withdrawn or otherwise not completed, otherwise validly tendered Original Notes will not be exchanged for the Exchange Consideration and will be returned to the Holders. ii Any questions and requests for assistance with respect to procedural matters in connection with the Offer may be directed to Wilmington Trust Company (the "Depositary") at its addresses and telephone numbers set forth on the back page of this Statement. J. Steven Person from Southwest is also available to answer any questions in connection with the Offer and Consent Solicitation. See "Company Contact." NEITHER SOUTHWEST, ITS PARENT SRH, ANY GUARANTOR, THEIR RESPECTIVE BOARDS OF DIRECTORS, THE DEPOSITARY, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE NOR ANY OTHER PERSON HAS AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON BEHALF OF SOUTHWEST, ITS PARENT SRH, ANY GUARANTOR, THE DEPOSITARY, THE ORIGINAL TRUSTEE OR THE NEW TRUSTEE AS TO WHETHER HOLDERS SHOULD PARTICIPATE OR REFRAIN FROM PARTICIPATING IN THE OFFER. NEITHER SOUTHWEST, ITS PARENT SRH, ANY GUARANTOR, THEIR RESPECTIVE BOARDS OF DIRECTORS, THE DEPOSITARY, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE NOR ANY OTHER PERSON HAS AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER AND CONSENT SOLICITATION ON BEHALF OF SOUTHWEST, ANY GUARANTOR, THE DEPOSITARY, THE ORIGINAL TRUSTEE OR THE NEW TRUSTEE, OTHER THAN THOSE CONTAINED IN THE OFFER AND CONSENT SOLICITATION. HOLDERS ARE ADVISED THAT THEY MAY NOT RELY ON ANY SUCH RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATION, IF GIVEN OR MADE, AS HAVING BEEN AUTHORIZED BY SOUTHWEST, ITS PARENT SRH, ANY GUARANTOR, THE DEPOSITARY, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE OR ANY OTHER PERSON. THE OFFER AND CONSENT SOLICITATION ARE NOT BEING MADE TO, NOR WILL SOUTHWEST ACCEPT SURRENDER OF ORIGINAL NOTES FOR EXCHANGE FROM, HOLDERS OF ORIGINAL NOTES IN ANY JURISDICTION IN WHICH THE OFFER OR THE ACCEPTANCE THEREOF, THE CONSENT SOLICITATION, THE POWER OF ATTORNEY OR THE ISSUANCE OF THE NEW NOTES OR THE CLASS A COMMON SHARES WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. THE OFFER OF THE SECURITIES OFFERED HEREBY HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFER AND CONSENT SOLICITATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE OFFER IS BEING MADE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION PROVIDED BY SECTION 3(A) (9) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SIMILAR EXEMPTIONS FROM REGISTRATION PROVIDED BY CERTAIN STATE SECURITIES LAWS. IMPORTANT INFORMATION Holders of Original Notes may not deliver Consents with respect to the Proposed Waivers and Amendments without tendering their Original Notes. Conversely, Holders may not tender their Original Notes without delivering the Consents with respect to the Proposed Waivers and Amendments. Therefore, the tender of an Original Note will be deemed to constitute the giving of Consent. In connection with the Exchange, Holders must also confer the Power of Attorney upon the Depositary to execute, on the Holder's behalf, any instruments which Southwest may deem necessary or advisable to accomplish the purposes of the Exchange, including, but not limited to, the Note Exchange Agreement, the form of which is attached hereto as Exhibit K, the Collateral Trust Agreement, a final version of which will be sent to each Holder at least ten business days prior to the Expiration Date, and the Stockholders Agreement, the form of which is attached hereto as Exhibit L. A Holder will grant a Power of Attorney upon the execution of the Consent and Letter of Transmittal. Any Holder desiring to tender Original Notes pursuant to the Offer, to deliver a Consent pursuant to the Consent Solicitation and to confer upon the Depositary a Power of Attorney must (i) deliver Original Notes to the Depositary or, in the case of Original Notes delivered by book-entry transfer, confirm the transfer of such Original iii Notes into the Depositary's account with the Depository Trust Company ("DTC") pursuant to the procedures set forth herein, (ii) complete and sign the Consent and Letter of Transmittal (or a facsimile copy thereof) in accordance with instructions thereon, have such Holder's signature thereon guaranteed by an Eligible Institution (as defined herein) if required by Instruction 1 of the Consent and Letter of Transmittal and send or deliver such manually signed Consent and Letter of Transmittal (or a manually signed facsimile copy thereof) to the Depositary prior to the Expiration Date and (iii) complete and deliver to the Depositary any other documents required by this Statement or the Consent and Letter of Transmittal. See "--Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney." Any beneficial owner whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who desires to tender Original Notes, deliver a Consent and confer a Power of Attorney should contact such registered Holder promptly and instruct such party to tender Original Notes, deliver a Consent pursuant to the Consent Solicitation and confer upon the Depositary a Power of Attorney on such beneficial owner's behalf. Beneficial owners may only accept the Offer by instructing such registered Holder pursuant to an instruction letter or similar communication to tender the Original Notes and deliver the corresponding Consents and Power of Attorney on behalf of such beneficial owner. Moreover, the beneficial owner must confer upon such registered Holder a power of attorney, which expressly appoints such party the true and lawful agent and attorney-in-fact of the beneficial owner and grants such party the power to confer upon the Depositary the Power of Attorney as required in connection with the Offer. A Letter of Instruction which includes a power of attorney is contained in the solicitation materials provided along with this Offer and may be used by beneficial owners. See the procedure for tender of Original Notes held through a custodian set forth in "--Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney." DTC has authorized DTC Participants that hold Original Notes on behalf of beneficial owners of Original Notes through DTC to tender their Original Notes. Accordingly, DTC Participants may electronically tender Original Notes through DTC's Automated Tender Offer Program ("ATOP"), for which the transaction will be eligible, and may follow the procedure for book-entry transfer set forth in "--Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney." ALTHOUGH A DTC PARTICIPANT MAY TENDER ORIGINAL NOTES ELECTRONICALLY THROUGH ATOP, DTC PARTICIPANTS MUST PHYSICALLY COMPLETE, SIGN AND DELIVER THE CONSENT AND LETTER OF TRANSMITTAL TO THE DEPOSITARY. CONSENTS AND POWERS OF ATTORNEY CANNOT BE DELIVERED THROUGH ATOP. Any Holder desiring to tender Original Notes, deliver Consents and confer a Power of Attorney but who cannot comply with the procedures set forth herein for tender on a timely basis or whose certificates for Original Notes are not immediately available may tender the Original Notes, deliver Consents and confer a Power of Attorney by following the procedures for guaranteed delivery set forth under "--Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney -- Guaranteed Delivery." Questions and requests for assistance with respect to procedural matters in connection with the Offer or for additional copies of this Statement, the Consent and Letter of Transmittal, any Exhibit to this Statement, the Collateral Trust Agreement, the Term Sheet for the Senior Credit Agreement, the Notice of Guaranteed Delivery or any other relevant document may be directed to the Depositary at its addresses and telephone numbers set forth on the last page of this Statement. Beneficial owners may also contact their broker, dealer, commercial bank, trust company or other nominee through which they hold the Original Notes with questions and requests for assistance. Holders may also contact J. Steven Person from Southwest at 407 N. Big Spring Street, Midland, Texas 79701 or telephone him at (915) 686-9927 with any questions regarding the Offer or the Consent Solicitation. See "Company Contact." THIS STATEMENT (INCLUDING ALL EXHIBITS HERETO) AND THE CONSENT AND LETTER OF TRANSMITTAL, CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER AND THE CONSENT SOLICITATION. iv TABLE OF CONTENTS AVAILABLE INFORMATION...................................................................................... 3 FORWARD-LOOKING STATEMENTS................................................................................. 3 SUMMARY.................................................................................................... 5 CERTAIN DEFINED TERMS...................................................................................... 14 RISK FACTORS............................................................................................... 16 Risks of Participating in the Exchange............................................................ 16 Risks Of Not Participating In The Exchange........................................................ 19 Risks of Southwest and the Oil and Gas Industry................................................... 21 Other Risks....................................................................................... 22 PRINCIPAL TERMS OF THE OFFER AND CONSENT SOLICITATION...................................................... 24 THE EXCHANGE............................................................................................... 26 The Original Notes................................................................................ 26 Reasons for the Exchange.......................................................................... 26 Terms of the New Notes............................................................................ 27 Terms of the Class A Common Shares................................................................ 50 Registration Rights............................................................................... 51 Participation Agreement........................................................................... 51 TERMS OF THE SPECIAL SHARES TO BE ISSUED TO SRH............................................................ 52 COMPARISON OF ORIGINAL NOTES AND NEW NOTES................................................................. 52 TERMS OF THE SENIOR CREDIT AGREEMENT AND THE COLLATERAL TRUST AGREEMENT......................................................................... 55 TERMS OF THE NOTE EXCHANGE AGREEMENT....................................................................... 56 TERMS OF THE STOCKHOLDERS AGREEMENT........................................................................ 56 THE DISTRIBUTION AND THE PROPOSED WAIVERS AND AMENDMENTS................................................... 57 The Distribution.................................................................................. 57 Description of Amendments to the Original Indenture............................................... 57 Description of the Pledge Agreement Waiver........................................................ 59 Description of the Amended and Restated Pledge Agreement.......................................... 60 TERMS OF THE OFFER......................................................................................... 61 Acceptance of Original Notes for Exchange......................................................... 61 Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney.................................................................................... 62 Withdrawal Rights................................................................................. 66 Depositary........................................................................................ 67 COMPANY CONTACT............................................................................................ 67 CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... 68 FEES AND EXPENSES.......................................................................................... 68 MISCELLANEOUS.............................................................................................. 69
AVAILABLE INFORMATION Southwest, along with SRH, Southwest's parent, files annual, quarterly and special reports, and other information with the SEC. The SEC filings of Southwest are available to the public over the Internet at the SEC's website at http://www.sec.gov. Holders may also read and copy any document Southwest has filed with the SEC at the SEC's public reference facilities at 450 Fifth Street, N.W., Washington, DC 20549. Holders can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. In connection with the Exchange, in addition to this Statement, Southwest will send to Holders the following documents: . The Annual Report on Form 10-K for the year ended 2000 of Southwest's current parent SRH, attached hereto as Exhibit A; . The Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 of Southwest's current parent SRH, and unaudited supplemental financial information from Southwest's management for the year ended December 31, 2001, each attached hereto as Exhibit B; . The Form of the New Indenture by and among Southwest, Wilmington Trust Company, and the Guarantors named therein, attached hereto as Exhibit C; . The Form of the New Note from Southwest, attached hereto as Exhibit D; . The Form of Supplemental Indenture to the Original Indenture by and among Southwest, State Street Bank and Trust Company, SRH as parent guarantor, and the other guarantors named therein, attached hereto as Exhibit E; . The Form of the Pledge Agreement Waiver, by and among Southwest, SRH and State Street Bank and Trust Company, attached hereto as Exhibit F; . The Form of the Amended and Restated Pledge Agreement, by and among Southwest, SRH, MRO Holdings and State Street Bank and Trust Company, attached hereto as Exhibit G; . The Consent and Letter of Transmittal, attached hereto as Exhibit H; . Southwest's Form of Amended and Restated Certificate of Incorporation, attached hereto as Exhibit I; and . Southwest's Form of Amended and Restated Bylaws, attached hereto as Exhibit J; . The Form of Note Exchange Agreement to be entered into among Southwest and each tendering Holder, attached hereto as Exhibit K; and . The Form of Stockholders Agreement to be entered into among Southwest, H. H. Wommack, III, and each tendering Holder, attached hereto as Exhibit L. At least ten business days prior to the Expiration Date, Southwest will mail to the Holders a final version of the Collateral Trust Agreement, as well as the Term Sheet for the Senior Credit Agreement (together with commitment letters from the Senior Lenders). FORWARD-LOOKING STATEMENTS This Statement contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act of 1934, as amended (the "Exchange Act") including, in particular, statements about Southwest's plans, strategies and 3 prospects. The use of the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expressions are intended to identify future uncertainties. Although Southwest believes that the plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Southwest cannot assure you that those expectations will prove to have been correct. Actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this Statement. Many of these factors are beyond Southwest's ability to control or predict. Southwest cautions you against putting any undue reliance on forward-looking statements or projecting future results based on such statements. All subsequent written and oral forward-looking statements attributable to Southwest and persons acting on its behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this Statement. 4 SUMMARY The following is a summary of certain information included elsewhere in this Statement or in documents attached hereto as Exhibits. It is not intended to be complete and is qualified in its entirety by the more detailed information found elsewhere in this Statement or in such documents. Summary of Risk Factors Before you make a decision whether or not to participate in the Exchange, in addition to the other information included in this Statement, you should carefully consider the risks associated with exchanging or not exchanging your Original Notes. Some of the risk factors associated with the Exchange are summarized below and are described in more detail elsewhere in this Statement under the caption "RISK FACTORS." . Southwest is highly leveraged and may be unable to service its debt, redeem the New Notes or pay the New Notes at maturity. . There is no public market for the New Notes or the Class A Common Shares, and holders of the New Notes and the Class A Common Shares may not be able to sell their securities on favorable terms and conditions. . Except under certain circumstances, the New Notes will be subordinated to the Indebtedness evidenced by the Senior Credit Agreement. . If a Holder does not exchange its Original Notes, most of the covenants will be removed from the Original Indenture, adversely affecting the rights of the Holders who do not exchange their Original Notes. . The extremely limited trading market that currently exists for the Original Notes will be adversely affected by the Exchange and Holders who fail to exchange their Original Notes in the Exchange may find it even more difficult to sell their Original Notes. Summary of the Exchange Issuer: Southwest Royalties, Inc., a Delaware corporation with its principal executive office at 407 North Big Spring, Suite 300, Midland, Texas, 79701. Securities To Be Exchanged 10 1/2% Senior Notes due 2004, in the aggregate principal amount of $123.685 million, and any interest accrued but not paid thereon. Securities Offered: Senior Secured Notes in the aggregate principal amount of $60 million (interest paid semi-annually at 10 1/2% from February 1, 2002 (as if the New Notes were issued on that date) through December 31, 2002, 11 1/2% per annum from January 1, 2003 through December 31, 2003, and 12 1/2% per annum thereafter until maturity), with a maturity date of June 30, 2004. 900,000 shares of Southwest's Class A common stock, par value $.01 per share, which, upon consummation of the Exchange, will equal 75% of Southwest's issued and outstanding capital stock. 5 Procedure for Exchange Generally, Holders wanting to tender their Original Notes must: (1) Deliver Original Notes to the Depositary or, in lieu of tendering Original Notes in physical form, electronically tender Original Notes through DTC's ATOP; (2) Complete and sign the Consent and Letter of Transmittal attached to this Statement as Exhibit H and deliver such Consent and Letter of Transmittal to the Depositary prior to the Expiration Date; and (3) Complete and deliver any other documents required by the Instructions to the Consent and Letter of Transmittal and this Statement to the Depositary. If Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, the beneficial owner of the Original Notes must give such party a power of attorney and instruct such party to tender Original Notes and deliver a Consent and Letter of Transmittal on such beneficial owner's behalf. All tenders of Original Notes, delivery of Consents and grants of Powers of Attorney must be made on or prior to the Expiration Date. Expiration Date: The Offer will expire at 5:00 p.m. New York, New York time on April 1, 2002 (the "Expiration Date"), unless extended by Southwest. Expenses and Fees: All expenses to be incurred by Southwest in connection with the Offer will be paid by Southwest. Unless otherwise agreed in writing, Holders must pay their own expenses incurred in connection with the Exchange. Conditions to the Offer: The obligations of Southwest to consummate the Exchange are subject to certain conditions, including (i) the receipt of the Minimum Tender (unless waived by the unanimous consent of the Participating Holders who are parties to the Participation Agreement), (ii) the receipt of the Requisite Consent to the Proposed Waivers and Amendments and, if any Original Notes remain outstanding, the execution and delivery of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement, (iii) the execution and delivery of the Senior Credit Agreement and the Collateral Trust Agreement and the Security Documents relating to those documents and to the Indenture, in each case by the parties thereto, (iv) the declaration of effectiveness by the SEC of Southwest's Form T-3 filed with respect to the New Indenture, (v) the execution of the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement by the tendering Holders, pursuant to a Power of Attorney to be granted to the Depositary on behalf of the exchanging Holders and (vi) the written cancellation of a $1.6 million note issued by H. H. Wommack, III, Southwest's Chief Executive Officer and President, to SRH in exchange for 123,710 shares of SRH common stock held by Mr. Wommack. Depositary: Wilmington Trust Company. 6 Summary Description of the Senior Secured Notes and the Class A Common Shares Set forth below is a summary of the principal features of the New Notes to be issued in connection with the Exchange: Issuer: Southwest Royalties, Inc. Securities Offered: $60 million aggregate principal amount of Senior Secured Notes Due 2004. Maturity Date: June 30, 2004. Interest Rates: Interest on the New Notes will accrue beginning on February 1, 2002 (as if the New Notes were issued on that date). Interest is payable semi-annually in arrears on April 15 and October 15 of each year (with the first interest payment on April 15, 2002) at the following rates: 10 1/2% per annum through December 31, 2002, 11 1/2% per annum from January 1, 2003 through December 31, 2003 and 12 1/2% per annum from January 1, 2004 until the maturity date. If Southwest defaults in the payment of any installment of interest, or the principal of or premium, if any, on the New Notes, when the same becomes due and payable, at maturity, upon redemption, by acceleration or otherwise (including, without limitation, failure to make a payment to purchase the New Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer), then the interest on the New Notes and all amounts due thereunder will accrue at a rate of 18% per annum until the New Notes are paid in cash or the Event of Default is cured (provided that a cure is permitted). Southwest must pay interest on all such overdue amounts (including installments of interest, to the extent lawful) on demand without regard to any applicable grace periods. Redemption at the Option of The New Notes are redeemable at par by Southwest: Southwest, without premium or penalty, at any time by payment in cash of principal outstanding plus accrued interest then outstanding. Mandatory Redemption: Unless otherwise prohibited by law, in the event Southwest has available funds to repurchase for cash all the New Notes at par from the Senior Credit Agreement and a Subordinated Credit Facility and the weighted average interest cost of the funds borrowed under the Senior Credit Agreement and the Subordinated Credit Facility is 12% or less, then Southwest must repurchase all of the New Notes at par; provided, however, that the Board of Directors may, by unanimous vote, direct that Southwest not repurchase of the New Notes, and provided further, that Southwest shall not effect such repurchase of New Notes if the repurchase would cause Southwest to become insolvent. The holders of the New Notes must tender their New Notes to Southwest under these circumstances. Security: The Obligations of Southwest under the New Notes will be secured by a lien on substantially all of Southwest's assets and guaranteed by Southwest's subsidiary, Blue Heel, which guarantee will be secured by substantially all of the assets of Blue Heel. These liens are subject to a Collateral Trust Agreement which will expressly subordinate right of payment on the New Notes to the Senior Credit Agreement (except when no Subordination Event exists (as will be defined in the Collateral Trust Agreement)). 7 The Obligations of Southwest under the New Notes will be secured by a guarantee of SRH and SRH will pledge the common stock of Basic held by SRH. The Obligations of Southwest under the New Notes will also be secured by a guarantee of MRO Holdings and MRO Holdings will pledge the common stock of Red Oak to be held by MRO Holdings. The shares of common stock of Basic and Red Oak are, however, subject to an existing pledge guaranteeing Southwest's Obligations under the Original Indenture. For more information regarding the terms of the security for the New Notes, see "-- Liens and Security Interests Against Assets of Southwest and its Subsidiaries" and "-- Guarantees and Collateral for Guarantees." Ranking, Subordination: As long as no Subordination Event exists (as will be defined in the Collateral Trust Agreement), regularly scheduled payments of interest on the New Notes will be pari passu with payment of the Indebtedness under the Senior Credit Agreement. In all other respects, the right to payment on the New Notes will be subordinated to the right to payment of the Indebtedness under the Senior Credit Agreement. The New Notes are superior in priority with respect to certain collateral to the Original Notes and with respect to other collateral are subordinate to the payment of Indebtedness under the Original Notes. The New Notes are pari passu in right of payment to the Original Notes. Covenants: Restrictions on the ability of Southwest to engage in certain mergers, consolidations and asset dispositions. Restrictions on Southwest's ability to utilize the proceeds of certain asset dispositions and engage in certain transactions resulting in a Change of Control of Southwest. These limitations are subject to a number of important qualifications and exceptions. For further information regarding the restrictions imposed on Southwest by the terms of the New Notes, see "-- Terms of New Notes -- Covenants." Registration: The New Notes are being offered to the Holders in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act and have not been registered with the SEC. The New Notes should be freely tradable, except by persons who are considered affiliates of Southwest, as that term is defined in the Securities Act, or by persons who hold New Notes that were previously held by an affiliate of Southwest. There is, however, currently no market for the New Notes and there can be no assurance that any such market will develop. See "Risk Factors -- Absence of Public Market for the New Notes, the Class A Common Shares and the Common Stock." Notwithstanding the availability of Section 3(a)(9), Southwest has agreed to register the New Notes for offer and sale by the holders of the New Notes under the Securities Act by filing a registration statement with the SEC no later than April 30, 2002. 8 Set forth below is a summary of the principal features of the Class A Common Shares to be issued in connection with the Exchange: Securities: 900,000 newly issued, fully paid and non-assessable shares of Class A common stock, par value $.01 per share, of Southwest, which will represent, upon consummation of the Exchange, 75% of Southwest's issued share capital. Dividends: Southwest has no present intention to pay any dividends on its capital stock for the foreseeable future. In addition, Southwest's Senior Credit Agreement, the New Indenture and Original Indenture, as currently in effect, effectively prohibit Southwest from paying cash dividends. If, however, Southwest declares and pays a dividend, holders of the Class A Common Shares will receive such dividends ratably with holders of Common Stock and, if outstanding, Special Stock. Board Representation: While the Class A Common Shares remain outstanding, the beneficial owners of the Class A Common Shares are entitled to elect four representatives to Southwest's board of directors, the total number of directors being set at seven under the Amended and Restated Certificate of Incorporation. In the event either (i) the New Notes are not satisfied and paid in cash in full or (ii) there is a voluntary or involuntary bankruptcy filing by or against Southwest prior to October 3, 2003, then, at the option of the holders of the Class A Common Shares, such holders are entitled to elect a fifth representative of a total of eight directors to serve on Southwest's board of directors. Conversion Rights: The Class A Common Shares will automatically convert into shares of Common Stock on the basis of one share of Common Stock for each Class A Common Share issued and outstanding (a) immediately prior to (i) the closing of a firm commitment underwritten initial public offering of at least $10 million in net proceeds by Southwest of Southwest's Common Stock, pursuant to an effective registration statement filed under the Securities Act, or (ii) any other transaction pursuant to which Southwest's Common Stock becomes listed on a national securities exchange or authorized for quotation on an inter-dealer quotation system or (b) immediately after H. H. Wommack, III (i) no longer directly or indirectly has beneficial ownership of 50% or more of Southwest's Common Stock, and (ii) resigns, is removed or otherwise no longer serves as an executive officer of Southwest. Listing: The Class A Common Shares will not be listed on any national securities exchange or authorized to be quoted on any inter-dealer quotation system of any national securities association upon the closing of the Exchange; provided, however, at the appropriate time, Southwest may apply for such listing or quotation with respect to Southwest's Common Stock, and in connection with such listing or quotation, all Class A Common Shares will convert to Common Stock. Registration: The Class A Common Shares are being offered to the Holders in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act and have not been registered with the SEC. The Class A Common Shares should be freely tradable, except by persons who are considered affiliates of Southwest, as that term is defined in the Securities Act, or by persons who hold Class A Common Shares that were previously held by an affiliate of Southwest. There is currently, however, no market for the Class A Common Shares and there can be no assurance that a market will develop. See "Risk Factors - Absence of Public Market for the New Notes, the Class A Common Shares and the Common Stock." Notwithstanding the availability 9 of Section 3(a)(9), Southwest has agreed to register the Class A Common Shares for offer and sale by the Holders under the Securities Act by filing a registration statement with the SEC no later than April 30, 2002. Stockholders Agreement: The Class A Common Shares are subject to a Stockholders Agreement, which places certain conditions on the transfer of the Class A Common Shares and the shares of Common Stock and Special Stock held by SRH. See "Terms of the Stockholders Agreement." Shares of Special Stock To Be Issued to SRH In connection with the Exchange, Southwest will issue to its current sole stockholder, SRH, 200,000 shares of Special Stock. Combined with the 100,000 shares of Common Stock which will be held by SRH upon consummation of the Exchange, SRH will own 25% of Southwest's issued and outstanding share capital. If prior to or on October 3, 2003 Southwest pays in cash in full the New Notes, the Special Shares held by SRH will automatically on the date of such payment be converted into shares of Common Stock, on a basis of one share of Common Stock per each Special Share issued and outstanding. If on or prior to October 3, 2003 Southwest either (i) fails to pay in cash in full the New Notes or (ii) there is a voluntary or involuntary bankruptcy filing by or against Southwest, then, upon the earlier of such event, the Special Shares will be deemed canceled, shall be null and void and of no further effect. Upon cancellation of the Special Shares, SRH would then own only 10% of Southwest's issued and outstanding share capital. See "Terms of the Special Shares To Be Issued to SRH." Consent Solicitation In connection with the Offer, Southwest is soliciting the Consents of Holders to the Proposed Waivers and Amendments. These undertakings require the consent of Holders under the terms of the Original Indenture and the Original Pledge Agreement. In particular, Southwest intends to: . Form MRO Holdings, transfer the shares of Red Oak to MRO Holdings, and then distribute the shares of MRO Holdings to the stockholders of SRH; and . Remove most of the covenants from the Original Indenture. This Statement discusses the above transactions in greater detail and identifies the specific provisions of the Original Indenture and the Original Pledge Agreement effected by the Proposed Waiver and Amendments. See "The Distribution and the Proposed Waivers and Amendments." IF THE PROPOSED WAIVERS AND AMENDMENTS BECOME EFFECTIVE, THEY WILL APPLY TO ALL ORIGINAL NOTES, IF ANY, THAT REMAIN OUTSTANDING, AND EACH HOLDER OF ORIGINAL NOTES THAT HAS NOT PROPERLY TENDERED FOR EXCHANGE ORIGINAL NOTES WILL BE BOUND BY THE PROPOSED WAIVERS AND AMENDMENTS, REGARDLESS OF WHETHER THAT HOLDER CONSENTED TO THE PROPOSED WAIVERS AND AMENDMENTS. Notwithstanding any other provision of the Offer, Southwest's obligation to accept for exchange Original Notes validly tendered pursuant to the Offer is conditioned upon, in part, the receipt of the Requisite Consent to the Proposed Waivers and Amendments and, if any Original Notes remain outstanding, the execution and delivery of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement. Terms of the Note Exchange Agreement In connection with the Exchange, the Note Exchange Agreement will be entered into among Southwest and each of the Holders participating in the Exchange. The execution of the Consent and Letter of Transmittal will confer upon the Depositary a Power of Attorney to execute the Note Exchange Agreement on behalf of the tendering Holders. Once executed by the Depositary on behalf of the tendering Holders, the Note Exchange Agreement will constitute a legally binding obligation on the part of the tendering Holders and Southwest to complete the Exchange. The Note Exchange Agreement will not become legally binding until both the Depositary, on behalf of the tendering 10 Holders, and Southwest execute the Note Exchange Agreement. The Note Exchange Agreement reiterates the terms of the Offer, contains certain representations and warranties by Southwest and the exchanging Holders and indemnification by Southwest of the exchanging Holders with respect to certain matters involving the Exchange and includes registration rights provisions for the Holders and SRH, Southwest's current parent. The Note Exchange Agreement is attached to this Statement as Exhibit K. Terms of the Stockholders Agreement In connection with the Exchange, the Stockholders Agreement will be entered into among Southwest, SRH, H. H. Wommack, III and the holders of Class A Common Shares. The execution of the Consent and Letter of Transmittal will confer upon the Depositary a Power of Attorney to execute the Stockholders Agreement on behalf of the tendering Holders. Once executed by the Depositary on behalf of the tendering Holders, Southwest, Mr. Wommack and SRH, the Stockholders Agreement will place conditions on certain sales of the Class A Common Shares, Common Stock and Special Stock. The Stockholders Agreement (i) provides the tendering Holders a right of first refusal for purchasing shares of Common Stock or Special Stock held by SRH, (ii) grants tag-along rights to SRH which permit SRH to sell a pro rata percentage of its Common Stock and/or Special Stock if the tendering Holders collectively transfer a majority of their Class A Common Shares, and (iii) grants co-sale rights to the tendering Holders whereby tendering Holders desiring to sell collectively a majority of their Class A Common Shares may require SRH to sell a pro rata percentage of its Common Stock and/or Special Shares in connection with such sale. The Stockholders Agreement is attached to this Statement as Exhibit L. Terms of the Senior Credit Agreement and the Collateral Trust Agreement In connection with the Exchange, Southwest will enter into the Senior Credit Agreement. Union Bank of California will act as administrative agent under the Senior Credit Agreement. As of the date of this Statement, Southwest is pursuing commitments from other potential Senior Lenders to participate in the Senior Credit Agreement. The proposed terms of the Senior Credit Agreement provide for an initial borrowing base of $60 million, with a maximum of $80 million, of which $60 million will be available for general corporate purposes, with the remaining $20 million subject to debt incurrence tests (asset value and cash flow-based calculated on a pro-forma basis). The proposed interest rate of the Senior Credit Agreement will be determined by a LIBOR grid based upon borrowing base usage, with a margin ranging from 225 to 275 basis points. The Indebtedness under the Senior Credit Agreement will mature on March 30, 2004. All of the Obligations of Southwest under the Senior Credit Agreement will be secured by, among other things, liens on and security interests in substantially all of the assets of Southwest, and the Obligations of Southwest are guaranteed by its Subsidiary Blue Heel, which guarantee is secured by substantially all of Blue Heel's assets. The liens and security interests against the assets of Southwest and Blue Heel (collectively the "Southwest Collateral") will be granted to and held by the Collateral Trustee pursuant to various security documents for the benefit of all Senior Lenders and all holders of the New Notes. The maintenance and disposition of the Collateral and the liens against the Collateral will be governed by the Collateral Trust Agreement unless and until the Collateral Trust Agreement is terminated in accordance with its terms. While all the material terms of the Collateral Trust Agreement are not yet agreed upon by the parties thereto, the Collateral Trust Agreement will, among other items, establish the relative rights of the holders of the New Notes and the Senior Lenders in and to the Southwest Collateral. Subject to and according to the specific terms of the Collateral Trust Agreement, the Collateral Trustee will be responsible for and will control matters such as the release of liens and the exercise of default remedies, including the sale of the Southwest Collateral upon foreclosure. The Collateral Trustee will hold liens on the Southwest Collateral to secure payment under the Senior Credit Agreement and New Notes; however, upon any liquidation of the Southwest Collateral or disposition thereof for the benefit of Southwest's creditors, the Indebtedness under the New Notes will be subordinated in right of payment to the Indebtedness under the Senior Credit Agreement. Additionally, under the Collateral Trust Agreement, each holder of the New Notes (i) must make certain representations, including that such holder has made and will continue to make an independent credit analysis of Southwest and the Southwest Collateral and (ii) must indemnify the Collateral Trustee for certain liabilities with respect to the Security Documents under certain limited circumstances and certain expenses in connection with preserving and enforcing such holder's rights with respect to the Southwest Collateral. 11 If an event of default under the Senior Credit Agreement occurs and is continuing, and the Senior Lenders provide notice of such default to Southwest and the New Trustee in accordance with the Collateral Trust Agreement, thereby declaring a Subordination Event, Southwest may not pay and the holders of the New Notes are not entitled to receive any further payments of interest on the new Notes for a period of time (a "Blocking Period") commencing on the date the Subordination Event is declared and ending on the earlier to occur of: (a) 180 days after the date the Subordination Event was declared, (b) the date on which the event of default giving rise to the Subordination Event is cured, waived or for which a forbearance agreement is put in place, (c) the date on which the Indebtedness under the Senior Credit Agreement is paid in full, or (d) the filing of a bankruptcy case by or against Southwest. Upon the expiration or termination of any Blocking Period, Southwest shall pay to the holders of New Notes all interest which has accrued (including any interest which has accrued at the default rate provided for in the New Indenture), has become due or is past due and remains unpaid and, thereafter, shall pay interest when the same becomes due and payable as provided for in the Indenture. Following the expiration or termination of any Blocking Period, additional Blocking Periods may be commenced, however, Holders are seeking a provision that in no event shall there be a Blocking Periods in effect for more than 180 days in any period of 360 consecutive days. The subordination provisions of the Collateral Trust Agreement will not prevent the occurrence of any Event of Default under the New Indenture. However, in the event Southwest defaults on its obligations under the New Notes prior to the maturity of the New Notes, the Collateral Trust Agreement will provide that the Indebtedness under the New Notes cannot be accelerated unless and until, (a) the Indebtedness under the Senior Credit Agreement is paid in full, (b) the Company files a bankruptcy petition (or an involuntary petition is filed against it and not dismissed within 60 days) or (c) the Indebtedness under the Senior Credit Agreement has been accelerated. In addition, the provisions of the Collateral Trust Agreement limit the rights of the New Trustee and/or the holders of the New Notes to foreclose on, or otherwise exercise any rights or remedies with respect to, the Southwest Collateral until such time as all Obligations under the Senior Credit Agreement have been paid in full in cash or other payment satisfactory to the Senior Lenders and all lending commitments thereunder have been terminated. A FINAL VERSION OF THE COLLATERAL TRUST AGREEMENT AND THE TERM SHEET FOR THE SENIOR CREDIT AGREEMENT WILL BE SENT TO HOLDERS AT LEAST 10 BUSINESS DAYS PRIOR TO THE EXPIRATION DATE. THE EXCHANGE IS CONDITIONED UPON THE EXECUTION AND DELIVERY OF THE SENIOR CREDIT AGREEMENT AND THE COLLATERAL TRUST AGREEMENT. THERE CAN BE NO ASSURANCE THAT THE SENIOR CREDIT AGREEMENT OR THE COLLATERAL TRUST AGREEMENT WILL BECOME EFFECTIVE AND, THUS, THE EXCHANGE MAY NOT BE CONSUMMATED. Certain Offer and Consent Solicitation Matters The obligations of Southwest to consummate the Exchange are subject to certain conditions, including (i) receipt of the Minimum Tender (unless waived by the unanimous consent of the Participating Holders who are parties to the Participation Agreement), (ii) receipt of the Requisite Consent to the Proposed Waivers and Amendments and, if any Original Notes remain outstanding, the execution and delivery of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement, (iii) the execution and delivery of the Senior Credit Agreement, the Collateral Trust Agreement and the Security Documents relating to those documents and to the Indenture, (iv) the declaration of effectiveness by the SEC of Southwest's Form T-3 filed with respect to the New Indenture, (v) the execution of the Note Exchange Agreement, Collateral Trust Agreement and Stockholders Agreement by the tendering Holders, pursuant to a Power of Attorney to be granted to the Depositary on behalf of the exchanging Holders, and (vi) the written cancellation of a $1.6 million note issued by H. H. Wommack, III, Southwest's Chief Executive Officer and President, to SRH in exchange for 123,710 shares of SRH common stock held by Mr. Wommack. The Offer is being made pursuant and subject to the effectiveness of the Supplemental Indenture, which will remove most of the covenants from the Original Indenture, and the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement (assuming any Original Notes remain outstanding). Accordingly, Southwest may not under any circumstances waive the condition that Southwest receive the Requisite Consent. Participating Holders who are parties to the Participation Agreement may waive by unanimous consent the Minimum Tender and Southwest may otherwise withdraw the Offer and the Consent Solicitation at any time and from time to time prior to the closing of the Exchange. A tendering Holder may revoke a tender of Original Notes at any time prior to 5:00 p.m., New York, New York time, on the Expiration Date, but not thereafter, unless Southwest has failed to issue the Exchange Consideration on the Exchange Date, which Exchange Consideration will be sent to the Depositary for delivery to the exchanging Holders. The revocation of a Holder's tender will be effective only by means of a signed writing specifically stating such withdrawing Holder's intention to revoke its tender, and an 12 attempted withdrawal of Original Notes absent such a writing will not effect a revocation of tender with respect to such Original Notes. A Holder who validly withdraws any previously tendered Original Notes will not receive the Exchange Consideration with respect to the withdrawn Original Notes. See "--Withdrawal Rights." Unless the Offer is amended, withdrawn or terminated, Southwest will notify the Holders of the results of the Offer, together with the effectiveness of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement (if any Original Notes remain outstanding) and the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement on the Exchange Date. See "Certain Federal Income Tax Consequences" for discussions of certain factors that should be considered in evaluating the Offer and the Consent Solicitation, and also see "The Distribution and Proposed Waivers and Amendments," "-- Terms of the New Notes" and "-- Terms of the Class A Common Shares" for a description of the Proposed Waivers and Amendments and the terms of the Exchange Consideration to be issued in the Exchange. No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Statement and if given or made, any such information or representation may not be relied upon as having been authorized by Southwest, its parent SRH, any Guarantor, the Depositary, the Original Trustee or the New Trustee. The delivery of this Statement shall not under any circumstances create any implication that the information contained herein is correct as of any time subsequent to the date as of which it is provided or that there has been no change in the information set forth herein or in any attachments hereto or in the affairs of Southwest or any of its subsidiaries or affiliates since such date or the date hereof. 13 CERTAIN DEFINED TERMS In addition to terms defined elsewhere in this Statement, including terms which may be defined under the subheading "--Certain Definitions in the New Indenture," the terms set forth below have the following meanings: Amended and Restated The Amended and Restated Bylaws of Bylaws Southwest, to be adopted in connection with the Exchange. Amended and Restated The Amended and Restated Certificate of Certificate of Incorporation of Southwest, to be filed Incorporation with the Delaware Secretary of State in connection with the Exchange. Amended and Restated An amended and restated pledge agreement Pledge Agreement which will contain certain amendments to the Original Pledge Agreement. See "-- Description of the Amended and Restated Pledge Agreement." Basic Basic Energy Services, Inc., of which SRH directly owns approximately 3.75% of its common stock. Blue Heel Blue Heel Company, Southwest's only subsidiary. Class A Common Shares 900,000 shares of Class A common stock, $.01 par value share, to be issued by Southwest in the Exchange to the exchanging Holders. Collateral Trust The Collateral Trust Agreement among Agreement Southwest, Blue Heel, the New Trustee, the holders of the New Notes and the Senior Lenders from time to time party to the Senior Credit Agreement, which, inter alia, establishes the relative rights of the holders and the Senior Lenders party to the Senior Credit Agreement in and to the collateral directly owned by Southwest and Blue Heel. Collateral Trustee The party named in the Collateral Trust Agreement until a successor replaces it in accordance with the provisions of the Collateral Trust Agreement, and thereafter means such successor. Company Contact J. Steven Person. See "Company Contact." Consent and Letter The form attached to this Statement on of Transmittal which the Holders may indicate their decision to tender the Original Notes, consent to the Proposed Waivers and Amendments and grant a Power of Attorney. Consents The consents to the Proposed Waivers and Amendments. Depositary Wilmington Trust Company Distribution Collectively, the transfer by SRH of the shares of Red Oak held by SRH to MRO Holdings, and the subsequent distribution of the shares of MRO Holdings to the stockholders of SRH. Exchange Date The date upon which the Exchange occurs and on which the Consents become effective, which shall be within a 14 reasonable time following the Expiration Date. Expiration Date April 1, 2002, 5:00 p.m., New York, New York time, unless extended by Southwest. Guarantor(s) SRH, MRO Holdings, Blue Heel and each Subsidiary Guarantee. Holders The holders of the Original Notes. Minimum Tender At least $115 million of the Original Notes. MRO Holdings MRO Holdings, Inc., a Delaware corporation, the newly formed holding company for shares of Red Oak common stock previously held by SRH. New Indenture The Indenture to be entered into with respect to the New Notes. New Notes The Senior Secured Notes due 2004 to be issued by Southwest in connection with the Exchange. New Trustee Wilmington Trust Company, the trustee under the New Indenture. Note Exchange The agreement among the Holders tendering Agreement their Original Notes and Southwest to be entered into in connection with the Exchange. See "Terms of the Note Exchange Agreement." Obligations All obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing the Indebtedness. Original Indenture The indenture, dated October 15, 1997, among Southwest, SRH as parent guarantor, and the Original Trustee, as trustee for the Holders. Original Notes Southwest's 10 1/2% Senior Notes due 2004. Original Pledge The Pledge Agreement, dated October 14, 1997, Agreement among Southwest, SRH, and the Original Trustee. Original Trustee State Street Bank and Trust Company, the trustee under the Original Indenture. Participating Holders Those Holders who have entered into a Participation Agreement with Southwest to exchange their Original Notes in connection with the Exchange. Participation The agreement, dated January 14, 2002, as Agreement amended, by and among Southwest and the Participating Holders holding approximately $88.61 million in principal amount of Original Notes. Pledge Agreement The agreement of the Holders to waive certain Waiver provisions of the Original Pledge Agreement. See "--Description of the 15 Waiver Pledge Agreement Waiver." 16 Proposed Waivers and Collectively, the Pledge Agreement Waiver, Amendments the Supplemental Indenture and the Amended and Restated Pledge Agreement. Red Oak Midland Red Oak Realty, Inc., a Delaware corporation and former subsidiary of SRH. Requisite Consent Consent from the holders of 66 2/3% of the aggregate principal amount of the Original Notes, excluding Original Notes held by Southwest or its affiliates; provided, however, that for purposes of the Consent Solicitation, the effective Requisite Consent will be equal to such greater percentage of the Original Notes held by the Holders who tender such Original Notes in the Consent Solicitation. SEC The Securities and Exchange Commission. Securities Act The Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. Senior Credit Agreement The senior secured revolving credit facility due March 30, 2004 to be entered into among Southwest, the guarantors named therein, the Senior Lenders named therein and Union Bank of California, as administrative agent, subject to a borrowing base to be determined at least semi-annually, which shall initially be set at $60 million with an additional $20 million based upon incurrence tests. Senior Lenders The lenders to be named in the Senior Credit Agreement. Special Shares or The shares of convertible cancelable Special Stock special stock, $.01 par value per share, to be issued by Southwest to SRH in connection with the Exchange. See "Terms of the Special Shares To Be Issued to SRH." SRH Southwest Royalties Holdings, Inc., Southwest's parent company. Southwest Southwest Royalties, Inc., a Delaware corporation. Southwest Collateral Substantially all of the assets of Southwest and Blue Heel. Stockholders Agreement The agreement among Southwest, SRH, H. H. Wommack, III, and the tendering Holders to be entered into in connection with the Exchange, which terms govern certain matters regarding the disposition of Class A Shares and shares of Common Stock and Special Stock. Subordinated Credit Any subordinated credit facility entered Facility into by Southwest after the closing of the Exchange with a maturity date of June 30, 2005 or later. 17 Supplemental Indenture A supplemental indenture which contain certain amendments to the Original Indenture. See "-- Description of Amendments to the Original Indenture." you or your The Holders of the Original Notes. RISK FACTORS Before you make a decision whether or not to exchange your Original Notes, in addition to the other information included in this Statement, you should carefully consider the risks associated with participating or not participating in the Exchange. Certain of the risk factors associated with the Exchange and the business and operations of Southwest are described below. Risks of Participating in the Exchange Significant Leverage; Inability to Service Debt; Lack of Profitable Operations Southwest is, and after the Exchange is consummated will continue to be, highly leveraged. As of December 31, 2001, as set forth in Southwest's unaudited supplemental financial information set forth on Exhibit B-Part II, Southwest had total outstanding indebtedness of approximately $185.341 million, consisting of $123.685 million principal amount of Original Notes (including the original discount), $49.97 million of its existing senior credit facility with Foothill Capital Corporation and $11.686 million of other indebtedness. Assuming 100% of the outstanding Original Notes are tendered, upon consummation of the Exchange, Southwest's note Indebtedness will decrease from $123.685 million (face value) to $60 million (face value). The degree to which Southwest is leveraged could have important consequences to holders of the New Notes and the Class A Common Shares, including, but not limited to: . minimizing the likelihood that Southwest will have sufficient excess cash to redeem the New Notes and/or pay the New Notes at maturity; . limiting its ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements; . requiring a substantial portion of Southwest's cash flow from operations for the payment of principal of, and interest on, other indebtedness, thereby reducing the availability of such excess cash flow to fund working capital, capital expenditures or other general corporate purposes, including redemption of the New Notes; . making Southwest more vulnerable to general adverse economic and industry conditions; . limiting Southwest's flexibility in planning for, or reacting to, changes in the oil and gas industry; and . placing Southwest at a competitive disadvantage to less leveraged competitors. Southwest's future operating performance is dependent on a number of factors, many of which are outside of its control, including prevailing economic conditions and financial, business, regulatory and other factors. Southwest cannot assure you that it will generate sufficient cash flow from operations in order to make redemptions of the New Notes or pay the New Notes at maturity, and the Senior Credit Agreement and Collateral Trust Agreement will restrict its ability to redeem or repay the New Notes without the consent of the Senior Lenders. If Southwest were unable to generate sufficient cash from future operations to service its debt, to satisfy its operating expenses, or to generally pay its debts as they mature, Southwest would be required to explore its alternatives, such as seeking additional debt or equity financing, reducing or delaying capital expenditures, selling assets or operations or seeking protection from creditors under applicable bankruptcy laws. Southwest cannot assure you that it would be successful in implementing any of these alternatives, if necessary. 