-----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, Mo6ksP58EAx5rUjjhNIKqilIc+uMD4RuO/AKFXZJCNO9rSTbfSrWyn3//zj++c2o wfKrEtDdL2oxodaEMOn2iw== 0000930661-97-000709.txt : 19970328 0000930661-97-000709.hdr.sgml : 19970328 ACCESSION NUMBER: 0000930661-97-000709 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VINTAGE PETROLEUM INC CENTRAL INDEX KEY: 0000809428 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731182669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10578 FILM NUMBER: 97565298 BUSINESS ADDRESS: STREET 1: 4200 ONE WILLIAMS CTR CITY: TULSA STATE: OK ZIP: 74172 BUSINESS PHONE: 9185920101 MAIL ADDRESS: STREET 1: 4200 ONE WILLIAMS CENTER CITY: TULSA STATE: OK ZIP: 74172 10-K405 1 FORM 10-K405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 1-10578 VINTAGE PETROLEUM, INC. (Exact name of registrant as specified in its charter DELAWARE 73-1182669 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4200 ONE WILLIAMS CENTER TULSA, OKLAHOMA 74172 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 592-0101 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ----------------------- Common Stock, $.005 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of March 17, 1997, 25,714,443 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $471,734,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996, are incorporated by reference into Parts I and II of this Form 10-K. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 13, 1997, are incorporated by reference into Part III of this Form 10-K. ================================================================================ VINTAGE PETROLEUM, INC. FORM 10-K YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS Page ---- PART I Items 1 and 2. Business and Properties....................................... 1 Item 3. Legal Proceedings............................................. 27 Item 4. Submission of Matters to a Vote of Security-Holders.............................................. 28 Item 4A. Executive Officers of the Registrant.......................... 28 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................... 31 Item 6. Selected Financial Data....................................... 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 31 Item 8. Financial Statements and Supplementary Data................... 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 31 PART III Item 10. Directors and Executive Officers of the Registrant............ 31 Item 11. Executive Compensation........................................ 31 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 31 Item 13. Certain Relationships and Related Transactions................ 31 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 32 Signatures .............................................................. 36 -i- CERTAIN DEFINITIONS AS USED IN THIS FORM 10-K: Unless the context requires otherwise, all references to the "Company" include Vintage Petroleum, Inc., its consolidated subsidiaries and its proportionately consolidated general partner interests in various limited partnerships and joint ventures. "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels, "MMBbls" means million barrels, "BOE" means equivalent barrels of oil, "MBOE" means thousand equivalent barrels of oil and "MMBOE" means million equivalent barrels of oil. Unless otherwise indicated in this Form 10-K, gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60 degrees Fahrenheit. Equivalent barrels of oil are determined using the ratio of six Mcf of gas to one Bbl of oil. The term "gross" refers to the total acres or wells in which the Company has a working interest, and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. "Net production" means production that is owned by the Company less royalties and production due others. The terms "net" and "net production" include 100 percent of the Company's subsidiary Cadipsa S.A. and do not reflect reductions for minority interest ownership. The term "oil" includes crude oil, condensate and natural gas liquids. "Proved reserves" are estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. "Proved developed reserves" are those reserves which are expected to be recovered through existing wells with existing equipment and operating methods. "Proved undeveloped reserves" are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required. FORWARD-LOOKING STATEMENTS THIS FORM 10-K INCLUDES CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALL STATEMENTS IN THIS FORM 10-K, OTHER THAN STATEMENTS OF HISTORICAL FACTS, THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING THE DRILLING OF WELLS, RESERVE ESTIMATES, FUTURE PRODUCTION OF OIL AND GAS, FUTURE CASH FLOWS, FUTURE RESERVE ACTIVITY AND OTHER SUCH MATTERS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THE EXPECTATIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS WITHIN THE BOUNDS OF ITS KNOWLEDGE OF ITS BUSINESS, SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE: OIL AND GAS PRICES; EXPLOITATION AND EXPLORATION SUCCESSES; CONTINUED AVAILABILITY OF CAPITAL AND FINANCING; GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS; ACQUISITION OPPORTUNITIES (OR LACK THEREOF); CHANGES IN LAWS OR REGULATIONS; RISK