18 Absence of Public Market for the New Notes, the Class A Common Shares and the Common Stock The New Notes and the Class A Common Shares are new issues of securities and have no established trading markets. Southwest does not intend to list the New Notes or the Class A Common Shares or the Common Stock on any securities exchange or automated quotation system, and Southwest cannot assure you that a market will develop for the New Notes, the Class A Common Shares or the Common Stock or that Holders will be able to sell their New Notes or Class A Common Shares at prices acceptable to them or otherwise. Future trading prices of the New Notes, the Class A Common Shares and the Common Stock will depend on many factors, including, among others, Southwest's operating results and general market conditions like those for similar securities. Security and Subordination The Obligations of Southwest under the New Notes will be secured by a lien on substantially all of Southwest's assets and guaranteed by Southwest's subsidiary, Blue Heel, which guarantee will be secured by substantially all of the assets of Blue Heel. These liens and all rights regarding payment priority are subject to a Collateral Trust Agreement which will expressly subordinate and block the right of payment on the New Notes to the Indebtedness evidenced by the Senior Credit Agreement (except for the payment of interest when no Subordination Event exists (as will be defined in the Collateral Trust Agreement)). The Obligations of Southwest under the New Notes will be secured by a guarantee of SRH and SRH will pledge the common stock of Basic held by SRH. The Obligations of Southwest under the New Notes will also be secured by a guarantee of MRO Holdings and MRO Holdings will pledge the common stock of Red Oak to be held by MRO Holdings. The shares of common stock of Basic and Red Oak are, however, subject to an existing pledge guaranteeing Southwest's Obligations under the Original Indenture. Except as may otherwise be provided for in the Collateral Trust Agreement, in connection with the distribution of assets of Southwest or Blue Heel upon any dissolution, winding up, voluntary or involuntary bankruptcy, insolvency, liquidation, reorganization, receivership or similar proceeding relating to Southwest or its property, an assignment for the benefit of creditors or any marshaling of the assets or liabilities of Southwest or Blue Heel, the Senior Lenders will be entitled to receive payment in full, in cash or other payment satisfactory to the Senior Lenders, of all Obligations under the Senior Credit Agreement before the holders of the New Notes will be entitled to receive any payment of the Indebtedness then owing in respect of the New Notes. Additionally, due to the existing pledge on the shares of common stock of Basic and Red Oak, Holders of Original Notes (if any remain outstanding upon consummation of the Exchange) may be entitled to foreclose on the guarantee collateral prior to the holders of New Notes. After all the Obligations under the Senior Credit Agreement and the Original Notes are paid, there may be insufficient assets remaining to pay amounts due on any or all of the New Notes outstanding. See "--Subordination," "Guarantees and Collateral for Guarantees," and "--Certain Covenants." Risk of Prepayment The New Notes will be subject to redemption at the option of Southwest in whole or in part, at par, at any time without penalty or premium upon notice to the holders of the New Notes. Additionally, the New Notes will be subject to a mandatory redemption if certain circumstances exist. See "--Redemption; Prepayment." As a result, the holders of the New Notes will be subject to a risk of prepayment at a time when interest rates may be generally declining. In such case, holders of New Notes that are redeemed will no longer have the right to receive interest and may only be able to reinvest the redemption proceeds in securities with a lower rate of interest, depending upon prevailing conditions. Exchange Offer May Have Tax Consequences to Southwest The exchange of Original Notes for New Notes and Class A Common Shares will have certain tax consequences to the holders of New Notes and Class A Common Shares, each of whom is urged to consult his tax advisor as to the particular tax consequences associated with such Holder. Additionally, if all of the Original Notes are tendered in the Exchange, Southwest will recognize cancellation of indebtedness income in an amount equal to the difference, if any, between the face amount of the Original Notes exchanged and the fair market value of the New Notes and Class A Common Shares. Although Southwest believes that the fair market value of the New Notes and Class A Common Shares will not be less than the principal amount of the Original Notes exchanged therefor, there can be no assurance that the Internal Revenue Service will not seek to challenge Southwest's determination of 19 the value of the New Notes and Class A Common Shares in the Exchange, which challenge, if successful, could cause the cancellation of indebtedness income to exceed Southwest's net operating loss carryforward (the availability of which also may be limited as a result of the Exchange), resulting in the recognition of taxable income by Southwest from the Exchange. Conditions To Consummate the Exchange In conjunction with the Offer, Southwest is also soliciting the consent to the Proposed Waivers and Amendments of certain provisions of the Original Indenture and the Original Pledge Agreement. The Proposed Waivers and Amendments will remove most of the covenants from the Original Indenture and will allow SRH to consummate the Distribution. Southwest will not complete the Distribution or cause the covenants in the Original Indenture to be removed unless and until it has received the Requisite Consents, and Southwest will not complete the Exchange unless the Proposed Waivers and Amendments are approved. Southwest can give no assurance that it will receive the Requisite Consent and complete the Exchange, and accordingly, that the Distribution, the removal of the covenants in the Original Indenture or the Exchange will occur. Southwest has the right to revoke this Offer and Consent Solicitation at any time prior to the Expiration Date. The Exchange is conditioned upon Southwest and the Senior Lenders entering into the Senior Credit Agreement and the Collateral Trust Agreement and Southwest entering into the Security Documents, many terms of which must still be negotiated. Southwest must also receive the Minimum Tender (unless waived by the unanimous consent of the Participating Holders who are parties to the Participation Agreement), and Southwest's Form T-3, filed with respect to the New Indenture, must be declared effective by the SEC. The Exchange is also conditioned upon the written cancellation of a $1.6 million note issued to SRH by H. H. Wommack, III in exchange for 123,710 shares of the SRH common stock held by Mr. Wommack. Additionally, it is a condition that each Holder grant a Power of Attorney to the Depositary to execute, on behalf of the exchanging Holder, the Note Exchange Agreement, the Stockholders Agreement and the Collateral Trust Agreement. There is no assurance that any of these conditions will be satisfied and, thus, that the Exchange will be consummated. Risks Of Not Participating In The Exchange Reduced Public Market for Original Notes The extremely limited trading market that currently exists for the Original Notes will be adversely affected by the Exchange. Holders who fail to exchange their Original Notes in the Exchange will find it even more difficult to sell their Original Notes. To the extent that the Original Notes are tendered and accepted for exchange in the Offer, the trading market for the remaining Original Notes will be even more limited or may cease altogether. A debt security with a smaller outstanding aggregate principal amount or "float" may command a lower price than would a comparable debt security with a larger float. Therefore, the market price for the unexchanged Original Notes will be adversely affected to the extent that the principal amount of the Original Notes tendered in the Exchange reduces the float. The reduced float may also tend to make the trading prices of the Original Notes more volatile. Removal of Covenants from the Original Indenture In connection with the Exchange, Southwest intends to cause most of the covenants from the Original Indenture to be removed. The restrictions in these covenants include receipt of a premium in the event Southwest redeems the Original Notes or causes "a change in control" of Southwest (as such term is defined in the Original Indenture) and restrictions on Southwest's ability to incur additional indebtedness. The removal of these restrictive covenants will have a material adverse affect on the rights of the Holders of the Original Notes. 20 Risks of Southwest and the Oil and Gas Industry Dependence on Price of Oil and Gas The markets for oil and gas are volatile and prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and gas and a variety of additional factors that are beyond Southwest's control. These factors include the level of consumer demand, weather conditions, domestic and foreign governmental regulations, market uncertainty, the price and availability of alternative fuels, political conditions in the Middle East, foreign supply of oil and gas, price of foreign imports and overall economic conditions. In the last 18 months the price of oil per barrel has fluctuated from a low of $17.45 to a high of $37.21. It is impossible for Southwest to predict future oil and gas prices with any certainty. In order to reduce Southwest's exposure to price risks in the sale of oil and gas, Southwest enters into hedging arrangements from time to time. The hedging arrangements, however, only generally apply to a portion of Southwest's production and provide only limited price protection against fluctuations in the oil and gas markets. See "--Hedging Transactions" below. Southwest uses the full cost method of accounting for its investment in oil and gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized into a "full cost pool" as incurred, and properties in the pool are depleted and charged to operations using the gross revenues method based on the ratio of current gross revenues to total proved future gross revenues, computed based on current prices. Significant downward revisions of quantity estimates or declines in oil and gas prices that are not offset by other factors could result in a write-down for impairment of oil and gas properties. Once incurred, a write-down of oil and gas properties is not reversible at a later date, even if oil or natural gas prices increase. Hedging Transactions In order to manage its exposure to price risks in the marketing of its oil and natural gas production, Southwest has in the past and may in the future enter into oil and natural gas price hedging arrangements with respect to a portion of its expected production. Southwest's hedging arrangements may include futures contracts on the New York Mercantile Exchange. While intended to reduce the effects of volatile oil and natural gas prices, such transactions may limit Southwest's potential gains if oil and natural gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose Southwest to the risk of loss in certain circumstances, including instances in which: . Southwest's production is less than expected; . there is a widening of price differentials between delivery points for Southwest's production and the delivery point assumed in the hedge arrangement; . the counter-parties to Southwest's futures contracts fail to perform the contracts; or . a sudden, unexpected event materially impacts oil or natural gas prices. Southwest entered into several fixed price swap agreements covering approximately 26% to 80% of its current daily oil and gas production over the period of January 2001 through May 2002. All of Southwest's hedging agreements are with Enron North America, an entity affiliated with Enron Corp., which filed for bankruptcy protection on December 2, 2001. Through the February settlement date, Enron North America owes Southwest approximately $1.83 million for hedging agreements. Southwest has approximately 26% of its production hedged after February through May 2002 and will probably, depending on pricing, be owed additional monies at the time of settlement. Southwest, along with other similarly situated plaintiffs, have filed suit seeking payment under the fixed price swap agreements. There can be no assurance that Southwest will receive any payment pursuant to these agreements due to the current financial situation of Enron Corp. 21 Depletion of Existing Reserves In general, the volume of production from oil and gas properties declines as reserves are depleted. Unless Southwest acquires additional properties containing proved reserves or conducts successful development and exploration activities on existing properties, or both, its proved reserves will decline as reserves are depleted and, as a result, Southwest's cash flow will correspondingly decline. Southwest's future oil and gas production is, therefore, highly dependent upon its success in finding or acquiring additional reserves. Exploring for, developing or acquiring new reserves requires substantial amounts of capital. Because cash flow from operations has been reduced and external sources of capital have become limited or unavailable, Southwest's ability to make the capital investments necessary to maintain or expand its reserves has been impaired. In addition, there can be no assurance that Southwest's future development, acquisition and exploration activities will result in additional proved reserves or that Southwest will be able to drill productive wells at acceptable costs. Estimates of Reserves and Future Net Revenue Estimating oil and gas reserves and their values involves numerous uncertainties, including many factors beyond Southwest's control. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas which cannot be measured in an exact manner. Estimates of economically recoverable oil and gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, including the following: . historical production from the area compared with production from other producing areas; . the assumed effects of regulation by governmental agencies; and . assumptions concerning future oil and gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs. Because of the variable factors and assumptions involved in the estimation of reserves, different engineers or the same engineers at different times may reach substantially different results in their estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, their classification of reserves based on risk recovery and their estimates of the future net cash flows expected from reserves. In addition, reserve estimates may be adjusted downward or upward because of changes in such factors and assumptions. Because all reserve estimates are subjective to some degree, each of the following items may differ materially from those assumed in the estimated reserves: . the quantities of oil and gas that are ultimately recovered; . the production and operating costs incurred; . the amount and timing of future development expenditures; and . future oil and gas prices. The present values of estimated future net cash flows of Southwest estimated from time to time should not be construed as the current market value of the estimated oil and gas reserves attributable to its properties. In accordance with applicable requirements of the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as: . the amount and timing of actual production; . supply and demand for oil and gas; . curtailments or increases in consumption by gas purchasers; and 22 . changes in governmental regulations or taxation. The timing of actual future net cash flows from proved reserves, and their actual present value, estimated from time to time, will be affected by both the timing of the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the calculation of the present value of the future net revenues using a 10% discount, as required by the SEC, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with Southwest's reserves or the oil and gas industry in general. Risks of Drilling and Development Activities Southwest may not be successful in future drilling or development activities, and such failures will have an adverse effect on its future results of operations and financial condition. In addition, the cost of drilling, completing, recompleting, developing, and operating wells is often uncertain and these operations may be curtailed, delayed or canceled as a result of a variety of factors, including the following: . unexpected drilling or geologic conditions; . pressure or irregularities in formations; . equipment failures or accidents; . adverse weather conditions; . title problems; or . shortages or delays in the delivery of equipment. Other Risks Services of Key Personnel Southwest depends to a large extent on the services of H. H. Wommack, III and certain other senior management personnel. The loss of the services of Mr. Wommack and other senior management could have a material adverse effect on Southwest's operations. Southwest does not currently have employment contracts with its senior management or key personnel but anticipates entering into such agreements prior to the consummation of the Exchange; provided, however, that all such agreements shall be subject to the approval or ratification of Southwest's new Board of Directors, which will be formed simultaneously with the closing of Exchange. Although Southwest maintains key man life insurance on the life of Mr. Wommack in the amount of $15 million, the existence of such insurance does not mean that the death or disability of Mr. Wommack would not have a materially adverse effect upon Southwest. Southwest believes that its success is also dependent upon its ability to continue to employ and retain skilled technical personnel. Southwest's inability to employ or retain skilled technical personnel could have a material adverse effect on its operations. Control of the Board After the consummation of the Exchange, the holders of the Class A Common Shares will be entitled to elect four representatives to Southwest's Board of Directors. Because Southwest's Board will initially be composed of seven members, the directors representing the Class A Common Shares will constitute a majority of the Board, and accordingly, will have the ability to control Southwest's management decisions and policies. 23 PRINCIPAL TERMS OF THE OFFER AND CONSENT SOLICITATION Southwest hereby offers, upon the terms and subject to the conditions set forth in this Statement and in the accompanying Consent and Letter of Transmittal and Note Exchange Agreement, to exchange at least the Minimum Tender of its outstanding Original Notes, and any interest accrued but not paid thereon, for: . $60 million of Senior Secured Notes due 2004; and . 900,000 Class A Common Shares, which will equal 75% of Southwest's issued and outstanding share capital upon consummation of the Exchange. The New Notes will mature on June 30, 2004 and will begin accruing interest at a rate of 10 1/2% per annum from February 1, 2002 (as if the New Notes were issued on that date) through December 31, 2002, 11 1/2% per annum from January 1, 2003 through December 31, 2003 and 12 1/2% per annum thereafter until the maturity date. Interest is payable semi-annually on April 15 and October 15 of each year (with the first payment on April 15, 2002) in cash. In the event Southwest defaults on the New Notes, interest will accrue at a rate of 18% per annum. The Class A Common Shares are entitled to one vote per Common Share on all matters on which Southwest's stockholders are entitled or permitted to vote, except that holders of Class A Common Shares are entitled to appoint four of a total of seven members to the Board of Directors in accordance with the Amended and Restated Certificate of Incorporation. The Holder of the Common Stock and Special Stock is entitled to elect the three remaining members to the Board of Directors. The terms of the Exchange Consideration are described in greater detail below in "-- Terms of the New Notes" and "-- Terms of the Class A Common Shares." In the event Southwest receives more than the Minimum Tender, the Exchange Consideration will not be proportionately increased upon receipt of such additional Original Notes in the Exchange. Thus, in the event Southwest receives the Minimum Tender, for each $1,000,000 principal amount of Original Notes tendered, the Holders will receive $521,740 principal amount of New Notes and 7,826 Class A Common Shares. If, however, the Holders tender all of the Original Notes outstanding, which equal $123.685 million in principal, then for each $1,000,000 principal amount tendered, the Holders will receive $485,100 principal amount of New Notes and 7,276 Class A Common Shares. Southwest will, on the Exchange Date, notify the Holders of the results of the Offer, along with the achievement or waiver of the Minimum Tender, the execution and delivery of the Senior Credit Agreement, the Collateral Trust Agreement and the Security Documents relating to the foregoing documents and to the New Indenture, in each case by the parties thereto, and the effectiveness of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement (if any Original Notes remain outstanding) and the Note Exchange Agreement and the Stockholders Agreement. In connection with the Exchange, Southwest will issue to its current sole stockholder, SRH, 200,000 shares of Special Stock. Combined with the 100,000 shares of Common Stock which will be held by SRH upon consummation of the Exchange, SRH will own 25% of Southwest's issued and outstanding share capital. If, prior to or on October 3, 2003, Southwest pays in cash in full the New Notes, shares of Special Stock held by SRH will automatically be converted into shares of Common Stock upon the closing of Southwest's payment in cash of the New Notes, on a basis of one share of Common Stock per share of Special Stock issued and outstanding. If prior to or on October 3, 2003 Southwest either (i) fails to pay in cash in full the New Notes or (ii) there is a voluntary or involuntary bankruptcy filed by or against Southwest then, upon the earlier of such event, the Special Shares will be deemed canceled, shall be null and void and of no further effect. Upon cancellation of the Special Shares, SRH would then own only 10% of Southwest's issued and outstanding share capital. In connection with the Offer, Southwest is also hereby soliciting Consents to the Proposed Waivers and Amendments. Southwest will not complete the Distribution or remove the covenants in the Original Indenture unless and until it has received the Requisite Consents, and Southwest will not complete the Exchange unless the Proposed Waivers and Amendments are approved. Southwest can give no assurance that it will receive the Requisite Consent, and accordingly, that the Distribution, the removal of the covenants in the Original Indenture or the Exchange will occur. Southwest has the right to revoke this Offer and Consent Solicitation at any time prior to the Expiration Date. 24 The Consent Solicitation shall be conducted pursuant to the terms set forth in this Statement. If the Holders deliver and do not revoke the Requisite Consent and if Southwest receives the Minimum Tender by the Expiration Date, in the event the other conditions of the Exchange are met, then Southwest will promptly execute the Supplemental Indenture, the Pledge Agreement Waiver, the Amended and Restated Pledge Agreement if any Original Notes remain outstanding, and will execute the New Notes, the New Indenture, the Collateral Trust Agreement, the Note Exchange Agreement and the Stockholders Agreement. IN ORDER TO EXCHANGE ORIGINAL NOTES, HOLDERS MUST ALSO CONSENT TO THE PROPOSED WAIVERS AND AMENDMENTS AND MUST GRANT A POWER OF ATTORNEY TO THE DEPOSITARY TO EXECUTE, ON BEHALF OF SUCH EXCHANGING HOLDER, THE NOTE EXCHANGE AGREEMENT, THE STOCKHOLDERS AGREEMENT, AND THE COLLATERAL TRUST AGREEMENT. Consents may be revoked in accordance with the procedure set forth herein under the subheading "--Withdrawal Rights" at any time prior to the Expiration Date. Southwest reserves the right, in its sole discretion, subject to any applicable law, at any time prior to the Expiration Date to amend the terms of or withdraw this Offer and the Consent Solicitation. See "--Withdrawal Rights." Notwithstanding any other provision of the Offer or the Consent Solicitation, Southwest's obligation to accept for exchange, and to exchange Original Notes validly tendered pursuant to the Offer, is conditioned upon (i) the receipt of the Minimum Tender (unless waived by the unanimous consent of the Participating Holders who are parties to the Participation Agreement), (ii) the receipt of the Requisite Consent to the Proposed Waivers and the Amendments and the execution and delivery of the Supplemental Indenture, the Pledge Agreement Waiver, the Amended and Restated Pledge Agreement (if any Original Notes remain outstanding upon consummation of the Exchange), (iii) the execution and delivery of the Senior Credit Agreement, the Collateral Trust Agreement and the Security Documents relating to the foregoing documents and to the Indenture, in each case by the parties thereto, (iv) the declaration of effectiveness by the SEC of Southwest's Form T-3 filed with respect to the New Indenture, (v) the entering into of the Stockholders Agreement, the Note Exchange Agreement and the Collateral Trust Agreement by Southwest and the exchanging Holders, pursuant to a Power of Attorney to be granted to the Depositary on behalf of exchanging Holders and (vi) the written cancellation of a $1.6 million note issued by H. H. Wommack, III, Southwest's Chief Executive Officer and President, to SRH in exchange for 123,710 shares of SRH common stock held by Mr. Wommack. SOUTHWEST RESERVES THE RIGHT TO AMEND, EXTEND, WITHDRAW OR TERMINATE THE OFFER AND THE CONSENT SOLICITATION AT ANY TIME AND FOR ANY REASON PRIOR TO THE CLOSING OF THE EXCHANGE (SUBJECT TO CERTAIN NOTICE AND EXTENSION REQUIREMENTS AS DESCRIBED BELOW). IN THE EVENT THAT THE OFFER AND THE CONSENT SOLICITATION ARE WITHDRAWN OR OTHERWISE NOT COMPLETED, OTHERWISE VALIDLY TENDERED ORIGINAL NOTES WILL NOT BE EXCHANGED FOR THE EXCHANGE CONSIDERATION AND ORIGINAL NOTES WILL BE RETURNED TO THE HOLDERS. HOLDERS WHO TENDER ORIGINAL NOTES ARE OBLIGATED TO CONSENT TO THE PROPOSED WAIVERS AND AMENDMENTS WITH RESPECT TO THE ORIGINAL NOTES TENDERED AND TO GRANT A POWER OF ATTORNEY TO THE DEPOSITARY TO EXECUTE, ON BEHALF OF SUCH EXCHANGING HOLDER, THE NOTE EXCHANGE AGREEMENT, THE STOCKHOLDERS AGREEMENT AND THE COLLATERAL TRUST AGREEMENT. PURSUANT TO THE TERMS OF THE CONSENT AND LETTER OF TRANSMITTAL AND THIS STATEMENT, THE TENDER OF ORIGINAL NOTES IN ACCORDANCE WITH ANY OF THE PROCEDURES PROVIDED FOR HEREIN WILL BE DEEMED TO CONSTITUTE THE CONSENT OF SUCH TENDERING HOLDER TO THE PROPOSED WAIVERS AND AMENDMENTS WITH RESPECT TO THE ORIGINAL NOTES TENDERED AND THE GRANT OF A POWER OF ATTORNEY. A HOLDER MAY NOT VALIDLY REVOKE ITS CONSENTS OR POWER OF ATTORNEY WITH RESPECT TO TENDERED ORIGINAL NOTES WITHOUT WITHDRAWING THE PREVIOUSLY TENDERED ORIGINAL NOTES TO WHICH SUCH CONSENTS RELATE. Southwest intends to execute the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement if there are any Original Notes outstanding upon consummation of the Exchange, to execute the New Notes, the New Indenture, the Note Exchange Agreement and the Stockholders Agreement and to file with the Delaware Secretary of State an Amended and Restated Certificate of Incorporation on the Exchange Date. IF THE SUPPLEMENTAL INDENTURE, THE PLEDGE AGREEMENT WAIVER AND THE AMENDED 25 AND RESTATED PLEDGE AGREEMENT AND PROPOSED WAIVERS AND AMENDMENTS BECOME EFFECTIVE, THE PROPOSED WAIVERS AND AMENDMENTS WILL BE BINDING ON ALL HOLDERS WHO CONTINUE TO HOLD THE ORIGINAL NOTES. A Holder who validly withdraws previously tendered Original Notes will not receive the Exchange Consideration unless such Original Notes are retendered at or prior to 5:00 p.m., New York, New York time, on the Expiration Date. UNLESS THE OFFER IS AMENDED, HOLDERS WILL HAVE NO RIGHT TO WITHDRAW PREVIOUSLY TENDERED NOTES AFTER 5:00 P.M., NEW YORK, NEW YORK TIME, ON THE EXPIRATION DATE, UNLESS SOUTHWEST HAS FAILED TO PAY THE EXCHANGE CONSIDERATION TO THE DEPOSITARY ON THE EXCHANGE DATE. Descriptions in this Statement of the provisions of the Original Indenture and Original Pledge Agreement and of the New Indenture, the Amended and Restated Certificate of Incorporation, the Note Exchange Agreement, the Senior Credit Agreement, the Collateral Trust Agreement, the Stockholders Agreement and all other documents described in this Statement are summaries and do not purport to be complete. References to the New Indenture are subject to and qualified by the full text of the New Indenture, the form of which is attached hereto as Exhibit C; references to the Amended and Restated Certification of Incorporation are subject to and qualified by the full text of the Amended and Restated Certificate of Incorporation, the form of which is attached hereto I; references to the Note Exchange Agreement are subject to and qualified by the full text of the Note Exchange Agreement, the form of which is attached hereto K; and references to the Stockholders Agreement are subject to and qualified by the full text of the Stockholders Agreement, the form of which is attached hereto as Exhibit L. Where reference is made to particular provisions of the Original Indenture, such provisions, including the definitions of certain terms, are incorporated herein by reference as part of such summaries, which are qualified in their entirety by such reference. A form of the Original Indenture has been previously filed with the SEC. Copies of any information or document, including the Original Indenture, will be provided upon written request submitted to J. Steve Person, Executive Vice President of Southwest, at 407 N. Big Spring Street, Midland, Texas 79701. You may also contact Mr. Person at (915) 686-9927. See "Company Contact." The Collateral Trust Agreement and the Term Sheet of the Senior Credit Agreement (along with commitment letters) will be mailed to each Holder at least 10 business days prior to the Expiration Date. THE EXCHANGE The Original Notes On October 15, 1997, Southwest completed a $200 million private placement of 10 1/2% Senior Notes due 2004, Series A ("Series A Notes"), which were offered and sold by underwriters only to qualified institutional buyers. The Series A Notes were issued pursuant to an indenture, dated October 14, 1997 (as defined in this Statement as the Original Indenture), by and among Southwest, as issuer, SRH, as the parent guarantor, and State Street Bank and Trust Company, N.A., as trustee. On March 11, 1998, Southwest concluded a registered offering to exchange the Series A Notes for 10 1/2% Senior Notes due 2004, Series B (as defined in this Statement as the Original Notes), which had been registered under the Securities Act. The form and terms of the Original Notes were identical in all material respects to the form and terms of the Series A Notes. The Original Notes evidenced the same debt as the Series A Notes and were issued under and are entitled to the benefits of the Original Indenture governing the Series A Notes. Currently there is outstanding $123.685 million in principal amount of the Original Notes. Reasons for the Exchange Southwest faces significant cash flow problems based upon the recent decline in energy prices and the significant cost of Southwest's debt. As a consequence, Southwest has insufficient cash available after debt service for capital investment in oil and gas production, which is critical to mitigate the decline in its oil and gas reserves. Without the ability to replenish its oil and gas reserves, Southwest will continue to suffer from reduced cash flows as oil and gas production declines. Southwest is making the Offer in an effort to reduce its debt and the costs associated with servicing its debt. The Offer, if all Holders were to accept it, would reduce Southwest's debt by approximately $63.7 million and would decrease Southwest's annual interest payments by approximately $6.7 million. Southwest believes that this should: 26 . enhance Southwest's ability to obtain financing for working capital, capital expenditures and other needs; . increase cash flow, which in turn, may be used to increase Southwest's asset base and production; and . improve Southwest's ability from a financial standpoint, to adjust in a timely fashion to changing market conditions, including the use of hedging arrangements. Terms of the New Notes The following summary of certain provisions of the New Notes, the New Indenture and the Security Documents does not purport to be complete and is subject to, and is qualified in its entirety by, reference to the provisions of the New Notes and the New Indenture, as applicable. A copy of the form of the New Indenture is attached hereto as Exhibit C and the form of the New Notes is attached hereto as Exhibit D. The Security Documents will be prepared prior to the consummation of the Exchange to implement the essential security terms of the New Indenture. Capitalized terms used in this subsection have the meanings defined set forth below under the subheading "-- Certain Definitions in the New Indenture." Southwest will issue the New Notes without registering them under the Securities Act in reliance on an exemption thereto under Section 3(a)(9) of the Securities Act. Pursuant to SEC interpretations, the New Notes will retain the status of the Original Notes as being registered and freely tradable under the Securities Act, except by persons who are considered affiliates of Southwest or persons who hold New Notes that were previously held by affiliates of Southwest. (As a result of the Exchange, certain holders of the New Notes may be considered affiliates of Southwest.) There is, however, no market for the New Notes and there can be no assurance that such a market will develop. See "Risk Factors--Absence of Public Market for the New Notes, the Class A Common Shares and the Common Stock." The New Notes will be issued in denominations of $1,000 and integral multiples thereof. Any fractional portion of the New Notes that would otherwise be issued will be paid in cash on the Exchange Date. The New Trustee will be Wilmington Trust Company. The New Notes may be presented for registration of transfer and exchange at the New Trustee's corporate trust office at 1100 North Market Street, Wilmington, Delaware 19890. Southwest will pay principal and interest on the New Notes at the corporate trust offices of the New Trustee. In addition, in the event the New Notes do not remain in book-entry form, interest may be paid, at Southwest's option, by wire transfer or check mailed to the registered addresses of the holders of the New Notes as shown on the Note Register. Certain Definitions in the New Indenture Set forth below are certain defined terms contained in the New Indenture. Reference is made to the New Indenture for any other terms used herein for which no definition is provided. "Adjusted Consolidated Net Income" of Southwest for any period means the Net Income (loss) of Southwest and its Subsidiaries for such period, determined in accordance with GAAP. "Adjusted Consolidated Net Tangible Assets" means (without duplication), as of the date of determination, (a) the sum of (i) discounted future net revenue from proved oil and gas reserves of Southwest and its Subsidiaries calculated in accordance with SEC guidelines before any state or federal income taxes, as estimated or audited by independent petroleum engineers in one or more Reserve Reports prepared as of the date of determination, increased by the discounted future net revenue of (A) estimated proved oil and gas reserves of Southwest and its Subsidiaries attributable to any acquisition consummated since the effective date of such year-end Reserve Reports and (B) estimated oil and gas reserves of Southwest and its Subsidiaries attributable to extensions, discoveries and other additions and upward revisions of estimates of proved oil and gas reserves due to exploration, development or exploitation, production or other activities conducted or otherwise occurring since the effective date of such year-end Reserve Reports which, in the case of sub-clauses (A) and (B), would, in accordance with standard 27 industry practice, result in such increases, in each case calculated in accordance with SEC guidelines (utilizing the prices utilized in such year-end Reserve Reports), and decreased by, as of the date of determination, the discounted future net revenue of (C) estimated proved oil and gas reserves of Southwest and its Subsidiaries produced or disposed of since the effective date of such year-end Reserve Reports and (D) reductions in the estimated oil and gas reserves of Southwest and its Subsidiaries since the effective date of such year-end Reserve Reports attributable to downward revisions of estimates of proved oil and gas reserves due to exploration, development or exploitation, production or other activities conducted or otherwise occurring since the effective date of such year-end Reserve Reports which would, in accordance with standard industry practice, result in such revisions, in each case calculated in accordance with SEC guidelines (utilizing the prices utilized in such year-end Reserve Reports); provided that, in the case of each of the determinations made pursuant to sub-clauses (A) through (D) above, such increases and decreases shall be as estimated by Southwest's engineers, except that if there is a Material Change and in connection with the Incurrence of Indebtedness for which the Consolidated Fixed Charge Coverage Ratio must be determined, all or any part of an increase in discounted future net revenue resulting from the matters described in sub-clauses (A) and (B) above is needed to permit the Incurrence of such Indebtedness, then the discounted future net revenue utilized for purposes of this clause (a) (i) shall be confirmed in writing by independent petroleum engineers, provided further that, if the events referred to in sub- clauses (C) and (D) above, when taken alone, would not cause a Material Change, then such written confirmation need only cover the incremental additions to discounted future net revenue resulting from the determinations made pursuant to sub-clauses (A) and (B) above to the extent needed to permit the Incurrence of such Indebtedness, (ii) the capitalized costs that are attributable to oil and gas properties of Southwest and its Subsidiaries to which no proved oil and gas reserves are attributed, based on Southwest's books and records as of a date no earlier than the date of Southwest's latest annual or quarterly financial statements, (iii) the Net Working Capital on a date no earlier than the date of Southwest's latest annual or quarterly financial statements and (iv) the greater of (A) the net book value on a date no earlier than the date of Southwest's latest annual or quarterly financial statements and (B) the appraised value, as estimated by independent appraisers, of other tangible assets (including the amount of Investments in unconsolidated Subsidiaries, Affiliates, or other Persons) of Southwest and its Subsidiaries, as of a date no earlier than the date of Southwest's latest audited financial statements, minus (b) the sum of (i) minority interests, (ii) any non-current portion of gas balancing liabilities of Southwest and its Subsidiaries reflected in Southwest's latest annual or quarterly financial statements, (iii) the discounted future net revenue, calculated in accordance with SEC guidelines (utilizing the prices utilized in Southwest's year-end Reserve Reports), attributable to reserves which are required to be delivered to third parties to fully satisfy the obligations of Southwest and its Subsidiaries with respect to Production Payments on the schedules specified with respect thereto, (iv) the discounted future net revenue, calculated in accordance with SEC guidelines (utilizing the same prices utilized in Southwest's initial or year-end Reserve Reports), attributable to reserves subject to participation interests, overriding royalty interests or other interests of third parties, pursuant to participation, partnership, vendor financing or other agreements then in effect, or which otherwise are required to be delivered to third parties and (v) the amount of environmental liabilities payable by Southwest or any Subsidiary. If Southwest changes its method of accounting from the full cost method to the successful efforts method or a similar method of accounting, Adjusted Consolidated Net Tangible Assets will continue to be calculated as if Southwest was still using the full cost method of accounting. "Affiliate" means, with respect to any Person, (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such Person or any officer, director, or employee of such Person or such other Person, (ii) the spouse, any immediate family member, or any other relative who has the same principal residence of any Person described in clause (i) above, and any Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with, such spouse, family member or other relative, and (iii) any trust in which any Person described in clause (i) or (ii), above, is a fiduciary or has a beneficial interest. For purposes of this definition the term "control" means the beneficial ownership of 15% or more of the total voting power of the outstanding Voting Stock of such Person (on a fully diluted basis) or of warrants or other rights to acquire such equity (whether or not presently exercisable). For purposes of determining "control" with respect to Southwest, all of the Common Stock, Class A Common Shares and Special Shares are considered identical with respect to voting power. "Asset Sale" means (i) any direct or indirect conveyance, sale, transfer or other disposition (including through damage or destruction for which Insurance Proceeds are paid or by condemnation), in one transaction or a 28 series of related transactions, of any of the properties, business or assets of Southwest or any Subsidiary of Southwest, whether owned on the Issue Date or thereafter acquired or (ii) any sale or other disposition by Southwest of any Capital Stock of any Affiliate or any Subsidiary of Southwest or its Subsidiaries. Notwithstanding the foregoing, the following will not be deemed to be an Asset Sale: (a) the conveyance, sale, lease, transfer or other disposition by any of Southwest's Subsidiaries of any or all its assets (upon voluntary liquidation or otherwise) to Southwest; (b) the conveyance, sale lease, transfer or other disposition by any Subsidiary of any or all of its assets (upon voluntary liquidation of otherwise) to another Subsidiary; (c) non-material dispositions of assets in the ordinary course of business; (d) Asset Sales not otherwise permitted by clauses (a) through (c) or (f) and (g) of this sentence provided that the aggregate proceeds from all such Asset Sales do not exceed $2.5 million in any twelve-month period; (e) the disposition of all or substantially all of the assets of (i) Southwest and its Subsidiaries, taken as a whole, or (ii) Southwest, if such disposition is governed by its Subsidiaries, taken as a whole, or (iii) Southwest if such disposition is governed by the terms of the New Indenture as described under the heading "Limitation on Asset Sales" or as described under the heading "Limitation on Merger, Sale or Consolidation"; (f) a conveyance, sale, assignment, lease, license, transfer, abandonment or other disposal by Southwest and its Subsidiaries of (i) damaged, worn out, unserviceable or other obsolete property in the ordinary course of business or (ii) other property no longer necessary for the proper conduct of their business; and (g) the conveyance, sale, transfer or otherwise disposition by Southwest and its Subsidiaries of crude oil and natural gas production and refined products in the ordinary course of business. "Business Day" means any day other than a day on which commercial banks are authorized or requirement to close in New York, New York. "Capital Stock" means, with respect to any Person, any capital stock of such Person and shares, interests, participations, or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into corporate stock), warrants or options to purchase any of the foregoing, including without limitation, each class of common stock and preferred stock of such Person, if such Person is a corporation, and each general or limited partnership interest or other equity interest of such Person, if such Person is a partnership or limited liability company. "Capitalized Lease Obligation" means obligations under a lease that are required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations, as determined in accordance with GAAP. "Cash Equivalents" means (a) U.S. Legal Tender, (b) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (c) certificates of deposit with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year, and overnight bank deposits, in each case, with any Eligible Institution, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any Eligible Institution, (e) commercial paper rated "P-l," "A-l" or the equivalent thereof by Moody's Investors Service, Inc. or Standard & Poor's Ratings Service, respectively, and in each case maturing within 180 days after the date of acquisition, (f) shares of money market funds, including those of the New Trustee, that invest solely in U.S. Legal Tender and securities of the types described in clauses (a) through (e), and (g) demand and time deposits and certificates of deposit with an Eligible Institution. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of Southwest and its Subsidiaries, taken as a whole, to any person (as such term is used in Section 13(d)(3) of the Exchange Act) other than to Southwest or a Subsidiary of Southwest; (ii) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of Southwest to any person (as such term is used in Section 13(d)(3) of the Exchange Act) other than to a Subsidiary; (iii) Southwest consolidates with or mergers into another Person or any Person consolidates with, or merges into, Southwest, in any such event pursuant to a transaction in which the then outstanding Voting Stock of Southwest is changed into or exchanged for cash, securities or other property, other than any such transaction where (a) the then outstanding Voting Stock of Southwest is changed into or exchanged for Voting Stock of the surviving or resulting Person that is Qualified Capital Stock and (b) the holders of the Voting Stock of Southwest immediately 29 prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving or resulting Person immediately after such transaction; (iv) the adoption of a plan relating to the liquidation or dissolution of Southwest not involving a merger or consolidation or a sale or other disposition of assets described in clause (i) or (ii) above; or (v) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any person (as defined above), excluding the Permitted Holders, becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of Southwest then outstanding Voting Stock; provided that the sale of Voting Stock of Southwest to a Person or Persons acting as underwriters in connection with a firm commitment underwriting shall not constitute a Change of Control. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring Voting Stock of Southwest shall be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. "Change of Control Payment Date" has the meaning given to it under the heading "- Repurchase of New Notes at the Option of the Holder Upon a Change of Control." "Change of Control Purchase Price" has the meaning given to it under the heading "- Repurchase of New Notes at the Option of the Holder Upon a Change of Control." "Collateral" means all the property in which a Lien has been granted under the Security Documents as security for the Obligations of Southwest and the Guarantors under the New Indenture, the Guarantees and the New Notes. "Consolidated Fixed Charge Coverage Ratio" on any date means, with respect to Southwest, the ratio, on a pro forma basis, of (i) the aggregate amount of EBITDA attributable to continuing operations and businesses and exclusive of the amounts attributable to operations and businesses discontinued or disposed of, on a pro forma basis as if such operations and businesses were discontinued or disposed of on the first day of the Reference Period, for the Reference Period to (ii) the aggregate Consolidated Interest Expense (exclusive of amounts attributable to discontinued operations and businesses on a pro forma basis as if such operations and businesses were discontinued or disposed of on the first day of the Reference Period, but only to the extent that the obligations giving rise to such Consolidated Interest Expense would no longer be obligations contributing to Consolidated Interest Expense subsequent to the date of discontinuation or disposal) during the Reference Period; provided, that for purposes of such computation, in calculating EBITDA and Consolidated Interest Expense, (a) the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio shall be assumed to have occurred on the first day of the Reference Period, (b) the Incurrence of any Indebtedness or issuance of Disqualified Capital Stock or the retirement of any Indebtedness or Capital Stock during the Reference Period or subsequent thereto shall be assumed to have occurred on the first day of such Reference Period, and (c) Consolidated Interest Expense attributable to any Indebtedness (whether existing or being incurred) bearing a floating interest rate shall be computed as if the rate in effect on the date of determination had been the applicable rate for the entire period, unless Southwest or any of its Subsidiaries is a party to a Swap Obligation (that remains in effect for the 12-month period after the date of determination) that has the effect of fixing the interest rate on the date of computation, in which case such rate (whether higher or lower) shall be used. "Consolidated Interest Expense" of Southwest means, for any period, the aggregate interest expense (without duplication), during such period in respect of all Indebtedness of Southwest and its Subsidiaries (including all commissions, discounts, other fees and charges owed with respect to letters of credit and banker's acceptance financing and costs associated with Swap Obligations, but excluding any interest accrued on intercompany payables among Southwest and its Subsidiaries determined on a consolidated basis in accordance with GAAP. For purposes of this definition, (x) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and (y) any interest with respect to Indebtedness guaranteed by Southwest or any Subsidiary or any Subsidiary of Southwest other than with respect to Indebtedness of Southwest or a Subsidiary of Southwest shall be included in the computation of Consolidation Interest Expense. 30 "Default" means an event or condition, the occurrence of which is, or with the lapse of time or giving of notice or both would be, an Event of Default. "Disqualified Capital Stock" means with respect to any Person any Capital Stock of such Person or its Subsidiaries that, by its terms or by the terms of any security into which 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 by such Person or its Subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an even or passage of time would have, a redemption or similar payment due, on or prior to the Stated Maturity Date. "EBITDA" means for any period the sum of the Adjusted Consolidated Net Income of Southwest for such period, plus the sum, without duplication (and only to the extent such amounts are deducted from net revenues in determining such Adjusted Consolidated Net Income), of (i) the provision for income taxes for such period for Southwest, (ii) depreciation, depletion, and amortization of Southwest for such period and (iii) Consolidated Interest Expense for such period, determined, in each case, on a consolidated basis for Southwest and its consolidated Subsidiaries otherwise in accordance with GAAP. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million and has long term debt that is rated "A" (or higher) according to Moody's Investors Service, Inc. or Standard & Poor's Ratings Service at the time as of which any investment or rollover therein is made. "Excess Cash" has the meaning given to it in the covenant described herein under the heading "-- Covenant -- Limitation on Asset Sales." "Excess Cash Acceptance Amount" has the meaning given to it in the covenant described herein under the heading "-- Covenant - Limitation on Asset Sales." "Excess Cash Offer Amount" has the meaning given to it in the covenant described herein under the heading "-- Covenant - Limitation on Asset Sales." "Excess Cash Offer Price" has the meaning given to it in the covenant described herein under the heading "-- Covenant - Limitation on Asset Sales." "Exchange Assets" means assets required by Southwest or any Subsidiary of Southwest in exchange for assets of Southwest or any Subsidiary of Southwest in connection with an Asset Sale, which acquired assets include proved reserves with a value that, together with the cash or Cash Equivalents received from the assets disposed of by Southwest or such Subsidiary, is equal to or greater than the value of the proved reserves included in the assets disposed of by Southwest or such Subsidiary in connection with such Asset Sale; provided, that (i) ownership of such assets does not violate the covenant described herein under the heading "-- Limitation on Lines of Business" and (ii) during any fiscal year, Southwest and its Subsidiaries can collectively acquire assets (other than proved reserves, cash or Cash Equivalents) with a Fair Market Value of up to $500,000 in exchange for assets of Southwest and the Subsidiaries with proved reserves, and such assets acquired by such Person shall constitute "Exchange Assets" hereunder. "GAAP" means generally accepted accounting principles as in effect in the United States on the Issue Date applied on a consistent basis. "Guarantees" means the unconditional guarantees of the New Notes given by SRH, MRO Holdings, Blue Heel or any Subsidiary Guarantor pursuant to the terms of the New Indenture. "Indebtedness" means, with respect to any Person, without duplication (i) all liabilities, contingent or otherwise, of such Person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by bonds, New Notes, debentures, or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property acquired by such Person or services received by such Person, but excluding trade account payables and accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or being contested in good faith by appropriate proceedings, promptly instituted and diligently pursued, (c) evidenced by bankers' acceptances or similar instruments issued or accepted by banks or Swap Obligations, (d) for the payment of money relating to a 31 Capitalized Lease Obligation or (e) for Production Payments that such Person or any of its Subsidiaries elect to treat as Indebtedness; (ii) reimbursement obligations of such Person with respect to letters of credit; (iii) all liabilities of others of the kind described in the preceding clause (i) or (ii) that such Person has guaranteed or that is otherwise its legal liability (to the extent of such guaranty or other legal liability) other than for endorsements, with recourse, of negotiable instruments in the ordinary course of business; and (iv) all obligations secured by a Lien (other than Permitted Liens, except to the extent the obligations secured by such Permitted Liens are otherwise included in clause (i), (ii) or (iii) of this definition and are obligations of such Person) to which the property or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such Person are subject, regardless of whether the obligations secured thereby shall have been assumed by or shall otherwise be such Person's legal liability (but, if such obligations are not assumed by such Person or are not otherwise such Person's legal liability, the amount of such Indebtedness shall be deemed to be limited to the fair market value of such property or assets determined as of the end of the preceding fiscal quarter). "Interest Rate or Currency Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars, puts and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates. "Investment" by any Person in any other Person means (i) the acquisition (whether for cash, property, services, securities or otherwise) of capital stock, bonds, New Notes, debentures, partnership, or other ownership interests or other securities of such other Person or any agreement to make any such acquisition; (ii) the making by such Person of any deposit with, or advance, loan or other extension of credit to, such other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other Person) and (without duplication) any amount committed to be advanced, loaned or extended to such other Person; (iii) the entering into of any guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of such other Person; (iv) the entering into of any Swap Obligation with such other Person; or (v) the making of any capital contribution by such Person to such other Person. "Investment Grade Rating" means with respect to any Person or issue of debt securities or preferred stock, a rating in one of the four highest letter rating categories (without regard to "+" or "-" or other modifiers) by any rating agency or if any such rating agency has ceased using letter rating categories or the four highest of such letter rating categories are not considered to represent "investment grade" ratings, then the comparable "investment grade" ratings (as designated by any such rating agency). "Issue Date" means the date of first issuance of the New Notes under the New Indenture. "Lien" means any mortgage, lien, pledge, charge, security interest, or other encumbrance of any kind, regardless of whether filed, recorded, or otherwise perfected under applicable law (including any conditional sale or other title retention agreement and any lease deemed to constitute a security interest and any option or other agreement to give any security interest). "Material Change" means an increase or decrease (excluding changes that result solely from changes in prices) of more than either (i) 10% from the end of the immediately preceding fiscal quarter in the estimated discounted future net revenue from proved oil and gas reserves of Southwest and its Subsidiaries, or (ii) 20% from the end of the immediately preceding year in the estimated discounted future net revenue from proved oil and gas reserves of Southwest and its Subsidiaries, in each case calculated in accordance with clause (a) (i) of the definition of Adjusted Consolidated Net Tangible Assets; provided, however, that the following will be excluded from the calculation of Material Change: (a) any acquisitions of oil and gas reserves made after the end of the immediately preceding year for which the discounted future net revenues have been estimated by independent petroleum engineers since the end of the preceding year and on which a Reserve Report or Reserve Reports exist and (b) any disposition of properties existing at the beginning of the current quarter or current year, as the case may be, for purposes of clause (i) or clause (ii) above that have been disposed of in accordance with the provisions described under the heading "Limitation on Asset Sales." "Net Cash Proceeds" means an amount equal to the aggregate amount of cash and Cash Equivalents received by Southwest or any Subsidiary of Southwest in respect of an Asset Sale (including cash and Cash Equivalents received by Southwest or any of its Subsidiaries pursuant to any notes or other evidence of indebtedness 32 received by Southwest or any of its Subsidiaries in respect of an Asset Sale), less the sum of (i) all reasonable and customary out-of-pocket fees, commissions, and other expenses incurred in connection with such Asset Sale, including the amount (estimated in good faith by Southwest) of income, franchise, sales and other applicable taxes to be paid, payable or accrued by Southwest or such Subsidiary (in each case as estimated in good faith by Southwest without giving effect to tax attributes unrelated to such Asset Sale) in connection with such Asset Sale, and (ii) the aggregate amount of cash and Cash Equivalents so received which is used to retire any then existing Indebtedness of Southwest or such Subsidiary (other than the New Notes), as the case may be, which is secured by a Lien on the property subject of the Asset Sale or which is required by the terms of such Indebtedness to be repaid in connection with such Asset Sale. "Net Income (Loss)" of any Person for any period means the net income (loss) of such Person for such period, determined on a consolidated basis in accordance with GAAP, excluding (without duplication) (i) all extraordinary, unusual and nonrecurring gains, (ii) the net income, if positive, of any other Person, in which such Person or any of its consolidated Subsidiaries has an interest, except to the extent of the amount of any dividends or distributions actually paid in cash to such Person or a consolidated Subsidiary of such Person during such period, (iii) the net income, if positive, of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition and (iv) the net income, if positive, of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule, or governmental regulation applicable to such Subsidiary. "Net Proceeds" means (i) in the case of any sale by a Person of Qualified Capital Stock or other securities, the aggregate Net Cash Proceeds received by such Person from the sale of such securities (other than to a Subsidiary) after payment of reasonable and customary out-of-pocket expenses, commissions and discounts incurred in connection therewith, and (ii) in the case of any exchange, exercise, conversion or surrender of any then outstanding securities or Indebtedness of such Person for or into shares of Qualified Capital Stock of such Person, the net book value of such outstanding securities as adjusted on the books of such Person or Indebtedness of such Person to the extent recorded in accordance with GAAP, in each case, on the date of such exchange, exercise, conversion or surrender (plus any additional amount required to be paid by the holder of such Indebtedness or securities to such Person upon such exchange, exercise, conversion or surrender and less (a) any and all payments made to the holders of such Indebtedness or securities and (b) all other expenses incurred by such Person in connection therewith, in each case, insofar as such payments or expenses are incident to such exchange, exercise, conversion, or surrender). "Net Working Capital" of any Person means (i) all current assets of such Person and its consolidated Subsidiaries, minus (ii) all current liabilities of such Person and its consolidated Subsidiaries other than the current portion of long term Indebtedness, each item to be determined on a consolidated basis in conformity with GAAP. "Net Worth" of any Person means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of such Person and its consolidated Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation), less any amounts included therein attributable to Disqualified Capital Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock (not otherwise deducted from stockholder's equity), and the principal amount of any promissory New Notes receivable from the sale of the Capital Stock of such Person or any of its consolidated Subsidiaries each item to be determined in conformity with GAAP. "Permitted Hedging Transactions" means non-speculative transactions in futures, forwards, swaps or option contracts (including both physical and financial settlement transactions) engaged in by Southwest and its Subsidiaries as part of their normal business operations as a risk-management strategy or hedge against adverse changes in the prices of natural gas, feedstock or refined products; provided, that such transactions do not in the case of Southwest and its Subsidiaries, on a monthly basis, relate to more than 90% of their combined average net natural oil and gas production per month for the most recent 3-month period measured at the time of such transaction; provided, further, that, at the time of such transaction (i) the counter party to any such transaction is an Eligible Institution or a Person that has an Investment Grade Rating or has an issue of debt securities or preferred stock then outstanding with an Investment Grade Rating or (ii) such counter party's obligation pursuant to such transaction is unconditionally guaranteed in full by, or secured by a letter of credit issued by, an Eligible Institution or a Person 33 that has an Investment Grade Rating or that has an issue of debt securities or preferred stock then outstanding with an Investment Grade Rating. "Permitted Holders" means H. H. Wommack, III (or his heirs, his estate or any trust in which he or his immediate family members own, directly or indirectly, a beneficial ownership in excess of 50%), SRH or any Person who was a Holder as of the Issue Date or any of their respective Affiliates. "Permitted Indebtedness" means, without duplication, each of the following, as may be refinanced if permitted hereunder from time to time: (a) the Indebtedness evidenced by the New Notes or the Guarantees; (b) Indebtedness owed by any Subsidiary of Southwest to Southwest or any other Subsidiary of Southwest or Indebtedness owed by Southwest to any Subsidiary of Southwest; provided that, such Indebtedness is Subordinated Indebtedness; (c) Indebtedness outstanding under a Permitted Credit Facility so long as the aggregate principal amount of all Indebtedness outstanding under the Permitted Credit Facility for Southwest and its Subsidiaries does not exceed $80,000,000; provided, however, that all indebtedness under the Permitted Credit Facility shall not exceed $60,000,000 (except as provided under "--Limitation on Incurrences of Additional Indebtedness and Issuances of Disqualified Capital Stock)"; (d) Swap Obligations of Southwest or its Subsidiaries; (e) Indebtedness outstanding on the Issue Date (and not repaid with the proceeds of the Offering); and (f) other Indebtedness owed by Southwest or its Subsidiaries in an aggregate principal amount then outstanding not to exceed $1,000,000 at any one time. "Permitted Investment" means, when used with reference to Southwest or any Subsidiary, (i) trade credit extended to Persons in the ordinary course of business; (ii) purchases of Cash Equivalents; (iii) Investments by Southwest or its Subsidiaries in Persons which are Wholly-Owned Subsidiaries and are engaged in the oil and gas exploration and production business; (iv) Swap Obligations; (v) advances to officers and employees of Southwest or any Subsidiary in connection with the performance of their duties in the ordinary course of business in an amount not to exceed $500,000 in the aggregate outstanding at any time; (vi) margin deposits in connection with Permitted Hedging Transactions; (vii) any Investments outstanding on the Issue Date; (viii) repurchases of the New Notes on the open market with the approval of Southwest's Board of Directors; (ix) Investments and expenditures made in the ordinary course of business by Southwest or its Subsidiaries, and of a nature that is or shall have become customary in, the oil and gas business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil or gas through agreements, transactions, interests or arrangements which permit a Person to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the oil and gas business jointly with third parties, including, without limitation, (a) ownership interests in oil and gas properties or gathering systems, including the repurchase of interests in Issuer-sponsored partnerships owning oil and gas properties and (b) Investments and expenditures in the form of or pursuant to operating agreements, processing agreements, farm-in agreements, farm-out agreements, development agreements, area of mutual interest agreements, unitization agreements, pooling arrangements, joint bidding agreements, service contracts, joint venture agreements, partnership agreements (whether general or limited), subscription agreements, stock purchase agreements and other similar agreements with third parties; provided that in the case of any joint venture engaged in processing, gathering, marketing or transporting oil or gas (i) all Indebtedness of such joint venture that would not otherwise constitute Indebtedness of Southwest or a Subsidiary shall be deemed Indebtedness of such Person in proportion to its direct or indirect ownership interest in such joint venture and (ii) such joint venture shall be reasonably calculated to enhance the value of the reserves of such Person or marketability of production from such reserves; (x) other Investments not in excess of $2 million at any time outstanding; (xi) loans made to officers, directors and employees of Southwest or any of its Subsidiaries approved by the applicable Board of Directors (or by an authorized officer), the proceeds of which are used solely to purchase stock or to exercise stock options received pursuant to an employee stock option plan or other incentive plan, in a principal amount not to exceed the purchase price of such stock or the exercise price of such stock options, as applicable. "Permitted Liens" with respect to any Person means (a) Liens imposed by governmental authorities for taxes, assessments, or other charges not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of any of such Person in accordance with GAAP; (b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen, mineral interest owners, or other like Liens arising by operation of law in the ordinary course of business provided that (i) the underlying obligations are not overdue for a period of more than 30 days, or (ii) such Liens are 34 being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of any of such Person in accordance with GAAP; (c) deposits of cash or Cash Equivalents to secure the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety bonds, performance bonds, and other obligations of a like nature incurred in the ordinary course of business (or to secure reimbursement obligations or letters of credit issued to secure such performance or other obligations); (d) easements, rights-of-way, zoning, similar restrictions and other similar encumbrances or title defects incurred in the ordinary course of business which, in the aggregate, are not material in amount and which do not, in any case, materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of such Person; (e) Liens securing the New Notes, the Original Notes, the Guarantees or the Permitted Credit Facility that were in place on the Issue Date; (f) pledges or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, other types of social security legislation, property insurance and liability insurance; (g) Liens on the assets of any Person existing at the time such assets are acquired by such Person, whether by merger, consolidation, purchase of assets or otherwise so long as such Liens (A) are not created, incurred or assumed in contemplation of such assets being acquired by such Person and (B) do not extend to any other assets of such Person whether prior to or after such merger, consolidation, purchase of assets or otherwise; (h) leases or subleases granted to others that do not materially interfere with the ordinary course of business of such Person, and (i) any extension, renewal or replacement of the Liens created pursuant to any of clauses (a) through (h); provided that such Liens would have otherwise been permitted under such clauses, and provided further that the Liens permitted by this clause (i) do not secure any additional Indebtedness or encumber any additional property. "Person" means any corporation, individual, joint stock company, joint venture, partnership, unincorporated association, governmental regulatory entity, country, state, or political subdivision thereof, trust, municipality, or other entity. "Preferred Stock" means, with respect to any Person, any class or classes (however designated) of Capital Stock of such Person that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person over shares of Capital Stock of any other class of such Person. "Production Payment" means any volumetric or dollar-denominated production payment or other similar burden on the property of Southwest or any of its Subsidiaries. "Public Equity Offering" means an underwritten public offering by a nationally recognized member of the National Association of Securities Dealers (or any other member of the National Association of Securities Dealers if Southwest will receive at least $10 million of Net Proceeds from such offering) of Qualified Capital Stock of Southwest pursuant to an effective registration statement filed with the SEC pursuant to the Securities Act. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock. "Reference Period" with regard to any Person means the four full fiscal quarters of such Person ended on or immediately preceding any date upon which any determination is to be made pursuant to the terms of the New Notes or the New Indenture. "Reserve Report" means a report prepared by independent petroleum engineers with respect to Hydrocarbon reserves in accordance with guidelines published by the SEC. "Restricted Investment" means any Investment other than a Permitted Investment. "Security Documents" means, collectively, those certain security agreements from Southwest and Blue Heel pursuant to which Southwest and Blue Heel will grant a security interest in all of their respective personal property to the New Trustee for the benefit of the New Trustee, the Holders and the Senior Lenders, the SRH Pledge Agreement, the MRO Pledge Agreement, the Mortgages, the Collateral Trust Agreement, the Tri-Party Agreement and each other agreement granting or evidencing a lien or security interest in, or the pledge of, assets to secure and support the New Notes and the Guarantees that may be entered into on or after the Issue Date pursuant to the terms of the New Indenture. 35 "Stated Maturity Date" means June 30, 2004. "Subordinated Indebtedness" means Indebtedness of Southwest or a Subsidiary of Southwest that (i) requires no payment of principal prior to or on the Stated Maturity Date and (ii) is expressly subordinate and junior in right of payment to the New Notes, or the Guarantees. "Subsidiary" with respect to any Person means (i) a corporation with respect to which such Person or its Subsidiaries own, directly or indirectly, at least 50% of such corporation's Voting Stock, or (ii) a partnership other than Southwest-sponsored oil and gas partnerships, in which such Person or a Subsidiary of such Person is, at the time, a general partner of such partnership and has more than 50% of the total voting power of partnership interests, or (iii) any other Person (other than a corporation or a partnership) in which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof has (x) at least a 50% ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such other Person. "Super-Affiliate" means, with respect to Southwest, any holder which, directly or indirectly owns 15% or more of the total voting power of the outstanding Voting Stock of Southwest. "Swap Obligation" of any Person means any Interest Rate or Currency Agreement entered into with one or more financial institutions or one or more futures exchanges in the ordinary course of business and not for purposes of speculation that is designed to protect such Person against fluctuations in (x) interest rates with respect to Indebtedness Incurred and which shall have a notional amount no greater than 100% of the principal amount of the Indebtedness being hedged thereby or (y) currency exchange rate fluctuations. "Voting Stock" means Capital Stock of a Person having generally the right to vote in the election of such Person's directors, managers, trustees or other Persons performing comparable functions to a corporation's board of directors. Principal, Maturity and Interest The New Notes will mature on June 30, 2004. Interest on the New Notes will begin to accrue on February 1, 2002 (as if the New Notes were issued on such date) at a rate of 10 1/2% per annum through December 31, 2002, 11 1/2% from January 1, 2003 through December 31, 2003 and 12 1/2% thereafter. The New Notes will be payable semi-annually on April 15 and October 15 commencing on April 15, 2002, to the Persons who are registered holders of the New Notes at the close of business on April 15 and October 15 immediately preceding the applicable interest payment date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. If Southwest defaults in the payment of any installment of interest, or the principal of or premium, if any, on the New Notes, when the same becomes due and payable, at maturity, upon redemption, by acceleration or otherwise (including, without limitation, failure to make a payment to purchase the New Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer), then the interest on the New Notes and all amounts due thereunder will accrue interest at a rate of 18% per annum until the New Notes are paid in cash or the Event of Default is cured. Southwest must pay interest on all such overdue amounts (including installments of interest, to the extent lawful) on demand without regard to any applicable grace periods. Redemption; Prepayment Subject to any restrictions contained in the Senior Credit Agreement, Southwest may redeem the New Notes, at its option, in whole or in part, without premium or penalty, at any time at a redemption price equal to 100% of the principal amount of the New Notes so redeemed, together with accrued and unpaid interest thereon to the redemption date. Unless otherwise prohibited by law, if Southwest procures sufficient funds to repurchase all of the New Notes at par from the Senior Credit Agreement and the Subordinated Credit Facility and the weighted average interest cost of the funds borrowed under the Senior Credit Agreement and the Subordinated Credit Facility is 12% or less, then Southwest must repurchase the New Notes; provided, however, that the Board of Directors, by unanimous vote, may direct that Southwest not effect such repurchase, and provided further that Southwest shall not effect such repurchase if the repurchase would cause Southwest to become insolvent. The holders of the New Notes must tender their New Notes to Southwest under these circumstances. 36 In the case of any partial redemption, selection of the New Notes for redemption will be made by the New Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the New Notes are listed, or if the New Notes are not listed, on a pro rata basis or on as nearly a pro-rata basis as is practicable, unless such method is otherwise prohibited, in which case the New Trustee shall select New Notes for redemption by lot or by such other method as the New Trustee shall deem fair and appropriate, provided that no note of $1,000 or less shall be redeemed in part. Notice of redemption will be sent by first class mail, at least 30 days and not more than 60 days prior to the date fixed for redemption, to the holder of each New Note to be redeemed to such holder's last address as then shown upon the Note Register. Any notice which relates to a New Note to be redeemed in part only must state the portion of the principal amount to be redeemed and must state that on and after the date fixed for redemption, upon surrender of such New Note, a new note in a principal amount equal to the unredeemed portion thereof will be issued. On and after the date fixed for redemption, unless Southwest defaults on its payment obligations, interest will cease to accrue on the New Notes or portions thereof called for redemption. Repurchase of New Notes at the Option of the Holder Upon a Change of Control Subject to any restrictions on proposal of the New Notes contained in the Collateral Trust Agreement, upon the occurrence of a Change of Control and pursuant to the terms of the New Indenture, each holder of the New Notes will have the right, at such holder's option, subject to the terms and conditions of the New Indenture, to require Southwest to repurchase all or any part of such holder's New Notes (provided that the principal amount of such New Notes must be $1,000 or an integral multiple thereof) on a date that is no later than 60 Business Days after the occurrence of such Change of Control (the date on which the repurchase is effected being referred to herein as the "Change of Control Payment Date"), at a cash purchase price equal to 101% of the principal amount thereof (the "Change of Control Purchase Price"), plus accrued and unpaid interest thereon to the Change of Control Payment Date. Except as described above with respect to a Change of Control, the New Indenture will not contain provisions that permit the holders to require that Southwest repurchase or redeem the New Notes in the event of a takeover, recapitalization or other similar transaction of Southwest. The provisions of the New Indenture may not afford holders protection in the event of a highly leveraged transaction, reorganization, restructuring, merger or other similar transaction affecting Southwest that may adversely affect the holders if such transaction is not the type of transaction included within the definition of "Change of Control." A transaction involving the management of Southwest, any Affiliate or a transaction involving a recapitalization of Southwest will result in a Change of Control only if it is the type of transaction specified in such definition. The existence of a holder's right to require Southwest to repurchase New Notes in connection with a Change of Control may deter a third party from acquiring Southwest in a transaction that would constitute a Change of Control. The source of funds for any repurchase of New Notes upon a Change of Control will be Southwest's cash or cash generated from operation or other sources, including borrowings or sales of assets; however, there can be no assurance that sufficient funds will be available at the time of any Change of Control to repay all Indebtedness owing or to make any required repurchase of the New Notes. Any failure by Southwest to repurchase New Notes properly tendered by holders of the New Notes in connection with a Change of Control will constitute an Event of Default. See "--Events of Default and Remedies." Southwest will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the New Indenture applicable to a Change of Control Offer made by Southwest and such third party repurchases all New Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of Southwest. Although there is a developing body of judicial opinions interpreting the phrase "all or substantially all," no precise standard exists under New York law, which is the law governing the New Indenture and the New Notes. Accordingly, the ability of a holder of New Notes to require Southwest to repurchase such New Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of Southwest to another Person or group is uncertain. 37 To the extent applicable and if required by law, Southwest will comply with Section 14 of the Exchange Act, the provisions of Regulation 14E and any other tender offer rules under the Exchange Act and other securities laws, rules, and regulations which may then be applicable to any offer by Southwest to repurchase the New Notes at the option of holders upon a Change of Control; and, if such laws, rules and regulations require or prohibit any action inconsistent with the foregoing, compliance by Southwest with such laws, rules and regulations will not constitute a breach of Southwest's obligations with respect to the foregoing. The ability of Southwest to repurchase the New Notes upon a Change of Control may be restricted under the Senior Credit Agreement and the ability of the holders of the New Notes to accept payment from Southwest upon such repurchase may be restricted under the Collateral Trust Agreement. The failure of Southwest to offer to repurchase or to consummate a repurchase of the New Notes upon a Change of Control would, however, constitute an Event of Default under the Indenture. Covenants The New Indenture contains, among others, the following covenants: Limitation on Incurrences of Additional Indebtedness and Issuances of --------------------------------------------------------------------- Disqualified Capital Stock - -------------------------- The New Indenture provides that Southwest may not, and may not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or otherwise become liable for, contingently or otherwise (to "Incur" or, as appropriate, an "Incurrence"), any Indebtedness, including, for this purpose, borrowing in excess of $60,000,000 under the Permitted Credit Facility, or issue any Disqualified Capital Stock, except that Southwest or a Subsidiary may Incur Indebtedness and Southwest may issue shares of Disqualified Capital Stock if: (i) the Consolidated Fixed Charge Coverage Ratio for Southwest's Reference Period for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is Incurred or such Disqualified Capital Stock is issued would have been (A) at least 1.75 to 1.0 if such additional Indebtedness is Incurred or such Disqualified Capital Stock is issued; (ii) no Default or Event of Default shall have occurred and be continuing at the time such additional Indebtedness is Incurred or such Disqualified Capital Stock is issued or would occur as the result of such Incurrence of such additional Indebtedness or the issuance of such Disqualified Capital Stock; and (iii) Southwest's Adjusted Consolidated Net Tangible Assets are equal to or greater than 150% of the consolidated Indebtedness of Southwest and its Subsidiaries. Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing at the time or as a consequence of the Incurrence of such Indebtedness, Southwest and any Subsidiary of Southwest may Incur Permitted Indebtedness. Any Indebtedness Incurred or Disqualified Capital Stock issued by any Person that is not a Subsidiary of Southwest which Indebtedness or Disqualified Capital Stock is outstanding at the time such Person becomes a Subsidiary of, or is merged into, or consolidated with Southwest or such Subsidiary, as the case may be, shall be deemed to have been Incurred or issued, as the case may be, at the time such Person becomes a Subsidiary of, or is merged into, or consolidated with Southwest or such Subsidiary. Limitation on Restricted Payments --------------------------------- The New Indenture provides that: (a) Southwest will not, and will not permit any Subsidiary to, directly or indirectly (i) declare or pay any dividend on, or make any other distribution to holders of, any shares of Capital Stock of Southwest or any Subsidiary (other than dividends or distributions payable solely in shares of Qualified Capital Stock of Southwest or any Subsidiary or dividends or distributions payable to Southwest or any Wholly-Owned Subsidiary of Southwest or warrants, rights or options to acquire Qualified Capital Stock of Southwest or any Subsidiary), (ii) purchase, redeem or otherwise acquire or retire for value any such shares of Capital Stock of Southwest or any Affiliate (other than 38 any Capital Stock owned by Southwest or any of its Wholly-Owned Subsidiaries), or any options, warrants or other rights to acquire such Capital Stock, (iii) make any principal payment on or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, scheduled sinking fund payment or maturity, any Subordinated Indebtedness, or (iv) make any Restricted Investment (such payments or other actions described in clauses (i) through (iv) being collectively referred to as a "Restricted Payment"), unless at the time of and after giving effect to the proposed Restricted Payment (the amount of any such Restricted Payment, if other than cash, shall be the amount determined by the Board of Directors of Southwest, whose determination shall be conclusive and evidenced by a Board Resolution): (1) no Default or Event of Default shall have occurred and be continuing; (2) Southwest could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) in accordance with the covenant under "Limitation on Incurrences of Additional Indebtedness and Issuances of Disqualified Capital Stock;" and (3) the aggregate amount of all Restricted Payments declared or made after the Issue Date shall not exceed the sum (without duplication) of the following: (A) 50% of the Adjusted Consolidated Net Income of Southwest accrued on a cumulative basis during the period commencing with the first full quarter after the Issue Date and ending on the last day of the Issuer's last fiscal quarter ending prior to the date of such proposed Restricted Payment (or if Adjusted Consolidated Net Income is a loss, minus 100% of such loss), plus (B) the aggregate Net Proceeds received after the Issue Date by Southwest from the issuance or sale (other than to any of its Subsidiaries) of shares of Qualified Capital Stock of Southwest or any options, warrants or rights to purchase such shares of Qualified Capital Stock of Southwest, plus (C) the aggregate Net Proceeds received after the Issue Date by Southwest (other than from any of its Subsidiaries) upon the exercise of any options, warrants or rights to purchase shares of Qualified Capital Stock of Southwest, plus (D) the aggregate Net Proceeds received after the Issue Date by Southwest from the issuance or sale (other than to any of its Subsidiaries) of Indebtedness or shares of Disqualified Capital Stock that have been converted into or exchanged for Qualified Capital Stock of Southwest, together with the aggregate cash received by the Issuer at the time of such conversion or exchange, minus (E) the amount of any write-downs, writeoffs, other negative revaluations and other negative extraordinary charges not otherwise reflected in Adjusted Consolidated Net Income of Southwest during such period. (b) Notwithstanding the foregoing paragraph (a), Southwest and its Subsidiaries may take the following actions so long as (in the case of clauses (2), (3), (4) and (5) below) no Default or Event of Default shall have occurred and be continuing: (1) the payment of any dividend on Capital Stock of Southwest or any Subsidiary of Southwest within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of the foregoing paragraph (a); (2) the repurchase, redemption or other acquisition or retirement of any shares of any class of Capital Stock of Southwest or any Subsidiary of Southwest, in exchange for, or out of the aggregate Net Proceeds from, a substantially concurrent issue and sale (other than to a Subsidiary) of shares of Qualified Capital Stock of Southwest; (3) the repurchase, redemption, repayment, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness in exchange for, or out of the aggregate Net Proceeds from, a substantially concurrent issue and sale (other than to a Subsidiary) of (i) Subordinated Indebtedness (provided such Indebtedness is on terms no less favorable to the holders of the New 39 Notes than the terms of the Subordinated Indebtedness being redeemed) or (ii) shares of Qualified Capital Stock of Southwest; (4) the repurchase, redemption or other acquisition of any Capital Stock of any Affiliate of Southwest organized as a limited partnership in which Southwest is a general partner pursuant to a redemption which is mandatory under the terms of such partnership's limited partnership agreement (as in effect on the Issue Date); (5) the repurchase or other acquisition of any Capital Stock of any Subsidiary, whether in one or a series of substantially contemporaneous transactions, which causes such Person to become a Wholly-Owned Subsidiary of Southwest; and (6) the payment on behalf of any Subsidiary or Affiliate of its allocated pro rata costs associated with the issuance of the New Notes and any Investment in Capital Stock of such Person taken by Southwest in payment thereof. The actions described in clause (1) of this paragraph (b) shall be Restricted Payments that shall be permitted to be made in accordance with the terms described above but shall reduce the amount that would otherwise be available for Restricted Payments under clause (3) of the above paragraph (a), provided that any dividend paid pursuant to clause (1) of this paragraph (b), shall reduce the amount that would otherwise be available under clause (3) of the above paragraph (a) when declared, but not also when subsequently paid pursuant to clause (1) of this paragraph (b), and provided that any Net Proceeds received under clause (2) or (3) of this paragraph (b), shall not be included in subclauses (B) or (C) of clause (3) of the above paragraph (a). Limitation on Dividend and Other Payment Restrictions Affecting --------------------------------------------------------------- Subsidiaries - ------------ The New Indenture provides that Southwest may not, and may not permit any of its Subsidiaries to, directly or indirectly, create, or permit or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of Southwest to (a) pay dividends or make other distributions on its Capital Stock to Southwest or any of its other Subsidiaries, (b) make loans or advances or pay any Indebtedness or other obligations owed to Southwest or to any other Subsidiary, or (c) transfer any of its properties or assets to Southwest or to any other Subsidiary, except encumbrances and restrictions existing under (i) the New Indenture, any of the Security Documents, any credit agreement or other documents relating to the Permitted Credit Facility as in effect on the Issue Date and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive with respect to such dividend and other payment or transfer restrictions than those contained in the Permitted Credit Facility, the Original Indenture, the security documents relating thereto or the Security Documents as in effect on the Issue Date, and (ii) any agreement of a Person acquired by Southwest or a Subsidiary of Southwest, which restrictions existed at the time of acquisition, were not put in place in anticipation of such acquisition, and are not applicable to any Person or property, other than the Person or any property of the Person so acquired. Limitation on Transactions with Affiliates ------------------------------------------ The New Indenture provides that Southwest and each Guarantor may not, and may not permit any of their respective Subsidiaries to, enter directly or indirectly into, or permit to exist, any transaction or series of related transactions with or for the benefit of any Affiliate of Southwest, such Guarantor or any of their respective Subsidiaries, as the case may be, except for transactions made in good faith, the terms of which are fair and reasonable to Southwest, such Guarantor or their respective Subsidiaries, as the case may be, and are at least as favorable as the terms which could be obtained by Southwest, such Guarantor or their respective Subsidiaries, as the case may be, in a comparable transaction made on an arm's length basis with Persons who are not Affiliates of Southwest, such Guarantor or their respective Subsidiaries, as the case may be, and Southwest, such Guarantor and their respective Subsidiaries, as the case may be, delivers to the New Trustee: (i) with respect to any transaction or series of transactions with an Affiliate of Southwest, such Guarantor or their respective Subsidiaries, as the case may be, involving aggregate consideration in excess of $1 million, an officers' certificate certifying that such transaction or transactions comply with this covenant, (ii) with respect to any transaction or series of transactions with an Affiliate involving aggregate consideration in excess of $2 million, a resolution of the Board of Directors set 40 forth in an officers' certificate certifying that such transaction or transactions comply with this covenant and that such transaction or transactions have been approved in good faith by a majority of the members of the Board of Directors who are independent (which resolution shall be conclusive evidence of compliance with this provision), provided that if there is not a majority of independent directors able to approve such transaction, Southwest, such Guarantor or their respective Subsidiaries, as the case may be, shall also deliver an opinion as to the fairness to Southwest, such Guarantor or their respective Subsidiaries, as the case may be, of such transaction or transactions from a financial point of view issued by an investment banking firm of recognized national standing, which opinion shall be conclusive evidence of compliance with this provision; and (iii) with respect to any transaction or series of transactions with an Affiliate of Southwest, such Guarantor or their respective Subsidiaries, as the case may be, involving aggregate consideration in excess of $5 million, an officers' certificate as described in subclause (ii) above and an opinion as to the fairness to Southwest, such Guarantor or their respective Subsidiaries, as the case may be, of such transaction or transactions from a financial point of view issued by an investment banking firm of recognized national standing, which resolution and opinion shall be conclusive evidence of compliance with this provision; provided, however, that this covenant does not restrict: (1) transactions between Southwest or the Guarantors, as the case may be, and any of their respective Subsidiaries or transactions between Subsidiaries of Southwest or the Guarantors, as the case may be, (2) transactions pursuant to the Security Documents, (3) Restricted Payments permitted by the provisions of the New Indenture described under the covenant captioned "--Limitation on Restricted Payments," (4) any employee compensation arrangements by Southwest or any of its Subsidiaries or by any Guarantor or any of its Subsidiaries which have been approved by a majority of such Person's disinterested directors and found in good faith by such directors to be in the best interests of Southwest or its Subsidiary or such Guarantor or its Subsidiary, as the case may be, (5) customary directors' fees and indemnification and similar arrangements and (6) purchases of the New Notes as permitted hereunder. Limitation on Assets Sales -------------------------- The New Indenture provides that Southwest may not, and may not permit any Subsidiary to, consummate an Asset Sale without the consent of holders of not less than 66% in aggregate principal amount of the then outstanding New Notes unless: (a) Southwest or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (as determined in good faith by resolution of the Board of Directors set forth in an officers' certificate delivered to the New Trustee, which determination shall be conclusive evidence of compliance with this provision) of the assets or Capital Stock being sold or issued or otherwise disposed of; and (b) at least 75% of the value of the consideration for such Asset Sale consists of cash, Cash Equivalents or Exchange Assets or any combination thereof; provided, however, that the amount of any liabilities (as shown on Southwest's or such Subsidiary's most recent balance sheet) of Southwest or any Subsidiary (other than contingent liabilities and liabilities that are Subordinated Indebtedness or otherwise by their terms subordinated to the New Notes or the Guarantees) that are assumed by the transferee of such assets pursuant to a customary novation agreement that releases Southwest and such Subsidiary from further liability shall also be deemed to be cash for purposes of this provision. Within 180 days after the receipt of any Net Cash Proceeds from an Asset Sale, Southwest or such Subsidiary may only apply such Net Cash Proceeds: (a) to repay and permanently reduce the maximum amount that can be borrowed under the Permitted Credit Facility, (b) to make Capital Expenditures or (c) to make other acquisitions of assets to be used in Southwest's and its Subsidiaries' oil and gas business; provided, however, that if a Default or Event of Default has occurred and is continuing under the New Indenture before or at the time application of such Net Cash Proceeds would be made hereunder, then Southwest and such Subsidiary must apply such Net Cash Proceeds: (x) to cure any Default or Event of Default that is a default in the payment of any Obligation hereunder or (y) to pay and permanently reduce the maximum amount that can be borrowed under the Permitted Credit Facility. Pending the final application of any such Net Cash Proceeds, Southwest or such Subsidiary may temporarily invest such Net Cash Proceeds in any manner that is not prohibited by the terms of the New Indenture. Any Net Cash Proceeds from Asset Sales that are not applied as provided in clauses (a) through (c) of the first sentence of this paragraph will (after expiration of the relevant periods) be deemed to constitute "Excess Cash." Subject to any restrictions on payment of the New Notes contained in the Collateral Trust Agent, when the amount of Excess Cash exceeds $10 million, Southwest must make an irrevocable, unconditional offer (an "Excess Cash Offer") to the holders of the New Notes to purchase the maximum amount of New Notes which could be acquired by application of such amount of Excess Cash as described herein (the "Excess Cash Offer 41 Amount"), in cash at the purchase price equal to 100% of the principal amount thereof (the "Excess Cash Offer Price"), together with accrued and unpaid interest to the Excess Cash Purchase Date. Limitation on Liens ------------------- The New Indenture provides that Southwest may not, and may not permit any Subsidiary to, directly or indirectly, incur, or suffer to exist any Lien upon any of their respective properties or assets, whether now owned or hereafter acquired, other than Permitted Liens. Limitation on Lines of Business ------------------------------- The New Indenture provides that Southwest may not engage in, and shall not permit any Subsidiaries of Southwest to engage in, any line of business other than the oil and gas exploration and production business and such business activities as are reasonably related or incidental thereto and any other business activities of Southwest and its Subsidiaries conducted as of the Issue Date. Limitation on the Sale or Issuance of Capital Stock of Subsidiaries ------------------------------------------------------------------- The New Indenture provides that Southwest will not sell or otherwise dispose of any shares of Capital Stock of any Subsidiary, and shall not permit any Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock except (a) to Southwest or a Wholly-Owned Subsidiary, or (b) if all shares of Capital Stock of such Subsidiary are sold or otherwise disposed of or (c) if such sale is a Public Equity Offering. Limitation on Merger, Sale or Consolidation ------------------------------------------- The New Indenture provides that no Guarantor will consolidate with or merge with or into any other Person or, directly or indirectly sell, lease, assign, transfer, or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Persons acting in concert, whether in a single transaction or through a series of related transactions, unless (i) either (a) Guarantor is the continuing Person or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States or any state thereof, or the District of Columbia, and shall expressly assume all of the obligations of such Guarantor under the New Indenture, the applicable Guarantee and the Security Documents by appropriate document supplemental thereto, executed and delivered to the New Trustee on or prior to the consummation of such transaction, in form satisfactory to the New Trustee; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect to such transactions; and (iii) immediately after giving effect to such transaction on a pro forma basis, the Net Worth of the surviving or transferee entity is at least equal to the Net Worth of such Guarantor immediately prior to such transaction. The New Indenture provides that Southwest will not consolidate with or merge with or into any other Person, or, directly or indirectly, sell, lease, assign, transfer, or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Persons acting in concert, whether in a single transaction or through a series of related transaction, unless (i) either (a) Southwest is the continuing Person or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof, or the District of Columbia, and shall expressly assume all of the obligations of Southwest under the New Indenture and the New Notes by a supplemental indenture, executed and delivered to the New Trustee on or prior to the consummation of such transaction, in form satisfactory to the New Trustee; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect to such transaction; (iii) immediately after giving effect to such transaction on a pro forma basis, the Net Worth of the surviving or transferee entity is at least equal to the Net Worth of Southwest immediately prior to such transaction; (iv) except for a consolidation or merger of Southwest with or into any Wholly-Owned Subsidiary, the surviving or transferee entity would immediately thereafter be permitted to Incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the terms of the covenant described herein under the caption "Limitation on Incurrences of Additional Indebtedness and Issuances of Disqualified Capital Stock"; (v) each Guarantor shall have executed and delivered to the New Trustee, in form satisfactory to the New Trustee, a supplemental indenture confirming the obligation to pay the principal of and interest on the New Notes pursuant to their respective Guarantees and to perform their respective covenants under the New Indenture and the Guarantees; and (vi) the New Trustee shall have received an opinion of counsel to the effect that such consolidation, merger, conveyance, transfer or lease will not result in Southwest being required to 42 make any deduction for or on account of taxes from payments made under or in respect of the New Notes. For purposes of this covenant, the Consolidated Fixed Charge Coverage Ratio shall be determined on a pro forma consolidated basis (giving effect to the transaction) for the Reference Period immediately preceding such transaction. The New Indenture provides that Southwest shall not permit or allow any Subsidiary to consolidate with or merge with or into any other Person or, directly or indirectly, sell, lease, assign, transfer, or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Persons acting in concert, whether in a single transaction or through a series of related transactions, unless (i) the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary) or the transferee entity (A) is a corporation organized and existing under the laws of the United States, any state thereof, or the District of Columbia and (B) expressly assumes all the obligations of such Subsidiary pursuant to a supplemental indenture, in a form satisfactory to the New Trustee, under the New Notes and the New Indenture; (ii) immediately before and after giving effect to such transaction, no Default or Event of Default exists and immediately after giving effect to such transaction, no Default or Event of Default exists and immediately after giving effect to such transaction, the resulting, surviving or transferee entity could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the terms of the covenant described under "Limitation on Incurrences of Additional Indebtedness and Issuances of Disqualified Capital Stock"; and (iii) such Subsidiary or Person formed by or surviving any such consolidation or merger or the transferee entity on a pro forma basis will have Net Worth (immediately after the transaction) equal to or greater than the Net Worth of such Subsidiary immediately preceding the transaction; provided that, the foregoing shall not apply to a merger, consolidation, sale or other such transaction between Subsidiaries and between Southwest and any Subsidiary. Upon any consolidation or merger or any transfer of all or substantially all of the assets of Southwest, any Subsidiary of Southwest, or the applicable Guarantor, as the case may be, in accordance with the foregoing in which such Person is not the continuing or surviving Person, the successor Person of such consolidation or merger or the Person to whom such transfer is made shall succeed to, and be substituted for, any may exercise every right and power of, Southwest or the Guarantor, or such Subsidiary, as the case may be, under the New Indenture, the New Notes, the Guarantees and the Security Documents, as the case may be, Southwest under the New Indenture and the New Notes, with the same effect as if such successor corporation had been named as Southwest or the Guarantors, as the case may be, therein. This covenant includes a phrase relating to the sale, lease, transfer, conveyance or other dispositions of "all or substantially all" of the assets of a Person. Although there is a developing body of judicial opinions interpreting the phrase "all or substantially all," no precise standard exists under New York law, which is the law governing the New Indenture and the New Notes. Accordingly, the ability of the holders of the New Notes to declare an Event of Default as the result of such a disposition or series of dispositions of less than all of the assets of Southwest, a Subsidiary of Southwest or any Guarantor, as the case may be, to another Person or group is uncertain. Events of Default and Remedies The New Indenture defines an Event of Default as (i) the failure by Southwest to pay installments of interest on the New Notes as and when the same become due and payable and the continuance of any such failure for 30 days, (ii) the failure by Southwest to pay all or any part of the principal or premium, if any, on the New Notes when and as the same become due and payable at maturity, redemption, by acceleration or otherwise (including the failure to make a payment to purchase the New Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer), (iii) a default in the performance or breach of the provisions under the caption "Repurchase of New Notes at the Option of the Holder Upon a Change of Control," "Limitations on Asset Sales," or "Limitations on Merger, Sale or Consolidation," (iv) the failure by Southwest or any Guarantor to observe or perform any other covenant, agreement or warranty contained in the New Notes, the New Indenture or any Guarantee which default continues for a single period of 30 days after Southwest receives written notice specifying a default (and demanding that such default be remedied) from the New Trustee, or the New Trustee and Southwest receive such a notice from the holders of at least 25% of the then outstanding principal amount of the New Notes; provided, however, that such 30-day cure period shall be extended for an additional 30-day period if its is possible for Southwest to cure such default within such additional 30-day period and Southwest is diligently pursuing such cure; (v) a default in the observance or performance of any covenant or agreement contained in any Security Document which default 43 continues after such notice of default is given, if such notice is required therein, and beyond the expiration of any applicable grace or cure period provided for therein; (vi) certain events of bankruptcy, insolvency, or reorganization in respect of Southwest or any of its Subsidiaries, (vii) a default which extends beyond any stated period of grace applicable thereto (including any extension thereof) under any mortgage, indenture, or instrument under which there is outstanding any Indebtedness of Southwest or any of its Subsidiaries aggregating in excess of $1 million or a failure to pay such Indebtedness at its stated maturity, (viii) one or more final judgments not covered by insurance by a reputable insurer aggregating in excess of $1 million at any one time rendered against Southwest or any Subsidiary and not stayed or discharged within 60 days, (ix) any New Note, the New Indenture or any Security Document not, at any time, being in full force and effect (except where no material adverse effect to the holders of the New Notes would result or the validity or enforceability of the New Notes, the New Indenture or the Security Documents being contested by Southwest, any Guarantor or any of their Affiliates) or any Lien on the Collateral ceases to be a valid and perfected Lien having the priority contemplated thereby (other than by reason of release in accordance with the terms of the New Indenture) or (x) any Guarantee ceases to be in full force and effect or any Guarantee is declared to be null and void or unenforceable or any Guarantee is found to be invalid or any Guarantor denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the New Indenture). The New Indenture provides that if an Event of Default occurs and is continuing and if it is known to a Trust Officer, the New Trustee must, within 60 days after the occurrence of such Event of Default, give to the Holders notice of such default; provided, that, except in the case of default in payment of principal of, premium, if any, or interest on the New Notes, including an accelerated payment or a Default in payment on the Change of Control Payment Date pursuant to a Change of Control Offer or on the Excess Cash Purchase Date pursuant to an Excess Cash Offer, the New Trustee will be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of the Holders of the New Notes. If an Event of Default occurs and is continuing (other than an Event of Default specified in clause (v) above), then either the New Trustee or the Holders of 25% of the principal amount of New Notes then outstanding, by notice in writing to Southwest (and to the New Trustee if given by Holders), may declare all principal of, premium, if any, and accrued interest on the New Notes to be due and payable immediately. If an Event of Default specified in clause (v) above occurs, all principal, premium, if any, and accrued interest on the New Notes will be immediately due and payable on all outstanding New Notes without any declaration or other act on the part of the New Trustee or the Holders. The Holders of not less than a majority of the principal amount of New Notes are authorized to rescind such acceleration if any existing Events of Default, other than the non-payment of the principal of, premium, if any, and interest on the New Notes which have become due solely by such acceleration, have been cured or waived or certain other conditions are met. Prior to the declaration of acceleration of the New Notes, the holders of a majority of the New Notes at the time outstanding may waive on behalf of all the Holders any Default or Event of Default, except a Default in the payment of principal of, premium, if any, or interest on any Note not yet cured, or a Default, or Event of Default with respect to any covenant or provision which cannot be modified or amended without the consent of the Holders of not less than 66% of the principal amount of the outstanding New Notes. Subject to all provisions of the New Indenture, the Holders of a majority of the New Notes at the time outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the New Trustee or exercising any trust or power conferred on the New Trustee. In determining whether the holders of the New Notes have concurred in any direction, waiver, consent or notice, New Notes owned by Southwest or a Super-Affiliate of Southwest will be considered as though such New Notes are not outstanding. While the Senior Credit Agreement is outstanding, the New Notes will be severely limited with respect to how and under what circumstances an Event of Default may be declared. For a discussion of these limitations, see "Liens and Security Interests Against Assets of Southwest and Its Subsidiary" and "Terms of the Senior Credit Agreement and the Collateral Trust Agreement" below. 