FACTORS LISTED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION; AND OTHER FACTORS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. -ii- PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. GENERAL Vintage Petroleum, Inc. (the "Company") is an independent oil and gas company focused on the acquisition of producing oil and gas properties which contain the potential for increased value through exploitation and development. The Company, through its experienced management and engineering staff, has been successful in realizing such potential on prior acquisitions through workovers, recompletions, secondary recovery operations, operating cost reductions, and the drilling of development or infill wells. The Company believes that its primary strengths are its ability to add reserves at attractive prices through property acquisitions and subsequent exploitation, and its low cost operating structure. These strengths have allowed the Company to substantially increase reserves, production and cash flow during the last five years. As the Company has grown its cash flow and added to its technical staff, exploration has become a larger focus for its future growth. Planned exploration expenditures for 1997 of approximately $43 million represent 37 percent of the Company's capital budget, excluding acquisitions. At December 31, 1996, the Company owned and operated producing properties in 11 states, with its domestic proved reserves located primarily in four core areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas of the United States. During 1996, the Company expanded its Gulf Coast area through the acquisitions of certain oil and gas properties from Exxon Company, U.S.A. and Conoco Inc. In addition, the Company established a new core area in 1995 by acquiring 12 oil concessions, 11 of which are producing and operated by the Company, in the south flank of the San Jorge Basin in southern Argentina. The Company recently expanded its South American operations into Bolivia through the acquisition of Shamrock Ventures (Boliviana) Ltd. which owns and operates three blocks covering approximately 570,000 gross acres in the Chaco Plains area of southern Bolivia. The Company owned interests in 3,032 gross (2,004 net) producing wells in the United States as of December 31, 1996, of which approximately 81 percent are operated by the Company. The Company owned interests in 642 gross (629 net) producing wells in Argentina as of December 31, 1996, of which approximately 97 percent are operated by the Company. As of December 31, 1996, the Company's properties had proved reserves of 242.1 MMBOE, comprised of 178.3 MMBbls of oil and 382.8 Bcf of gas, with a present value of estimated future net revenues before income taxes (utilizing a 10 percent discount rate) of $1.8 billion and a standardized measure of discounted future net cash flows of $1.4 billion. The Company has consistently achieved growth in proved reserves, production and revenues and has been profitable every full year since its founding in 1983. From the first quarter of 1994 through the fourth quarter of 1996, the Company increased its average net daily production from 18,000 Bbls of oil to 35,800 Bbls of oil and from 78,500 Mcf of gas to 85,100 Mcf of gas. For the year ended December 31, 1996, the Company generated revenues of $311.7 million and net income of $41.2 million. Financial information relating to the Company's industry segments is set forth in "Note 8 to Consolidated Financial Statements - Segment Information" which is incorporated by reference from pages 42 and 43 of the Company's 1996 Annual Report to Stockholders. The Company was incorporated in Delaware on May 31, 1983. The Company's principal office is located at 4200 One Williams Center, Tulsa, Oklahoma 74172, and its telephone number is (918) 592-0101. -1- RECENT DEVELOPMENTS On February 5, 1997, the Company completed a public offering of 1,500,000 shares of its Common Stock, all of which were sold by the Company. The net proceeds to the Company of approximately $47.1 million were used to repay a portion of the existing indebtedness under the Company's revolving credit facility. Also on February 5, 1997, the Company issued $100 million of its 8 5/8% Senior Subordinated Notes Due 2009 (the "8 5/8% Notes"). The 8 5/8% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002. Upon a change in control (as defined) of the Company, holders of the 8 5/8% Notes may require the Company to repurchase all or a portion of the 8 5/8% Notes at a purchase price equal to 101 percent of the principal amount thereof; plus accrued and unpaid interest. The 8 5/8% Notes mature on February 1, 2009, with interest payable semiannually on February 1 and August 1 of each year. The 8 5/8% Notes are unsecured senior subordinated obligations of the Company, rank subordinate in right of payment to all senior indebtedness (as defined) and rank pari passu with the Company's 9% Senior Subordinated Notes Due 2005 (the "9% Notes"). The indenture for the 8 5/8% Notes contains limitations similar to those contained in the indenture for the 9% Notes. The net proceeds to the Company of approximately $96.4 million from the sale of the 8 5/8% Notes were used to repay a portion