44 Reports The New Indenture requires Southwest and each Guarantor to furnish to the New Trustee, within 60 days after the end of each fiscal quarter that is not also the fiscal year end and 90 days after the end of each fiscal year, an officers' certificate to the effect that a review of Southwest and its Subsidiaries or such Guarantor, as the case may be, during the preceding fiscal year has been made under the supervision of such Person's officers with a view to determining whether Southwest and its Subsidiaries or such Guarantor, as the case may be, have kept, observed, performed and fulfilled their obligations under the New Indenture and that, to the best of the knowledge of each officer executing the certificate, Southwest and its Subsidiaries or such Guarantor, as the case may be, have kept, observed, performed and fulfilled each and every covenant contained in the New Indenture, and are not in default in the performance or observance of any of the terms, provisions and conditions thereof (or, if an Event of Default has occurred, describing such Event of Default of which he may have knowledge and what action Southwest or such Guarantor, as the case may be, is taking or proposes to take with respect thereto) and that, to the best of the knowledge of each officer executing the certificate, no event has occurred or is occurring by reason for which payments of principal or interest on the New Notes are prohibited or if such event has occurred, a description of the event and what action Southwest or such Guarantor, as the case may be, is taking or proposes to take with respect thereto. Additionally, Southwest or such Guarantor, as the case may be, is required upon becoming aware of any Default or Event of Default to deliver to the New Trustee a statement specifying such Default or Event of Default. Southwest must also notify the New Trustee of any changes in the composition of the Board of Directors of Southwest or any of its Subsidiaries or of any amendment to the charter or bylaws of Southwest or any of its Subsidiaries. Southwest and each of its Subsidiaries, as applicable, must deliver to the New Trustee copies of quarterly and annual reports and of the information, documents and other reports, if any, which Southwest or such Subsidiary is required to file or would file, if so required, with the SEC pursuant to Section 13 or 15(d) of the Exchange Act within 15 days following the date such filing is or would be required. Each of MRO Holdings and SRH must deliver, and must cause their respective Subsidiaries to deliver, to the New Trustee copies of unaudited quarterly and annual reports within 105 days following the end of their respective fiscal year or 60 days following the end of their respective quarter, as the case may be. Concerning the New Trustee The New Indenture contains certain limitations on the rights of the New Trustee, should it become a creditor of Southwest or any Guarantor, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. In the event the New Trustee acquires any conflicting interest (as defined in the Trust Indenture Act), it must eliminate such conflict within 90 days or resign as New Trustee. Subject to the limitations and the rights of holders of the New Notes set forth in the Collateral Trust Agreement and certain other exceptions, the Holders of not less than a majority of the principal amount of the then outstanding New Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the New Trustee. The New Indenture provides that in case an Event of Default occurs or is continuing, the New Trustee will be required, in the exercise of its power, to use the same degree of care and skill as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Subject to such provisions, the New Trustee will be under no obligation to exercise any of its rights or powers under the New Indenture at the request, order or direction of any Holder of the New Notes unless the Holders have offered to the New Trustee security or indemnity reasonably satisfactory to the New Trustee against the cost, expenses and liabilities which may be incurred by it in compliance with such request, order or direction. Amendments and Supplements The New Indenture contains provisions permitting Southwest, the Guarantors and the New Trustee to enter into a supplemental indenture to modify or amend the New Indenture, the New Notes and any Guarantee for certain limited purposes without the consent of the Holders, including curing ambiguities, defects or inconsistencies or making any other change with respect to matters arising under the New Indenture, provided that such changes shall not materially adversely affect the interests of the holders of the New Notes, or complying with the provisions 45 described under the heading entitled "Limitations on Merger, Sale or Consolidation." With the consent of the holders of not less than a majority of the principal amount of the New Notes then outstanding, Southwest, the Guarantors and the New Trustee will be permitted to amend or supplement the New Indenture, the New Notes, any Guarantee or the Security Documents or enter into any supplemental New Indenture to amend or modify the rights of the holders; provided, however, that no such modification or amendment may, without the consent of the holders of not less than 66% of the aggregate principal amount of the New Notes then outstanding, (i) prior to the date on which a Change of Control Offer is required to be made, reduce the Change of Control Purchase Price or alter the provisions of the covenant described under the heading "--Repurchase of New Notes at the Option of the Holder Upon a Change of Control"; or (ii) prior to the date upon which an Excess Cash Offer is required to be made, reduce the Excess Cash Offer Price or alter the provisions of the covenant described under "Limitation on Asset Sales" in a manner adverse to the holders of the New Notes; provided further, that no such modification or amendment may, without the consent of the holders of all the New Notes then outstanding, directly or indirectly, (i) change the stated maturity date or the date any installment of principal of, or any installment of interest on, any New Note is due, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any New Note or any premium or the interest thereon is payable or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity date thereof (or, in the case of redemption, on or after the redemption date), or (x) after the date upon which a Change of Control Offer is to be made, reduce the Change of Control Purchase Price or alter the provisions described under the subheading "--Repurchase of New Notes at the Option of the Holder Upon a Change of Control" or (y) after the date upon which an Excess Cash Offer is required to be made, reduce the Excess Cash Offer Purchase Price or alter the provisions described under the subheading "--Limitations on Asset Sales" (ii) reduce the percentage of the outstanding New Notes whose consent is required for any such amendment, supplemental indenture, or waiver provided for in the New Indenture, (iii) modify certain of the waiver provisions, (iv) adversely affect the ranking of the New Notes or (v) release any Collateral from the Liens created pursuant to the Security Documents or release any of the Guarantees, in any case otherwise than in accordance with the terms of the New Indenture. Liens and Security Interests Against Assets of Southwest and its Subsidiary All of the Obligations of Southwest under the New Notes and the related New Indenture will be secured by, among other things, liens on and security interests in substantially all of the assets of Southwest. The Obligations of Southwest are guaranteed by its Subsidiary Blue Heel, which guarantee is secured by substantially all of Blue Heel's assets. The liens and security interests against the Southwest Collateral will be granted to and held by the Collateral Trustee pursuant to various security documents for the benefit of all Senior Lenders and all holders of the New Notes. The maintenance and disposition of the Southwest Collateral and the Liens against the Southwest Collateral will be governed by a Collateral Trust Agreement. See "--Collateral Trust Agreement" below. The Collateral Trustee will hold liens on the Southwest Collateral to secure payment under the Senior Credit Agreement and the New Notes; however, upon any liquidation or disposition of the Southwest Collateral for the benefit of Southwest's creditors, the Indebtedness of the New Notes will be subordinated in right of payment to the Indebtedness under the Senior Credit Agreement. See "--Subordination of the New Notes" below. Collateral Trust Agreement The Liens on and security interests against the Southwest Collateral granted to the Collateral Trustee will be subject to a Collateral Trust Agreement among the holders of the New Notes, the New Trustee, the Senior Lenders, Southwest, Blue Heel and a Collateral Trustee. Upon consummation of the Exchange, the Collateral Trustee will be the agent of the Senior Lenders under the Senior Credit Agreement. While all the material terms of the Collateral Trust Agreement have not yet been agreed upon by the parties thereto, the Collateral Trust Agreement will, among other items, establish the relative rights of the holders of the New Notes and the Senior Lenders in and to the Southwest Collateral. Subject to and according to the specific terms of the Collateral Trust Agreement, the Collateral Trustee will be responsible for and control matters such as the release of Liens and the exercise of default remedies, including the sale of the Southwest Collateral upon foreclosure. See "--Foreclosure on Collateral" below. The Collateral Trust Agreement also provides for the subordination of the Indebtedness under the New Notes to the Indebtedness under the Senior Credit Agreement, except in the event no Subordination Event exists (as such term will be defined in the Collateral Trust Agreement). See "--Subordination of the New Notes" below. Under the collateral trust agreement, each holder of the New Notes (i) must make certain representations including that such holder has made and will continue to make an independent credit analysis of Southwest and the Southwest Collateral and (ii) must indemnify the Collateral Trust for certain liabilities with respect to the Security Documents under certain limited circumstances and certain expenses in connection with preserving and enforcing such holder's rights with respect to the Southwest collateral. 46 Subordination of the New Notes The Indebtedness evidenced by the New Notes is generally subordinated in right to payment to the prior payment in full in cash or other payment satisfactory to the Senior Lenders to the Indebtedness under the Senior Credit Agreement to the extent provided in the New Indenture and the Collateral Trust Agreement. Notwithstanding the foregoing, until and unless a Subordination Event has occurred, interest payments may be made on the New Notes. However, upon any distribution of assets of Southwest or Blue Heel or upon any dissolution, winding up, voluntary or involuntary bankruptcy, insolvency, liquidation, reorganization, receivership or similar proceeding relating to Southwest or Blue Heel or their respective property, an assignment for the benefit of creditors or any marshaling of the assets or liabilities of Southwest or Blue Heel, the Senior Lenders will be entitled to receive payment in full of the Indebtedness under the Senior Credit Agreement, in cash or other payment satisfactory to the Senior Lenders, before the holders of the New Notes will be entitled to receive any payment of the Indebtedness then owing in respect of the New Notes. Prior to maturity of the New Notes and absent the occurrence and continuance of Subordination Event (as will be defined in the Collateral Trust Agreement), the holders of New Notes will be entitled to receive regularly scheduled payments of interest under the New Indenture. If an event of default under the Senior Credit Agreement occurs and is continuing, and the Senior Lenders provide notice of such default to Southwest and the New Trustee in accordance with the Collateral Trust Agreement, thereby declaring a Subordination Event, Southwest may not pay and the holders of the New Notes are not entitled to receive any further payments of interest on the New Notes for a period of time commencing on the date the Subordination Event is declared and ending on the earlier to occur of: (a) 180 days after the date the Subordination Event was declared, (b) the date on which the event of default giving rise to the Subordination Event is cured, waived or for which a forbearance agreement is put in place, (c) the date on which the Indebtedness under the Senior Credit Agreement is paid in full, or (d) the filing of a bankruptcy case by or against Southwest. Upon the expiration or termination of any Blocking Period, Southwest shall pay to the holders of New Notes all interest which has accrued (including any interest which has accrued at the default rate provided for in the New Indenture), has become due or is past due and remains unpaid and, thereafter, shall pay interest when the same becomes due and payable as provided for in the New Indenture. Following the expiration or termination of any Blocking Period, additional Blocking Periods may be commenced, however, Holders are seeking a provision that in no event shall there be a Blocking Periods in effect for more than 180 days in any period of 360 consecutive days. The subordination provisions of the Collateral Trust Agreement will not prevent the occurrence of any Event of Default under the New Indenture. However, in the event Southwest defaults on its Obligations under the New Notes prior to the maturity of the New Notes, the Collateral Trust Agreement will provide that the Indebtedness under the New Notes cannot be accelerated unless, (a) the Indebtedness under the Senior Credit Agreement is paid in full, (b) Southwest files a bankruptcy petition (or an involuntary petition is filed against it and not dismissed in 60 days) or (c) the Indebtedness under the Senior Credit Agreement has been accelerated. In addition, the provisions of the Collateral Trust Agreement limit the rights of the New Trustee and/or the holders of the New Notes to foreclose on, or otherwise exercise any rights or remedies with respect to, the Southwest Collateral until such time as all Obligations under the Senior Credit Agreement have been paid in full in cash or other payment satisfactory to the Senior Lenders and all lending commitments thereunder have been terminated. Upon consummation of the Exchange, Southwest expects to have approximately $60 million of senior Indebtedness outstanding under the Senior Credit Agreement to which the New Notes will be subordinated. The New Notes rank pari passu to the Original Notes with respect to payment of interest and principal. Guarantees and Collateral for Guarantees Pursuant to the SRH Guarantee, SRH unconditionally guarantees to each Holder and the New Trustee the full and prompt performance of Southwest's Obligations under the New Indenture and the New Notes, including the payment of principal and interest on the New Notes. The SRH Guarantee ranks pari passu in right of payment to all existing and future senior Indebtedness of SRH and payment on the Original Notes. The SRH Guarantee is secured by the pledge of the Capital Stock of Basic directly owned by SRH, which equals approximately 3.75% of the outstanding shares of capital stock of Basic. MRO Holdings, pursuant to a MRO Holdings Guarantee, unconditionally guarantees to each holder and the New Trustee the full and prompt performance of Southwest's Obligations under the New Indenture and the New 47 Notes, including the payment of principal and interest on the New Notes. The MRO Holdings Guarantee ranks pari passu in right of payment to all existing and future senior Indebtedness of MRO Holdings and payment on the Original Notes. The MRO Holdings Guarantee will be secured by the pledge of Capital Stock of Red Oak hereafter directly owned by MRO Holdings, which equals approximately 82% of the outstanding shares of Capital Stock of Red Oak. The pledge of the Capital Stock of Basic directly owned by SRH and the pledge of Capital Stock of Red Oak directly owned by MRO Holdings is subject to an existing Lien for the benefit of the Holders of Original Notes, if any, remain outstanding upon consummation of the Exchange under the Amended and Restated Pledge Agreement. Pursuant to the Blue Heel Guarantee, Blue Heel unconditionally guarantees to each holder and the New Trustee, the full and prompt performance of Southwest's Obligations under the New Indenture and the New Notes, including the payment of principal and interest on the New Notes. The Blue Heel Guarantee will rank pari passu in right of payment to all existing and future senior Indebtedness of Blue Heel. The Blue Heel Guarantee will be secured by a Lien and security interest on substantially all of its assets in favor of the holders of the New Notes. The Liens and security interests securing the Blue Heel Guarantee, however, are subject to the terms and limitations of the Collateral Trust Agreement with respect to subordination and priority in the right to payment from proceeds of Collateral. See "Collateral Trust Agreement" The New Indenture also provides that each future Subsidiary of Southwest must become a Subsidiary Guarantor either by execution of the New Indenture or a supplemental New Indenture and thereby guarantee the New Notes as described herein. As of the Exchange Date, there will be no Subsidiary Guarantor. The obligations of SRH, MRO Holdings and Blue Heel, as Guarantors, are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor will result in the obligations of such Guarantor under the respective Guarantee not constituting a fraudulent conveyance or fraudulent transfer under applicable federal or state law. Foreclosure on Collateral Upon the occurrence of an Event of Default and/or the acceleration of Southwest's Obligation to repay the principal of, and accrued but unpaid interest on, the New Notes, the Collateral Trustee, the New Trustee or any other collateral trustee designated by the New Trustee, as the case may be, may take all actions it deems necessary or appropriate, including, but not limited to, all actions to preserve or protect the Collateral or to foreclose upon the Collateral in accordance with the security documents, the Collateral Trust Agreement and/or applicable law. However, until such time as all Obligations under the Senior Credit Agreement have been paid in full in cash or other payment satisfactory to the Senior Lenders and all lending commitments thereunder have been terminated, the rights of the New Trustee or the holder of the New Notes to direct or control actions to foreclose upon the Southwest Collateral or otherwise exercise remedies against the Southwest Collateral or Southwest will be limited by the terms of the Collateral Trust Agreement. The proceeds received from the sale of any Collateral that is the subject of a foreclosure or collection suit shall be applied first to pay the expenses of such foreclosure or suit, including amounts then payable to the Collateral Trustee, the New Trustee or any other collateral trustee designated by the New Trustee, then to pay the Indebtedness due under the Senior Credit Agreement, and thereafter to pay the principal of and interest on the New Notes. There can be no assurance that the Collateral Trustee, the New Trustee or any other collateral trustee designated by the New Trustee will be able to sell the Collateral without substantial delays or that the proceeds obtained will be sufficient to pay all amounts owing to holders of the New Notes. Certain Bankruptcy Limitations The right of the Collateral Trustee, the New Trustee or any other collateral trustee designated by the New Trustee, as the case may be, to repossess and dispose of the Collateral would likely be significantly impaired under applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or against Southwest or any Subsidiary prior to such trustee having repossessed and disposed of the Collateral. Under applicable bankruptcy law, a secured creditors are prohibited from repossessing collateral security from a debtor in a bankruptcy case, or from 48 disposing of security repossessed from such debtor, without bankruptcy court approval. Moreover, applicable bankruptcy law permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given "adequate protection." The meaning of the term "adequate protection" may vary according to the circumstances, but it is intended generally to protect the value of the secured creditor's interest in the collateral and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term "adequate protection" and the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the New Notes could be delayed following commencement of a bankruptcy case, whether or when the Collateral Trustee, the New Trustee or any other collateral trustee designated by the New Trustee could repossess or dispose of the Collateral or whether or to what extent Holders of the New Notes would be compensated for any delay in payment or loss of value of the Collateral through the requirement of "adequate protection." Transfer of Collateral; Release of Collateral Pursuant to the terms of the Collateral Trust Agreement, Southwest will be entitled to transfer all or a portion of the Southwest Collateral, and the Collateral Trustee shall be required to release Liens on Southwest Collateral, only to the extent that any such transfer is permitted under both the Senior Credit Agreement and the New Indenture. To the extent the proceeds of any sale of the Southwest Collateral are not used to pay the Indebtedness owing to the Senior Lenders or the holders of New Notes prior to the repayment in full of such Indebtedness, such proceeds shall be subject to the Liens of the Collateral Trustee. Legal Defeasance; Satisfaction and Discharge of the New Indenture Southwest will be deemed to have paid and discharged the entire Indebtedness on all of the outstanding New Notes (except as to (i) rights of registration of transfer, substitution and exchange of the New Notes and Southwest's right of optional redemption, (ii) rights of Holders to receive payments of principal of, premium, if any, and interest on the New Notes (but not the Change in Control Purchase Price or the Excess Cash Purchase Price), solely from the trust fund described below, when such payments are due (or at such time as the New Notes would be subject to redemption at the option of Southwest in accordance with the New Indenture), (iii) the rights, obligations and immunities of the New Trustee under the New Indenture, and (iv) certain other specified provisions in the New Indenture regarding discharge of the New Indenture and legal defeasance (the foregoing exceptions (i) through (iv) are collectively referred to as the "Reserved Rights")) after the irrevocable deposit by Southwest with the New Trustee, in trust for the benefit of the Holders, of cash in U.S. dollars, non-callable U.S. Government Obligations, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants or investment bank, to pay the principal of, premium, if any, and interest on the New Notes then outstanding on the Stated Maturity Date or on the applicable redemption date, as the case may be. Southwest must specify whether the New Notes are being defeased to the Stated Maturity Date or to a particular redemption date. Such a trust may be established only if certain conditions are satisfied, including delivery by Southwest to the New Trustee of an opinion of counsel acceptable to the New Trustee (who may be outside counsel to Southwest but shall not be employed by Southwest or any Affiliate) to the effect that (i) the defeasance and discharge will not be deemed, or result in, a taxable event for Federal income tax purposes, with respect to the Holders, (ii) Southwest's deposit will not result in Southwest or any Guarantor, the trust or the New Trustee being subject to regulation under the Investment Company Act of 1940, and (iii) after the passage of 90 days (or any greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those laws apply to Southwest or any Guarantor) following the deposit of the trust funds, such funds will not be subject to set aside or avoidance under any bankruptcy, insolvency, or other similar laws affecting creditors' rights generally. The New Indenture will not be discharged if, among other things, an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of Southwest or any Guarantor shall have occurred on the date of such deposit or at any time in the period ending on the 91st day after the date of deposit or if such legal defeasance would result in a breach or violation of, or constitute a default under, the New Indenture or any agreement or installment to which Southwest or any Subsidiary is bound. The New Indenture, the Guarantees, and each of the Security Documents will cease to be of further effect as to all outstanding New Notes when Southwest has paid all other sums payable under the New Indenture by 49 Southwest and either (i) all outstanding New Notes have been delivered to the New Trustee for cancellation, or (ii) all New Notes not delivered to the New Trustee for cancellation have become due and payable and Southwest has irrevocably deposited or caused to be deposited with the New Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the New Notes not already delivered to the New Trustee for cancellation, for principal of, premium if any, and interest on the New Notes. No Personal Liability of Stockholders, Officers or Directors No stockholder, employee, officer, or director, as such, past, present, or future of Southwest, SRH, Blue Heel or MRO Holdings or any of their respective Subsidiaries or any successor corporation of any of them shall have any personal liability in respect of the obligations of SRH, Southwest, MRO Holdings or any of their respective Subsidiaries under the New Notes, the New Indenture, the Guarantees or any Security Document by reason of his or its status as such stockholder, employee, officer, or director. Governing Law The New Indenture, the New Notes, the Guarantees and the Security Documents are and will be governed by the laws of the State of New York. Terms of the Class A Common Shares The following description is a summary of the material terms of the Class A Common Shares and the Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws and is subject to, and qualified in its entirety by reference to, the Amended and Restated Certificate of Incorporation, attached hereto as Exhibit I, and the Amended and Restated Bylaws, attached hereto as Exhibit J. General Southwest will issue an aggregate 900,000 Class A Common Shares to the Holders who tender their Original Notes, which will equal 75% of Southwest's issued share capital upon consummation of the Exchange. Each Class A Common Share has one vote on all matters on which stockholders are entitled or permitted to vote and has equivalent rights to the holders of Common Stock, except with rights with respect to the election of directors. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of Class A Common Shares are entitled to share ratably in dividends declared by the Board of Directors out of funds legally available therefor with holders of shares of Common Stock and Special Stock, if outstanding. Southwest does not expect to declare or pay cash dividends to holders of its Common Stock in the foreseeable future. Upon liquidation or dissolution, subject to preferences that may be applicable to an outstanding share of preferred stock, the holders of Class A Common Shares are entitled to share ratably in all assets available for distribution to holders of the Class A Common Shares and holders of Common Stock. All of the outstanding Class A Common Shares will be fully paid and nonassessable. Southwest will issue the Class A Common Shares without registering them under the Securities Act in reliance on an exemption thereto under Section 3(a)(9) of the Securities Act. Pursuant to SEC interpretations, the Class A Common Shares will retain the status of the Original Notes as being registered and freely tradable under the Securities Act, except by persons who are considered affiliates of Southwest or persons who hold Class A Common Shares that were previously held by affiliates of Southwest. (Certain Holders will be considered "Affiliates" as a result of the Exchange.) There is currently, however, no market for the Class A Common Shares and there can be no assurance that such a market will develop. See "Risk Factors -- Absence of Public Market for the New Notes, the Class A Common Shares and the Common Stock." Board Representation The Board of Directors will initially be composed of seven members. While any Class A Common Shares remain outstanding, the beneficial owners of the Class A Common Shares are entitled to elect four out of seven total members to Southwest's Board of Directors in accordance with the terms of the Amended and Restated Certificate of Incorporation. The remaining three directors will be appointed by the holder of Common Stock and Special Stock. The initial four members of the Board representing the Class A Common Shares will be set forth in the Amended and Restated Certificate of Incorporation, to be filed with the Delaware Secretary of State prior to or on 50 the Exchange Date. In the event the Special Shares are cancelled (as described below), at the option of the holders of the Class A Common Shares, such holders of Class A Common Shares will be entitled to elect a fifth representative out of eight total members to serve on Southwest's Board of Directors. Any vacancy occurring in the Board of Directors by reason of the death, resignation, retirement, disqualification or removal from office of any director elected by the holders of the Class A Common Shares must be filled by those remaining directors that were elected by the holders of Class A Common Shares. Any vacancy occurring in the Board of Directors by reason of the death, resignation, retirement, disqualification or removal from office of any director elected by the holders of Common Stock and Special Stock must be filled by those remaining directors that were elected by the holders of Common Stock and Special Stock. Each director elected to fill a vacancy shall serve until the expiration of the term of his predecessor or, if there is no predecessor, until the next succeeding annual meeting and thereafter until his successor shall be duly elected and qualified, unless sooner displaced from office by resignation, removal or otherwise. Any director or the entire Board of Directors may be removed at any time, but only by the affirmative vote of the holders of two-thirds of the outstanding shares of capital stock of Southwest entitled to elect such director cast at a meeting of the stockholders called for that purpose; provided, however, that within 120 days after H. H. Wommack, III (a) no longer directly or indirectly has beneficial ownership of 50% or more of Southwest's Common Stock and (b) resigns, is removed or otherwise no longer serves as an executive officer of Southwest, then the Class A Common Shares will automatically convert to Common Stock and any director or the entire Board of Directors of Southwest may be removed with or without cause by a majority of the outstanding shares of capital stock of Southwest entitled to vote generally in the electoral directors (considered for this purpose as a single class). Conversion into Common Stock The Class A Common Shares will automatically convert into shares of Common Stock on the basis of one share of Common Stock for each Class A Common Share issued and outstanding (a) immediately prior to (i) the closing of a firm commitment underwritten initial public offering of at least $10 million in net proceeds by Southwest of Southwest's Common Stock, pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, or (ii) any other transaction pursuant to which Southwest's Common Stock becomes listed on a national securities exchange or authorized for quotation on an inter-dealer quotation system or (b) immediately after H. H. Wommack, III (a) no longer directly or indirectly has beneficial ownership of 50% or more of Southwest's Common Stock, and (b) resigns, is removed as or is otherwise no longer an executive officer of Southwest. No Listing or Quotation Neither the Class A Common Shares nor the Common Stock will be listed on any national securities exchange or authorized to be quoted on any inter-dealer quotation system of any national securities association and Southwest does not currently intend to apply for such listing or quotation with respect to the Class A Common Shares; however, at the appropriate time, Southwest may apply for such listing or quotation with respect to Southwest's Common Stock, and, in connection with such listing or quotation, all Class A Common Shares will convert to Common Stock. Registration Rights Holders of the New Notes and the Class A Common Shares issued in the Exchange (the "Registrable Securities") will have registration rights with respect to the Exchange Consideration. Southwest is obligated to register the Registrable Securities under the Securities Act and must file a registration statement by April 30, 2002. Under the terms of the Note Exchange Agreement, SRH is entitled to piggy-back registration rights with respect to its Common Stock and Special Stock. Participation Agreement Holders of $88 million in principal amount of the Original Notes have entered into a Participation Agreement with Southwest. Each Participating Holder has agreed: (i) to continue to hold the Original Notes and to surrender the Original Notes upon consummation of the Exchange on the terms set forth in this Statement, or (ii) to 51 sell the Original Notes only to a purchaser who agrees to be bound by all of the terms of the Participation Agreement to which such Holder is a party. In the event that the Exchange is not consummated on or prior to April 3, 2002 the Participation Agreement will terminate and the holders of Original Notes that are parties to it will be released from their obligations thereunder and will be free to dispose of the Original Notes and/or decline to surrender the Original Notes or to participate in the Exchange. TERMS OF THE SPECIAL SHARES TO BE ISSUED TO SRH The following description is a summary of the material terms of the Special Shares. The following description does not restate or fully summarize the Special Shares or the applicable provisions of the Amended and Restated Certification of Incorporation and is subject to and qualified in its entirety by reference to such provisions of the Amended and Restated Certificate of Incorporation, attached hereto as Exhibit I. In connection with the Exchange, Southwest will issue to its current sole stockholder, SRH, 200,000 shares of Special Stock. Combined with the 100,000 shares of Common Stock to be held by SRH upon consummation of the Exchange, SRH will own 25% of Southwest's issued and outstanding share capital. Holders of Special Shares are entitled to receive dividends, when and as declared by the Board of Directors, out of funds available for the payment of dividends, on a pro rata basis with the holders of shares of Common Stock and Class A Common Stock. Southwest has no present intention to pay dividends to its stockholders. Holders of Special Shares are entitled to one vote per share on all matters upon which the stockholders of Southwest are entitled or permitted to vote. If, prior to or on October 3, 2003 Southwest pays in cash in full the New Notes, Special Shares will automatically on the date such payment be converted into shares of Common Stock, on a basis of one share of Common Stock per share of Special Stock issued and outstanding. If, prior to or on October 3, 2003, Southwest either (i) fails to pay in cash in full the New Notes or (ii) there is a voluntary or involuntary bankruptcy filing by or against Southwest, then, upon the earlier of such event, the Special Shares shall be deemed canceled, shall be null and void and of no further effect. Upon cancellation of the Special Shares, SRH would then own only 10% of Southwest's issued and outstanding share capital. COMPARISON OF ORIGINAL NOTES AND NEW NOTES Set forth below is a comparison of the terms of the Original Notes and the New Notes:
Original Notes New Notes -------------- --------- Issuer ................... Southwest Royalties, Inc. Southwest Royalties, Inc. Issue .................... $200 million Principal Amount of $60 million Principal Amount of Senior 10 1/2% Notes Senior Secured Notes Security ................. Unsecured; Guaranteed by pledge of Secured by a shared lien with the stock of SRH's Subsidiaries Senior Credit Agreement on substantially all of Southwest's assets and guaranteed by a pledge of Basic common stock held by SRH, Red Oak common stock held by MRO Holdings and by substantially all the assets of Blue Heel, Southwest's only Subsidiary Issue Date ............... October 15, 1997 On or about April 3, 2002
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Original Notes New Notes -------------- --------- Maturity ................. October 15, 2004 June 30, 2004 Interest Payments ........ 10 1/2% semi-annually on April 15 Interest will begin accruing at 10 1/2% per and October 15 annum on February 1, 2002 through December 31, 2002, at 11 1/2% per annum from January 2, 2003 through December 31, 2003, and at 12 1/2% per annum thereafter until the Maturity Date; interest upon an Event of Default is 18% per annum Conversion ............... Not convertible Not convertible
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Original Notes New Notes -------------- --------- Ranking; Subordination ..... The Original Notes rank pari passu As long as no Subordination Event with the Indebtedness under the exists (as will be defined in the existing senior credit facility with Collateral Trust Agreement), Foothill Capital Corporation and all regularly scheduled payments of other general payment obligations of interest on the New Notes will be Southwest, are guaranteed by certain pari passu with payment of the pledges of capital stock but are not Indebtedness under the Senior Credit secured by liens against the Agreement and all other general payment collateral. obligations of the Southwest. In all other respects, the right to payment on the New Notes will be subordinated to the payment of the Indebtedness under the Senior Credit Agreement, but not to any other secured payment obligations of Southwest. The New Notes will be secured by liens on substantially all of the assets of Southwest and Blue Heel and are guaranteed by certain pledges of capital stock. The New Notes are superior in priority with respect to certain collateral to the Original Notes and with respect to other collateral are subordinate to the payment of Indebtedness under the Original Notes. The New Notes are pari passu in right of payment to the Original Notes. Optional Redemption ........ At its option, Southwest may redeem Redeemable at par (plus accrued and the Original Notes at the following unpaid interest) at Southwest's redemption prices (expressed as a option at any time prior to maturity. percentage of the outstanding principal amount): 102.625% in 2002 and 100% in 2003 and thereafter; plus, in each case, accrued and unpaid interest. Mandatory Redemption and Holders can cause Southwest to Holders can cause Southwest to Repurchase at Option of repurchase the Original Notes at repurchase the Original Notes at Holder ..................... 101% of par following a "Change of 101% of par following a "Change of Control" of Southwest (as defined in Control" of Southwest (as defined in the Original Indenture). the New Indenture). Subject to any restrictions on payment of the New Notes contained in the Collateral Trust Agreement, in the event Southwest has available funds with which to repurchase all of the New Notes at par from the Senior Credit Agreement and a Subordinated Credit Facility and the weighted average interest cost of the funds borrowed under the Senior Credit Agreement and the Subordinated Credit Facility is 12% or less, then Southwest must repurchase the New Notes; provided, however, the Board of Directors, by unanimous vote, may direct Southwest not to effect such repurchase; and provided further, Southwest shall not effect such repurchase if the repurchase would cause Southwest to become insolvent. The holders of the New Notes, must tender their New Notes under the circumstances.
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Original Notes New Notes -------------- --------- Covenants ................ Restrictions on Southwest's ability Southwest and the Guarantors to to engage in certain mergers, engage in certain mergers, consolidations and asset consolidations and asset dispositions. dispositions. Restrictions on Southwest's ability to utilize the proceeds of certain Restrictions on Southwest's ability asset dispositions and engage in to utilize the proceeds of certain certain transactions resulting in a asset dispositions and engage in Change of Control of Southwest. certain transactions resulting in a Change of Control of Southwest.
TERMS OF THE SENIOR CREDIT AGREEMENT AND THE COLLATERAL TRUST AGREEMENT In connection with the Exchange, Southwest will enter into the Senior Credit Agreement. Union Bank of California will act as administrative agent to the Senior Credit Agreement. As of the date of this Statement, Southwest is pursuing commitments from other potential Senior Lenders to participate in the Senior Credit Agreement. The proposed terms of the Senior Credit Agreement provides for an initial borrowing base of $60 million, with a maximum of $80 million, of which $60 million will be available for general corporate purposes, with the remaining $20 million subject to debt incurrence tests (asset value and cash flow-based calculated on a pro-forma basis). The proposed interest rate of the Senior Credit Agreement will be determined by a LIBOR grid based upon borrowing base usage, with a margin ranging from 225 to 275 basis points. The Indebtedness under the Senior Credit Agreement will mature on March 30, 2004. All of the Obligations of Southwest under the Senior Credit Agreement will be secured by, among other things, liens on and security interests in substantially all of the assets of Southwest. The Obligations of Southwest are guaranteed by its Subsidiary Blue Heel, which guarantee is secured by substantially all of Blue Heel's assets. The liens on and security interests in the Southwest Collateral will be granted to and held by the Collateral Trustee pursuant to various security documents for the benefit of the New Trustee, all Senior Lenders and all holders of the New Notes. The maintenance and disposition of the Southwest Collateral and the liens against the Southwest Collateral will be governed by the Collateral Trust Agreement, unless and until the Collateral Trust Agreement has been terminated in accordance with its terms. While all the materials terms of the Collateral Trust Agreement have not yet been agreed upon by the parties thereto, the Collateral Trust Agreement will, among other items, establish the relative rights of the holders of the New Notes and the Senior Lenders in and to the Southwest Collateral. Subject to and according to the specific terms of the Collateral Trust Agreement, the Collateral Trustee will be responsible for and will control matters such as the release of liens and the exercise of default remedies, including the sale of the Southwest Collateral upon foreclosure. The Collateral Trustee will hold Liens on the Southwest Collateral to secure payment under the Senior Credit Agreement and New Notes; however, upon any liquidation or disposition of the Southwest Collateral for the benefit of Southwest's creditors, the Indebtedness under the New Notes will be subordinated in right of payment to the Indebtedness under the Senior Credit Agreement. Additionally, under the Collateral Trust Agreement, each holder of the New Notes (i) must make certain representations, including that such holder has made and will continue to make an independent credit analysis of Southwest and the Southwest Collateral and (ii) must indemnify the Collateral Trustee for certain liabilities with respect to the Security Documents under certain limited circumstances and certain expenses in connection with preserving and enforcing such holder's rights with respect to the Southwest Collateral. If an event of default under the Senior Credit Agreement occurs and is continuing, and the Senior Lenders provide notice of such default to Southwest and the New Trustee in accordance with the Collateral Trust Agreement, thereby declaring a Subordination Event, Southwest may not pay and the Holders of the New Notes are not entitled to receive any further payments of interest on the New Notes for a period of time commencing on the date the Subordination Event is declared and ending on the earlier to occur of: (a) 180 days after the date the 55 Subordination Event was declared, (b) the date on which the event of default giving rise to the Subordination Event is cured, waived or for which a forbearance agreement is put in place, (c) the date on which the Indebtedness under the Senior Credit Agreement is paid in full, or (d) the date on which a bankruptcy case by or against Southwest is commenced. Upon the expiration or termination of any Blocking Period, Southwest shall pay to the holders of New Notes all interest which has accrued (including any interest which has accrued at the default rate provided for in the New Indenture), has become due or is past due and remains unpaid and, thereafter, shall pay interest when the same becomes due and payable as provided for in the Indenture. Following the expiration or termination of any Blocking Period, additional Blocking Periods may be commenced, however, Holders are seeking a provision that in no event shall there be a Blocking Periods in effect for more than 180 days in any period of 360 consecutive days. The subordination provisions of the Collateral Trust Agreement will not prevent the occurrence of any Event of Default under the New Indenture. However, in the event Southwest defaults on its Obligations under the New Notes prior to the maturity of the New Notes, the Collateral Trust Agreement will provide that the Indebtedness under the New Notes cannot be accelerated unless, (a) the Indebtedness under the Senior Credit Agreement is paid in full, (b) Southwest files a bankruptcy petition (or an involuntary petition is filed against it and not dismissed in 60 days) or (c) the Indebtedness under the Senior Credit Agreement has been accelerated. In addition, the provisions of the Collateral Trust Agreement limit the rights of the New Trustee and/or the holders of the New Notes to foreclose on, or otherwise exercise any rights or remedies with respect to, the Southwest Collateral until such time as all the Indebtedness under the Senior Credit Agreement has been paid in full in cash or other payment satisfactory to the Senior Lenders and all lending commitments thereunder have been terminated. A FINAL VERSION OF THE COLLATERAL TRUST AGREEMENT AND THE TERM SHEET FOR THE SENIOR CREDIT AGREEMENT WILL BE SENT TO THE HOLDERS AT LEAST 10 BUSINESS DAYS PRIOR TO THE EXPIRATION DATE. THE EXCHANGE IS CONDITIONED UPON THE EXECUTION AND DELIVERY OF THE SENIOR CREDIT AGREEMENT AND THE COLLATERAL TRUST AGREEMENT. THERE CAN BE NO ASSURANCE THAT THE SENIOR CREDIT AGREEMENT OR THE COLLATERAL TRUST AGREEMENT WILL BECOME EFFECTIVE AND THUS THE EXCHANGE WILL BE CONSUMMATED. TERMS OF THE NOTE EXCHANGE AGREEMENT In connection with the Exchange, the Note Exchange Agreement will be entered into between Southwest and each of the Holders participating in the Exchange. The execution of the Consent and Letter of Transmittal will confer upon the Depositary a Power of Attorney to execute the Note Exchange Agreement on behalf of the tendering Holders. Once executed by the Depositary on behalf of the tendering Holders, the Note Exchange Agreement will constitute a legally binding obligation on the part of the tendering Holders and Southwest to complete the Exchange. The Exchange Agreement will not become legally binding until both the Depositary, on behalf of the tendering Holders, and Southwest execute the Note Exchange Agreement. The Note Exchange Agreement reiterates the terms of the Offer, contains certain representations and warranties by Southwest and the exchanging Holders and indemnification by Southwest of the exchanging Holders with respect to certain matters involving the Exchange and includes registration rights provisions for the Holders and SRH, Southwest's current parent. The Note Exchange Agreement is attached to this Statement as Exhibit K. TERMS OF THE STOCKHOLDERS AGREEMENT In connection with the Exchange, the Stockholders Agreement will be entered into among Southwest, SRH, H. H. Wommack, III and the holders of Class A Common Shares. The execution of the Consent and Letter of Transmittal will confer upon the Depositary a Power of Attorney to execute the Stockholders Agreement on behalf of the tendering Holders. Once executed by the Depositary on behalf of the tendering Holders, Southwest, Mr. Wommack and SRH, the Stockholders Agreement will place conditions on certain sales of Class A Common Shares, Common Stock and Special Stock. The Stockholders Agreement (i) provides the tendering Holders a right of first refusal for shares of Common Stock or Special Stock held by SRH, (ii) grants tag-along rights to SRH which permit SRH to sell a pro rata percentage of its Common Stock and/or Special Stock if the tendering Holders collectively transfer a majority of their Class A Common Shares, and (iii) grants co-sale rights to the tendering Holders whereby tendering Holders desiring to sell collectively a majority of their Class A Common Shares may require SRH to sell a pro rata percentage of its Common Stock and/or Special Shares in connection with such sale. The Stockholders Agreement is attached to this Statement as Exhibit L. 56 THE DISTRIBUTION AND THE PROPOSED WAIVERS AND AMENDMENTS The following is a description of the Distribution and the Proposed Waivers and Amendments. In order to consummate the proposed Distribution, certain provisions in the Original Indenture and in the Original Pledge Agreement must be waived or amended. Southwest also intends to remove most of the covenants from the Original Indenture. Consummation of the Exchange is conditioned upon obtaining the Requisite Consent to the Proposed Waivers and Amendments. The Proposed Waivers and Amendments must be approved by the Requisite Consent of the Holders in accordance with the terms of the Original Indenture and must be approved in order for the Holders to exchange their Original Notes. The Distribution SRH owns approximately 82% of the common stock of Red Oak. Red Oak was formed in 1992 to own and manage commercial real estate properties, including shopping centers and office buildings, in secondary real estate markets in the southwestern United States. As of December 31, 2001, Red Oak owned and managed 20 commercial real estate properties. Red Oak is an Affiliate and an Unrestricted Subsidiary of SRH as defined in the Original Indenture. SRH will transfer its shares of Red Oak to MRO Holdings, which will become a Restricted Subsidiary under the Original Indenture (assuming any Original Notes remain outstanding upon consummation of the Exchange). SRH will receive shares in MRO Holdings in exchange for the transfer to MRO Holdings of its shares of Red Oak. Thereafter, SRH will distribute its shares of MRO Holdings to its stockholders. SRH will have no rights to the shares of Red Oak or MRO Holdings. MRO Holdings will become a guarantor under the Original Indenture and the New Indenture, as more fully discussed below. The shares of Red Oak are pledged by SRH as collateral under the Original Indenture and are subject to the Original Pledge Agreement. The shares of Red Oak will also be pledged as collateral under the New Indenture and the Security Documents. MRO Holdings will guarantee payment of the New Notes under the New Indenture, will become a guarantor under the Original Indenture and will become a party to the Original Pledge Agreement. Therefore, the shares of Red Oak will continue to be pledged to the Holders under the Original Pledge Agreement. Moreover, MRO Holdings will be subject to all of the restrictions set forth in the Original Pledge Agreement and the New Indenture. Because the Original Pledge Agreement, the Original Indenture, the Original Notes and the Collateral will remain in place and MRO Holdings will become a guarantor and sign the Amended and Restated Pledge Agreement (assuming any Original Notes remain outstanding upon consummation of the Exchange), Southwest does not believe that the Distribution will materially affect the Collateral. Description of Amendments to the Original Indenture Southwest proposes to amend the Original Indenture to allow the Distribution and to remove most of its restrictive covenants. The provisions which Southwest proposes to modify are set forth in full in the form of the Supplemental Indenture which is attached hereto as Exhibit E. The descriptions set forth below only briefly summarize the substantive amendments to the Original Indenture, do not purport to be complete and are subject to, and are qualified in their entirety by, reference to the form of the Supplemental Indenture. Section 9.02 of the Original Indenture provides for the amendment of any provision by the Holders of not less than a majority of the principal amount of the outstanding Original Notes, except that alterations to Sections 4.15 and 4.16 require the consent of 66 2/3% of the principal amount of the outstanding Original Notes. Consequently, Southwest is soliciting the consents for the proposed covenants removal from Holders of not less than 66 2/3% of the principal amount of the Original Notes. Holders must consent to Proposed Waivers and Amendments in order to tender their Original Notes in the Exchange. The proposed amendments to the Original Indenture would modify the following provisions of the Original Indenture: 57
- ----------------------------------------------------------------------------------------------------------------------- Indenture Agreement Provision Substance Substance of Proposed Section of Provision Amendment - ------------------------------------------------------------------------------------------------------------------------ Section 1.01 Certain Definitions Definitions in the Original Indenture Removes certain definitions. will no longer apply due to the removal of most of the covenants - ------------------------------------------------------------------------------------------------------------------------ Section 4.06 Compliance Requires SRH and Southwest to Amended to remove requirement Certificate; Financial delivery an officer's certificate to that SRH's financial statements Statements; Notice of Original Trustee regarding compliance include a report from its auditors Default with the provisions of the Original regarding compliance with financial Indenture ratios - ------------------------------------------------------------------------------------------------------------------------ Section 4.08 Reports to Holders Requires SRH and Southwest, as Amended to remove certain applicable, to deliver annual and requirements about filing quarterly reports to the Original reports with the SEC and, in Trustee certain situations, to the Holders - ------------------------------------------------------------------------------------------------------------------------ Section 4.09 Waiver of Stay, Prohibits Southwest from making claims Delete Extension or Usury Laws based upon any stay or extension law or any usury law - ------------------------------------------------------------------------------------------------------------------------ Section 4.10 Limitation on Subject to certain exceptions, Delete Restricted Payments prohibits SRH and Southwest from declaring dividends, purchasing or redeeming capital stock, and making payments on subordinated indebtedness and certain restricted investments - ------------------------------------------------------------------------------------------------------------------------ Section 4.11 Limitation on Prohibits SRH and Southwest from Delete Transactions with entering into affiliate transactions Affiliates (subject to certain exceptions) - ------------------------------------------------------------------------------------------------------------------------ Section 4.12 Limitation on Places limitations on SRH and Delete Incurrence of Southwest's ability to incur Additional indebtedness Indebtedness and Issuances of Disqualified Capital Stock - ------------------------------------------------------------------------------------------------------------------------ Section 4.13 Limitation on Dividend Limits SRH and Southwest's ability to Delete and Other Payment pay dividends or other distributions, Restrictions Affecting make loans or transfer its properties Restricted Subsidiaries or assets - ------------------------------------------------------------------------------------------------------------------------ Section 4.14 Limitation on Limits designation of Restricted and Delete Designation of Unrestricted Subsidiaries Unrestricted Subsidiaries; Ownership of Restricted Subsidiaries - ------------------------------------------------------------------------------------------------------------------------ Section 4.15 Change of Control Requires a repurchase of the Original Delete Notes at a premium upon a "change of control" - ------------------------------------------------------------------------------------------------------------------------ Section 4.16 Limitation on Asset Limits SRH and Southwest's ability to Delete Sales consummate certain asset sales - ------------------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------------- Indenture Agreement Provision Substance Substance of Proposed Section of Provision Amendment - ------------------------------------------------------------------------------------------------------------------------ - ----------------------------------------------------------------------------------------------------------------------- Section 4.17 Limitation on Sale or Limits SRH's ability to sell shares of Delete Issuance of Capital capital stock of its restricted Stock of Restricted subsidiaries Subsidiaries - ----------------------------------------------------------------------------------------------------------------------- Section 4.18 Limitations on Liens Prohibits SRH and Southwest from Delete incurring liens on its properties or assets - ----------------------------------------------------------------------------------------------------------------------- Section 4.19 Limitation on Lines of Prohibits SRH from engaging in any Delete Business line of business other than as presently conducted - ----------------------------------------------------------------------------------------------------------------------- Section 4.21 Payment of Existing Requires Southwest to pay off certain Delete Secured Debt of its indebtedness - ----------------------------------------------------------------------------------------------------------------------- Section 5.01 Merger, Consolidation Addresses the ability of SRH and Delete and Sale of Assets Southwest to merge, consolidate or sell assets - ----------------------------------------------------------------------------------------------------------------------- Section 6.01(b) Events of Default Qualifies failure to pay principal of, Deletes references to payments or premiums on, (including payments a change of control or an upon a upon change of control and excess excess cash offer cash offer) as an Event of Default - ----------------------------------------------------------------------------------------------------------------------- Section 6.01(c) Events of Default Qualifies a default of Section 5.01 or Delete failure to comply with Section 4.15 and 4.16 as an Event of Default - ----------------------------------------------------------------------------------------------------------------------- Section 6.01(d) Events of Default Qualifies a default in the observance Delete of covenants or agreements in the Indenture, Notes or Guarantee as an Event of Default - ----------------------------------------------------------------------------------------------------------------------- Section 6.01(e) Events of Default Qualifies a default in the observance Delete or covenants or agreements in the Security Documents as an Event of Default - ----------------------------------------------------------------------------------------------------------------------- Section 6.01(f) Events of Default Qualifies a default under any Delete mortgage, indenture, or other instrument evidencing debt as an Event of Default - ----------------------------------------------------------------------------------------------------------------------- Section 6.01(g) Events of Default Qualifies judgments in excess of $1 Delete million rendered against SRH or Southwest as an Event of Default - ----------------------------------------------------------------------------------------------------------------------- Section 6.02 Acceleration Allows acceleration of payment of Amends the ability to premium and interest upon an Event of accelerate from a 25% vote of Default the Note holders to at least 51% of the Note holders - -----------------------------------------------------------------------------------------------------------------------
Description of the Pledge Agreement Waiver Southwest proposes that the Holders waive certain provisions of the Original Pledge Agreement to permit the consummation of the Distribution and provide for the other matters referred to below. The Pledge Agreement Waiver is necessary to allow the transfer by SRH of the Red Oak common stock to MRO Holdings, which would, in turn, become a signatory to the Original Pledge Agreement. The waiver is not intended to limit or in any way alter the substantive protections under the Original Pledge Agreement, but only to permit the Distribution. The provisions which are proposed for waiver are set forth in full in the form of the Pledge Agreement Waiver, which is attached hereto as Exhibit F. The description below only briefly summarizes the substantive waivers, does not 59 purport to be complete and is subject to, and qualified in its entirety by reference to, the form of the Pledge Agreement Waiver. Section 22 of the Original Pledge Agreement provides that it may only be amended or modified in accordance with Article Nine of the Original Indenture. Section 9.02 of the Original Indenture provides for the waiver of any provision (except certain provisions not relevant to this Statement) upon the consent of the Holders of not less than a majority of the principal amount of the outstanding Original Notes. These waivers must be approved in order for the Original Notes to be tendered. The Pledge Agreement Waivers would waive the following provisions of the Original Pledge Agreement:
- ---------------------------------------------------------------------------------------------------------------------- Original Pledge Agreement Provision Pertinent Substance of Provision If Not Waived Section - ---------------------------------------------------------------------------------------------------------------------- Section 1(d) Pledge Would create a security interest in shares of MRO Holdings - ---------------------------------------------------------------------------------------------------------------------- Section 2(a) Representations, Warranties and Would prevent the transfer of Red Oak shares of common Covenants of the Pledgor stock to MRO Holdings - ---------------------------------------------------------------------------------------------------------------------- Section 2(j) Representations, Warranties and Would restrict SRH from forming MRO Holdings Covenants of the Pledgor - ----------------------------------------------------------------------------------------------------------------------
Description of the Amended and Restated Pledge Agreement Southwest proposes to amend and restate the Original Pledge Agreement to include MRO Holdings as a Pledgor (as that term is defined in the Original Pledge Agreement) of the shares of Red Oak that it beneficially owns. The amendment is not intended to alter or modify any substantive provision of the Original Pledge Agreement. The provision which Southwest proposes to modify is set forth in full in the form of Amended and Restated Pledge Agreement, which is attached hereto as Exhibit G. The description below only briefly summarizes the substantive amendment, does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the form of the Amended and Restated Pledge Agreement. Section 9.02 of the Original Indenture allows the amendment of any provision (except certain provisions not relevant to this Statement) upon the consent of the Holders of not less than a majority of the principal amount of the outstanding Original Notes. The Original Pledge Agreement Amendments would modify the following provisions of the Original Indenture:
- ---------------------------------------------------------------------------------------------------------------------- Original Pledge Pertinent Substance of Agreement Provision Current Provision Substance of Proposed Amendment Section - ---------------------------------------------------------------------------------------------------------------------- 1st Paragraph Definition of Defines "Pledgor" as SRH Definition of "Pledgor" expanded to "Pledgor" include MRO Holdings, Inc., but only to the extent of the assets of Red Oak common stock that it holds - ----------------------------------------------------------------------------------------------------------------------
IF THE PROPOSED WAIVERS AND AMENDMENTS BECOME EFFECTIVE, THEY WILL APPLY TO ALL REMAINING OUTSTANDING ORIGINAL NOTES, IF ANY, ISSUED UNDER THE ORIGINAL INDENTURE, AND EACH HOLDER OF ORIGINAL NOTES WHICH HAS NOT PROPERLY TENDERED 60 FOR NEW NOTES WILL BE BOUND BY THE PROPOSED WAIVERS AND AMENDMENTS, REGARDLESS OF WHETHER THAT HOLDER CONSENTED TO THE PROPOSED WAIVERS AND AMENDMENTS. TERMS OF THE OFFER The Offer will expire at 5:00 p.m., New York, New York time, on April 1, 2002, unless extended by Southwest. Southwest expressly reserves the right, at any time or from time to time, (i) to extend the period of time during which the Offer is open and thereby delay acceptance for exchange of any Original Notes, by giving oral (confirmed promptly in writing) or written notice of such extension to the Depositary and (ii) to amend the Offer in any respect by giving oral (confirmed promply in writing) or written notice of such amendment to the Depositary. Any extension, amendment or termination will be followed promptly by notice to the Holders. The Participation Agreement between Southwest and the Participating Holders terminates on April 3, 2002. If Southwest extends the Offer, or if, for any reason, the acceptance for exchange of Original Notes is delayed or if Southwest is unable to accept for exchange Original Notes pursuant to the Offer, then, without prejudice to Southwest's rights under the Offer, the Depositary may retain tendered Original Notes on behalf of Southwest, and such Original Notes may not be withdrawn except to the extent tendering Holders are entitled to withdrawal rights as described under "--Withdrawal Rights." If Southwest makes a change in the terms of the Offer or the information concerning the Offer or waives a condition of the Offer (other than the condition of Consent to the Proposed Waivers and Amendments, which Southwest cannot waive), in each case which would have a substantive effect upon the rights of the Holders, Southwest will disseminate additional informational materials and will ensure that the Offer remains open for a minimum of 5 business days and a maximum of 10 business days (such period of time to be determined by Southwest based on the materiality and significance of the term or information) from the date that such change in terms is sent to the Holders. If the Consent Solicitation is amended prior to the Expiration Date in a manner reasonably determined by Southwest to have a substantive effect upon the Holders, Southwest promptly will disclose such amendment, and will ensure that the Offer remains open for a minimum of 5 business days and a maximum of 10 business days (such period of time to be determined by Southwest based on the materiality and significance of the term or information) from the date that such amendment is sent to the Holders. Waiver of the Minimum Tender requires the unanimous consent of the Participating Holders who are parties to the Participation Agreement. Southwest expressly reserves the right, in its sole discretion, to terminate the Offer and the Consent Solicitation at any time prior to the closing of the Exchange. Any such termination will be followed promptly by notification to the Holders. In the event that Southwest terminates the Offer, it shall give immediate notice thereof to the Depositary, and all Original Notes theretofore tendered and not accepted for exchange shall be returned promptly to the tendering Holders thereof, and the consent to the Proposed Waivers and Amendments, the Supplemental Indenture, the Pledge Agreement Waiver, the Amended and Restated Pledge Agreement and the Note Exchange Agreement, together with all other documents signed on behalf of the tendering Holders pursuant to the Power of Attorney, shall be void and of no effect. In the event that the Offer and the Solicitation are withdrawn or otherwise not completed, Original Notes otherwise validly tendered for exchange will not be exchanged. See "--Withdrawal Rights." Acceptance of Original Notes for Exchange Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), including the execution of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement, Southwest will accept for exchange, and thereby exchange, and will issue the Exchange Consideration with respect to, all Original Notes validly tendered prior to the Expiration Date (and not properly withdrawn in the manner described in "--Withdrawal Rights") on the Exchange Date. In all cases, the issuance of the Exchange Consideration payable with respect to Original Notes exchanged pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates representing such Original Notes or confirmation of a book-entry transfer of such Original Notes into the Depositary's account at DTC, 61 as defined in and pursuant to the procedures set forth under "Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney," (ii) a properly completed and duly executed Consent and Letter of Transmittal (or a manually signed facsimile copy thereof), with any required signature guarantees, and (iii) any other documents required by the Consent and Letter of Transmittal or this Statement. For purposes of the Offer, validly tendered Original Notes (or defectively tendered Original Notes with respect to which Southwest has waived, or has caused to be waived, such defect) will be deemed to have been accepted for exchange if, as and when Southwest gives oral (confirmed in writing) or written notice thereof to the Depositary. Southwest will issue the Exchange Consideration with respect to Original Notes so accepted on the Exchange Date by depositing the aggregate Exchange Consideration with the Depositary, which will act as agent for tendering Holders for the purpose of receiving the Exchange Consideration from Southwest and transmitting such Exchange Consideration to the tendering Holders. Tenders of Original Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. UNDER NO CIRCUMSTANCES WILL ANY INTEREST BE PAYABLE BECAUSE OF ANY DELAY IN THE TRANSMISSION OF THE EXCHANGE CONSIDERATION TO THE HOLDERS OF EXCHANGED ORIGINAL NOTES OR OTHERWISE. For purposes of the Consent Solicitation, Consents received by the Depositary will be deemed to have been accepted, if, as and when (a) Southwest, the Guarantors and the New Trustee execute the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement on the Exchange Date, (b) Southwest has executed the New Notes and the New Indenture and issued the Class A Common Shares, and (c) Southwest has accepted the Original Notes for exchange pursuant to the Offer. For purposes of the Power of Attorney, documents signed on behalf of Holders pursuant to the Power of Attorney conferred upon the Depositary will be deemed to be effective if, as and when Southwest, SRH, the Guarantors, the Senior Lenders, the Original Trustee, the New Trustee or any other necessary party execute the applicable documents. Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney Original Notes may be tendered, Consents delivered and a Power of Attorney granted by any of the following procedures. The tender by a Holder pursuant to one of the procedures set forth below will constitute (if and when accepted by Southwest in accordance with this Statement, the Consent and Letter of Transmittal, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement) a binding agreement between such Holder and Southwest in accordance with the terms and subject to the conditions set forth in this Statement, the Consent and Letter of Transmittal, the Note Exchange Agreement, the Collateral Trust Agreement, the Stockholders Agreement, and, if applicable, the Notice of Guaranteed Delivery. Without limiting the foregoing, any Holder so tendering Original Notes shall be deemed to have consented to the Proposed Waivers and Amendments with respect to all of the Original Notes tendered by such Holder. The procedures by which Original Notes may be tendered, Consents given and a Power of Attorney granted by persons other than the person in whose name the Original Notes are registered, will depend on how the Original Notes are held. Only registered Holders are authorized to tender their Original Notes, deliver Consents and grant Powers of Attorney to the Depositary for the execution and delivery of the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement. THE METHOD OF DELIVERY OF ORIGINAL NOTES, CONSENTS, A POWER OF ATTORNEY AND/OR ANY OTHER REQUIRED DOCUMENTS, INCLUDING TENDER OF ORIGINAL NOTES THROUGH DTC, AND ANY SIGNATURE GUARANTEES, AND ALL OTHER ASPECTS OF ANY OF THE FOLLOWING PROCEDURES, ARE AT THE ELECTION AND RISK OF THE HOLDER TENDERING 62 ORIGINAL NOTES, DELIVERING THE CONSENT, CONFERRING THE A POWER OF ATTORNEY AND, EXCEPT AS OTHERWISE PROVIDED IN THE CONSENT AND LETTER OF TRANSMITTAL, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. WITHOUT LIMITING THE FOREGOING, IF ANY DELIVERY IS TO BE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE DEPOSITARY ON OR PRIOR TO SUCH DATE. Tender of Original Notes Held in Physical Form. To validly tender ---------------------------------------------- Original Notes held in physical form pursuant to the Offer, a registered Holder who holds Original Notes in physical form ("Physical Holders") must (i) deliver certificates representing such Original Notes to the Depositary at its address set forth on the back page of this Statement; (ii) complete and sign the Consent and Letter of Transmittal (or a facsimile copy thereof) in accordance with the Instructions to the Consent and Letter of Transmittal, have the signature thereon guaranteed if required by the Instructions to the Consent and Letter of Transmittal and deliver it to the Depositary at its address set forth on the back page of this Statement and (iii) complete and deliver any other documents required by the Instructions to the Consent and Letter of Transmittal and this Statement to the Depositary at its address set forth on the back page of this Statement. A Physical Holder who desires to tender Original Notes and who cannot comply with the procedures set forth herein for tender on a timely basis or whose Original Notes are not immediately available must comply with the procedures for guaranteed delivery set forth below. THE CONSENT AND LETTER OF TRANSMITTAL AND ANY CERTIFICATES EVIDENCING ORIGINAL NOTES TENDERED PURSUANT TO THE OFFER SHOULD BE SENT ONLY TO THE DEPOSITARY, AND NOT TO SOUTHWEST. The proper completion, execution and delivery of the Consent and Letter of Transmittal by a Physical Holder with respect to Original Notes will constitute the giving of a Consent by such Physical Holder to the Proposed Waivers and Amendments with respect to all of the Original Notes tendered by such Physical Holder and will confer a Power of Attorney upon the Depositary. If Original Notes are to be tendered by any person other than the person in whose name the Original Notes are registered, the Original Notes must be endorsed or accompanied by an appropriate written instrument or instruments of transfer executed exactly as the name or names of the Physical Holder or Physical Holders appear on the Original Notes, with the signature(s) on the Original Notes or instruments of transfer guaranteed as provided below, and a Consent and Letter of Transmittal must be executed and delivered either by the Physical Holder or Physical Holders, or by the tendering person pursuant to a valid power of attorney signed by the Physical Holder or Physical Holders, which signature must, in either case, be guaranteed as provided below, since only Physical Holders or their attorneys-in-fact are entitled to deliver Consents to the Proposed Waivers and Amendments and confer a Power of Attorney. Tender of Original Notes Held Through a Custodian. Any beneficial owner ------------------------------------------------- whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Original Notes, deliver a Consent and confer a Power of Attorney should contact such registered Holder promptly and instruct such party to tender Original Notes, deliver a Consent and confer a Power of Attorney to the Depositary on such beneficial owner's behalf. Beneficial owners may only accept the Offer by instructing such registered Holder pursuant to an instruction letter or similar communication to tender the Original Notes and deliver the corresponding Consents and Power of Attorney on behalf of such beneficial owner. Moreover, the beneficial owner must confer upon the such registered Holder a power of attorney, which expressly appoints such party the true and lawful agent and attorney-in-fact of the beneficial owner and grants such party the power to confer upon the Depositary the Power of Attorney as required in connection with the Offer. A Letter of Instruction which includes a power of attorney is contained in the solicitation materials provided along with this Offer and may be used by beneficial owners. Once a beneficial owner instructs such registered Holder to tender the Original Notes, deliver a Consent and confer a Power of Attorney, such registered Holder must follow the procedures for tendering Original Notes set forth for Physical Holders or DTC Participant set forth below. The broker, dealer, commercial bank, trust company or other nominee must be properly instructed by the beneficial owner and then must validly tender the Original Notes pursuant to the instructions set forth in Consent and Letter of Transmittal and this Statement in order to accept the Offer. 63 Tender of Original Notes Held Through DTC. Pursuant to authority ----------------------------------------- granted by DTC, any DTC participant whose name appears on a security position listing it as owner of the Original Notes and that has Original Notes credited to its DTC account (and thereby held of record by DTC's nominee) (a "DTC Participant") may directly tender such Original Notes and deliver Consents and Powers of Attorney with respect thereto as if it were the registered Holder of such Original Notes, and references herein to registered or record Holders shall include DTC Participants. To effectively tender Original Notes, DTC Participants must (i) deliver certificates representing such Original Notes to the Depositary at its address set forth on the back page of this Statement, or, in lieu of tendering Original Notes in physical form, electronically tender their Original Notes through DTC's ATOP, for which the transaction will be eligible, pursuant to the book-entry delivery procedures set forth below; (ii) complete and sign the Consent and Letter of Transmittal (or a facsimile copy thereof) in accordance with the Instructions to the Consent and Letter of Transmittal, have the signature thereon guaranteed if required by the Instructions to the Consent and Letter of Transmittal and deliver it to the Depositary at its address set forth on the back page of this Statement and (iii) complete and deliver any other documents required by the Instructions to the Consent and Letter of Transmittal and this Statement to the Depositary at its address set forth on the back page of this Statement. ALTHOUGH A DTC PARTICIPANT MAY TENDER ORIGINAL NOTES ELECTRONICALLY THROUGH ATOP, DTC PARTICIPANTS STILL MUST PHYSICALLY COMPLETE, SIGN AND DELIVER THE CONSENT AND LETTER OF TRANSMITTAL TO THE DEPOSITARY. CONSENTS AND POWERS OF ATTORNEY CANNOT BE DELIVERED THROUGH ATOP. If a DTC Participant tenders through ATOP, DTC will then verify the tender of the Original Notes and send an Agent's Message (as defined below) to the Depositary for its acceptance. A DTC Participant who desires to tender Original Notes and who cannot comply with the procedures set forth herein for tender on a timely basis must comply with the procedures for guaranteed delivery set forth below. The term "Agent's Message" means a message transmitted by DTC to, and received by, the Depositary and forming a part of the Book-Entry Confirmation (defined below), which states that DTC has received an express acknowledgement from each DTC Participant tendering Original Notes. Except as provided below, unless the Original Notes being tendered are deposited with the Depositary at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, as applicable (accompanied by a properly completed and duly executed Consent and Letter of Transmittal), Southwest may, at its option, treat such tender as defective for purposes of acceptance for exchange and/or the right to receive the applicable Exchange Consideration. DELIVERY OF DOCUMENTS TO THE DTC (PHYSICALLY OR BY ELECTRONIC MEANS) DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. A PROPERLY EXECUTED CONSENT AND LETTER OF TRANSMITTAL MUST BE DELIVERED DIRECTLY TO THE DEPOSITARY. Book-Entry Delivery Procedures. The Depositary has or will promptly ------------------------------ establish an account with respect to the Original Notes at DTC for purposes of the Offer. Any DTC Participant may make book-entry delivery of the Original Notes by causing DTC to transfer such Original Notes into the Depositary's account at DTC in accordance with such DTC's procedures for such transfer. Timely book-entry delivery of original notes pursuant to the offer, however, requires receipt of a confirmation (a "Book-entry Confirmation") at or prior to 5:00 p.m., New York, New York time on the expiration date. IN ADDITION, ALTHOUGH DELIVERY OF ORIGINAL NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER INTO THE DEPOSITARY'S ACCOUNT AT DTC, A PROPERLY COMPLETED AND DULY EXECUTED CONSENT AND LETTER OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE COPY THEREOF), ANY REQUIRED SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS, MUST, IN ANY CASE, BE DELIVERED OR TRANSMITTED TO AND RECEIVED BY THE DEPOSITARY AT ITS ADDRESS SET FORTH ON THE BACK PAGE OF THIS STATEMENT AT OR PRIOR TO 5:00 P.M., NEW YORK, NEW YORK TIME, ON THE EXPIRATION DATE, OR THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH, FOR TENDERED ORIGINAL NOTES TO BE CONSIDERED FOR ACCEPTANCE FOR EXCHANGE. TENDERS OF ORIGINAL NOTES WILL NOT BE DEEMED VALIDLY MADE UNTIL SUCH DOCUMENTS ARE RECEIVED BY THE DEPOSITARY. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Signature Guarantees. Signatures on all Consents and Letters of -------------------- Transmittal must be guaranteed by a financial institution that is a member of the Securities Transfer Agents' Medallion Program, the Stock Exchange Medallion Program or the New York Stock Exchange Medallion Signature Program (each of the foregoing being referred to as an "Eligible Institution"), unless the Original Notes tendered thereby are tendered (i) by a Physical Holder of Original Notes or DTC Participant who has NOT completed either the box entitled "Special Delivery 64 Instructions" or the box entitled "Special Issuance Instructions" contained in the Consent and Letter of Transmittal, or (ii) for the account of an Eligible Institution. See Instruction 1 of the Consent and Letter of Transmittal. If Original Notes are registered in the name of a person other than the person executing the Consent and Letter of Transmittal or if Original Notes not accepted for exchange or not tendered are to be returned to a person other than the Physical Holder or DTC Participant, then the signatures on the Consent and Letter of Transmittal accompanying the tendered Original Notes must be guaranteed by an Eligible Institution as described above. See Instructions 1 and 5 of the Consent and Letter of Transmittal. Guaranteed Delivery. If a Physical Holder or DTC Participant desires to ------------------- tender Original Notes pursuant to the Offer, deliver a Consent pursuant to the Solicitation and confer a Power of Attorney, and time will not permit the Consent and Letter of Transmittal, certificates representing such Original Notes (or the procedures for book-entry delivery cannot be completed) and/or all other required documents to reach the Depositary, in each case, at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, such Physical Holder or DTC Participant may nevertheless tender Original Notes, deliver Consents and confer a Power of Attorney if all the following conditions are satisfied: (i) the tender of Original Notes is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, a copy of which is attached to the Consent and Letter of Transmittal, substantially in the form provided by Southwest herewith, or an Agent's Message with respect to guaranteed delivery, is received by the Depositary at or prior to 5:00 p.m. New York, New York time, on the Expiration Date, as provided below; and (iii) the certificates for the tendered Original Notes in proper form for transfer (or a Book-Entry Confirmation, including by means of an Agent's Message, of the transfer of such Original Notes into the Depositary's account at DTC as described above), together with a Consent and Letter of Transmittal (or a manually signed facsimile copy thereof), properly completed and duly executed, with any required signature guarantees and any other documents required by the Instructions to the Consent and Letter of Transmittal, are received by the Depositary within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be sent by hand delivery, telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the Notice of Guaranteed Delivery. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY SOUTHWEST BY REASON OF ANY DELAY IN MAKING PAYMENT OF THE EXCHANGE CONSIDERATION TO ANY PERSON USING THE GUARANTEED DELIVERY PROCEDURES, AND THE EXCHANGE CONSIDERATION FOR ORIGINAL NOTES TENDERED PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR ORIGINAL NOTES DELIVERED TO THE DEPOSITARY ON OR PRIOR TO THE EXPIRATION DATE. Notwithstanding any other provision hereof and subject to the conditions described herein, payments of the Exchange Consideration with respect to Original Notes tendered and accepted for exchange pursuant to the Offer will, in all cases, be made only after timely receipt by the Depositary of such Original Notes (or a Book-Entry Confirmation, including by means of an Agent's Message, of the transfer of such Original Notes into the Depositary's account at DTC as described above); (ii) a Consent and Letter of Transmittal (or a manually signed facsimile copy thereof) with respect to such Original Notes, properly completed and duly executed, with any required signature guarantees; and (iii) any other documents required by the Consent and Letter of Transmittal. Backup Federal Income Tax Withholding. To prevent backup Federal income tax ------------------------------------- withholding, each tendering Holder of Original Notes must provide the Depositary with such Holder's correct taxpayer identification number and certify that such Holder is not subject to backup Federal income tax withholding by completing the Substitute Form W-9 included in the Consent and Letter of Transmittal. See "Certain Federal Income Tax Consequences." 65 Determination of Validity. In order for any tender of Original Notes to be ------------------------- valid, it must be in proper form. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tendered Original Notes, delivered Consents and granted Powers of Attorney pursuant to any of the procedures described above will be determined by Southwest, in Southwest's sole discretion (which determination will be final and binding). Southwest reserves the absolute right to reject any or all tenders of any Original Notes, deliveries of any Consents and grants of any Powers of Attorney determined by it not to be in proper form or if the acceptance for exchange of such Original Notes, Consents and a Power of Attorney may, in the opinion of Southwest's counsel, be unlawful. Southwest also reserves the absolute right, in its sole discretion, to waive any of the conditions of the Offer or any defect or irregularity in any tender with respect to Notes or delivery with respect to a Consent and a Power of Attorney of any particular Holder, whether or not similar defects or irregularities are waived in the case of other Holders. Southwest's interpretation of the terms and conditions of the Offer (including the Consent and Letter of Transmittal and the Instructions thereto) will be final and binding. NONE OF SOUTHWEST, THE DEPOSITARY, THE NEW TRUSTEE OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN TENDERS OR WILL INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION. IF SOUTHWEST WAIVES ITS RIGHT TO REJECT A DEFECTIVE TENDER OF ORIGINAL NOTES, THE TENDERING HOLDER WILL BE ENTITLED TO THE APPLICABLE EXCHANGE CONSIDERATION. Withdrawal Rights A HOLDER MAY NOT REVOKE ITS CONSENT OR A POWER OF ATTORNEY WITH RESPECT TO TENDERED ORIGINAL NOTES WITHOUT WITHDRAWING FROM TENDER THE ORIGINAL NOTES TO WHICH SUCH CONSENTS AND A POWER OF ATTORNEY RELATE. A HOLDER WHO VALIDLY WITHDRAWS PREVIOUSLY TENDERED ORIGINAL NOTES WILL NOT RECEIVE THE EXCHANGE CONSIDERATION WITH RESPECT TO SUCH WITHDRAWN ORIGINAL NOTES. Except as otherwise stated below, tenders of Original Notes and the concurrent delivery of Consents and Powers of Attorney made pursuant to the Offer and the Consent Solicitation are irrevocable. Original Notes tendered pursuant to the Offer may be withdrawn and the related Consents and Powers of Attorney revoked at any time at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, but not thereafter, unless Southwest has failed to issue the Exchange Consideration on the Exchange Date, which Exchange Consideration will be sent to the Depositary for delivery to the exchanging Holders. If, after such time as withdrawal rights expire, Southwest alters the terms of the Exchange, then the time to exercise withdrawal rights will be extended for a minimum of 5 business days and a maximum of 10 business days (such period of time to be determined by Southwest based on the materiality and significance of the altered terms) from the date that notice of any such alteration is given or sent to Holders by Southwest. In the event of a termination of the Offer, the Original Notes and Consents and Letters of Transmittal tendered pursuant to the Offer will be promptly returned to the tendering Holders, and the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement will not become operative and no documents will be executed pursuant to the Power of Attorney. For a withdrawal of a tender of Original Notes and a concurrent revocation of Consents and Powers of Attorney to be effective, a written, telegraphic or facsimile transmission notice of withdrawal or a "Request Message" (as defined below) must be timely received by the Depositary at its address set forth on the back page of this Statement at or prior to 5:00 p.m., New York, New York time, on the Expiration Date or on a business day after the Exchange Date if Southwest has failed to issue the Exchange Consideration on the Exchange Date, which Exchange Consideration will be sent to the Depositary for delivery to the exchanging Holders. Any such notice of withdrawal must (i) specify the name of the person who tendered the Original Notes to be withdrawn, (ii) contain the description of the Original Notes to be withdrawn and identify the certificate number or numbers shown on the particular certificates evidencing such Original Notes (unless such Notes were tendered by book-entry transfer) and the aggregate principal amount represented by such Original Notes, (iii) contain a statement that such Holder is withdrawing its signature from any documents signed on its behalf pursuant to a Power of Attorney, its tender of Original Notes and delivery of Consents, and (iv) be signed by the Holder of such Original Notes in the same manner as the original signature on the Consent and Letter of Transmittal by which such Original Notes were tendered (including any required signature guarantees) or be accompanied by (x) documents of transfer sufficient to have the Original Trustee register the transfer of the Original Notes into the name of the person withdrawing such Original Notes and (y) a properly completed irrevocable proxy and power of attorney that authorized such person to effect such revocation on behalf of such Holder. In lieu of submitting a written, telegraphic or facsimile transmissions notice of withdrawal or revocation, DTC participants may electronically transmit a request for 66 withdrawal or revocation to DTC. DTC will then edit the request and send a Request Message to the Depositary. If the Original Notes to be withdrawn have been delivered or otherwise identified to the Depositary, a properly completed and presented written or facsimile notice of withdrawal or a Request Message is effective immediately upon receipt thereof even if physical release is not yet effected. The term "Request Message" means a message transmitted by DTC and received by the Depositary, which states that DTC has received a request for withdrawal from a DTC participant and identifies the Original Notes to which such request relates. A withdrawal of Original Notes and a revocation of Consents and a Power of Attorney can only be accomplished in accordance with the foregoing procedures. ALL QUESTIONS AS TO THE FORM AND VALIDITY (INCLUDING TIME OF RECEIPT) OF NOTICES OF WITHDRAWAL AND REVOCATION OF CONSENTS AND A POWER OF ATTORNEY, INCLUDING A REQUEST MESSAGE, WILL BE DETERMINED BY SOUTHWEST, IN SOUTHWEST'S SOLE DISCRETION (WHICH DETERMINATION WILL BE FINAL AND BINDING). NONE OF SOUTHWEST, THE DEPOSITARY, THE NEW TRUSTEE OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL OR REVOCATION OF CONSENTS AND POWERS OF ATTORNEY, INCLUDING A REQUEST MESSAGE, OR INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION. Any Original Notes properly withdrawn, and with respect to which a Consent and a Power of Attorney has been properly revoked, will be deemed to be not validly tendered for purposes of the Offer. Withdrawn Original Notes may be retendered by following one of the procedures described under "Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney" at any time at or prior to 5:00 p.m., New York, New York time, on the Expiration Date. There are no appraisal or other similar statutory rights available to the Holders of Original Notes in connection with the Offer or the Solicitation. Depositary Wilmington Trust Company has been appointed as Depositary for the Offer and the Consent Solicitation. The Consent and Letter of Transmittal and all correspondence in connection with the Offer and the Consent Solicitation should be sent or delivered by each Holder or a beneficial owner's broker, dealer, commercial bank, trust company or other nominee to the Depositary at the appropriate address or telecopier number set forth on the back page of this Statement. Any Holder or beneficial owner that has questions concerning tender, Consent or a Power of Attorney procedures or whose Original Notes have been mutilated, lost, stolen or destroyed should contact the Depositary at the address or telecopier number set forth on the back page of this Statement. Requests for assistance or additional copies of this Statement, the Consent and Letter of Transmittal, the Note Exchange Agreement, the Collateral Trust Agreement, the Stockholders Agreement or the Notice of Guaranteed Delivery may be directed to the Depositary at the addresses or telephone numbers set forth on the back page of this Statement. Holders of Original Notes may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer or the Consent Solicitation. Southwest will pay the Depositary reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. Southwest will also reimburse brokers and dealers for customary mailing and handling expenses incurred by them in forwarding copies of this Statement and related documents to the beneficial owners of Original Notes. COMPANY CONTACT J. Steven Person, Executive Vice President of Southwest, is available to answer questions in connection with the Exchange and the Consent Solicitation. You may write to him at 407 N. Big Spring Street, Midland, Texas 79701 or you may telephone him at 915-686-9927. 67 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes certain federal income tax consequences likely to result from the Exchange and adoption of the Proposed Waivers and Amendments under existing federal income tax law, which is subject to change, possibly retroactively. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Holder in light of such Holder's personal investment circumstances or to certain types of Holders subject to special treatment under the federal income tax laws (for example, financial institutions, insurance companies, tax-exempt organizations and foreign taxpayers) and it does not discuss any aspects of state, local or foreign tax laws. Holders are advised to consult their tax advisors as to the specific tax consequences of the Exchange and adoption of the Proposed Waivers and Amendments, including the application and effect of federal, state, local and foreign income and other tax laws. The exchange of the Original Notes for the New Notes and the Class A Common Shares as currently structured most likely will constitute a significant modification of the Original Notes as contemplated under Treasury Regulations relating to the modification of the terms of a debt instrument (the "Modification Regulations"). Consequently, a holder of Original Notes may be required to recognize gain or loss upon receipt of the New Notes and the Class A Common Shares for the Original Notes. A significant modification would affect the adjusted tax basis and holding period in the New Notes and the Class A Common Shares and may not relate back to the Original Notes' basis and holding period prior to the exchange. The issuance of the Class A Common Shares may be treated as changing the yield of the Original Notes. Under the Modification Regulations, a modification of a debt instrument that changes the annual yield of the debt instrument constitutes a significant modification if the annual yield of the debt instrument after the modification, measured from the date of the agreement to such modification, varies from the annual yield on the original unmodified debt instrument by more than the greater of 0.25 percent or 5 percent of the annual yield of the unmodified instrument (the "Yield Change Threshold"). Calculation of such yield is to take into account both accrued and unpaid interest on the debt instrument at such date and the payment of any consideration given in exchange for consent to the modifications, which in the case at hand could include the value of the Class A Common Shares. Southwest has not determined whether the issuance of the Class A Common Shares will change the yield on the Original Notes by more than the Yield Change Threshold, and accordingly, does not opine as to whether the Class A Common Shares will result in a significant modification of the Original Notes for federal income tax purposes. Southwest does not make any representation as to the fair market value of the Class A Common Shares and all Holders of Original Notes should consult their advisors regarding the valuation of the Class A Common Shares and whether their issuance should be treated as a significant modification of the Original Notes for federal income tax purposes. There can be no assurance as to whether the Exchange constitutes a significant modification. The Holder of Original Notes will recognize ordinary income equal to the fair market value of the New Notes and Class A Common Shares it receives in connection with the offer to the extent of additional value received in the Exchange exceeds the value of the Original Notes. Further, Holders who do not tender their Original Notes may nevertheless be deemed to recognize gain or loss in the Exchange if the Proposed Waivers and Amendments constitute a significant modification to the Original Notes. Holders who do not tender their Original Notes are encouraged to consult their tax advisers to determine the tax consequences of not tendering their Original Notes. THE FOREGOING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF ORIGINAL NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER EITHER OF TENDERING THE ORIGINAL NOTES OR OF RETAINING THE ORIGINAL NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. FEES AND EXPENSES Southwest will, upon request, reimburse brokers, dealers and commercial banks for customary mailing and handling expenses incurred by such persons in forwarding any of the materials with respect to the Exchange and 68 Consent Solicitation to the beneficial owners of Original Notes held by any such person or nominee or in a fiduciary capacity. No person is being paid or given, directly or indirectly, any commission or other remuneration for soliciting the Exchange and the Consents. Friedman, Billings, Ramsey & Co., Inc. ("FBR") will be paid a fee of $1,250,000 for its financial advisory services in connection with the Exchange. Except as aforesaid, no broker, dealer, commercial bank or trust company has been authorized to act as the agent of Southwest for purposes of the Exchange and the Consent Solicitation. MISCELLANEOUS Southwest is not aware of any jurisdiction where the making of the Exchange and the Consent Solicitation is not in compliance with the laws of such jurisdiction. If Southwest becomes aware of any jurisdiction where the making of the Exchange and the Consent Solicitation would not be in compliance with such laws, Southwest will make a good faith effort to comply with any such laws or seek to have such law declared inapplicable to the Exchange and the Consent Solicitation. If, after such good faith effort, Southwest cannot comply with any such applicable laws, the Exchange and the Consent Solicitation will not be made to (nor Original Notes accepted or consents accepted, from or on behalf of) Holders residing in such jurisdictions. 69 March 4, 2002 Manually signed facsimile copies of the Consent and Letter of Transmittal will be accepted. The Consent and Letter of Transmittal, Original Notes and the Note Exchange Agreement and any other required documents should be sent by each Holder or his broker, dealer commercial bank, trust company or nominee to the Depositary at the address set forth below: The Depositary for the Offer and the Solicitation is: Wilmington Trust Company By Hand/Overnight Courier: By Mail: Wilmington Trust Company Wilmington Trust Company Corporate Trust Reorg Services DC-1615 Reorg Services Rodney Square North P.O. Box 8861 1100 North Market Street Wilmington, Delaware 19899-8861 Wilmington, Delaware 19890-1615 By facsimile: (302) 636-4145 Call (302) 636-6469 for Confirmation Any questions or requests for assistance with respect to procedural matters in connection with the Offer or additional copies of this Statement, any Exhibit to this Statement, the Collateral Trust Agreement, the Term Sheet for the Senior Credit Agreement or the Consent and Letter of Transmittal may be directed to the Depositary at the telephone numbers and locations listed above. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer and the Solicitation. EX-99.(T3E2) 7 dex99t3e2.txt CONSENT AND LETTER OF TRANSMITTAL EXHIBIT T3E(2) CONSENT AND LETTER OF TRANSMITTAL To Tender and To Give Consent in Respect of 10 1/2% Senior Notes Due 2004 of SOUTHWEST ROYALTIES, INC. Pursuant to the Offer to Exchange and Consent Solicitation Statement Dated March 4, 2002 - -------------------------------------------------------------------------------- THIS OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002 OR SUCH OTHER DATE AS MAY BE ANNOUNCED PURSUANT TO THE TERMS HEREOF (THE "EXPIRATION DATE"). TO BE CONSIDERED FOR ACCEPTANCE, 10 1/2% SENIOR NOTES DUE 2004 ("ORIGINAL NOTES") MUST BE VALIDLY TENDERED BY NO LATER THAN 5:00 P.M., NEW YORK, NEW YORK TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- The Depositary for the Offer and the Consent Solicitation is: WILMINGTON TRUST COMPANY By Hand/Overnight Courier: By Registered or Certified Mail: Wilmington Trust Company Wilmington Trust Company Corporate Trust Reorg Services DC-1615 Reorg Services Rodney Square North P.O. Box 8861 1100 North Market Street Wilmington, Delaware 19899-8861 Wilmington, Delaware 19890-1615 Call (302) 636-6469 for Confirmation By facsimile: (302) 636-4145 Call (302) 636-6469 for Confirmation CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN HAVE THE MEANING GIVEN TO THEM IN THE OFFER TO EXCHANGE AND CONSENT SOLICITATION (THE "STATEMENT"). The Offer is subject to certain conditions, including (i) receipt of the tender of at least $115 million of the outstanding principal amount of Original Notes for exchange in accordance with the offer ("Minimum Tender") (unless waived by the unanimous consent of those Participating Holders which are parties to the Participation Agreement), (ii) receipt of the Requisite Consent to the Proposed Waivers and Amendments and, if any Original Notes remain outstanding, the execution of and delivery of the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement, (iii) the execution and delivery of the Senior Credit Agreement, the Collateral Trust and Intercreditor Agreement (the "Collateral Trust Agreement"), and all other security documents with respect to the Indenture, the Senior Credit Agreement and the Collateral Trust Agreement by the parties thereto, (iv) the declaration of effectiveness by the SEC of Southwest's T-3 filed with respect to the New Indenture, (v) the filing of the Amended and Restated Certificate of Incorporation of Southwest with the Secretary of State of Delaware, (vi) the execution of the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement by the tendering Holders, pursuant to a Power of Attorney to be granted to the Depositary on behalf of the exchanging Holders, and (vii) the cancellation of a $1.6 million note issued by H.H. Wommack, III, Southwest's Chief Executive Officer and President, to SRH in exchange for 123,710 shares of SRH common stock held by Mr. Wommack. Holders of Original Notes may not deliver Consents with respect to the Proposed Waivers and Amendments without tendering their Original Notes. Conversely, Holders may not tender their Original Notes without delivering the Consents with respect to the Proposed Waivers and Amendments. Therefore, the tender of an Original Note will be deemed to constitute the giving of Consent. The Proposed Waivers and Amendments will not become effective if the Offer and the Consent Solicitation are withdrawn or the Exchange is otherwise not completed. If the Proposed Waivers and Amendments become effective, they will apply to all Original Notes, if any, that remain outstanding, and each Holder of Original Notes that has not properly tendered for exchange Original Notes will be bound by the Proposed Waivers and Amendments, regardless of whether that Holder consented to the Proposed Waivers and Amendments. Until accepted by Southwest in accordance with the terms set forth herein and in the Statement, however, the Offer may be amended, extended, rescinded or terminated by Southwest for any reason. If the Minimum Tender is not obtained or waived, if for any reason the Proposed Waivers and Amendments do not become effective or if any other condition to the offer are not satisfied, no Original Notes may be accepted for exchange and any tendered Original Notes will be returned. The execution of this Consent and Letter of Transmittal ("Consent and Letter of Transmittal") will also confer upon Wilmington Trust Company, as depositary ("Depositary"), a power of attorney to execute any instrument which Southwest may deem necessary or advisable to accomplish the purpose of the Offer now or in the future, including, but not limited to, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement (the "Power of Attorney"). Once executed on your behalf by the Depositary pursuant to the Power of Attorney contained herein and executed by Southwest, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement will constitute a legally-binding obligation on your part and Southwest's part to complete the Exchange. Original Notes tendered may be withdrawn at any time prior to 5:00 p.m., New York, New York time, on the Expiration Date, but not thereafter, unless Southwest has failed to deliver the Exchange Consideration to the Depositary on the Exchange Date. The revocation of a Holder's tender, Consent and Power of Attorney will be effective only by means of a signed writing 2 specifically stating such withdrawing Holder's intention to revoke its tender, Consent and Power of Attorney. Original Notes may be tendered and withdrawn only as provided for herein and in the Statement. Delivery of this Consent and Letter of Transmittal to an address or facsimile number other than that of the Depositary as set forth above will not constitute a valid delivery. Any questions and requests for assistance with respect to procedural matters in connection with the Offer may be directed to the Depositary at its addresses and telephone numbers set forth on the front page of this Consent and Letter of Transmittal. Questions may also be directed to Southwest contact, J. Steven Person, Executive Vice President of Southwest, by writing to 407 N. Big Spring Street, Midland, Texas 79701, or by phone at (915) 686-9927. NEITHER SOUTHWEST, SOUTHWEST ROYALTIES HOLDINGS, INC. ("SRH"), ANY GUARANTOR, THEIR RESPECTIVE BOARDS OF DIRECTORS, THE DEPOSITARY, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE NOR ANY OTHER PERSON HAS AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON BEHALF OF SOUTHWEST, SRH, ANY GUARANTOR, THE DEPOSITARY, THE ORIGINAL TRUSTEE OR THE NEW TRUSTEE AS TO WHETHER HOLDERS SHOULD PARTICIPATE OR REFRAIN FROM PARTICIPATING IN THE OFFER. NEITHER SOUTHWEST, SRH, ANY GUARANTOR, THEIR RESPECTIVE BOARDS OF DIRECTORS, THE DEPOSITARY, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE NOR ANY OTHER PERSON HAS AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER ON BEHALF OF SOUTHWEST, ANY GUARANTOR, THE DEPOSITARY, THE ORIGINAL TRUSTEE OR THE NEW TRUSTEE, OTHER THAN THOSE CONTAINED IN THIS OFFER. YOU ARE ADVISED THAT YOU MAY NOT RELY ON ANY SUCH RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATION, IF GIVEN OR MADE, AS HAVING BEEN AUTHORIZED BY SOUTHWEST, SRH, ANY GUARANTOR, THE DEPOSITARY, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE OR ANY OTHER PERSON. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS CONSENT AND LETTER OF TRANSMITTAL IS COMPLETED, OR ANY OTHER ACTION IS TAKEN IN CONNECTION HEREWITH. Physical Holders and DTC Participants who wish to be eligible to receive the Exchange Consideration pursuant to the Offer must (i) deliver Original Notes to the Depositary or, in lieu of tendering Original Notes in physical form, electronically tender their Original Notes through the Depositary Trust Clearing Corporation's ("DTC") Automated Tender Offer Program ("ATOP"), for which the transaction will be eligible, pursuant to the book-entry delivery procedures set forth in the Statement, (ii) complete and sign this Consent and Letter of Transmittal (or a facsimile copy thereof) in accordance with instructions herein, have such Holder's signature thereon guaranteed by an Eligible Institution if required by Instruction 1 of this Consent and Letter of Transmittal and deliver such manually signed Consent and Letter of Transmittal (or a manually signed facsimile copy thereof) to the Depositary prior to the 3 Expiration Time and (iii) complete and deliver to the Depositary any other document required by this Consent and Letter of Transmittal or the Statement. Although a DTC Participant may tender Original Notes electronically through ATOP, DTC participants still must physically complete, sign and deliver the Consent and Letter of Transmittal to the Depositary. Consents and Powers of Attorney cannot be delivered through ATOP. A beneficial owner whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Original Notes, deliver a Consent and confer a Power of Attorney should contact such registered Holder promptly and instruct such party to tender Original Notes, deliver a Consent and confer a Power of Attorney to the Depositary on such beneficial owner's behalf. Beneficial owners may only accept the Offer by instructing such registered Holder pursuant to an instruction letter or similar communication to tender the Original Notes and deliver the corresponding Consents and Power of Attorney on behalf of such beneficial owner. Moreover, the beneficial owner must confer upon such registered Holder a power of attorney, which expressly appoints such party the true and lawful agent and attorney-in-fact of the beneficial owner and grants such party the power to confer upon the Depositary the Power of Attorney as required in connection with the Offer. Once a beneficial owner instructs such registered Holder to tender the Original Notes, deliver a Consent and confer a Power of Attorney, such registered Holder must follow the procedures for tendering Original Notes by Physical Holders or DTC Participants set forth herein and in the Statement. The broker, dealer, commercial bank, trust company or other nominee must be properly instructed by the beneficial owner and then must validly tender the Original Notes pursuant to the instructions set forth in this Consent and Letter of Transmittal and the Statement in order to accept the Offer. BENEFICIAL OWNERS CANNOT USE THIS CONSENT AND LETTER OF TRANSMITTAL TO TENDER ORIGINAL NOTES HELD ON BEHALF OF SUCH BENEFICIAL OWNERS. A LETTER OF INSTRUCTION WHICH INCLUDES A POWER OF ATTORNEY IS CONTAINED IN THE SOLICITATION MATERIALS PROVIDED ALONG WITH THIS OFFER AND MAY BE USED BY BENEFICIAL OWNERS TO INSTRUCT THE REGISTERED HOLDER TO ACCEPT THE OFFER ON BEHALF OF THE BENEFICIAL OWNER. For Physical Holders and DTC Participants to validly tender Original Notes, deliver Consents and confer a Power of Attorney, Original Notes (in physical form or through book-entry delivery procedures), a completed and signed Consent and Letter of Transmittal and all other required documents must be delivered to Wilmington Trust Company, as Depositary, at or prior to 5:00 p.m., New York, New York time, on the Expiration Date. Tenders may not be withdrawn at any time after 5:00 p.m., New York, New York time, on the Expiration Date, unless Southwest has failed to pay the Exchange Consideration to the Depositary on the Exchange Date. This Consent and Letter of Transmittal must be completed and delivered to the Depositary by each Physical Holder or DTC Participant or its attorney-in-fact that tenders Original Notes in the Offer. Even if a DTC Participant tenders Original Notes via DTC's ATOP, such DTC participant still must complete and deliver this Consent and Letter of Transmittal to the Depositary. Neither the delivery of any document nor the transmittal of any information to 4 DTC via ATOP or otherwise, however, shall constitute delivery to the Depositary, unless and until actually received by the Depositary. The manner and all aspects of tender and delivery are the responsibility of and at the risk of the Holder. SOUTHWEST RESERVES THE RIGHT TO WITHDRAW THE OFFER AND THE CONSENT SOLICITATION FOR ANY REASON UNTIL THE CLOSING OF THE EXCHANGE. IN THE EVENT THAT THE OFFER AND THE CONSENT SOLICITATION ARE WITHDRAWN OR THE EXCHANGE IS OTHERWISE NOT COMPLETED, OTHERWISE VALIDLY TENDERED ORIGINAL NOTES WILL NOT BE EXCHANGED FOR THE EXCHANGE CONSIDERATION AND THE PROPOSED WAIVERS AND AMENDMENTS WILL NOT BE EFFECTIVE. THE OFFER AND CONSENT SOLICITATION ARE MADE UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN AND IN THE STATEMENT AND THE EXHIBITS ATTACHED THERETO. HOLDERS SHOULD CAREFULLY REVIEW THE INFORMATION SET FORTH THEREIN AND HEREIN. Each Physical Holder or DTC Participant that shall, or whose attorney-in-fact shall, have completed, executed and delivered this Consent and Letter of Transmittal to the Depositary agrees to be bound by the terms of this Consent and Letter of Transmittal, the Statement, the Note Exchange Agreement, the Stockholders Agreement, the Collateral Trust Agreement and any other document signed by the Depositary on behalf of the tendering Holder pursuant to the Power of Attorney. Each Holder seeking to tender Original Notes, deliver Consents and confer the Power of Attorney in connection with this Offer is advised to seek assistance from its broker, dealer, commercial bank, trust company or other nominee in completing this form. The instructions included with this Consent and Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Statement, any exhibit thereto, and this Consent and Letter of Transmittal may be directed to the Depositary, whose addresses and telephone numbers appear on the back cover of this Consent and Letter of Transmittal. See Instruction 11 below. 5 MANNER OF TENDER [ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE ENCLOSED HEREWITH. [ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE DEPOSITARY WITH DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ____________________________________________ Participant Number with DTC: ______________________________________________ VOI Number: _______________________________________________________________ If a Physical Holder or DTC Participant desires to tender Original Notes pursuant to the Offer, deliver a Consent pursuant to the Consent Solicitation and confer upon the Depositary the Power of Attorney and time will not permit (i) certificates representing such Original Notes to reach the Depositary or the procedures for book-entry transfer to be completed, (ii) this Consent and Letter of Transmittal to reach the Depositary and/or (iii) all other required documents to reach the Depositary, in each case, at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, such Physical Holder or DTC Participant may nevertheless tender Original Notes, deliver Consents and confer the Power of Attorney in respect of such Original Notes in accordance with the guaranteed delivery procedures set forth in the Statement under the caption "Procedures for Tendering Original Notes -- Guaranteed Delivery." See Instruction 1 below. [ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): __________________________________________ Window Ticket No. (if any): _______________________________________________ Date of Execution of Notice of Guaranteed Delivery: _______________________ Name of Eligible Institution that Guaranteed Delivery: ____________________ Check if using DTC: [ ] Participant Number with DTC: ______________________________________________ VOI Number: _______________________________________________________________ List below the Original Notes to which this Consent and Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and principal amounts on a separately executed schedule and affix the schedule to this Consent and Letter of Transmittal. 6 Southwest will not accept partial tenders of Original Notes. In order to participate in the Exchange, Holders must tender the full amount of its Original Notes. ORIGINAL NOTES TENDERED AND CONSENTS GIVEN