of the existing indebtedness under the Company's revolving credit facility. In February 1997, the Company reached an agreement with subsidiaries of Burlington Resources Inc. to purchase certain producing oil and gas properties and facilities located in the Gulf Coast of Texas and Louisiana for $114.1 million in cash, subject to closing adjustments. The effective date of the transaction is January 1, 1997, with closing scheduled for April 1, 1997, subject to board approvals by the Company and Burlington Resources Inc. and satisfaction of other normal conditions to closing. The properties to be acquired consist of several onshore fields, 5 offshore fields and a number of smaller fields covering over 74,000 net acres, about 46 percent of which are associated with offshore fields. The Company will operate the properties which have current net daily production averaging approximately 5,200 Bbls of oil and 17,000 Mcf of gas. Key producing areas are the West Ranch, Luling/Darst Creek and Terryville fields. West Ranch, located along the Texas Gulf Coast, produces primarily oil from the Greta sandstone formation at depths of 5,000 feet to 6,000 feet. Oil is also produced in the Luling/Darst Creek fields in south central Texas from the Edwards limestone formation at depths of less than 3,000 feet. Terryville, in north Louisiana, produces principally gas from the Cotton Valley and Gray formations between 9,000 feet and 13,000 feet. BUSINESS STRATEGY The Company's overall goal is to maximize its value through profitable growth in its oil and gas reserves and production. The Company has been successful at achieving this goal through its ongoing strategy of (a) acquiring producing oil and gas properties, at favorable prices, with significant exploitation potential, (b) focusing on low risk exploitation and development activities to maximize production and ultimate reserve recovery, (c) exploring non-producing properties, (d) maintaining a low cost operating structure, and (e) maintaining financial flexibility. Key elements of the Company's strategy include: . Acquisitions of Producing Properties. The Company has an experienced management and engineering team which focuses on acquisitions of operated producing properties that meet its selection criteria which include (a) significant potential for increasing reserves and production through low risk exploitation and development, (b) attractive purchase price, -2- and (c) opportunities for improved operating efficiency. The Company's emphasis on property acquisitions reflects its belief that continuing consolidation and restructuring activities on the part of major integrated and large independent oil companies has afforded in recent years, and should afford in the future, attractive opportunities to purchase domestic and international producing properties. This acquisition strategy has allowed the Company to rapidly grow its reserves at favorable acquisition prices. From January 1, 1994, through December 31, 1996, the Company acquired 120.7 MMBOE of proved oil and gas reserves at an average acquisition cost of $2.78 per BOE, which is significantly below the industry average. The Company replaced through acquisitions approximately 2.9 times its production of 41.5 MMBOE during the same period. . Exploitation and Development. The Company pursues workovers, recompletions, secondary recovery operations and other production optimization techniques on its properties, as well as development and infill drilling, to offset normal production declines and replace the Company's annual production. From January 1, 1994, through December 31, 1996, the Company spent approximately $154.8 million on exploitation and development activities. During this period, the Company's recompletion and workover activities resulted in improved production or operating efficiencies in approximately 77 percent of these operations, and the result of all of its exploitation activities, including development and infill drilling, succeeded in replacing more than 125 percent of production during this period. The Company has an extensive inventory of exploitation and development opportunities including identified projects which represent approximately a ten year inventory at current activity levels. The Company anticipates spending approximately $33 million in the United States and approximately $40 million in Argentina during 1997 on exploitation and development projects. . Exploration. The Company's overall exploration strategy balances high potential international prospects with lower risk drilling in known formations in the United States and Argentina. This prospect mix and the Company's practice of risk-sharing with industry partners is intended to lower the incidence and costs of dry holes. The Company makes extensive use of geophysical studies, including 3-D seismic, which further reduce the cost and increase the success of its exploration program. From January 1, 1994, through December 31, 1996, the Company spent approximately $38.6 million on exploration activities including the drilling of 52 gross (29.51 net) exploration wells, of which approximately 63 percent gross (60 percent net) were productive. The Company has increased its 1997 exploration budget