- ----------------------------------------------------------------------------------------------- Name(s) and Address(es ) of Physical Holder(s) or Name of DTC Participant and Participant's Account Number in which Principal Amount Original Notes are Held. (Please fill in, if Tendered (and with blank, exactly as name(s) appear(s) on Certificate Respect to Which Certificate(s)). Number(s)* Consent is Given)** - ----------------------------------------------------------------------------------------------- $ - ----------------------------------------------------------------------------------------------- $ - ----------------------------------------------------------------------------------------------- $ - ----------------------------------------------------------------------------------------------- $ - ----------------------------------------------------------------------------------------------- Total $ Principal Amount of Original Notes - -----------------------------------------------------------------------------------------------
* Need not be completed by DTC Participants tendering by book-entry transfer. ** In order to participate in the Exchange, Holders must tender the full amount of its Original Notes. Thus, a Physical Holder or DTC Participant will be deemed to have tendered and consented with respect to the entire aggregate principal amount represented by the Original Notes indicated in the column labeled "Principal Amount Tendered (and with Respect to Which Consent is Given)." Consents shall be deemed to be given with respect to all Original Notes tendered. See Instruction 3, "No Partial Tenders and Consents." 7 NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. LADIES AND GENTLEMEN: By execution hereof, the undersigned acknowledges receipt of the Offer to Exchange and Consent Solicitation Statement dated March 4, 2002, including exhibits thereto (the "Statement") of Southwest Royalties, Inc., a Delaware corporation ("Southwest"), with respect to its 10 1/2% Senior Notes Due 2004 (the "Original Notes"), and this Consent and Letter of Transmittal and the instructions hereto (the "Consent and Letter of Transmittal" and, together with the Statement, the "Offer"), which together constitute (i) Southwest's offer to exchange its outstanding Original Notes for an aggregate of $60 million principal amount of Senior Secured Notes Due 2004 ("New Notes"), which will bear interest at the rate of 10 1/2% per annum beginning February 1, 2002 (as if the New Notes were issued on such date) through December 31, 2002, 11 1/2% per annum from January 1, 2003 through December 31, 2003 and 12 1/2% thereafter until the maturity date of June 30, 2004 pursuant to an indenture with Wilmington Trust Company as trustee (the "New Trustee"), and an aggregate of 900,000 shares of Southwest's Class A Common Stock, par value $.01 per share (the "Class A Common Shares" and, together with the New Notes, the "Exchange Consideration"), and (ii) Southwest's consent solicitation (the "Consent Solicitation") of related consents (the "Consents") from registered holders of Original Notes to the Proposed Waivers and Amendments to the Indenture (the "Original Indenture"), dated as of October 14, 1997, among Southwest, its parent guarantor, the subsidiary guarantors parties thereto and State Street Bank and Trust Company, as trustee (the "Original Trustee"), and the Pledge Agreement, dated October 14, 1997, by and among Southwest, SRH, and the Original Trustee (the "Pledge Agreement"), pursuant to which the Original Notes were issued. The provisions of the Proposed Waivers and Amendments to the Indenture and the Pledge Agreement will only apply to the Original Notes. Additional terms relating to the Proposed Waivers and Amendments and terms relating to the New Notes and the Class A Common Shares are described in greater detail in the Statement. References herein to "Holders" shall include all holders of Original Notes. Upon the terms and subject to the conditions of the Offer, the undersigned hereby: (i) tenders to Southwest the Original Notes in the principal amount indicated in the table above entitled Original Notes Tendered and Consents Given (the "Tendered Amount"), (ii) gives its Consent with respect to such tendered Original Notes to the Proposed Waivers and Amendments and to the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement, each substantially in the form attached as an exhibit to the Statement (hereby revoking any previously submitted withdrawal or revocation), (iii) confers upon Wilmington Trust Company, as Depositary ("Depositary"), a Power of Attorney to execute any instruments which Southwest may deem necessary or advisable to accomplish the purpose of the Offer (the "Power of Attorney") and (iv) authorizes and instructs the Original Trustee to execute and deliver on the undersigned's behalf the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement. Subject to, and effective upon, the Exchange of any Original Notes tendered herewith in accordance with the terms and subject to the conditions of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, Southwest, all right, title and interest in and 8 to the tendered Original Notes so accepted and exchanged, the undersigned consents to the Proposed Waivers and Amendments and the undersigned also agrees to the terms of the Note Exchange Agreement, the Stockholders Agreement and any other document signed by the Depositary on behalf of the undersigned pursuant to the Power of Attorney. The undersigned hereby irrevocably constitutes and appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Depositary also acts as the agent of Southwest) with respect to such Original Notes, with full powers of substitution and revocation (i) to present such Original Notes and all evidences of transfer and authenticity to, or transfer ownership of, such Original Notes on the account books maintained by DTC to, or upon the order of, Southwest, (ii) to present such Original Notes for transfer of ownership on the books of the relevant security register, (iii) to receive all benefits and otherwise exercise all rights of beneficial ownership of such Original Notes, (iv) to deliver to Southwest and the Original Trustee this Consent and Letter of Transmittal as evidence of the undersigned's Consent to the Proposed Waivers and Amendments and (v) to execute any instruments which Southwest may deem necessary and advisable to accomplish the purposes of the Exchange Offer now or in the future, including, but not limited to, the Note Exchange Agreement, the Collateral Trust and Intercreditor Agreement (the "Collateral Trust Agreement") and the Stockholders Agreement all in accordance with the terms of and conditions to the Offer and the Consent Solicitation as described in the Statement. If the undersigned is not the registered Holder of the Original Notes listed in the table above entitled Original Notes Tendered and Consents Given, then the Original Notes must be endorsed or accompanied by an appropriate written instrument or instruments of transfer executed exactly as the name or names of the Physical Holder or Physical Holders appear on the Original Notes, with the signature(s) on the Original Notes or instruments of transfer guaranteed as provided below, and this Consent and Letter of Transmittal must be executed and delivered either by the Physical Holder or Physical Holders, or by the tendering person pursuant to a valid power of attorney signed by the Physical Holder or Physical Holders, which signature must, in either case, be guaranteed as provided below, since only Physical Holders or their attorneys-in-fact are entitled to deliver Consents to the Proposed Waivers and Amendments and confer a Power of Attorney. Assuming the consummation of the Offer, Southwest intends to execute the Supplemental Indenture, the Pledge Agreement Waiver, the Amended and Restated Pledge Agreement, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement and to file the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on the Exchange Date, and to thereafter proceed with the Offer and Exchange in accordance with its terms and conditions. The undersigned understands that tenders of Original Notes may be withdrawn as provided for in the Statement and herein at any time at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, and not thereafter, unless Southwest has failed to issue the Exchange Consideration on the Exchange Date, which Exchange Consideration will be sent to the Depositary for delivery to the exchanging Holders. THE UNDERSIGNED UNDERSTANDS THAT TENDERED ORIGINAL NOTES MAY BE WITHDRAWN ONLY IN ACCORDANCE WITH THE PROCEDURES IN THE STATEMENT AND HEREIN AND THAT, EXCEPT AS PROVIDED IN THE NEXT PARAGRAPH, TENDERED ORIGINAL NOTES MAY NOT BE WITHDRAWN IN WHOLE OR IN PART AFTER 5:00 P.M., NEW YORK, NEW YORK TIME, ON THE EXPIRATION DATE, UNLESS SOUTHWEST HAS 9 FAILED TO DELIVER THE EXCHANGE CONSIDERATION TO THE DEPOSITARY ON THE EXCHANGE DATE. In the event of a termination of the Offer, Original Notes tendered pursuant to the Offer will be returned to the tendering Holder promptly (or, in the case of Original Notes tendered by book-entry transfer, such Original Notes will be credited to the account maintained at DTC from which such Original Notes were delivered). If the Minimum Tender is not obtained or waived or certain other conditions to the Offer are not satisfied, the Supplemental Indenture, the Pledge Agreement Waiver and the Amended and Restated Pledge Agreement will not become operative and the Offer will be terminated and the Proposed Waivers and Amendments, Note Exchange Agreement, Collateral Trust Agreement and Stockholders Agreement shall be void and of no effect. If Southwest makes a change in the terms of the Offer or the information concerning the Offer or waives a condition of the Offer (other than the condition of Consent to the Proposed Waivers and Amendments, which Southwest cannot waive), in each case which would have a substantive effect upon the rights of the Holders, Southwest will disseminate additional informational materials and will ensure that the Offer remains open for a minimum of five (5) business days and a maximum of ten (10) business days (such period of time to be determined by Southwest based on the materiality and significance of the term or information) from the date such change in terms is sent to the Holders. The undersigned understands that for a withdrawal of a tender of Original Notes and a concurrent revocation of Consents and Powers of Attorney to be effective, a written, telegraphic or facsimile transmission notice of withdrawal or a Request Message (as defined below) must be timely received by the Depositary at its address set forth on the front cover of this Consent and Letter of Transmittal at or prior to 5:00 p.m., New York, New York time, on the Expiration Date or on a business day after the Exchange Date if Southwest has failed to pay the Exchange Consideration to the Depositary on the Exchange Date. Any such notice of withdrawal and revocation must (i) specify the name of the person who tendered the Original Notes to be withdrawn and delivered the revoked Consents and Power of Attorney, (ii) contain the description of the Original Notes to be withdrawn and identify the certificate number or numbers shown on the particular certificates evidencing such Original Notes (unless such Notes were tendered by book-entry transfer) and the aggregate principal amount represented by such Original Notes, (iii) contain a statement that such Holder is withdrawing its signature from any documents signed on its behalf pursuant to the Power of Attorney, its tender of Original Notes and delivery of Consents, and (iv) be signed by the Holder of such Original Notes in the same manner as the original signature on the Consent and Letter of Transmittal by which such Original Notes were tendered (including any required signature guarantees) or be accompanied by (x) documents of transfer sufficient to have the Original Trustee register the transfer of the Original Notes into the name of the person withdrawing such Original Notes and (y) a properly completed irrevocable proxy that authorized such person to effect such revocation on behalf of such Holder. In lieu of submitting a written, telegraphic or facsimile transmission notice of withdrawal or revocation, DTC participants may electronically transmit a request for withdrawal or revocation to DTC. DTC will then edit the request and send a Request Message to the Depositary. If the Original Notes to be withdrawn have been delivered or otherwise identified to the Depositary, a properly completed and presented written or facsimile notice of withdrawal or a Request Message is effective immediately upon receipt thereof even if physical release is not yet effected. The term "Request Message" means a message transmitted by DTC and received by the 10 Depositary, which states that DTC has received a request for withdrawal from a DTC Participant and identifies the Original Notes to which such request relates. A withdrawal of Original Notes and a revocation of Consents and Power of Attorney can only be accomplished in accordance with the foregoing procedures. The undersigned understands that tenders of Original Notes and delivery of Consents and Power of Attorney pursuant to any of the procedures described in the Statement and in the instructions hereto (and subsequent acceptance by Southwest, in the case of tenders, or upon the effectiveness of the Supplemental Indenture, the Pledge Agreement Waiver, the Amended and Restated Pledge Agreement, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement, in the case of Consents or Power of Attorney) will constitute a binding agreement between the undersigned and Southwest in accordance with the terms and subject to the conditions set forth in the Statement, the Note Exchange Agreement, the Collateral Trust Agreement, the Stockholders Agreement, and, if applicable, the Notice of Guaranteed Delivery, except in the event of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to creditors' rights and generally principles of equity. The undersigned hereby represents that the undersigned has full power and authority to tender, exchange and transfer the Original Notes tendered hereby, to give the Consent contained herein and to confer the Power of Attorney contained herein, and that when such tendered Original Notes are accepted for exchange by Southwest, Southwest will acquire good title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim or right. The undersigned will, upon request, execute and deliver any additional documents deemed by the Depositary, the New Trustee, the Original Trustee or by Southwest to be necessary or desirable to complete the exchange, to transfer any Original Notes tendered hereby or to perfect the undersigned's Consent to the Proposed Waivers and Amendments or the Power of Attorney. THE UNDERSIGNED HEREBY REPRESENTS THAT IS THE UNDERSIGNED IN A REGISTERED HOLDER OR DTC PARTICIPANT THAT IS TENDERING THE ORIGINAL NOTES, DELIVERING THE CONSENTS AND CONFERRING THE POWER OF ATTORNEY ON BEHALF OF A BENEFICIAL OWNER, THE UNDERSIGNED HAS IN ITS POSSESSION A POWER OF ATTORNEY AND EXECUTED INSTRUCTION LETTER FROM THE BENEFICIAL OWNER INSTRUCTING SUCH HOLDER TO ACCEPT THE OFFER. For purposes of the Offer, the undersigned understands that validly tendered Original Notes (or defectively tendered Original Notes with respect to which Southwest has waived, or has caused to be waived, such defect) will be deemed to have been accepted for exchange, if, as and when Southwest gives oral (promptly confirmed in writing) or written notice thereof to the Depositary. For purposes of the Consent Solicitation, Consents received by the Depositary will be deemed to have been accepted if, as and when Southwest, SRH, the Guarantors and the Original Trustee execute the Supplemental Indenture, Pledge Agreement Waiver and Amended and Restated Pledge Agreement, which will be on the Exchange Date. For purposes of the Power of Attorney, documents signed on behalf of Holders pursuant to the Power of Attorney conferred upon the Depositary will be deemed to be effective if, as and when Southwest, SRH, the Guarantors, the lenders, the Original Trustee, the New Trustee or other necessary party execute the documents, which will be on the Exchange Date. 11 All authority conferred or agreed to be conferred by this Consent and Letter of Transmittal shall not be affected by, and shall survive, the death or incapacity of the undersigned and every obligation of the undersigned under this Consent and Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives. THE METHOD OF DELIVERY OF ORIGINAL NOTES, CONSENTS, POWER OF ATTORNEY AND/OR ANY OTHER REQUIRED DOCUMENTS, INCLUDING TENDER OF ORIGINAL NOTES THROUGH DTC, AND ANY SIGNATURE GUARANTEES, AND ALL OTHER ASPECTS OF ANY OF THE PROCEDURES, ARE AT THE ELECTION AND RISK OF THE HOLDER TENDERING ORIGINAL NOTES, DELIVERING THE CONSENT, CONFERRING THE POWER OF ATTORNEY AND, EXCEPT AS OTHERWISE PROVIDED IN THIS CONSENT AND LETTER OF TRANSMITTAL, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. WITHOUT LIMITING THE FOREGOING, IF ANY DELIVERY IS TO BE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE DEPOSITARY ON OR PRIOR TO SUCH DATE. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tendered Original Notes, delivered Consents and granted Powers of Attorney pursuant to any of the procedures described herein and in the Statement will be determined by Southwest, in Southwest's sole discretion (which determination will be final and binding). Southwest reserves the absolute right to reject any or all tenders of any Original Notes, deliveries of any Consents and grants of any Powers of Attorney determined by it not to be in proper form or if the acceptance for exchange of such Original Notes, Consents and Power of Attorney may, in the opinion of Southwest's counsel, be unlawful. Southwest also reserves the absolute right, in its sole discretion, to waive any of the conditions of the Offer (other than the Minimum Tender condition and the condition regarding Requisite Consent) or any defect or irregularity in any tender with respect to Original Notes or delivery with respect to a Consent and Power of Attorney of any particular Holder, whether or not similar defects or irregularities are waived in the case of other Holders. Southwest's interpretation of the terms and conditions of the Offer (including this Consent and Letter of Transmittal and the Instructions hereto) will be final and binding. None of Southwest, the Depositary, the New Trustee or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. If Southwest waives its right to reject a defective tender of Original Notes, the tendering Holder will be entitled to the applicable Exchange Consideration. Unless otherwise indicated herein under "Special Issuance Instructions," the undersigned hereby requests that any New Notes and Class A Common Shares to be issued in exchange for Original Notes tendered by the undersigned be issued in the name(s) of, and delivered to, the undersigned (and in the case of Original Notes tendered by book-entry transfer, by credit to DTC). Similarly, unless otherwise indicated herein under "Special Delivery Instructions," the undersigned hereby requests that any New Notes and Class A Common Shares to be issued in exchange for Original Notes be delivered to the undersigned at the address(es) shown above. In 12 the event that the "Special Issuance Instructions" box or the "Special Delivery Instructions" box is, or both are, completed, the undersigned hereby requests that any New Notes and Class A Common Shares to be issued in exchange for Original Notes be delivered to the person(s) at the address(es) so indicated, as applicable. The undersigned recognizes that Southwest has no obligation pursuant to the "Special Issuance Instructions" box or "Special Delivery Instructions" box to transfer any Original Notes from the name of the registered Holder(s) thereof if Southwest does not accept for exchange any of the principal amount of such Original Notes so tendered. ---------------------------------------------------------------------------- PLEASE SIGN BELOW TO BE COMPLETED BY ALL PHYSICAL HOLDERS AND DTC PARTICIPANTS OR THEIR RESPECTIVE ATTORNEYS-IN-FACT TENDERING ORIGINAL NOTES, DELIVERING CONSENTS AND CONFERRING A POWER OF ATTORNEY REGARDLESS OF WHETHER ORIGINAL NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH OR ARE TENDERED ELECTRONICALLY VIA DTC'S ATOP. THE COMPLETION, EXECUTION AND DELIVERY OF THIS CONSENT AND LETTER OF TRANSMITTAL WILL CONSTITUTE THE UNDERSIGNED HOLDER'S CONSENT TO THE PROPOSED WAIVERS AND AMENDMENTS AND WILL CONFER A POWER OF ATTORNEY UPON THE DEPOSITARY TO EXECUTE ON THE HOLDER'S BEHALF ANY INSTRUMENTS WHICH SOUTHWEST MAY DEEM NECESSARY OR ADVISABLE TO ACCOMPLISH THE PURPOSES OF THE EXCHANGE OFFER NOW OR IN THE FUTURE, INCLUDING, BUT NOT LIMITED TO, THE NOTE EXCHANGE AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE STOCKHOLDERS AGREEMENT. Except as provided below for attorneys-in-fact, this Consent and Letter of Transmittal must be signed by the registered Holder(s) of Original Notes exactly as their name(s) appear(s) on certificate(s) for Original Notes or, if executed by a DTC Participant, exactly as such participant's name appears on a security position listing as the owner of Original Notes, or by person(s) authorized to become registered Holder(s) by endorsements on certificates for Original Notes transmitted with this Consent and Letter of Transmittal. Endorsements on Original Notes by registered Holders not executing this Consent and Letter of Transmittal must be guaranteed by an Eligible Institution. See Instruction 4 below. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below under "Capacity" and submit evidence satisfactory to Southwest of such person's authority to so act. See Instruction 4 below. 13 IF THE SIGNATURE APPEARING BELOW IS NOT OF THE REGISTERED HOLDER(S) OF THE ORIGINAL NOTES OR THE DTC PARTICIPANT, THEN THE REGISTERED HOLDER(S) OR THE DTC PARTICIPANT MUST SIGN A POWER OF ATTORNEY, WHICH SIGNATURE MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION, AND THE SIGNATURE APPEARING BELOW MUST BE THAT OF THE ATTORNEY-IN-FACT. X _____________________________________________________________________________ X _____________________________________________________________________________ Signature(s) of Registered Holder(s), DTC Participant or attorney-in-fact Dated:_______________________, 2002 Name(s): _______________________________________________________________________ ___________________________________________________________________________ (Please Print) Capacity: ______________________________________________________________________ Address: _______________________________________________________________________ ________________________________________________________________________________ (Including Zip Code) Area Code and Telephone No.: ___________________________________________________ Tax Identification or Social Security No.: _____________________________________ SIGNATURE GUARANTEE (SEE INSTRUCTION 4 BELOW) CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (Name of Eligible Institution Guaranteeing Signature(s)): ______________________ (Address (including zip code) and Telephone Number (including area code) of Eligible Institution) __________________________________________________________ ________________________________________________________________________________ Authorized Signature: __________________________________________________________ Printed Name: __________________________________________________________________ Title: _________________________________________________________________________ Dated: ____________________, 2002 14 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3, 4, 5, 6 AND 7) To be completed ONLY if certificates for New Notes and Class A Common Shares are to be issued in the name of someone other than the person or persons whose signature(s) appear(s) within this Consent and Letter of Transmittal, or issued to an address different from that shown in the box entitled Original Notes Tendered and Consents Given within this Consent and Letter of Transmittal, or if Original Notes tendered by book-entry transfer that are not accepted for purchase are to be credited to an account maintained at DTC other than the one designated above. [ ] Issue New Notes to: (check if desired) [ ] Issue Common Shares to: (check if desired) Name: __________________________________________________________________________ (Please Print) Address: _______________________________________________________________________ ________________________________________________________________________________ (Include Zip Code) Taxpayer Identification or Social Security Number (See Substitute Form W-9 herein): _______________________________________________________________________ ________________________________________________________________________________ Credit New Notes and Common Shares by book-entry transfer to the DTC account set forth below: ________________________________________________________________________________ (DTC Account Number) Number of Account Party: _______________________________________________________ 15 SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3, 4, 5, 6 AND 7) To be completed ONLY if certificates for New Notes and Class A Common Shares are to be sent to someone other than the person or persons whose signature(s) appear(s) within this Consent and Letter of Transmittal or to an address different from that shown in the box entitled Original Notes Tendered and Consents Given within this Consent and Letter of Transmittal. [ ] Deliver New Notes to: (check if desired) [ ] Deliver Common Shares to: (check if desired) Name: __________________________________________________________________________ (Please Print) Address: _______________________________________________________________________ ________________________________________________________________________________ (Include Zip Code) Taxpayer Identification or Social Security Number (See Substitute Form W-9 herein): _______________________________________________________________________ ________________________________________________________________________________ 16 INSTRUCTIONS (Forming Part of the Terms and Conditions of the Offer and the Consent Solicitation) 1. DELIVERY OF THIS CONSENT AND LETTER OF TRANSMITTAL AND CERTIFICATES FOR ORIGINAL NOTES OR BOOK-ENTRY CONFIRMATIONS; GUARANTEED DELIVERY PROCEDURES; WITHDRAWAL OF TENDERS. This Consent and Letter of Transmittal is to be completed by Holders if (i) certificates representing Original Notes are to be physically delivered to the Depositary herewith by such Holders; (ii) tender of Original Notes is to be made by book-entry transfer to the Depositary's account at DTC pursuant to the procedures set forth under the caption "Procedures for Tendering Original Notes - -- Book-Entry Delivery Procedures" in the Statement; or (iii) tender of Original Notes is to be made according to the guaranteed delivery procedures set forth under the caption "Procedures for Tendering Original Notes -- Guaranteed Delivery" in the Statement. All physically delivered Original Notes or a confirmation of a book-entry transfer into the Depositary's account at DTC of all Original Notes delivered electronically, as well as a properly completed and duly executed Consent and Letter of Transmittal (or a manually signed facsimile copy thereof) and any other documents required by this Consent and Letter of Transmittal, must be received by the Depositary at its address set forth herein at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, or the tendering Holder must comply with the guaranteed delivery procedures set forth below. Delivery of documents to DTC does not constitute delivery to the Depositary. THE METHOD OF DELIVERY OF THIS CONSENT AND LETTER OF TRANSMITTAL, THE ORIGINAL NOTES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING TENDER OF ORIGINAL NOTES THROUGH DTC AND ANY BOOK-ENTRY CONFIRMATION OR AGENT'S MESSAGE DELIVERED THROUGH ATOP, IS AT THE OPTION AND RISK OF THE TENDERING HOLDER. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed for such documents to reach the Depositary. Except as otherwise provided in this Instruction 1, delivery will be deemed made only when actually received by the Depositary. No alternative, conditional or contingent tenders, Consents or Powers of Attorney will be accepted. All tendering Holders, by execution of this Consent and Letter of Transmittal (or a manually signed facsimile copy thereof), waive any right to receive any notice of the acceptance of their Original Notes for exchange. THIS CONSENT AND LETTER OF TRANSMITTAL AND ORIGINAL NOTES SHOULD BE SENT ONLY TO THE DEPOSITARY, NOT TO SOUTHWEST OR THE ORIGINAL TRUSTEE. PHYSICAL HOLDERS AND DTC PARTICIPANTS WHO WISH TO BE ELIGIBLE TO RECEIVE THE EXCHANGE CONSIDERATION PURSUANT TO THE OFFER MUST (I) DELIVER ORIGINAL NOTES TO THE DEPOSITARY OR, IN LIEU OF TENDERING ORIGINAL NOTES IN PHYSICAL FORM, ELECTRONICALLY TENDER THEIR ORIGINAL NOTES THROUGH DTC'S ATOP, FOR WHICH THE TRANSACTION WILL 17 BE ELIGIBLE, PURSUANT TO THE BOOK-ENTRY DELIVERY PROCEDURES SET FORTH IN THE STATEMENT, (II) COMPLETE AND SIGN THIS CONSENT AND LETTER OF TRANSMITTAL (OR A FACSIMILE COPY THEREOF) IN ACCORDANCE WITH INSTRUCTIONS HEREIN, HAVE SUCH HOLDER'S SIGNATURE THEREON GUARANTEED BY AN ELIGIBLE INSTITUTION IF REQUIRED BY INSTRUCTION 1 OF THIS CONSENT AND LETTER OF TRANSMITTAL AND DELIVER SUCH MANUALLY SIGNED CONSENT AND LETTER OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE COPY THEREOF) TO THE DEPOSITARY PRIOR TO THE EXPIRATION TIME AND (III) COMPLETE AND DELIVER TO THE DEPOSITARY ANY OTHER DOCUMENT REQUIRED BY THIS CONSENT AND LETTER OF TRANSMITTAL OR THE STATEMENT. ALTHOUGH A DTC PARTICIPANT MAY TENDER ORIGINAL NOTES ELECTRONICALLY THOROUGH ATOP, DTC PARTICIPANTS STILL MUST PHYSICALLY COMPLETE, SIGN AND DELIVER THE CONSENT AND LETTER OF TRANSMITTAL TO THE DEPOSITARY. CONSENTS AND POWERS OF ATTORNEY CANNOT BE DELIVERED THROUGH ATOP. If a Physical Holder or DTC Participant desires to tender Original Notes pursuant to the Offer, deliver a Consent pursuant to the Consent Solicitation and confer upon the Depositary the Power of Attorney and time will not permit (i) certificates representing such Original Notes to reach the Depositary or the procedures for book-entry transfer to be completed, (ii) this Consent and Letter of Transmittal to reach the Depositary and/or (iii) all other required documents to reach the Depositary, in each case, at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, such Physical Holder or DTC Participant may nevertheless tender Original Notes, deliver Consents and confer the Power of Attorney in respect of such Original Notes in accordance with the guaranteed delivery procedures set forth herein and in the Statement under the caption "Procedures for Tendering Original Notes Delivering Consents and Conferring a Power of Attorney -- Guaranteed Delivery." Pursuant to the guaranteed delivery procedures: (a) such tender and delivery must be made by or through an "Eligible Institution" that is a participant in the Security Transfer Agents' Medallion Program, the Stock Exchange Medallion Program or the New York Stock Exchange Medallion Signature Program; (b) at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, the Depositary must have received from such Eligible Institution, at its address set forth herein, a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail, telegram or hand delivery) substantially in the form provided by Southwest, a copy of which is attached to this Consent and Letter of Transmittal, (or an Agent's Message with respect to guaranteed delivery), setting forth the name(s) and address(es) of the registered Holders or DTC Participants, and the principal amount of Original Notes being tendered and with respect to which a Consent and a Power of Attorney is being delivered, and stating that the tender of the Original Notes and delivery of Consents and Powers of Attorney are being made thereby and guaranteeing that, within three New York Stock Exchange ("NYSE") trading days after the date of the Notice of Guaranteed Delivery, a properly completed and duly executed Consent and Letter of Transmittal, or a manually signed facsimile copy thereof, together with certificates representing the Original Notes (or confirmation of book- 18 entry transfer of such Original Notes into the Depositary's account with DTC as described above), and any other documents required by this Consent and Letter of Transmittal (including, if the person executing this Consent and Letter of Transmittal is not the registered Holder of the Original Notes tendered, a power of attorney executed by such registered Holder) and the instructions hereto, will be deposited by such Eligible Institution with the Depositary; and (c) this Consent and Letter of Transmittal or a facsimile copy hereof, properly completed and duly executed, certificates for the tendered Original Notes in proper form for transfer (or a Book-Entry Confirmation, including by means of an Agent's Message, of the transfer of such Original Notes into the Depositary's account with DTC as described above), any required signature guarantees and all other required documents (including, if the person executing this Consent and Letter of Transmittal is not the registered Holder of the Original Notes tendered, a power of attorney executed by such registered Holder) must be received by the Depositary within three NYSE trading days after the date of the Notice of Guaranteed Delivery. Except as otherwise stated below, tenders of Original Notes and the concurrent delivery of Consents and Powers of Attorney made pursuant to the Offer and the Consent Solicitation are irrevocable, unless Southwest has failed to pay the Exchange Consideration to the Depositary on the Exchange Date. Original Notes tendered pursuant to the Offer may be withdrawn and the related Consents and Powers of Attorney revoked at any time at or prior to 5:00 p.m., New York, New York time, on the Expiration Date. If, after such time as withdrawal rights expire, Southwest alters the terms of the Exchange, then the time to exercise withdrawal rights will be extended for a minimum of five (5) business days a nd a maximum of ten (10) business days (such period of time to be determined by Southwest based on the materiality and significance of the altered terms) from the date such change in terms is first published, given or sent to Holders by Southwest. Tenders of Original Notes may be withdrawn and related Consents and Powers of Attorney may be revoked pursuant to the procedures set forth herein and in the Statement. For a withdrawal of a tender of Original Notes and a concurrent revocation of Consents and Powers of Attorney to be effective, a written, telegraphic or facsimile transmission notice of withdrawal or a "Request Message" (as defined below) must be timely received by the Depositary at its address set forth on the back page of this Statement at or prior to 5:00 p.m., New York, New York time, on the Expiration Date or on a business day after the Exchange Date if Southwest has failed to pay the Exchange Consideration to the Depositary on the Exchange Date. Any such notice of withdrawal must (i) specify the name of the person who tendered the Original Notes to be withdrawn (and, if tendered by book-entry transfer, the name of the DTC Participant whose name appears in a security position listing as the owner of such Original Notes), (ii) contain the description of the Original Notes to be withdrawn and identify the certificate number or numbers shown on the particular certificates evidencing such Original Notes (unless such Notes were tendered by book-entry transfer) and the aggregate principal amount represented by such Original Notes, (iii) contain a statement that such Holder is withdrawing its signature from any documents signed on its behalf pursuant to the Power of Attorney, its tender of Original Notes and delivery of Consents, and (iv) be signed by the Holder of such Original Notes in the same manner as the original signature on the Consent and Letter of Transmittal by which such Original Notes were tendered (including any required signature guarantees) or be accompanied by (x) documents of transfer sufficient to have the Original Trustee register the transfer of the Original 19 Notes into the name of the person withdrawing such Original Notes and (y) a properly completed irrevocable proxy and power of attorney that authorized such person to effect such revocation on behalf of such Holder. In lieu of submitting a written, telegraphic or facsimile transmissions notice of withdrawal or revocation, DTC participants may electronically transmit a request for withdrawal or revocation to DTC. DTC will then edit the request and send a Request Message to the Depositary. If the Original Notes to be withdrawn have been delivered or otherwise identified to the Depositary, a properly completed and presented written or facsimile notice of withdrawal or a Request Message is effective immediately upon receipt thereof even if physical release is not yet effected. The term "Request Message" means a message transmitted by DTC and received by the Depositary, which states that DTC has received a request for withdrawal from a DTC participant and identifies the Original Notes to which such request relates. A withdrawal of Original Notes and a revocation of Consents and Power of Attorney can only be accomplished in accordance with the foregoing procedures. 2. CONSENT TO PROPOSED WAIVERS AND AMENDMENTS; REVOCATION OF CONSENTS; POWER OF ATTORNEY CONFERRED UPON DEPOSITARY; REVOCATION OF POWER OF ATTORNEY. In accordance with the Statement, all properly completed and executed Consents and Letters of Transmittal tendering Original Notes that are accepted for exchange will be counted as Consents with respect to the Proposed Waivers and Amendments and will grant a Power of Attorney to the Depositary to execute on the Holder's behalf any instruments which Southwest may deem necessary or advisable to accomplish the purposes of the Exchange, including the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement, unless the Depositary receives a written notice of revocation of such Tender (and related Consent and Power of Attorney) at or prior to 5:00 p.m., New York, New York time, on the Expiration Date, or unless Southwest has failed to pay the Exchange Consideration to the Depositary on the Exchange Date. Notice of revocation of a Consent or a Power of Attorney, to be effective, must comply with the provisions set forth in Instruction 1 above. SOUTHWEST INTENDS TO CAUSE THE EXECUTION OF THE SUPPLEMENTAL INDENTURE, THE PLEDGE AGREEMENT WAIVER, THE AMENDED AND RESTATED PLEDGE AGREEMENT, THE NOTE EXCHANGE AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE STOCKHOLDERS AGREEMENT TO OCCUR ON THE EXCHANGE DATE. SUCH SUPPLEMENTAL INDENTURE, THE PLEDGE AGREEMENT WAIVER, THE AMENDED AND RESTATED PLEDGE AGREEMENT AND THE PROPOSED WAIVERS AND AMENDMENTS CONTAINED THEREIN WILL BE BINDING ON ALL ORIGINAL NOTES THAT REMAIN OUTSTANDING OR THAT HAVE NOT BEEN PROPERLY TENDERED. THE NOTE EXCHANGE AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE STOCKHOLDERS AGREEMENT WILL BE BINDING UPON EACH HOLDER OF NEW NOTES. 3. NO PARTIAL TENDERS AND CONSENTS. Tenders of Original Notes pursuant to the Offer and rendering of corresponding Consents pursuant to the Consent Solicitation may be made only in respect of full amounts of such Original Notes. If less than the entire principal amount of any Original Notes evidenced by a 20 submitted certificate is tendered, the Original Note will not be accepted. The entire principal amount represented by the certificates for all Original Notes delivered to the Depositary will be deemed to have been tendered, unless otherwise indicated. 4. SIGNATURES ON THIS CONSENT AND LETTER OF TRANSMITTAL; GUARANTEE OF SIGNATURES. If this Consent and Letter of Transmittal is signed by the Physical Holder(s) of the Original Notes tendered hereby and with respect to which the Consent and Power of Attorney is given, the signature(s) must correspond with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever. If this Consent and Letter of Transmittal is signed by a DTC Participant whose name is shown as the owner of the Original Notes tendered hereby, the signature must correspond with the name shown on the security position listing as the owner of the Original Notes. If any of the Original Notes tendered hereby are registered in the name of two or more Holders, or in the case of DTC Participants, are owned of record by two or more joint owners, all such Holders must sign this Consent and Letter of Transmittal. If any tendered Original Notes are registered or held in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Consent and Letter of Transmittal and any necessary accompanying documents (including powers of attorney) as there are different names in which Original Notes are held. If this Consent and Letter of Transmittal is signed by the Physical Holder or DTC Participant, and the certificates for any New Notes and Class A Common Shares are to be issued to or, if tendered by book-entry transfer, credited to the account at DTC of, the Physical Holder or DTC Participant, as the case may be, then the Physical Holder or DTC Participant need not endorse any certificates for tendered Original Notes. In any other case, the Physical Holder or DTC Participant must either properly endorse the certificates for Original Notes tendered or transmit a separate properly completed bond power with this Consent and Letter of Transmittal (in either case, executed exactly as the names of the Physical Holder(s) appear(s) on such Original Notes, and, with respect to a DTC Participant whose name appears on a security position listing as the owner of Original Notes, exactly as the name(s) of the participant(s) appear(s) on such security position listing), with the signature on the endorsement or bond power guaranteed by an Eligible Institution, unless such certificates or bond powers are executed by an Eligible Institution. If this Consent and Letter of Transmittal, any certificates for Original Notes or bond powers or any other necessary instrument are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to Southwest, in its sole discretion, of their authority so to act must be submitted with this Consent and Letter of Transmittal. Endorsements on certificates for Original Notes, signatures on bond powers and any other necessary document provided in accordance with this Instruction 4 by Physical Holders or 21 DTC Participants not executing this Consent and Letter of Transmittal must be guaranteed by an Eligible Institution. No signature guarantee is required if this Consent and Letter of Transmittal is signed by the Physical Holder(s) of the Original Notes tendered herewith or by a DTC Participant whose name appears on a security position listing as the owner of Original Notes and any New Notes and Class A Common Shares are to be issued directly to such Holder(s) or, if signed by a DTC Participant, any New Notes and Class A Common Shares are to be credited to such participant's account at DTC and neither the "Special Issuance Instructions" box nor the "Special Delivery Instructions" box of this Consent and Letter of Transmittal has been completed. In all other cases, all signatures on Consents and Letters of Transmittal and endorsements on certificates, signatures on bond powers and any other necessary instrument accompanying Original Notes must be guaranteed by an Eligible Institution. 5. SPECIAL ISSUANCE AND SPECIAL DELIVERY INSTRUCTIONS. Tendering Holders should indicate in the applicable box or boxes the name and address to which certificates for New Notes and Class A Common Shares are to be issued or sent, if different from the name and address of the Physical Holder or DTC Participant signing this Consent and Letter of Transmittal. In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. If no instructions are given, certificates for New Notes and Class A Common Shares will be sent to the Physical Holder of the Original Notes tendered. Any DTC Participant tendering by book-entry transfer may request that certificates for New Notes and Class A Common Shares be credited to such account at DTC as such DTC Participant may designate under the caption "Special Issuance Instructions." If no such instructions are given, any such Original Notes not tendered or not accepted for exchange will be returned by crediting the account at DTC designated above. 6. TAXPAYER IDENTIFICATION NUMBER. Each tendering Holder is required to provide the Depositary with the Holder's (and that of any other party receiving the Exchange Consideration) correct Taxpayer Identification Number ("TIN"), generally such person's social security or Federal employer identification number, on Substitute Form W-9, which is provided under "Important Tax Information" below, or, alternatively, to establish another basis for exemption from backup withholding. A Holder or other person required to submit the Substitute Form W-9 must cross out item (2) in the Certification box on Substitute Form W-9 if such person is subject to backup withholding. If the Depositary is not provided with the correct TIN and certificate of no loss of exemption from backup withholding or other adequate basis for exemption, the Holder or other person required to submit the Substitute Form W-9 may be subject to a $50 penalty imposed by the Internal Revenue Service, and such person may be subject to 30% Federal income tax backup withholding on the distributions to the Holder or other recipient of the Exchange Consideration with respect to Original Notes tendered pursuant to the Offer. The box in Part 3 of the form should be checked if the tendering Holder or other person required to submit the Substitute Form W-9 has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 3 is checked and the Depositary is not provided with a TIN within 22 sixty (60) days of the effective date of a payment, the Depositary may withhold the distribution of the Exchange Consideration. 7. TRANSFER TAXES. Southwest will pay all transfer taxes applicable to the exchange and transfer of Original Notes pursuant to the Offer, except in the case of deliveries of certificates for Original Notes for principal amounts not tendered or not accepted for exchange that are registered or issued in the name of any person other than the registered Holder of Original Notes tendered thereby and deliveries of certificates for tendered Original Notes registered in the name of any persons other than the persons signing this Consent and Letter of Transmittal. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the certificates listed in this Consent and Letter of Transmittal. 8. IRREGULARITIES. All questions as to the form of all documents and the validity (including time of receipt) and acceptance of tenders and withdrawals of Original Notes and deliveries and revocations of Consents and Power of Attorney will be determined by Southwest, in its sole discretion, which determination shall be final and binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS, CONSENTS AND POWER OF ATTORNEY WILL NOT BE CONSIDERED VALID. Southwest reserves the absolute right to reject any or all tenders of Original Notes, Consents and Powers of Attorney that are not in proper form or the acceptance of which would, in Southwest's opinion, be unlawful. Southwest also reserves the right to waive any defects, irregularities or conditions of tender as to particular Original Notes and of delivery as to the corresponding Consents and Powers of Attorney. Southwest's interpretations of the terms and conditions of the Offer and the Consent Solicitation (including the instructions in this Consent and Letter of Transmittal) will be final and binding. Any defect or irregularity in connection with tenders of Original Notes and deliveries of Consents and Powers of Attorney must be cured within such time as Southwest determines, unless waived by Southwest. Tenders of Original Notes shall not be deemed to have been made until all defects or irregularities have been waived by Southwest or cured. If Southwest waives its right to reject a defective tender of Original Notes and delivery of Consents or Powers of Attorney, the tendering Holder will be entitled to the applicable Exchange Consideration. ALL TENDERING HOLDERS, BY EXECUTION OF THIS CONSENT AND LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF, WAIVE ANY RIGHT TO RECEIVE NOTICE OF THE ACCEPTANCE OF THEIR ORIGINAL NOTES FOR EXCHANGE AND OF THE EFFECTIVENESS OF THE PROPOSED WAIVERS AND AMENDMENTS AND ALL OTHER DOCUMENTS RELATING TO THE EXCHANGE. Neither Southwest, the Depositary nor any other person will be under any duty to give notice of any defects or irregularities in tenders of Original Notes and deliveries of Consents and Powers of Attorney, or will incur any liability to Holders for failure to give any such notice. 9. WAIVERS OF CONDITIONS. 23 Southwest expressly reserves the absolute right, in its sole discretion, to amend or waive any of the conditions to the Offer or the Consent Solicitation in the case of any Original Notes tendered, Consents delivered and Power of Attorney granted, in whole or in part, at any time and from time to time; provided, however, that Southwest cannot waive the conditions regarding Minimum Tender or the receipt of Requisite Consents. 10. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES FOR ORIGINAL NOTES. Any Holder whose certificates for Original Notes have been mutilated, lost, stolen or destroyed should contact the Depositary at the address or telecopy number set forth on the front cover of this Consent and Letter of Transmittal. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering Original Notes, consenting to the Proposed Waivers and Amendments and granting a Power of Attorney and requests for assistance or additional copies of the Statement, the Note Exchange Agreement, a draft copy of the Collateral Trust Agreement, the Stockholders Agreement and this Consent and Letter of Transmittal may be directed to the Depositary, whose addresses and telephone numbers appear on the front cover of this Consent and Letter of Transmittal. Questions may also be directed to Southwest contact, J. Steven Person, by writing to 407 N. Big Spring Street, Midland, Texas 79701, or by phone at (915) 686-9927. IMPORTANT TAX INFORMATION Under U.S. Federal income tax laws, a Holder whose tendered Original Notes are accepted for exchange or other person receiving the Exchange Consideration is required to provide the Depositary (as payer) with such person's correct TIN on Substitute Form W-9 below or otherwise establish a basis for exemption from backup withholding. If such person is an individual, the TIN is his social security number. Certain persons (including, among others, all corporations and certain foreign persons) may not be subject to these backup withholding and reporting requirements, provided that they properly establish their status when required to do so by filing the applicable forms with the Internal Revenue Service. A foreign person may qualify as an exempt recipient by submitting to the Depositary a properly completed Internal Revenue Service Form W-8BEN, signed under penalties of perjury, attesting to that person's foreign status. Other exempt persons should indicate their exempt status on the attached Substitute Form W-9. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional instructions. If the Depositary is not provided with the correct TIN and certificate of no loss of exemption from backup withholding or other adequate basis for exemption, the Holder or other person receiving the Exchange Consideration may be subject to a $50 penalty imposed by the Internal Revenue Service, and the distribution of the Exchange Consideration made to the Holder or other recipient with respect to Original Notes purchased pursuant to the Offer may be subject to a backup withholding tax. If backup withholding applies, the Depositary is required to 24 withhold 30% of any distribution of the Exchange Consideration made to the Holder or other recipient. Backup withholding is not an additional U.S. Federal income tax. Rather, the U.S. Federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The Depositary reserves the right to withhold the Exchange Consideration until it receives a completed Form W-9, or other appropriate substitute, which provides proof of exemption from backup withholding. PURPOSE OF SUBSTITUTE FORM W-9 To avoid backup withholding on the distribution of the Exchange Consideration made with respect to Original Notes tendered pursuant to the Offer, the Holder or other person receiving the Exchange Consideration is required to (i) provide the Depositary with the such person's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such person is awaiting a TIN) and (ii) certify that (A) such person is exempt from backup withholding, (B) such person has not been notified by the Internal Revenue Service that such person is subject to backup withholding as a result of failure to report all interest or dividends or (C) the Internal Revenue Service has notified such person that such person is no longer subject to backup withholding. Alternatively, such person may establish another basis for exemption from backup withholding. A non-exempt person may check the box in Part 3 of the attached Substitute Form W-9 if such person has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If a non-exempt person checks the box in Part 3, such person must also complete the attached Certificate of Awaiting Taxpayer Identification Number in order to prevent backup withholding. In the event that such person fails to provide a TIN to the Depositary within sixty (60) days, the Depositary must backup withhold 30% of the distributions made to such person, and may withhold the distribution of the Exchange Consideration. WHAT NUMBER TO GIVE THE DEPOSITARY The Holder or other person receiving the Exchange Consideration is required to give the Depositary the TIN (e.g., social security number or employer identification number) of such person. If the Original Notes are held in more than one name or are held not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. 25 - ----------------------------------------------------------------------------------------------------------------- PAYOR'S NAME: WILMINGTON TRUST COMPANY - ----------------------------------------------------------------------------------------------------------------- SUBSTITUTE FORM PART 1 - PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT Social Security Number W-9 AND CERTIFY BY SIGNING AND DATING BELOW ______________________________ OR ______________________________ Employee Identification Number ---------------------------------------------------------------------------------------------- PART 2 - CERTIFICATION - Under Penalties of Perjury, I certify that: (1) The number shown on this form is my correct TIN (or I am waiting for a number to be issued to me); (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding, as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding; and (3) I am a U.S. person (including a U.S. resident alien). --------------------------------------------------------------------------------------------- PAYER'S REQUEST CERTIFICATION INSTRUCTIONS - You must cross out item (2)in Part PART 3 - FOR TAXPAYER 2 above if you have been notified by the IRS that you are subject IDENTIFICATION to backup withholding because you have failed to report all interest NUMBER ("TIN") or dividends on your tax return. However, if after being notified Awaiting TIN [_] by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). Signature _____________________________ Date:____________, 2002 __________________________________________________________ Name - -----------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 30% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFER AND THE COSENT SOLICITATION. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a TIN has not been issued to me, and either (a) I have mailed or delivered an application to receive a TIN to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I have not provided a TIN, 30% of all reportable payments made to me will be withheld until I provide a number. _____________________________________ ____________________________, 2002 Signature Date _____________________________________ Name (Please Print) 26 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. -- Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer. For this type of account Give the SOCIAL SECURITY number of 1. An individual's account The individual 2. Two or more individuals (joint The actual owner of the account account) or, if combined funds, the first individual on the account (1) 3. Husband and wife (joint account) The actual owner of the account or, if joint funds, either person (1) 4. Custodian account of a minor The minor (2) (Uniform Gift to Minors Act) 5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the minor (1) 6. Account in the name of guardian or The ward, minor, or incompetent committee for a designated ward, person (3) minor, or incompetent person 7. a. The usual revocable savings trust The grantor-trustee (1) account (grantor is also a trustee) b. So-called trust account that is The actual owner (1) not a legal or valid trust under State law 8. Sole proprietorship account The owner(4) 9. A valid trust, estate or pension trust Legal entity (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title (5)) 10. Corporate account The corporation 11. Religious, charitable or educational The organization organization 12. Partnership account held in the name The partnership of the business 27 13. Association, club or other tax-exempt The organization organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of Agriculture in the name of a public The public entity entity (such as a State or local government, school district or prison) that receives agricultural program payments (1) List first and circle the name of the person whose number you furnish. If only one person on a joint account has a SSN, that person's number must be furnished. (2) Circle the minor's name and furnish the minor's Social Security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's Social Security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate or pension trust. Note: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 OBTAINING A NUMBER If you don't have a TIN or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on payments include the following: . A corporation. . A financial institution. 28 . An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under section 403(b)(7), if the account satisfies the requirements of section 401(f)(2). . The United States or any agency or instrumentality thereof. . A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. . A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. . An international organization or any agency, or instrumentality thereof. . A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. . A real estate investment trust. . A common trust fund operated by a bank under section 584(a). . An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). . An entity registered at all times under the Investment Company Act of 1940. . A foreign central bank issue. Payments of dividends and patronage dividends not generally subject to backup withholding including the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments of patronage dividends where the amount received is not paid in money. . Payments made by certain foreign organizations. . Section 404(k) payments made by an ESOP. Payments of interest not generally subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct TIN to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). 29 . Payments described in section 6049(b)(5) to non-resident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. . Mortgage interest paid to you. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TIN, WRITE "EXEMPT" ON THE FORM, AND RETURN IT TO THE PAYER. ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6019 requires most recipients of dividend, interest, or other payments to give TINs to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 30% of taxable interest, dividend, and certain other payments to a payee who does not furnish a TIN to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TIN.--If you fail to furnish your TIN to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. 30 NOTICE OF GUARANTEED DELIVERY To Tender and To Give Consent in Respect of 10 1/2% Senior Notes Due 2004 of SOUTHWEST ROYALTIES, INC. - -------------------------------------------------------------------------------- THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002 OR SUCH OTHER DATE AS MAY BE ANNOUNCED PURSUANT TO THE TERMS HEREOF (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- This Notice of Guaranteed Delivery, or a form substantially equivalent hereto, must be used to accept the Offer of Southwest Royalties, Inc., a Delaware Corporation ("Southwest") to the holders (the "Holders") of Southwest's outstanding 10 1/2% Senior Notes Due 2004 (the "Original Notes") to exchange (the "Exchange") at least $115 million (the "Minimum Tender") of its Original Notes, and any interest accrued but not paid thereon, for $60 million of Senior Secured Notes Due 2004 (the "New Notes") and 900,000 shares (the "Class A Common Shares" and, together with the New Notes, the "Exchange Consideration") of Southwest's Class A common stock, par value $.01 per share, if time will not permit (i) certificates representing such Original Notes to reach the Depositary or the procedures for book-entry transfer to be completed, (ii) the properly executed Consent and Letter of Transmittal to reach the Depositary and/or (iii) all other required documents to reach the Depositary, in each case, at or prior to 5:00 p.m., New York, New York time, on the Expiration Date. This form may be delivered by an Eligible Institution (as defined below) by mail or hand delivery or transmitted, via facsimile, telegram or telex to the Depositary as set forth below. All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Offer to Exchange and Consent Solicitation Statement (the "Statement") or the Consent and Letter of Transmittal. To: WILMINGTON TRUST COMPANY, Depositary By Hand/Overnight Courier: By Registered or Certified Mail: Wilmington Trust Company Wilmington Trust Company Corporate Trust Reorg Services DC-1615 Reorg Services Rodney Square North P.O. Box 8861 1100 North Market Street Wilmington, Delaware 19899-8861 Wilmington, Delaware 19890-1615 Call (302) 636-6469 for Confirmation By facsimile: (302) 636-4145 Call (302) 636-6469 for Confirmation 31 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION TO A NUMBER, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Consent and Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box in the Consent and Letter of Transmittal. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Consent and Letter of Transmittal, certificates for Original Notes (or complete the procedures for book-entry transfer) and any other documents required by the Statement or Consent and Letter of Transmittal to the Depositary within the time period shown herein. Failure to do so could result in financial loss to such Eligible Institution. THE GUARANTEE SET FORTH BELOW MUST BE COMPLETED IF A NOTICE OF GUARANTEED DELIVER IS BEING USED TO ACCEPT THE OFFER 32 NOTE: IF COMPLYING WITH NOTICE OF GUARANTEED DELIVERY PROCEDURES, SIGNATURES MUST BE PROVIDED BELOW. Ladies and Gentlemen: The undersigned hereby tenders Original Notes pursuant to the Offer, delivers a Consent pursuant to the Consent Solicitation and confers upon the Depositary the Power of Attorney, upon the terms and subject to the conditions set forth in the Statement and the Consent and Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate principal amount of Original Notes set forth below, pursuant to the guaranteed delivery procedures set forth in the Statement under the heading "Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney--Guaranteed Delivery." All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. - -------------------------------------------------------------------------------- Name(s) of Record Holder(s): Aggregate Principal Amount of Original ______________________________________ Notes: ______________________________________ ______________________________________ (please type or print) Certificate No(s). (if available): Address(es):__________________________ ______________________________________ ______________________________________ (Zip Code) ______________________________________ If Original Notes will be delivered by Area code and Telephone No.: book-entry transfer, provide account number below: ______________________________________ DTC Account No.:______________________ Signature(s): ______________________________________ ______________________________________ Dated: _______________________________ - -------------------------------------------------------------------------------- GUARANTEE (Not to be used for signature guarantee) The undersigned, a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or a correspondent in the United States or another "Eligible Guarantor Institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an "Eligible 33 Institution"), hereby guarantees that, within three New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and validly executed Consent and Letter of Transmittal (or a manually signed facsimile copy thereof), together with certificates representing the Original Notes (or confirmation of book-entry transfer of such Original Notes into the Depositary's account with DTC, pursuant to the procedure for book-entry transfer set forth in the Statement under the heading "Procedures for Tendering Original Notes, Delivering Consents and Conferring a Power of Attorney-- Guaranteed Book-Entry Delivery Procedures") and all other required documents will be executed and deposited by the undersigned with the Depositary at one of its addresses set forth above. - -------------------------------------------------------------------------------- Name of Firm Title ______________________________________ ______________________________________ Authorized Signature Name (Please Print) ______________________________________ Address Date ______________________________________ ______________________________________ ______________________________________ ______________________________________ (Zip Code) Area Code and Telephone Number: ______________________________________ - -------------------------------------------------------------------------------- DO NOT SEND ORIGINAL NOTES WITH THIS FORM. ACTUAL SURRENDER OF ORIGINAL NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND VALIDLY EXECUTED CONSENT AND LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS. 34 The Depositary for the Offer and the Consent Solicitation is: WILMINGTON TRUST COMPANY By Hand/Overnight Courier: By Registered or Certified Mail: Wilmington Trust Company Wilmington Trust Company Corporate Trust Reorg Services DC-1615 Reorg Services Rodney Square North P.O. Box 8861 1100 North Market Street Wilmington, Delaware 19899-8861 Wilmington, Delaware 19890-1615 By facsimile: (302) 636-4145 Call (302) 636-6469 for Confirmation Call (302) 636-6469 for Confirmation 35 EX-99.(T3E3) 8 dex99t3e3.txt NOTE EXCHANGE AGREEMENT EXHIBIT T3E(3) FORM OF NOTE EXCHANGE AGREEMENT This NOTE EXCHANGE AGREEMENT (this "Agreement") is entered into as of April _____, 2002, by and among Southwest Royalties, Inc., a Delaware corporation (the "Company"), and certain holders of the Company's 10 1/2% Senior Notes due 2004 (the "Original Notes") that are listed on Schedule I hereto (the "Exchanging Holders"). WHEREAS, the Company has issued and there remains outstanding an aggregate of $123,685,000 principal amount of its Original Notes; WHEREAS, pursuant to an offer to exchange, the Company desires to issue to the Exchanging Holders, and the Exchanging Holders desire to acquire from the Company, in exchange for their respective Original Notes (including interest accrued but not paid thereon), in the aggregate, (i) $60 million Senior Secured Notes due June 30, 2004 (the "Exchange Notes") and (ii) 900,000 shares (the "Class A Common Shares") of the Company's Class A common stock, $.01 par value per share, in such amounts as set forth in Schedule I hereto and on the terms and subject to the conditions set forth herein (such exchange, the "Exchange"); and WHEREAS, effective upon the Closing Date, as defined below, the Company is filing an Amended and Restated Certificate of Incorporation, in the form of Exhibit A hereto, pursuant to which, among other things, all of the Company's outstanding capital stock, which is held by its current stockholder, will be converted into an aggregate of 100,000 shares of Common Stock, $.01 par value per share, and 200,00 shares of Special Stock, $.01 par value per share, the terms of which are set forth therein. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The Exchange Offer. ------------------ (a) The Exchange. Subject to the terms and conditions hereof, the ------------ Company hereby agrees to issue to the Exchanging Holders upon receipt of each Exchanging Holders' Original Notes, and each Exchanging Holder, severally and not jointly, agrees to accept from the Company, in the aggregate, (i) $60 million principal amount of Exchange Notes and (ii) 900,000 Class A Common Shares (collectively, the "Exchange Consideration"), in such amounts as set forth beside each Exchanging Holders' name on Schedule I hereto. Any unpaid interest on the Original Notes accrued through the Closing Date (as defined below) shall be extinguished and the Company shall have no liability with regard to such unpaid interest. (b) Terms of the Exchange Notes. The Exchange Notes will be governed --------------------------- by an Indenture (the "Indenture"), dated as of April ____, 2002 between the Company and Wilmington Trust Company, as trustee, the form of which is attached as Exhibit B hereto. --------- 1 Subject to the terms and conditions set forth in the Indenture, interest on the Exchange Notes shall begin to accrue on February 1, 2002 (as if the Exchanging Notes were issued on such date) at (i) 10 1/2 % per annum through December 31, 2002, (ii) 11 1/2% from January 1, 2003 through December 31, 2003 and (iii) 12 1/2% thereafter through the maturity date. Interest is payable on the Exchange Notes semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2002. The New Notes will mature on June 30, 2004. (c) Terms of the Class A Common Shares. Except as otherwise provided ---------------------------------- below, the Class A Common Shares shall be entitled to one vote per Class A Common Share on all matters to which the holders of the Company's Common Stock, $.01 par value per share (the "Common Stock"), may vote. Subject to the provisions of the Amended and Restated Certification of Incorporation, holders of Class A Common Shares shall be entitled to elect four of the seven members of the Company's Board of Directors and shall have such other rights, preferences and limitations as set forth in the Company's Amended and Restated Certificate of Incorporation. 2. Closing. ------- The consummation of the Exchange (the "Closing") shall occur at the offices of Baker, Donelson, Bearman & Caldwell, 555 11th Street, NW, 6th Floor, Washington, DC 20004, simultaneously with the Closing of the Refinancing (as defined herein), at 9:00 a.m. New York, New York time on April _____, 2002 (the "Closing Date") or at such other time and place as the Company and the Exchanging Holders mutually agree in writing. Prior to the time of Closing, the Company shall deliver to Wilmington Trust Company, as depositary, one or more certificates evidencing the Exchange Notes and the Class A Common Shares against delivery to the Company of the Original Notes. The depositary will execute such documents reasonably necessary to evidence receipt of such Exchange Notes and Class A Common Shares. If for any reason the Closing does not occur within 24 hours of the Company's delivery to the depositary of the Exchange Notes and the Class A Common Shares, the depositary shall immediately return such Exchange Notes and Class A Common Shares to the Company or an authorized representative thereof. At the Closing, the Company will cause to be delivered to the Exchanging Holders the legal opinion as described on Exhibit C attached hereto. --------- At the Closing, the Original Notes shall be delivered to the Company and the Exchange Notes and the Class A Common Shares shall be delivered to the Exchanging Holders, each from the depositary. 3. Exchanging Holder Representations. Each Exchanging Holder hereby --------------------------------- represents, warrants and covenants to the Company, severally and not jointly, as follows: (a) Authorization. The Exchanging Holder has requisite power and ------------- authority to execute, deliver and perform its obligations under this Agreement. The execution and delivery of this Agreement have been duly and validly authorized, and all necessary action has been taken to make this Agreement a legal, valid and binding obligation of the Exchanging Holder, enforceable in accordance with its terms, except that the enforcement hereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). 2 (b) Access to Information. The Company has delivered to the Exchanging --------------------- Holder its Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 10-K"), its Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (the "Third Quarter 10-Q") and unaudited financial information summary for the year ended December 31, 2001 (the "Unaudited 2001 Financial Summary") and has made available to the Exchanging Holder all other reports, schedules, forms, statements and other documents filed by the Company with the Securities and Exchange Commission (the "SEC") from 1997 through the Closing Date pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Exchanging Holder has received physical delivery of all such documents, records and information which Exchanging Holder has requested, and has had adequate opportunity to ask questions of, and receive answers from, the Company's officers, employees, agents, accountants, and representatives concerning the Company's business, operations, financial condition, assets, liabilities, and all other matters relevant in making a decision to participate in the Exchange. (c) Title to Original Notes. Immediately prior to the Closing, the ----------------------- Exchanging Holder will have title to the Original Notes being exchanged by it, free and clear of all claims, liens, title defects and objections or equities of any kind and nature whatsoever. (d) Investment Representations. -------------------------- (i) The Exchanging Holder understands that the Exchange Notes and the Class A Common Shares acquired hereunder have not been registered under Securities Act of 1933, as amended (the "Securities Act"), based upon an exemption from registration under Section 3(a)(9) of the Securities Act. (ii) The Exchanging Holder is either (i) a "Qualified Institutional Buyer" as such term is defined in Rule 144A under the Act or (ii) an "Accredited Investor" as such term is defined in Rule 501 of Regulation D promulgated under the Act; does not require the assistance of an investment advisor or other purchaser representative to participate in the transactions contemplated by this Agreement; has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Exchange Notes and Common Shares; and has the ability to bear the economic risks of its investment for an indefinite period of time. (e) No Commission or Remuneration. The Exchanging Holder has not ----------------------------- received any commission or remuneration for acting on the Company's behalf in connection with or in order to solicit or facilitate the Exchange. The Exchanging Holder has not paid any commission or remuneration to any individual, corporation, partnership, joint venture or other entity ("Person") in order to solicit or facilitate the Exchange. (f) Section 3(a)(9) Exemption. The Exchanging Holder acknowledges that ------------------------- the transaction contemplated hereby is intended to be exempt from registration by virtue of Section 3(a)(9) of the Securities Act. To its knowledge, the Exchanging Holder has not taken or will not take any action which might subject the offering and the issuance of the Exchange Consideration to the registration requirements of Section 5 of the Securities Act. 3 (g) No Listing of Exchange Consideration. The Exchanging Holder ------------------------------------ acknowledges that none of the Exchange Consideration will be listed on any national securities exchange or authorized to be quoted on any inter-dealer quotation system of any national securities association and that the Company has no obligation to effect such listing or authorization. 4. The Company's Representations and Covenants. The Company represents, ------------------------------------------- warrants and covenants to the Exchanging Holders as follows: (a) Organization, Authority, etc. The Company is a corporation duly ---------------------------- incorporated and validly existing under and by virtue of the laws of the State of Delaware and has all requisite corporate power to own or lease and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted; is duly qualified or licensed to do business and is in good standing as a foreign corporation in all jurisdictions in which it owns or leases property or in which the conduct of its business requires it so to qualify or be licensed, except where the failure to be so licensed or qualified could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the assets, business, properties or financial condition of the Company (as such business is presently conducted and as it is presently proposed to be conducted) (a "Material Adverse Effect"); and has all requisite corporate power to enter into this Agreement, to issue the Exchange Notes and the Class A Common Shares and to perform its obligations hereunder. (b) Corporate Acts and Proceedings. The execution and delivery of this ------------------------------ Agreement and the transactions contemplated hereby have been duly and validly authorized, and all necessary corporate action has been taken to make this Agreement a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except that the enforcement thereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). (c) Valid Issuance. When the Exchange Notes have been duly executed -------------- and authenticated in accordance with the terms of the Indenture and delivered upon consummation of the Exchange against receipt of the Original Notes surrendered in exchange therefor as provided herein, the Exchange Notes will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that the enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). When the Class A Common Shares are delivered upon consummation of the Exchange against receipt of the Original Notes as provided herein, the Class A Common Shares will be duly authorized and validly issued, fully paid and nonassessable. (d) Exempt Offering. Subject to the accuracy of the Exchanging --------------- Holders' representations and warranties contained in Section 3 hereof, the issuance hereunder of the 4 Exchange Notes and the Class A Common Shares is exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to an exemption set forth in Section 3(a)(9) of the Securities Act. Neither the Company nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Exchange Consideration under the Securities Act and the rules and regulations of the SEC thereunder) which might subject the offering and the issuance of the Exchange Consideration to the registration requirements of Section 5 of the Securities Act. (e) Disclosure Statement. The Offer to Exchange and Consent -------------------- Solicitation Statement, as delivered to each Holder in connection with the Exchange (the "Disclosure Statement"), does not contain, to the Company's knowledge, any untrue statement of material fact or omit a material fact necessary in order to make a statement contained in the Disclosure Statement, in light of the circumstances under which it was made, not misleading. (f) Brokers. There is no broker, investment banker, financial advisor, ------- finder or other person which has been retained by or is authorized to act on behalf of the Company who might be entitled to any fee or commission for which the Exchanging Holders will be liable in connection with the execution of this Agreement or the transactions contemplated hereby. The Company has not paid any commission or remuneration to any Person in order to solicit the Exchange. (g) Compliance with Other Instruments. As of the effective date of --------------------------------- this Agreement, neither the execution and delivery by the Company of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, (b) result in any violation of the provisions of the certificate of incorporation or by-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties, (c) result in the creation under any agreement or instrument of any lien, security interest, encumbrance or other claim upon any of the assets of the Company, or (d) create in any person or entity any right to terminate any agreement with the Company or otherwise exercise any rights against the Company or cause any payment or performance obligation of the Company to be accelerated, except in each case (a-d) or in the aggregate as would not have a Material Adverse Effect. (h) Additional Information. Since December 10, 1997, the Company has ---------------------- filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act. As of their respective filing dates, the information contained in its 2000 10-K and the Third Quarter 10-Q complied with the requirements of the Exchange Act, and the rules and regulations of the SEC promulgated thereunder applicable to the 2000 10-K or Third Quarter 10-Q, as the case may be, in all material respects, and the 2000 10-K and the Third Quarter 10-Q, at the time each was filed with the SEC, and the Unaudited 2001 Financial Summary contained no untrue statement of a material fact or 5 omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5. Stop Transfer Instructions. The Exchanging Holders acknowledge that the -------------------------- transfer agent for the Company shall be instructed not to transfer the ownership of the certificates evidencing the Class A Common Shares or the Exchange Notes in instances where the Exchanging Holder is an affiliate of the Company (as defined in the Securities Act) unless in the prior written opinion of counsel, reasonably acceptable to the Company, such transfer is in compliance with applicable provisions of federal and state securities laws. 6. Survival of Representations, Warranties and Agreements. All --------------------------------------------------------- representations and warranties made by the Company and the Exchanging Holders herein shall survive until eighteen months from the Closing Date. 7. Indemnification. --------------- (a) Indemnification of the Company. The Exchanging Holders, severally ------------------------------ and not jointly, agree to indemnify and hold harmless the Company, each officer, director, employee or agent thereof, its respective controlling persons, and respective estates, successors, and assigns (each an "Indemnified Party"), from and against any and all claims, losses damages, liabilities and expenses (including, without limitation, settlement costs and any reasonable legal fees and expenses or other expenses for investigating or defending any actions or threatened actions) (the "Losses") incurred by such Indemnified Party as a result of any breach of any representation or warranty made by the Exchanging Holder in this Agreement or any other document executed by an Exchanging Holder in connection with the Exchange (collectively, the "Transaction Documents"). (b) Indemnification of the Exchanging Holders. The Company shall ----------------------------------------- indemnify and hold harmless each Exchanging Holder, each officer, director, employee or agent thereof, its respective controlling persons, and its respective estates, successors, and assigns (each an "Indemnified Party") from and against any and all Losses incurred by such Indemnified Party as a result of any of the following: (i) any breach of any representation or warranty made by the Company in this Agreement or in any other Transaction Document; (ii) the nonfulfillment or breach of any covenant, agreement or obligation of the Company to or with an Exchanging Holder contained in this Agreement or in any other Transaction Document; (iii) any untrue statement of a material fact relating to the Company contained in the Disclosure Statement or arising out of or based on any omission or alleged omission to state therein a material fact relating to the Company required to be stated therein or necessary to make the statements therein not misleading; and 6 (iv) any claim brought in connection with the Exchange, whether or not consummated, against the Exchanging Holders by holders of the Original Notes not participating in the Exchange. (c) Advancement of Expenses. The Company will reimburse any Indemnified ----------------------- Party for all expenses, including reasonable attorney fees and expenses, contemplated by this Section 7 as they are incurred in connection with the investigation of, preparation for, or defense of any pending or threatened claims or any action or proceeding arising therefrom, whether or not the Indemnified Party is a party or whether or not such claim, action or proceeding is initiated. (d) Notice of Indemnification. Promptly after receipt by an indemnified ------------------------- party hereunder of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any Indemnified Party other than under this Section 7. In case any such action shall be brought against any Indemnified Party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such Indemnified Party and, after notice from the indemnifying party to such Indemnified Party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such Indemnified Party under this Section 7 for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, (i) if the indemnifying party has failed to assume the defense and employ counsel or (ii) if the defendants in any such action include both the Indemnified Party and the indemnifying party and counsel to the Indemnified Party shall have concluded that there may be reasonable defenses available to the Indemnified Party that are different from or additional to those available to the indemnifying party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the indemnifying party, then the Indemnified Party shall have the right to select a separate counsel and to assume such legal defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (e) Contribution. If the indemnification provided for in this Section 7 ------------ is not available to the Company or the Exchanging Holders or is insufficient to hold them harmless in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each such indemnifying party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities and expenses as between the Company on the one hand and each Exchanging Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of each Exchange Holder on the other in connection with the actions, statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. 8. Registration Rights. ------------------- (a) Registration of Exchange Notes and Class A Common Shares. -------------------------------------------------------- (i) The Company hereby agrees to register under the Securities Act all of the Registrable Securities held by the Exchanging Holders for sale in the manner set forth herein. The Company shall file a registration statement with the SEC prior to or on April 30, 2002. (ii) The Company shall use its best efforts to register under the Securities Act, for public sale, the Registrable Securities of the Exchanging Holders. Registration pursuant to this Section 8 (a) (ii) shall be counted only when (i) all the Registrable Securities of the Exchanging Holders have been so included, (ii) the corresponding registration statement has 7 become effective under the Securities Act, and (iii) the public offering has been consummated and the Registrable Securities of the Exchanging Holders have been sold on the terms and conditions specified therein. Notwithstanding anything to the contrary contained herein, the Company may delay the filing or effectiveness of a registration statement for up to 90 days if (i) the Company is engaged in a firm commitment underwritten public offering of shares of its Common Stock and the Exchanging Holders are permitted to include all of the Registrable Securities in such public offering or (ii) the Board of Directors of the Company determines in its reasonable judgment and in good faith that the filing of such a registration statement or the making of any required disclosure in connection therewith would have a Material Adverse Effect on the Company or substantially interfere with a significant transaction in which the Company is then engaged. The Company will promptly give the Exchanging Holders written notice of such determination and an approximation of the period of the anticipated delay. The Company shall provide written notice to the Exchanging Holders of the end of each delay period. The Company shall not be entitled to initiate a delay period unless it shall concurrently prohibit sales by such other security holders under registration statements covering securities held by such other security holders and have in place a policy that prohibits sales of securities of the Company by senior executive officers during such period. (iii) The Company shall be entitled to include in any registration statement filed pursuant to this Section 8(a), for sale securities of the Company entitled generally to vote in the election of directors (or any securities convertible into or exchangeable for or exercisable for the purchase of securities so entitled generally to vote in the election of directors). If, however, such registration is an underwritten registration and the managing underwriters participating in such offering conclude that the total amount of Registrable Securities held by the Exchanging Holders and the Company desiring to participate in such registration to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering without delaying or jeopardizing the success of the offering (including the price per share of the securities to be sold) then the amount of Common Stock to be offered for the account of the Company shall be reduced to zero, if necessary. (b) Piggy-Back Registration. When the Company registers the Registrable ------------------------ Securities held by the Exchanging Holders under the Securities Act for sale to the public, the Company hereby agrees to register the shares of Common Stock and Special Stock held by Southwest Royalties Holdings, Inc. ("SRH Registrable Securities") on the same terms and conditions as the securities otherwise being sold pursuant to such registration, and the Company will use its best efforts to cause the SRH Registrable Securities to be included in the securities to be covered by the registration statement proposed to be filed by the Company on the same terms and conditions as any similar securities included therein, all to the extent requisite to permit the sale or other disposition by SRH of the SRH Registrable Securities so registered, subject to any other restrictions relating to such SRH Registered Securities; provided, however, that the Company may at any time prior to the effectiveness of any such registration statement, in its sole discretion and without the consent of SRH, abandon the proposed registration of the SRH Registrable Securities in its entirety. If such registration is an underwritten registration, the number of SRH Registrable Securities to be included in such a registration may be reduced or eliminated if and to the extent the managing underwriter concludes that such inclusion would jeopardize the successful marketing of the securities proposed to be offered and sold thereunder. 8 Notwithstanding anything to the contrary contained in this Section 8(b), in the event that there is a firm underwriting commitment offer of securities of the Company pursuant to a registration statement covering Registrable Securities of the Exchanging Holders or Common Stock of the Company and SRH does not elect to sell its SRH Registrable Securities to the underwriters of the Company's securities in connection with such offering, SRH shall not offer for sale, sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock, or any securities convertible into or exchangeable into or exercisable for any shares of Common Stock during the period of distribution of the Company's securities by such underwriters, which shall be specified in writing by the underwriters and shall not exceed 90 days following the date of effectiveness under the Securities Act of the registration statement relating thereto. (c) Registration Procedures. If and when the Company, pursuant to ----------------------- Section 8(a) or (b), becomes obligated to effect the registration of any of the Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (i) prepare and file as promptly as possible with the Commission the registration statement in accordance with this Section 8 with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (as determined below); provided, that before filing a registration statement or prospectus or any amendment or supplement thereto, including documents incorporated by reference after the initial filing of any registration statement, the Company will furnish to the Holders of the Registrable Securities who beneficially own 10% or more of such Registrable Security covered by such registration statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of such Holders and underwriters; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified below and as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (iii) furnish to each Selling Holder and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus and each document incorporated by reference therein prior to the filing with the Commission) as such Persons may reasonably request in order to review such documentation and to facilitate the public sale or other disposition of the Registrable Securities covered by such registration statement; (iv) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Selling Holders or, in the case of an underwritten public offering, the managing underwriter, shall reasonably request; 9 (v) immediately notify each Selling Holder and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vi) furnish at the request of a Selling Holder, (i) on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration statement (or on the effective date in the case of an offering that is not underwritten), an opinion of counsel for the Company dated as of such date and addressed to the underwriters, if any, and to the Selling Holders, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus, and each amendment or supplement thereof, comply as to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations thereunder of the Commission (except that such counsel need express no opinion as to the financial statements or any engineering report contained or incorporated therein) and (C) to such other effects as may reasonably be requested by counsel for the underwriters or by any such Selling Holder or its counsel, and (ii) on the effective date of the registration statement and on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration statement, a letter dated such dates from the independent accountants retained by the Company, addressed to the underwriters, if any, and to the Selling Holders, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company and the schedules thereto that are included or incorporated by reference in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable requirements of the Securities Act and the published rules and regulations promulgated thereunder, and such letter shall additionally address such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) included in the registration statement in respect to which such letter is being given as the underwriters or any Selling Holder may reasonably request; (vii) use its reasonable best efforts to keep effective and maintain a registration, qualification, approval or listing obtained to cover the Registrable Securities as may be necessary for the Selling Holders to dispose thereof and shall from time to time amend or supplement any prospectus used in connection therewith to the extent necessary in order to comply with applicable law; (viii) use its reasonable best efforts to cause the Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Selling Holders to consummate the disposition of such Registrable Securities; and (ix) enter into customary agreements (including, if requested, an underwriting agreement in the customary form) and take such other actions as are reasonably requested by the 10 Selling Holders or the underwriters, if any, in order to expedite or facilitate the disposition of such Registrable Securities. The period of distribution of Registrable Securities in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Registrable Securities in any other registration shall be deemed to extend until the earlier of the sale of all Registrable Securities covered thereby or the fulfillment of the Company's obligations under subsection (vii) of this Section 8(c). In connection with each registration hereunder, each Selling Holder will furnish promptly to the Company in writing such information with respect to itself and the proposed distribution by it as shall be reasonably necessary in order to ensure compliance with federal and applicable state securities laws. In connection with each registration hereunder with respect to an underwritten public offering, each Selling Holder agrees to enter into a written agreement with the managing underwriter or underwriters selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between underwriters and companies of the Company's size and investment stature, provided that such agreement shall not contain any such provision applicable to the Selling Holders that is inconsistent with the provisions hereof; and further provided, that the time and place of the closing under said agreement shall be as mutually agreed upon among the Company, the Selling Holders and such managing underwriter. (d) Expenses. -------- (i) All expenses incident to the Company's performance or compliance with Section 8 of this Agreement, including without limitation, all registration and filing fees, blue sky fees and expenses, printing expenses, listing fees, fees and disbursements of counsel and independent public accountants for the Company, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, and costs of insurance and reasonable out-of-pocket expenses of the Selling Holders, but excluding any Selling Expenses (as defined below), are herein called "Registration Expenses." All underwriting discounts and selling commissions attributable to the sale of the Registrable Securities are herein called "Selling Expenses." (ii) The Company will pay all Registration Expenses with each registration statement filed pursuant to this Agreement, whether or not the registration becomes effective, and the Selling Holders shall pay Selling Expenses in connection with any Registrable Securities registered and sold pursuant to this Agreement. (e) Indemnification in Connection with Registration. ----------------------------------------------- (i) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless each Selling Holder thereunder and each underwriter of Registrable Securities thereunder and each 11 Person, if any, who controls such Selling Holder or underwriter within the meaning of the Securities Act and the Exchange Act, against any losses, claims, damages or liabilities (including reasonable attorneys' fees) ("Registration Rights Losses"), joint or several, to which such Selling Holder or underwriter or controlling Person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Registration Rights Losses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such Selling Holder, each such underwriter and each such controlling Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Loss or actions; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such Selling Holder, such underwriter or such controlling Person in writing specifically for use in such registration statement or prospectus. (ii) Each Selling Holder agrees to indemnify and hold harmless the Company, its directors, officers, employees and agents and each Person, if any, who controls the Company within the meaning of the Securities Act or of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Selling Holder, but only with respect to information with respect to such Selling Holder furnished in writing by or on behalf of such Selling Holder expressly for inclusion in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto. (iii) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under this Section 8(e). In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 8(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, (i) if the indemnifying party has failed to assume the defense and employ counsel or (ii) if the defendants in any such action include both the indemnified party and the indemnifying party and counsel to the indemnified party shall have concluded that there may be reasonable defenses available to the indemnified party that are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, then the 12 indemnified party shall have the right to select a separate counsel and to assume such legal defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (iv) If the indemnification provided for in this Section 8(e) is not available to the Company or the Selling Holders or is insufficient to hold them harmless in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each such indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses as between the Company on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of each Selling Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact or the omission or alleged omission to state a material fact has ben made by, or relates to, information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or 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 is not guilty of such fraudulent misrepresentation. (f) Stock Splits, Dividends, Recapitalizations, etc. Any shares or ----------------------------------------------- other securities resulting from any stock split, stock dividend, reclassification of the Common Stock of the Company, merger, consolidation or reorganization of the Company which may be received by the Holders shall also be deemed to be Registrable Securities. (g) Registrable Securities. (a) Any Registrable Security will cease ---------------------- to be a Registrable Security when (i) a registration statement covering such Registrable Security has been declared effective by the Commission and such Registrable Security has been issued, sold or disposed of pursuant to such effective registration statement or (ii) such Registrable Security is held by the Company or any of its subsidiaries. 9. Definitions. Unless otherwise defined in this Agreement, the terms set ----------- forth below have the meanings as so defined: "Business Day" means each day in which banking institutions in New York are not required or authorized by law or executive order to close. "Commission" means the Securities and Exchange Commission. "Common Stock" means shares of common stock of the Company, $.01 par value per share. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 13 "Holders" means the record holder of a Registrable Security. "Person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other governmental entity. "Registrable Securities" means the shares of Class A Common Stock and Exchange Notes issuable pursuant to this Agreement and shares of Common Stock and Special Stock held by SRH, until such time as such securities cease to be Registrable Securities pursuant to Section 8(g) hereof. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Selling Holder" means a Holder who is selling Registrable Securities pursuant to a registration statement. "SRH" means Southwest Royalties Holdings, Inc. 10. Miscellaneous. ------------- (a) Amendment. Neither this Agreement nor any provision hereof may be --------- changed, waived, discharged or terminated orally or by course of dealing, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (b) Expenses. Whether or not the transactions contemplated hereby are -------- consummated, each of the Company and the Exchanging Holders, unless otherwise provided in writing, will pay their own expenses incurred in connection with the transactions contemplated hereby. (c) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier, telex, facsimile, telecopier, or similar writing: (i) if to the Exchanging Holders to the name of such Exchanging Holder at the respective address set forth on Schedule I , with a copy to: Duane Morris, LLP Suite 4200, One Liberty Place Philadelphia, Pennsylvania 19103-7396 Attention: David Sykes, Esq. Telephone Number: (215) 979-1000 Facsimile Number: (215) 979-1020 ; and 14 (ii) If to the Company, to: Southwest Royalties, Inc. 407 North Big Spring Midland, Texas 79701 Telephone No.: (915) 686-9927 Facsimile No.: (915) 688-0190 , with a copy to: Baker, Donelson, Bearman & Caldwell 1800 Republic Centre 633 Chestnut Street Chattanooga, Tennessee 37450 Attention: J. Porter Durham, Esq. Telephone No.: (423) 756-2010 Facsimile No.: (423) 756-3477 (iii) All such notices and communications shall be deemed to have been duly given: (i) when delivered by hand, if personally delivered; (ii) five (5) business days after being deposited in the mail, postage prepaid, if mailed; (iii) one (1) business day after being timely dispatched postage prepaid, if by internationally recognized next-day courier; (iv) when answered back, if telexed; (v) when receipt acknowledged, if sent by facsimile transmission and (vi) if given by any other means, when delivered at the addresses referred to in this Section. Any of the above addresses may be changed by notice made in accordance with this Section 10(c). (d) Parties in Interest. All the terms and provisions of this ------------------- Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not. (e) Headings. The headings of the sections and paragraphs of this -------- Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. (f) Choice of Law. The internal laws of the State of Delaware shall ------------- govern the enforceability and validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereto without giving effect to conflicts of laws, rules or principles. (g) Entire Agreement. This Agreement contains the entire agreement ---------------- among the parties hereto with respect to the subject matter hereof and such Agreement supersedes and replaces all other prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof. 15 (h) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. (i) Jurisdiction. Any suit, action or proceeding seeking to enforce any ------------ provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may be brought in any federal or state court located in the State of Delaware, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 10(c) shall be deemed effective service of process on such party. (j) No Implied Waiver. No failure or delay by any party in exercising any ----------------- right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 16 (k) Waiver of Jury Trial. -------------------- EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. (l) Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties 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 in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. BEFORE EXECUTING THIS AGREEMENT, EACH EXCHANGING HOLDER SHOULD CONSULT WITH ITS TAX ADVISORS REGARDING THE CONSEQUENCES OF THE EXCHANGE AND OWNERSHIP OF THE EXCHANGE CONSIDERATION. IN WITNESS WHEREOF, the parties hereto have caused this Note Exchange Agreement to be executed as of the date first above written. SOUTHWEST ROYALTIES, INC. By: ___________________________________________ Name: H.H. Wommack, III Title: President and Chief Executive Officer [NAME OF EXCHANGING HOLDER] By: ________________________________________ Name: ________________________________________ Title: ________________________________________ Address: ____________________________________ _______________________________________________ Taxpayer Identification Number:________________ 17 SCHEDULE I EXCHANGING HOLDERS
Senior Number of Shares Name and Address 10 1/2% Notes Secured Notes of Class A Common Stock - ---------------- ------------- ------------- -----------------------