by 79 percent over 1996 to approximately $43 million with spending planned in its core areas in the United States and Argentina as well as in Block 19 of Ecuador and the Chaco Block in Bolivia. . Low Cost Structure. The Company is an efficient operator and capitalizes on its low cost structure in evaluating acquisition opportunities. The Company generally achieves substantial reductions in labor and other field level costs from those experienced by the previous operators. In addition, the Company targets acquisition candidates which are located in its core areas and provide opportunities for cost efficiencies through consolidation with other Company operations. The lower cost structure has generally allowed the Company to substantially improve the cash flow of newly acquired properties. . Financial Flexibility. The Company is committed to maintaining substantial financial flexibility, which management believes is important for the successful execution of its acquisition, exploitation and exploration strategy. In conjunction with the purchase of substantial oil and gas assets in 1990, 1992 and 1995, the Company completed three public equity offerings, as well as a public debt offering in 1995, which provided the Company with aggregate net proceeds of approximately $272 million. Additionally, the -3- Company closed February 5, 1997, on its fourth public equity offering and its second public debt offering. Net proceeds from these offerings totaled approximately $143.5 million and were used to repay a portion of existing indebtedness under the Company's revolving credit facility thereby providing increased financial flexibility for future acquisitions. ACQUISITION ACTIVITIES Historically, the Company has allocated a substantial portion of its capital expenditures to the acquisition of producing oil and gas properties. The Company's emphasis on property acquisitions reflects its belief that continuing consolidation and restructuring activities on the part of major integrated and large independent oil companies has in recent years and should in the future afford attractive opportunities to purchase domestic and international producing properties. The Company's ability to quickly evaluate and complete acquisitions as well as its financial flexibility allow it to take advantage of these opportunities as they materialize. Since the Company's incorporation in May 1983, it has been actively engaged in the acquisition of producing oil and gas properties primarily in the Gulf Coast, East Texas and Mid-Continent areas of the United States, and in California since April 1992. In 1995, a series of acquisitions made by the Company established a new core area in the San Jorge Basin in southern Argentina. From January 1, 1994, through December 31, 1996, the Company made oil and gas property acquisitions involving total costs of approximately $335.5 million. As a result of these acquisitions, the Company acquired approximately 120.7 MMBOE of proved oil and gas reserves. The following table summarizes the Company's acquisition experience during the periods indicated:
PROVED RESERVES WHEN ACQUIRED ACQUISITION ----------------------------- COST PER ACQUISITION OIL GAS BOE WHEN COSTS (MBbls) (MMcf) MBOE ACQUIRED ----------- ------- ------- ------ ---------- (In thousands) U.S. Acquisitions 1994............................................. $ 36,544 5,645 29,655 10,588 $3.45 1995............................................. 38,896 8,840 39,486 15,421 2.52 1996............................................. 50,480 8,095 20,787 11,560 4.37 -------- ------ ------- ------- ----- Total U.S. Acquisitions....... 125,920 22,580 89,928 37,569 3.35 -------- ------ ------- ------- ----- Argentina Acquisitions 1995............................................. 168,762 65,653 - 65,653 2.57 1996............................................. 3,754 2,849 - 2,849 1.32 -------- ------ ------- ------- ----- Total Argentina Acquisitions.. 172,516 68,502 - 68,502 2.52 -------- ------ ------- ------- ----- Bolivia Acquisition 1996............................................. 37,048 4,953 57,758 14,579 2.54 -------- ------ ------- ------- ----- Total U.S. and International Acquisitions..... $335,484 96,035 147,686 120,650 $2.78 ======== ====== ======= ======= =====
The following is a brief discussion of significant acquisitions in recent years: 1994 Acquisitions. The Company acquired approximately 5.6 MMBbls of oil and 29.7 Bcf of gas through a series of small transactions in 1994 for a total of approximately $36.5 million. The oil reserves are located primarily in the Colgrade field in Louisiana and the Rincon field in Southern -4- California. The gas reserves are located primarily in California's Sacramento Basin, Louisiana's Gulf Coast area and the Mid-Continent area in Oklahoma. The Company has identified numerous exploitation opportunities in these properties, including infill development drilling, adding productive intervals in existing producing wells and recompleting inactive wells. 