18 EXHIBIT C DESCRIPTION OF OPINION C-1 EXHIBIT C Counsel of Southwest, MRO Holdings, Inc., Southwest Royalties Holdings, Inc. and Blue Heel Company (collectively, the "Companies", and, in each case, the "Company") will render an opinion regarding, in part, the following: o Each Company's existence, good standing and corporate power to enter into the relevant documents in connection with the Exchange; o The legality, validity and enforceability of each of the documents to which a Company is a party in connection with the Exchange; o That the execution, delivery and performance by each Company of the documents to be entered into in connection with the Exchange will not contravene such Company's organizational documents, any applicable New York, federal, Delaware law, statute or regulation, or any material contract, or require authority, approval or consent of any governmental, regulatory authority or agency of the United States or the State of New York; o That the security documents will be effective to create in favor of the Trustee or any collateral trustee for the benefit of the Holders valid liens on and security interests in the collateral under the Uniform Commercial Code and other applicable law; o The means by which the liens on and security interests in the collateral for the benefit of the Exchanging Holders in the Collateral will be perfected and, upon completion of the steps enumerated therein, that such Collateral will, in fact, be perfected. o The exemption from registration of the Exchange Consideration pursuant to Section 3(a)(9) of the Securities Act. o The Offer to Exchange and Consent Solicitation Statements complies with applicable securities laws. o The validity of the issuance of Notes and the due authorization, valid issuance and non-assessability of the shares of Class A Common Stock. This opinion will be subject to customary qualifications and assumptions. EX-99.(T3E4) 9 dex99t3e4.txt FORM OF STOCKHOLDERS AGREEMENT Exhibit T3E(4) FORM OF STOCKHOLDERS AGREEMENT This Stockholders Agreement (this "Agreement"), dated as of ___________, 2002, is entered into by and among Southwest Royalties, Inc., a Delaware corporation (the "Company"), Southwest Royalties Holdings, Inc. ("SRH"), a stockholder of the Company, H.H. Wommack, III, the majority owner of SRH ("Wommack") and certain other stockholders of the Company which are listed on Schedule A hereto (collectively, the "Holders"). RECITALS WHEREAS, the Holders own 900,000 of the issued and outstanding shares of the Class A Common Stock, $0.01 par value, of the Company (the "Class A Common Stock"); WHEREAS, SRH owns 200,000 shares of Special Stock, $.01 par value per share, of the Company (the "Special Stock") and 100,000 shares of Common Stock, $.01 par value per share, of the Company ("Common Stock"); and WHEREAS, the Holders, SRH and the Company desire to agree upon certain terms and conditions that will govern the ownership and transfer of the Class A Common Stock, Special Stock and Common Stock. AGREEMENTS NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions set forth in this Agreement, and intended to be legally bound hereby, the parties agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following terms have the following respective meanings: "Affiliate" means, with respect to any Person, (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such Person or any officer, director or employee of such Person or such other Person, (ii) the spouse, any immediate family member or any other relative who has the same principal residence of any Person described in clause (i) above, and any Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with, such spouse, family member or other relative, and (iii) any trust in which any Person described in clause (i) or (ii), above, is a fiduciary or has a beneficial interest. "Agreement" has the meaning set forth in the preamble hereto. "Board of Directors" means the Board of Directors of the Company. "Class A Common Stock" has the meaning set forth in the recitals hereto. "Common Stock" has the meaning set forth in the recitals hereto. "Company" has the meaning set forth in the preamble hereto. "Holders" has the meaning set forth in the preamble hereto. "Notice of Intention to Sell" means the written notice specified in Section 2.1. "Offerors" has the meaning set forth in Section 3.1(a). "Offered Shares" has the meaning set forth in Section 2.1. "Participation Offer" has the meaning set forth in Section 3.1(a). "Person" means any individual, corporation, partnership, limited liability company, trust, unincorporated association or other entity. "Sale" has the meaning set forth in Section 3.1(a). "Securities Act" or the "Act" means the Securities Act of 1933, as amended from time to time. "Shares" means shares of Common Stock, Class A Common Stock and Special Stock now or hereafter outstanding and any securities now or hereafter outstanding that may be exercised, converted or exchanged for Common Stock which are beneficially owned by the Holders or by SRH, as the case may be. "Special Stock" has the meaning set forth in the recitals hereto. "Subsidiary" means any Person of which at least a majority of the voting stock or voting interests of such Person are owned, directly or indirectly, by any other Person. "Transfer" means sale, transfer, assignment, gift, pledge, hypothecation, encumbrance, or other disposition, whether voluntary or involuntary, or any contract to do any of the forgoing. SECTION 2. RIGHT OF FIRST REFUSAL TO PURCHASE SRH'S SHARES 2.1 Intention to Sell. If SRH wishes to sell any of the Shares owned by SRH to a bona fide third party, SRH promptly shall deliver to the Company a Notice of Intention to Sell (the "Notice of Intention to Sell") setting forth the number of Shares to be sold (the "Offered Shares"), the proposed purchase price per Offered Share, the proposed purchaser (including any information concerning such purchaser and its Affiliates as the Company may reasonably request) and the other terms of sale. 2.2 Notice of Election to Purchase; Failure to Exercise Option to Purchase. The Company shall, within five (5) business days of its receipt of the Notice of Intention to Sell, give the Notice of the Intention to Sell to the Holders by certified or registered mail or recognized overnight delivery service (and shall notify SRH of the date on which such notice was sent to the Holders) and the Holders will then have the right and option to elect to purchase (i) all or a portion of such Offered Shares (if there is only one Holder electing to purchase such Shares) or (ii) up to its pro rata share of such Offered Shares (if there is more than one Holder electing to purchase such Shares) or (iii) such Offered Shares in such other proportions as the Holders may mutually agree, at the purchase price and on the terms stated in the Notice of Intention to Sell, such election to be made by giving written notice to the Company within twenty (20) business days after the date of receipt by the Holder of the Notice of Intention to Sell. For purposes of this Section 2.2, the date of receipt by the Holders of the Notice of Intention to Sell shall be deemed to be three (3) business days if such notice is sent by certified or registered mail or one (1) business day if such notice is sent by recognized overnight delivery service, and such 20-business day period for all Holders shall be deemed to commence as of the last date on which a Holder is deemed to have received such notice. 2.3 SRH's Rights upon Failure to Exercise Right to Purchase All Offered Shares. If the Holders fail to elect to purchase all of the Offered Shares under Sections 2.1 and 2.2, then SRH may sell all (but not less than all) of the Offered Shares remaining to the purchaser specified in the Notice of Intention to Sell at the price and upon the same terms set forth in the Notice of Intention to Sell, at any time within twenty (20) business days after the last date on which a Holder will be entitled to make any election pursuant to the provisions of Section 2.2. Any purchaser specified in the Notice of Intention to Sell shall not be bound by the provisions of this Agreement upon receipt of the Shares, unless such purchaser is Wommack or an Affiliate of SRH or Wommack, in which case such purchaser shall be bound by the terms of this Agreement as if such purchaser were SRH and shall be required to execute a joinder to this Agreement. If the Offered Shares are not sold by SRH during such twenty (20) business-day period, the right of SRH to sell such Offered Shares will expire and such remaining Offered Shares again will be subject to the restrictions contained in this Agreement and may not thereafter be Transferred except in compliance with this Agreement. 2.4 Payment for Offered Shares. Payment by a Holder for the Offered Shares will be made by certified or official bank check, payable to the order of SRH against delivery by SRH of (a) a certificate or certificates representing the Offered Shares so sold, duly endorsed for transfer to the purchasing party or accompanied by a stock transfer power duly endorsed for transfer, with all requisite stock transfer taxes paid and 2 stamps affixed and (b) written representations and warranties of SRH to the effect that: (i) SRH is the record and beneficial owner of the Shares being purchased and sold, has good and valid title to the Shares and the absolute right to transfer the same to the purchaser, and the same, upon transfer to the purchaser, will be free and clear of all claims, liens, pledges, restrictions (other than restrictions imposed by this Agreement and restrictions under federal and state securities laws) or encumbrances of any nature whatsoever; (ii) SRH shall have full power, authority or capacity, as applicable, to perform the terms of this Agreement relating to such purchase and sale; and (iii) any consent or approval of any governmental authority, court or third person required to be obtained by SRH to permit the Transfer of the Shares have been obtained. 2.5 Closing Date. The closing of the sale and delivery of Offered Shares being purchased and sold pursuant to this Section 2 to a Holder, and payment for such Offered Shares, will be held at any date on or prior to the twentieth (20th) business day after the last day upon which any Holder elects to purchase Offered Shares pursuant to this Section 2. 2.6 Continuation in Interest. In the event SRH ceases to exist, whether by sale, merger, liquidation or otherwise or ceases to hold the Company's capital stock, the provisions of this Section 2 shall only apply to the Shares beneficially owned by Wommack or his Affiliates (excluding the Company). SECTION 3. TAG-ALONG/CO-SALE RIGHTS 3.1 Tag-Along Rights. (a) If the Holders collectively desire to Transfer 450,001 or more Shares (as may be adjusted in accordance with the Amended and Restated Certificate of Incorporation) (the "Offerors"), whether by sale, merger or otherwise (a "Sale"), then at least fifteen (15) business days prior to the closing of such Sale, the Offerors shall make an offer in writing (the "Participation Offer") to SRH to include in the proposed Sale a percentage of SRH's Shares equal to a percentage of the outstanding Shares of Class A Common Stock being Transferred by the Offerors. For purposes of this Section 3.3, the Participation Offer shall not be deemed made until SRH has received such Participation Offer. (b) The Participation Offer must be in writing and describe the terms (including purchase price) and conditions of the proposed Sale and must be conditioned upon (i) the consummation of the transactions contemplated in the Participation Offer, and (ii) SRH's execution and delivery of all agreements and other documents as may be reasonably required by the acquiror in connection with such Sale. (c) If SRH desires to exercise its right to Transfer Shares in the Participation Offer, SRH shall deliver notice to the Offerors within seven (7) business days after its receipt of the Participation Offer, specifying the number of Shares (up to the number or percentage of such Shares specified in the Participation Offer) that SRH desires to Transfer in the Participation Offer, whereupon SRH shall be obligated to Transfer such Shares at the closing of such Sale, if and when it occurs. All Shares Transferred by SRH pursuant to this Section 3.1 must be Transferred at the same price and terms (including form of consideration) as the Shares being Transferred by the Offerors. 3.2 Co-Sale Rights. (a) In connection with any Sale by the Offerors of 450,001 or more Shares (as may be adjusted in accordance with the Amended and Restated Certificate of Incorporation), and if SRH fails to exercise its tag-along rights under Section 3.1, then the Offerors have the right to require SRH to Transfer a percentage of SRH's Shares which equals the percentage of Shares being Transferred by the Offerors. All Shares Transferred by SRH pursuant to this Section 3.2 must be Transferred at the same price and terms (including form of consideration) as the Shares being Transferred by the Offerors. (b) The Offerors shall give the Company and SRH at least seven (7) business days' prior written notice of any Sale as to which the Offerors intend to exercise their rights under Section 3.2(a). 3.3 Continuation in Interest. In the event SRH ceases to exist, whether by sale, merger, liquidation or otherwise, or ceases to hold the Company's capital stock, the provisions of this Section 3 shall only apply to the Shares beneficially owned by Wommack or his Affiliates (excluding the Company). 3 SECTION 4. LEGEND ON SHARE CERTIFICATES All certificates representing Shares now or hereafter held by the Holders and SRH, will be endorsed with the following legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF _____________, 2002. A COPY OF SUCH AGREEMENT IS ON FILE AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS AND MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE CORPORATE SECRETARY OF THE COMPANY." SECTION 5. DURATION OF AGREEMENT This Agreement will terminate and be of no further force and effect upon the first to occur of (i) five (5) years from the date of this Agreement or (ii) upon the sale, disposition or sale of all of the shares of Class A Common Stock held by the Holders or their Affiliates. SECTION 6. GOVERNING LAW; CONSTRUCTION This Agreement is governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflict of law rules. The headings or titles to sections in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the heading or title of any section. Unless otherwise specifically stated, references in this Agreement to sections or schedules refer to sections and schedules of this Agreement. SECTION 7. CONSENT TO JURISDICTION AND SERVICE OF PROCESS Each Holder, SRH, Wommack and the Company irrevocably consent to the non-exclusive jurisdiction of the state and federal courts located in the State of Delaware, agree that any action, suit or proceeding by or among the Holders (or any of them), SRH, Wommack or the Company arising out of this Agreement may be brought in any court in the State of Delaware, and waives any objection which any Holder, SRH, Wommack or the Company, as the case may be, may now or hereafter have to the choice of forum whether on personal jurisdiction, venue, forum non conveniens or on any other ground. For purposes of actions arising out of this Agreement, each Holder, SRH, Wommack and the Company hereby irrevocably designate, appoint and empower the Secretary of the State of Delaware to receive for and on behalf of such Holder, SRH, Wommack or the Company service of process in the State of Delaware, and each Holder, SRH, Wommack and the Company irrevocably consent to the service of process outside of the territorial jurisdiction of said courts by mailing copies thereof by registered or certified United States mail, postage prepaid, to such last known address of any Holder, SRH , Wommack or the Company, as shown in the records of the Company with the same effect as if such Holder, SRH, Wommack or the Company were a resident of the State of Delaware and had been lawfully served in such State. Nothing in this Agreement will affect the right to service of process in any other manner permitted by law. Each Holder, SRH, Wommack and the Company further agree that final judgment against it or him in any such action or proceeding will be conclusive and may be enforced in any other jurisdiction within or outside the State of Delaware by suit on the judgment, a certified or exemplified copy of which will be conclusive evidence of the fact and the amount of such judgment. SECTION 8. BENEFITS OF AGREEMENT; ASSIGNMENT This Agreement is irrevocable and is binding upon and inures to the benefit of the parties and their respective successors, permitted assigns, heirs, executors, administrators, and legal representatives. Except as otherwise provided in this Agreement, neither the Holders nor SRH may assign or delegate any of its rights or obligations under this Agreement without the prior written consent of the Company, except that the Holders may assign or delegate any of their rights or obligations to their Affiliates under this Agreement without the consent of the Company. 4 SECTION 9. NOTICES (a) All notices, requests, consents, and other communications required by this Agreement must be in writing, delivered in person or duly sent by recognized overnight courier or sent by facsimile or by first-class registered or certified mail, postage prepaid, addressed to the Company, SRH or the applicable Holder at the addresses set forth for such Persons on Schedule A hereto, or to such other address which has been designated by notice in writing by such party to the others in accordance with the provisions of this Section 9. (b) Each party will at all times have an address to which any communications may be sent. All such notices, requests, consents and other communications will be deemed to have been received (i) in the case of personal delivery or facsimile, on the date of such delivery, (ii) in the case of delivery by recognized overnight courier service, on the first business day following delivery of such notice to the overnight courier, and (iii) in the case of mailing, on the third (3rd) business day following such mailing. SECTION 10. MODIFICATION AND WAIVER Except as otherwise provided in this Agreement, neither this Agreement, nor any provision of this Agreement, may be modified, changed, waived, discharged or terminated except by an instrument in writing signed by the Company, SRH and the holders of at least a majority of the Shares held by the Holders. SECTION 11. ENTIRE AGREEMENT This Agreement constitutes the entire agreement among the parties with respect to matters or understandings involving the ownership, control or disposition of the Shares, and supersedes in its entirety any and all prior agreements or understandings, oral or written, among any or all of the undersigned relating to such ownership, control or disposition. SECTION 12. SEVERABILITY If any provision of this Agreement, or the application of such provision to any Person or circumstance, is adjudged or ruled to be invalid or unenforceable, the remaining provisions of this Agreement and the application of such provisions to other Persons or circumstances will not be affected by such invalidity or unenforceability. SECTION 13. REMEDIES The parties recognize and agree that if the Company, SRH or any of the Holders breaches its or his obligations under this Agreement, the other parties may not have an adequate remedy at law. Such breach will cause such other parties irreparable harm for which there may be no adequate remedy at law. If any party institutes an action or proceeding to enforce the provisions of this Agreement, such party will be entitled to the remedies of specific performance and injunctive relief, and any such Person against whom such action or proceeding is brought hereby waives any claim or defense that there is an adequate remedy at law. The right to obtain an injunction hereunder will not be considered a waiver of any right on the part of the non-breaching parties to recover damages and to assert any other claims for remedies which such parties may have at law or in equity. The non-prevailing party in any such action agrees to bear any expenses incurred by the prevailing party, including reasonable attorneys' fees, in enforcing its rights under this Agreement. SECTION 14. GENDER Whenever the context requires, pronouns of any gender will be deemed to include and designate the feminine, masculine or neuter gender. SECTION 15. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which will be deemed to be an original, but all of which taken together will constitute one and the same instrument. [Remainder of page intentionally left blank] 5 IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. SOUTHWEST ROYALTIES, INC. By:___________________________ Name:_________________________ Title:________________________ Address:______________________ ______________________ ______________________ SOUTHWEST ROYALTIES HOLDINGS, INC. By:___________________________ Name:_________________________ Title:________________________ Address:______________________ ______________________ ______________________ __________________________________ H.H. WOMMACK, III Address:__________________________ __________________________ __________________________ [other signature blocks to come] 6 Schedule A [Name and addresses of stockholders to come] 7 EX-99.(T3E5) 10 dex99t3e5.txt FORM OF NEW NOTE EXHIBIT T3E(5) (Face of Note) SOUTHWEST ROYALTIES, INC. FORM OF SENIOR SECURED NOTE DUE 2004 No. __________ $__________ CUSIP No. __________ Southwest Royalties, Inc., a Delaware corporation (hereinafter the "Issuer," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to _________, or registered assigns, the principal sum of $_________, on June 30, 2004. Interest Payment Dates: April 15 and October 15 of each year, commencing April 15, 2002. Record Dates: April 1 and October 1. Reference is made to the further provisions of this Note set forth below or on the reverse side of this Note which will, for all purposes, have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Issuer has caused this Instrument to be duly executed under its corporate seal. Dated: ___________________ SOUTHWEST ROYALTIES, INC., a Delaware corporation By: ______________________________ Name: ______________________________ Title: ______________________________ Attest Secretary: _________________________ 1 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, as Trustee Dated:__________________ By: ____________________________ Authorized Signatory 2 (Back of Note) SOUTHWEST ROYALTIES, INC. SENIOR SECURED NOTE DUE 2004 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE 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 DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("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 IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. 3 SOUTHWEST ROYALTIES, INC. Senior Secured Note due June 30, 2004 1. Interest. -------- Southwest Royalties, Inc., a Delaware corporation (the "Issuer"), promises to pay interest on the principal amount of the Senior Secured Notes (the "Notes") due June 30, 2004 (the "Maturity Date") at a rate of 10 1/2% per annum beginning on February 1, 2002 (as if the Notes were issued on that date) through December 31, 2002, at a rate of 11 1/2% per annum from January 1, 2003 through December 31, 2003, and at a rate of 12 1/2% per annum from January 1, 2004 until the Maturity Date. The Issuer will pay interest semi-annually on April 15 and October 15 of each year (each, an "Interest Payment Date"), commencing April 15, 2002. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from February 1, 2002. If the Issuer shall default in the payment of any installment of interest, or the principal of or premium, if any, on the Notes, when the same becomes due and payable, at maturity, upon redemption, by acceleration or otherwise (including the failure to make a payment to purchase the Notes tendered pursuant to a Change of Control Offer or an Excess Cash Offer), then interest on the Notes and all amounts then due thereunder shall accrue interest at the rate 18% per annum (the "Default Rate") until the Notes are paid in full or the Default in payment is cured. The Issuer shall pay interest on all such overdue amounts (including installments of interest, to the extent lawful) on demand without regard to any applicable grace periods. Interest will be computed on the basis of a 360-day year comprised of twelve 30 day months, and, in the case of a partial month, the actual number of days elapsed. 2. Method of Payment. ----------------- The Issuer shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments. Except as provided below, the Issuer shall pay principal and interest in such coin or currency of the United States of America as at the time of payment shall be legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Issuer may pay principal and interest by wire transfer of Federal funds, or interest by its check payable in such U.S. Legal Tender. The Issuer may deliver any such interest payment to the Paying Agent or the Issuer may mail any such interest payment to a Holder at the Holder's registered address. 3. Paying Agent and Registrar. -------------------------- Initially, Wilmington Trust Company (the "Trustee") will act as Paying Agent and Registrar. The Issuer may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. The Issuer or any of its Subsidiaries may, subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar. 4 4. Indenture. --------- The Issuer issued the Notes under an Indenture, dated as of ____________, 2002 (the "Indenture"), among the Issuer, the Guarantors named therein and the Trustee. Capitalized terms used herein but not otherwise defined herein have the meanings set forth in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the TIA, as in effect on the date of the Indenture. The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of them. The Notes are senior secured obligations of the Issuer limited in aggregate principal amount to $60,000,000. 5. Redemption. ---------- (a) The Issuer may redeem, at its election, the Notes in cash at the Redemption Price equal to 100% of the principal amount of the Notes so redeemed, including accrued and unpaid interest, if any, to the Redemption Date. (b) Unless otherwise prohibited by law, in the event the Issuer has available funds to repurchase all of the Senior Notes at par from the Permitted Credit Facility and a Subordinated Credit Facility and the weighted average interest cost of the borrowed funds under the Permitted Credit Facility and the Subordinated Credit Facility is 12% or less, then the Issuer shall redeem, and the Holders shall tender, without premium or penalty, all of the Notes for a redemption price equal to 100% of the principal amount of the Notes so redeemed, plus accrued but unpaid interest, if any, thereon to the Redemption Date; provided, however, that the Board of Directors may, by unanimous vote, direct the Issuer not to effect such repurchase; and provided further, that the Issuer shall not effect a repurchase if such repurchase would cause the Issuer to become insolvent. (c) Any redemption shall comply with Article Three of the Indenture. 6. Notice of Redemption. -------------------- Notice of redemption will be mailed by first class mail at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at his registered address, with a copy to the Trustee or any Paying Agent. Notes in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, from and after any Redemption Date, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent on such Redemption Date, the Notes called for redemption will cease to bear interest and the only right of the Holders of such Notes will be to receive payment of the Redemption Price and any accrued and unpaid interest to the Redemption Date. 7. Subordination. ------------- The Notes are generally subordinated in right to payment to the prior payment in full in cash of the Senior Indebtedness or other payment satisfactory to the Senior Lenders to the extent provided in the Indenture and the Collateral Trust Agreement. The Notes are pari passu in right of payment to the Junior Notes and superior with respect to certain Collateral to the Junior Notes 5 and subject to an existing Lien for the benefit of holders of the Junior Notes with respect to certain other Collateral. Each Holder, by accepting a Note, agrees to the subordination with respect to the Senior Indebtedness and authorizes and directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee as its attorney-in-fact for such purposes. "Senior Indebtedness" means the Obligations of the Issuer under the Permitted Credit Facility. 8. Denominations: Transfer: Exchange. --------------------------------- The Notes are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A Holder may register the transfer of, or exchange Notes in accordance with, the Indenture. The Registrar 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 register the transfer of or exchange any Notes selected for redemption. 9. Persons Deemed Owners. --------------------- The registered Holder of a Note may be treated as the owner of it for all purposes. 10. Unclaimed Money. --------------- If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agent(s) will pay the money back to the Issuer at its written request. After such payment, all liability of the Trustee and such Paying Agent(s) with respect to such money shall cease. 11. Discharge Prior to Redemption or Maturity. ----------------------------------------- If the Issuer at any time deposits into an irrevocable trust with the Trustee U.S. Legal Tender or U.S. Government Obligations sufficient to pay the principal of and interest on the Notes to redemption or maturity and complies with the other provisions of the Indenture relating thereto, the Issuer will be discharged from certain provisions of the Indenture and the Notes (including the financial covenants, but excluding its obligation to pay the principal of and interest on the Notes). 12. Amendment: Supplement: Waiver. ----------------------------- Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency, or make any other change with respect to matters or questions arising under the Indenture. 6 13. Restrictive Covenants. --------------------- The Indenture imposes certain limitations on the ability of the Issuer and its Subsidiaries to, among other things, incur additional Indebtedness or issue Disqualified Capital Stock, make payments in respect of its Capital Stock, enter into transactions with Affiliates, permit additional Liens on their respective assets, sell assets, change the nature of its business, merge or consolidate with any other Person and sell, lease, transfer or otherwise dispose of substantially all of its properties or assets. The limitations are subject to a number of important qualifications and exceptions. The Issuer must report to the Trustee on compliance with such limitations on an annual basis. 14. Successors. ---------- When a successor assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor will be released from those obligations. 15. Defaults and Remedies. --------------------- If an Event of Default occurs and is continuing, the Trustee and the Holders shall have such rights and remedies as are set in the Indenture and the Security Documents. 16. No Recourse Against Others. -------------------------- No stockholder, director, officer or employee, as such, of any obligor under the Notes or the Indenture or any successor corporation shall have any liability for any obligation of any obligor under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Note by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 17. Authentication. -------------- This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 18. Abbreviations and Defined Terms. ------------------------------- Customary abbreviations may be used in the name of a Holder of a Note 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). 19. CUSIP Numbers. ------------- Pursuant to recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer will cause CUSIP numbers to be printed on the Notes as a convenience to the Holder of the Notes. No representation is made as to the accuracy of such 7 numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. 20. Guarantees. ---------- Payment of the principal of, premium, if any, and interest on the Notes will be unconditionally guaranteed by Southwest Royalties Holdings, Inc., MRO Holdings, Inc. and Blue Heel and certain future Subsidiaries of the Issuer pursuant to and in accordance with the terms of Article Twelve of the Indenture. 21. Security and Collateral. ----------------------- The Obligations of the Issuer under the Notes are secured by a lien on substantially all of the Issuer's material assets and as otherwise set forth in the Indenture and the Security Documents. 8 ASSIGNMENT I or we assign this note to: _______________________________ _______________________________ _______________________________ _______________________________ (Print or type name, address and zip code of assignee) Please insert Social Security or other identifying number of assignee: _______________________________ and irrevocably appoint ______________________ agent to transfer this Note on the books of the Issuer. The agent may substitute another to act for him. Dated: ___________________ Signature: ________________________ (Sign exactly as name appears on the other side of this Note) 9 EX-99.(T3E6) 11 dex99t3e6.txt LTR. TO HOLDERS OF ORIGINAL NOTES IN PHYSICAL FORM EXHIBIT T3E(6) LETTER TO HOLDERS OF ORIGINAL NOTES IN PHYSICAL FORM SOUTHWEST ROYALTIES, INC. OFFER TO EXCHANGE WITH RESPECT TO ITS 10 1/2% SENIOR NOTES DUE 2004 AND CONSENT SOLICITATION THE EXCHANGE OFFER AND CONSENT SOLICITATION AND RELATED WITHDRAWAL AND REVOCATION RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002 OR SUCH OTHER DATE AS MAY BE ANNOUNCED (THE "EXPIRATION DATE"). _______, 2002 To Holders of Original Notes in Physical Form: Enclosed for your consideration are the Offer to Exchange and Consent Solicitation Statement dated March 4, 2002, including accompanying exhibits (the "Statement") and the Consent and Letter of Transmittal which together constitute: (i) the offer (the "Exchange Offer") by Southwest Royalties, Inc., a Delaware corporation ("Southwest"), upon the terms of and subject to the conditions set forth in the Statement and the accompanying Consent and Letter of Transmittal, to exchange $60 million aggregate principal amount of its 10 1/2% Senior Secured Notes due 2004 (the "New Notes") and 900,000 shares of its Class A common stock, $.01 par value per share (the "Class A Common Shares" and, together with the New Notes, the "Exchange Consideration"), for at least $115 million (the "Minimum Tender") of its issued and outstanding 10 1/2% Senior Notes due 2004 (the "Original Notes"), from the registered holders thereof (the "Holders"); and (ii) Southwest's solicitation of the consent of Holders (the "Consent Solicitation") (a) to amend certain provisions of the Indenture dated October 14, 1997, between Southwest, Southwest Royalties Holdings, Inc. ("SRH"), as parent guarantor, and State Street Bank and Trust Company, National Association (the "Original Trustee"), as trustee for the Holders, pursuant to which the Original Notes were issued (the "Original Indenture"), by approving and adopting a supplemental indenture, which will contain such amendments; (b) to waive certain provisions of the pledge agreement dated October 15, 1997, by and between SRH and the Original Trustee (the "Pledge Agreement"); and (c) to approve an amended and restated pledge agreement which will contain certain amendments to the Pledge Agreement (collectively, the waivers and amendments described above are the "Consents"). If and when the Exchange Offer is consummated, the New Notes will be issued pursuant to, and will be entitled to the benefits of, an Indenture (the "New Indenture"), to be dated the Exchange Date, between Southwest and Wilmington Trust Company, as trustee for the Holders (the "New Trustee"). In the event Southwest receives more than the Minimum Tender, the Exchange Consideration will not be proportionately increased upon receipt of such additional Original Notes in connection with the Exchange. Thus, in the event Southwest receives the Minimum Tender, for each $1,000,000 principal amount of Original Notes tendered, the Holders will receive $521,740 principal amount of New Notes and 7,826 shares of Class A Common Shares. If, however, the Holders tender all of the Original Notes outstanding, which equal $123.685 million in principal, then for each $1,000,000 principal amount tendered the Holders will receive $485,100 principal amount of New Notes and 7,276 shares of Class A Common Shares. If you decide to tender the Original Notes you hold and to deliver the related Consents in the Exchange Offer and Consent Solicitation, you must complete the enclosed Consent and Letter of Transmittal and send it, together with the Original Notes and with any other required documents, to Wilmington Trust Company, as depositary (the "Depositary"), at one of the addresses indicated on the back page of the Consent and Letter of Transmittal, in compliance with the procedures described in the Statement and in the Consent and Letter of Transmittal. By executing the Consent and Letter of Transmittal, you will also confer upon the Depositary a power of attorney to execute any instrument which Southwest may deem necessary or advisable to accomplish the purpose of the Exchange Offer now or in the future, including, but not limited to the Note Exchange Agreement, the Collateral Trust and Intercreditor Agreement and the Stockholders Agreement (the "Power of Attorney"). To validly tender Original Notes held in physical form pursuant to the Offer, a registered holder who holds Original Notes in physical form ("Physical Holders") must (i) deliver certificates representing such Original Notes to the Depositary; (ii) complete and sign the Consent and Letter of Transmittal (or a facsimile copy thereof) in accordance with the Instructions to the Consent and Letter of Transmittal, have the signature thereon guaranteed if required by the Instructions to the Consent and Letter of Transmittal and deliver it to the Depositary and (iii) complete and deliver any other documents required by the Instructions to the Consent and Letter of Transmittal and this Statement to the Depositary. A Physical Holder who desires to tender Original Notes and who cannot comply with the procedures set forth in the Statement and Consent and Letter of Transmittal for tender on a timely basis or whose Original Notes are not immediately available must comply with the procedures for guaranteed delivery set forth in the Statement and Consent and Letter of Transmittal. THE CONSENT AND LETTER OF TRANSMITTAL AND ANY CERTIFICATES EVIDENCING ORIGINAL NOTES TENDERED PURSUANT TO THE OFFER SHOULD BE SENT ONLY TO THE DEPOSITARY AND NOT TO SOUTHWEST OR THE ORIGINAL TRUSTEE. Failure to provide necessary information may result in your tender being rejected or may cause a delay in confirmation of your New Notes. The New Notes and certificates for Class A Common Shares will be distributed to the Depositary, which will act as agent for the validly tending Holders of Original Notes for the purposes of receiving New Notes and Class A Common Shares and transmitting such securities to exchanging Holders of Original Notes. If you have any questions about the Exchange Offer and Consent Solicitation or the procedures required to tender your Original Notes, to deliver Consents and to confer the Power of Attorney, please call Wilmington Trust Company at the telephone numbers listed on the back page of the Consent and Letter of Transmittal. Questions may also be directed to J. Steven Person, Executive Vice President of Southwest, by writing to him at 407 N. Big Spring Street, Midland, Texas 79701, or by phoning him at (915) 686-9927. Very truly yours, Southwest Royalties Inc. EX-99.(T3E7) 12 dex99t3e7.txt LETTER TO DTC PARTICIPANTS EXHIBIT T3E(7) LETTER TO DTC PARTICIPANTS SOUTHWEST ROYALTIES, INC. OFFER TO EXCHANGE WITH RESPECT TO ITS 10 1/2% SENIOR NOTES DUE 2004 AND CONSENT SOLICITATION THE EXCHANGE OFFER AND CONSENT SOLICITATION AND RELATED WITHDRAWAL AND REVOCATION RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002 OR SUCH OTHER DATE AS MAY BE ANNOUNCED (THE "EXPIRATION DATE"). ____________, 2002 To DTC participants, including Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: Southwest Royalties, Inc., a Delaware corporation ("Southwest"), is offering to exchange (the "Exchange Offer") $60 million aggregate principal amount of its 10 1/2% Senior Secured Notes due 2004 (the "New Notes") and 900,000 shares of its Class A common stock, $.01 par value per share (the "Class A Common Shares" and, together with the New Notes, the "Exchange Consideration"), for at least $115 million (the "Minimum Tender") of its issued and outstanding 10 1/2% Senior Notes due 2004 (the "Original Notes") from the registered holders thereof (the "Holders"). The Exchange Offer is made upon the terms of and subject to the conditions set forth in the Offer to Exchange and Consent Solicitation Statement dated March 4, 2002, including accompanying exhibits (the "Statement") and the Consent and Letter of Transmittal. The terms of the New Notes are discussed under the "The Exchange -- Terms of the New Notes" in the Statement and the terms of the Class A Common Shares are discussed in further detail under "The Exchange -- Terms of the Class A Common Shares" in the Statement. If and when the Exchange Offer is consummated, the New Notes will be issued pursuant to, and will be entitled to the benefits of, an Indenture (the "New Indenture"), to be dated the Exchange Date, between Southwest and Wilmington Trust Company, as trustee for the holders of the New Notes (the "New Trustee"). Concurrently with the Exchange Offer, we are also soliciting consents (the "Consent Solicitation") from the Holders (a) to amend certain provisions of the Indenture dated October 14, 1997, between Southwest, Southwest Royalties Holdings, Inc. ("SRH"), as parent guarantor, and State Street Bank and Trust Company, N.A. (the "Original Trustee"), as trustee for the Holders, pursuant to which the Original Notes were issued (the "Original Indenture"), by approving and adopting a supplemental indenture, which will contain such amendments; (b) to waive certain provisions of the pledge agreement dated October 14, 1997, by and between SRH and the Original Trustee (the "Pledge Agreement"); and (c) to approve an amended and restated pledge agreement that will contain certain amendments to the Pledge Agreement (collectively, the waivers and amendments described above are the "Consents"). Moreover, the execution of the Consent and Letter of Transmittal will also confer upon Wilmington Trust Company, as depositary ("Depositary"), a power of attorney to execute any instrument which Southwest may deem necessary or advisable to accomplish the purpose of the Exchange Offer now or in the future, including, but not limited to, the Note Exchange Agreement, the Collateral Trust and Intercreditor Agreement and the Stockholders Agreement (the "Power of Attorney"). In the event Southwest receives more than the Minimum Tender, the Exchange Consideration will not be proportionately increased upon receipt of such additional Original Notes in connection with the Exchange. Thus, in the event Southwest receives the Minimum Tender, for each $1,000,000 principal amount of Original Notes tendered, the Holders will receive $521,740 principal amount of New Notes and 7,826 shares of Class A Common Shares. If, however, the Holders tender all of the Original Notes outstanding, which equal $123.685 million in principal, then for each $1,000,000 principal amount tendered the Holders will receive $485,100 principal amount of New Notes and 7,276 shares of Class A Common Shares. For your information and for forwarding to your clients for whom you hold Original Notes registered in your name or in the name of your nominee, we are enclosing the following documents: 1. The Offer to Exchange and Consent Solicitation Statement, including exhibits; 2. The Consent and Letter of Transmittal, including a Notice of Guaranteed Delivery, to be used to accept the Exchange Offer and Consent Solicitation if Original Notes (or the book-entry transfer of such Original Notes), Consents, Powers of Attorney and all other required documents cannot be delivered to the Depositary by the Expiration Date; and 3. A form of letter which may be sent to your clients for whose accounts you hold Original Notes in your name or in the name of your nominee with space provided for obtaining such clients' instructions with regard to the Exchange Offer and Consent Solicitation. Pursuant to authority granted by DTC, any DTC participant whose name appears on a security position listing it as owner of the Original Notes and that has Original Notes credited to its DTC account (and thereby held of record by DTC's nominee) (a "DTC Participant") may directly tender such Original Notes and deliver Consents and Powers of Attorney with respect thereto as if it were the registered Holder of such Original Notes, and references herein to registered or record Holders shall include DTC Participants. To effectively tender Original Notes, DTC Participants must (i) deliver certificates representing such Original Notes to the Depositary or, in lieu of tendering Original Notes in physical form, electronically tender their Original Notes through DTC's ATOP, for which the transaction will be eligible; (ii) complete and sign the Consent and Letter of Transmittal (or a facsimile copy thereof) in accordance with the Instructions to the Consent and Letter of Transmittal, have the signature thereon guaranteed if required by the Instructions to the Consent and Letter of Transmittal and deliver it to the Depositary and (iii) complete and deliver any other documents required by the Instructions to the Consent and Letter of Transmittal and this Statement to the Depositary at its address set forth on the back page of this Statement. ALTHOUGH A DTC PARTICIPANT MAY TENDER ORIGINAL NOTES ELECTRONICALLY THROUGH ATOP, DTC PARTICIPANTS STILL MUST PHYSICALLY COMPLETE, SIGN AND DELIVER THE CONSENT AND LETTER OF TRANSMITTAL TO THE DEPOSITARY. CONSENTS AND POWERS OF ATTORNEY CANNOT BE DELIVERED THROUGH ATOP. If a DTC Participant tenders through ATOP, DTC will then verify the tender of the Original Notes and send an Agent's Message to the Depositary for its acceptance. A DTC Participant who desires to tender Original Notes and who cannot comply with the procedures set forth herein for tender on a timely basis must comply with the procedures for guaranteed delivery set forth in the Statement and the Consent and Letter of Transmittal. Please note, in addition to instructing you to tender Original Notes on their behalf and to deliver the accompanying Consents, the beneficial owner must also confer upon you a power of attorney that expressly appoints you the beneficial owner's true and lawful agent and attorney-in-fact and grants you the power to confer upon the Depositary the necessary Power of Attorney. The form letter to your clients that is enclosed herewith includes a page entitled "Instructions with Respect to the Exchange Offer and Consent Solicitation." This page contains all the necessary power of attorney language, and, once properly completed and executed by the beneficial owner and returned to you, will authorize you to take all actions necessary to accept the Offer. WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE EXCHANGE OFFER AND CONSENT SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002 UNLESS EXTENDED. IMPORTANT: THE CONSENT AND LETTER OF TRANSMITTAL MUST BE COMPLETED AND DELIVERED TO THE DEPOSITARY BY ALL HOLDERS THAT TENDER ORIGINAL NOTES IN THE --- OFFER. EVEN IF A HOLDER TENDERS ORIGINAL NOTES VIA DTC'S ATOP, SUCH HOLDER STILL MUST COMPLETE AND DELIVER THE CONSENT AND LETTER OF TRANSMITTAL TO THE DEPOSITARY. HENCE, TO VALIDLY TENDER ORIGINAL NOTES, DELIVER CONSENTS AND CONFER POWER OF ATTORNEY, ORIGINAL NOTES (IN PHYSICIAL FORM OR THROUGH BOOK-ENTRY DELIVERY PROCEDURES), A COMPLETED AND SIGNED CONSENT AND LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS MUST BE DELIVERED TO THE DEPOSITARY PRIOR TO THE EXPIRATION DATE. Southwest will promptly, upon receipt of a properly documented invoice, reimburse brokers, dealers, commercial banks, trust companies and other nominees for reasonable and customary out-of-pocket mailing and handling expenses incurred by them in forwarding material to their customers. Southwest will pay or cause to be paid all transfer taxes, if any, with respect to the transfer of any Original Notes to it pursuant to the Exchange Offer, except as otherwise provided in Instruction 7 of the Consent and Letter of Transmittal. Any inquiries you may have with respect to the Exchange Offer and Consent Solicitation or the procedures required to tender your Original Notes, deliver Consents and confer the Power of Attorney should be addressed to, and additional copies of the enclosed materials may be obtained from Wilmington Trust Company at the address and telephone number listed on the back page of the Consent and Letter of Transmittal. Questions may also be directed to J. Steven Person, Executive Vice President of Southwest, by writing to him at 407 N. Big Spring Street, Midland, Texas 79701, or by phoning him at (915) 686-9927. Very truly yours, Southwest Royalties, Inc. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS IS INTENDED TO CONSTITUTE YOU, OR ANY PERSON, THE AGENT OF SOUTHWEST, THE ORIGINAL TRUSTEE, THE NEW TRUSTEE, THE DEPOSITARY, OR ANY OF THEIR RESPECTIVE AFFILIATES, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT ON THEIR BEHALF OTHER THAN STATEMENTS EXPRESSLY MADE IN THE OFFER TO EXCHANGE AND CONSENT SOLICITATION STATEMENT OR THE CONSENT AND LETTER OF TRANSMITTAL OR USE ANY DOCUMENTS IN CONNECTION WITH THE EXCHANGE OFFER AND CONSENT SOLICITATION OTHER THAN FOR THE PURPOSES DESCRIBED HEREIN. EX-99.(T3E8) 13 dex99t3e8.txt LETTER TO CLIENT EXHIBIT T3E(8) LETTER TO BENEFICIAL OWNERS SOUTHWEST ROYALTIES, INC. OFFER TO EXCHANGE WITH RESPECT TO ITS 10 1/2% SENIOR NOTES DUE 2004 AND CONSENT SOLICITATION THE EXCHANGE OFFER AND CONSENT SOLICITATION AND RELATED WITHDRAWAL AND REVOCATION RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK TIME, ON APRIL 1, 2002 OR SUCH OTHER DATE AS MAY BE ANNOUNCED (THE "EXPIRATION DATE"). _________,2002 To Our Clients: Enclosed for your consideration are the Offer to Exchange and Consent Solicitation Statement dated March 4, 2002, including accompanying exhibits (the "Statement") and the Consent and Letter of Transmittal, which together constitute: (i) the offer (the "Exchange Offer") by Southwest Royalties, Inc., a Delaware corporation ("Southwest"), upon the terms and subject to the conditions set forth in the Statement and the accompanying Consent and Letter of Transmittal, to exchange $60 million aggregate principal amount of its 10 1/2% Senior Secured Notes due 2004 (the "New Notes") and 900,000 shares of its Class A common stock, $.01 par value per share (the "Class A Common Shares" and, together with the New Notes, the "Exchange Consideration"), for at least $115 million (the "Minimum Tender") of its issued and outstanding 10 1/2% Senior Notes due 2004 (the "Original Notes"), from the registered holders thereof (the "Holders"); and (ii) Southwest's solicitation of the consent of Holders (the "Consent Solicitation") (a) to amend certain provisions of the Indenture dated October 14, 1997, between Southwest, Southwest Royalties Holdings, Inc. ("SRH"), as parent guarantor, and State Street Bank and Trust Company, National Association (the "Original Trustee"), as trustee for the Holders, pursuant to which the Original Notes were issued (the "Original Indenture"), by approving and adopting a supplemental indenture, which will contain such amendments; (b) to waive certain provisions of the pledge agreement dated October 14, 1997, by and between SRH and the Original Trustee (the "Pledge Agreement"); and (c) to approve an amended and restated pledge agreement which will contain certain amendments to the Pledge Agreement (collectively, the waivers and amendments described above are the "Consents"). If and when the Exchange Offer is consummated, the New Notes will be issued pursuant to, and will be entitled to the benefits of, an Indenture (the "New Indenture"), to be dated the Exchange Date, between Southwest and Wilmington Trust Company, as trustee for the Holders (the "New Trustee"). The terms of the Exchange Offer also require that Holders that desire to accept the Offer confer upon Wilmington Trust Company, as depositary ("Depositary"), a power of attorney to execute any instruments which Southwest may deem necessary or advisable to accomplish the purpose of the Exchange Offer now or in the future, including, but not limited to, the Note Exchange Agreement, the Collateral Trust and Intercreditor Agreement and the Stockholders Agreement, all in accordance with the terms of and conditions to the Offer and the Consent Solicitation as described in the Statement (the "Power of Attorney"). In the event Southwest receives more than the Minimum Tender, the Exchange Consideration will not be proportionately increased upon receipt of such additional Original Notes in connection with the Exchange. Thus, in the event Southwest receives the Minimum Tender, for each $1,000,000 principal amount of Original Notes tendered, the Holders will receive $521,740 principal amount of New Notes and 7,826 shares of Class A Common Shares. If, however, the Holders tender all of the Original Notes outstanding, which equal $123.685 million in principal, then for each $1,000,000 principal amount tendered the Holders will receive $485,100 principal amount of New Notes and 7,276 shares of Class A Common Shares. Beneficial owners of Original Notes whose Original Notes are held in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee and instruct such registered Holder to exchange Original Notes, to deliver Consents and to confer the Power of Attorney. We are the Holder of Original Notes held for your account. Accordingly, a tender of such Original Notes, a delivery of the related Consents and a grant of the Power of Attorney to Depositary can be made only by us as the Holder and pursuant to your instructions. The enclosed Consent and Letter of Transmittal is furnished to you for your information only and cannot be used by you to tender Original Notes held by us for your account, to deliver Consents, or to confer the Power of Attorney. Rather, the detachable instruction form set forth below should be used by you to instruct us to accept the Offer on your behalf. If you decide to instruct us to tender the Original Notes, deliver the related Consents and grant the Power of Attorney on your behalf, you will also have to confer upon us a power of attorney, which expressly appoints us your true and lawful agent and attorney-in-fact and grants us the power to confer upon the Depositary the necessary Power of Attorney. By signing the instruction form set forth below, such power of attorney will be granted. We request that you advise us whether you wish us to tender the Original Notes held by us for your account, to deliver related Consents and to confer the Power of Attorney upon the terms and subject to the conditions set forth in the Statement and the Consent and Letter of Transmittal. Your instructions to us should be forwarded as promptly as possible in order to permit us to execute a Consent and Letter of Transmittal, tender your Original Notes and deliver all other necessary documents on your behalf in accordance with the terms of the Exchange Offer and Consent Solicitation. Your attention is directed to the following: 1. The Exchange Offer and Consent Solicitation and related withdrawal and revocation rights will expire at 5:00 p.m., New York, New York time, on April 1, 2002, or such other date as may be announced. 2. Southwest's obligation to exchange Original Notes for New Notes and Class A Common Shares and to accept Consents and Powers of Attorney is subject to certain conditions set forth in the Statement under the caption "Principal Terms of the Offer and Consent Solicitation." 3. Any transfer taxes with respect to the exchange and transfer of Original Notes pursuant to the Exchange Offer and Consent Solicitation will be paid by Southwest, except as otherwise provided in Instruction 7 of the Consent and Letter of Transmittal. If you wish to have us tender your Original Notes, deliver Consents and grant a Power of Attorney, please so instruct us by completing, executing, detaching and returning to us the detachable instruction form set forth below. An envelope to return your instructions is enclosed. If you authorize the tender of your Original Notes, the delivery of Consents and the grant of a Power of Attorney, all such Original Notes will be tendered and the related Consents and Power of Attorney delivered and conferred. Your instruction should be forwarded to us in ample time to permit us to submit a tender on your behalf before the Expiration Date. Please contact us with any inquiries you may have with respect to the Exchange Offer and Consent Solicitation or the procedures required to tender your Original Notes, deliver Consents and confer the Power of Attorney. Very truly yours, INSTRUCTION WITH RESPECT TO THE EXCHANGE OFFER AND CONSENT SOLICITATION The undersigned acknowledge(s) receipt of your letter, the Offer to Exchange and Consent Solicitation Statement dated March 4, 2002, including accompanying exhibits, and the related Consent and Letter of Transmittal relating to the Original Notes, Consents and Power of Attorney in connection with the Exchange Offer and Consent Solicitation by Southwest to (i) exchange its New Notes in an aggregate principal amount of $60 million and 900,000 shares of its Class A common stock in each case in the manner set forth in the Consent and Letter of Transmittal and in the Statement, for its issued and outstanding Original Notes that are validly tendered and accepted for exchange, upon the terms and subject to the conditions set forth in the Statement and (ii) solicit the Consents with regard to the waivers and amendment set forth in the Consent and Letter of Transmittal and in the Statement. This instructs you to tender the Original Notes held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Statement and the Consent and Letter of Transmittal with respect to the Original Notes tendered and to deliver the related Consents. In addition, pursuant to the terms and conditions of the Exchange Offer, the undersigned hereby irrevocably constitutes and appoints you, as the Holder of Original Notes on behalf of the undersigned, the true and lawful agent and attorney-in-fact of the undersigned with respect to such Original Notes, with full powers of substitution and revocation to confer upon Wilmington Trust Company, as depositary, a power of attorney to execute on behalf of the undersigned any instruments which Southwest may deem necessary or advisable to accomplish the purposes of the Exchange Offer now or in the future, including, but not limited to, the Note Exchange Agreement, the Collateral Trust Agreement and the Stockholders Agreement. Tender of Original Notes prior to the Expiration Date will be deemed to constitute Consent to the waivers and amendments set forth herein and in the Statement. SIGN HERE - ------------------------------------- ---------------------------------- Signature Signature (if more than one account holder) - ------------------------------------- ---------------------------------- Name (Please print) Name (Please print) - ------------------------------------- ----------------------------------- Address Telephone No. (including area code) - ------------------------------------- ----------------------------------- City, State and Postal Code Date - ------------------------------------- Taxpayer Identification or Social Security No. [__] By checking this box, all Original Notes held by you for my (our) account will be tendered in the Exchange Offer, all related Consents will be delivered and the Power of Attorney will be conferred. -----END PRIVACY-ENHANCED MESSAGE-----