1995 Acquisitions. In May 1995, the Company purchased all of Texaco Exploration and Production, Inc.'s interests in nine oil fields and seven gas fields in California located primarily in Kern, Ventura, Los Angeles, Orange and Santa Barbara Counties and the Sacramento Basin area for $26.7 million in cash (the "Texaco Properties"). Netherland, Sewell & Associates, Inc. ("Netherland, Sewell") estimated that proved reserves attributable to these properties at the date of acquisition were approximately 7.5 MMBbls of oil and 16.4 Bcf of gas. The Company has identified numerous exploitation opportunities in these properties including development drilling, recompletions, steam flood expansions as well as lease operating expense efficiencies. In the third quarter of 1995, the Company closed two acquisitions of related properties located in the south flank of the San Jorge Basin in southern Argentina, establishing a new core area for the Company. On July 5, 1995, the Company purchased approximately 51.8 percent of the outstanding common stock of Cadipsa S.A. ("Cadipsa") for 302,808 shares of the Company's Common Stock (then valued at $5.7 million) and $7.4 million in cash. Cadipsa's major assets include a 100 percent working interest in two concessions and a 50 percent working interest in three additional concessions, all five of which are mature, producing and operated by Cadipsa, covering approximately 322,000 gross acres. Cadipsa's net daily production at the date of acquisition was approximately 3,700 Bbls of mid-gravity oil from multiple zones at depths between 2,500 feet and 5,500 feet. The Company has subsequently purchased an additional 45.0 percent of Cadipsa which increases its total ownership to approximately 96.8 percent. On September 29, 1995, the Company purchased 100 percent of the outstanding common stock of Vintage Oil Argentina, Inc., formerly BG Argentina, S.A. ("Vintage Argentina") from British Gas plc, for $37.0 million in cash. Vintage Argentina's major assets consist of a 50 percent working interest in three of the producing concessions operated by Cadipsa. In November 1995, the Company entered into separate agreements with Astra Compania Argentina de Petroleo S.A. ("Astra") and Shell Compania Argentina de Petroleo S.A. ("Shell") to acquire certain producing oil and gas properties in Argentina (the "Astra/Shell Properties"). On November 30, 1995, the Company completed the purchase of the Astra portion of the Astra/Shell Properties by paying $17.9 million in cash for Astra's 35 percent working interest in the Astra/Shell Properties. On December 27, 1995, the Company completed the purchase of the remaining 65 percent working interest from Shell for $32.8 million cash and deferred payments valued at $5.1 million. The acquisition of the Astra/Shell Properties resulted in the Company acquiring 100 percent working interests in seven concessions, six of which are currently producing and all of which are located on the south flank of the San Jorge Basin in southern Argentina. The concessions cover approximately 450,000 acres and are located in close proximity to the Company's other Argentina properties. 1996 Acquisitions. On January 31, 1996, the Company purchased interests in two fields located in south-central Louisiana from Conoco Inc. for $13.9 million (the "Conoco Properties"). Funds were provided by advances under the Company's revolving credit facility. The Conoco Properties included 26 gross (21 net) productive wells with net daily production of approximately 1,000 Bbls of oil and 550 Mcf of gas. All of the wells are now operated by the Company. The primary producing sands include the Ortego A, Haas, Tate, Wilcox 1 through 6 and the Middle and Basal Cockfield at depths ranging from 7,500 feet to 12,000 feet. Planned exploitation activities include workovers, recompletions and developmental drilling. -5- On November 20, 1996, the Company purchased certain producing oil and gas properties and facilities from Exxon Company, U.S.A. located in south Alabama for approximately $28.5 million in cash, subject to post-closing adjustments (the "Exxon Properties"). Funds were provided by advances under the Company's revolving credit facility. The Exxon Properties include an interest in two fields totaling approximately 5,000 net acres with a total of 17 gross (9.9 net) productive wells with current net daily production of approximately 1,450 Bbls of oil and liquids and 2,800 Mcf of gas. All of the wells are now operated by the Company. The primary producing sands are the Smackover and Norphlet at depths of approximately 15,000 feet. Future exploitation activities will include operating cost reductions, treating plant efficiencies, workovers and infill drilling. In November 1996, the Company agreed to purchase 100 percent of the outstanding common stock of Shamrock Ventures (Boliviana) Ltd. ("Shamrock") from affiliates of Ultramar Diamond Shamrock Corporation for approximately $29.0 million in cash. In addition, at closing on January 7, 1997, the Company repaid all of Shamrock's existing bank debt (approximately $9.2 million). Funds for the purchase of the stock and the repayment of debt were provided by advances under the Company's revolving credit facility. Shamrock's assets include (a) oil and gas properties valued at $37.0 million (including the effect of approximately $7.0 million of deferred income taxes recorded under the purchase method of accounting), and (b) inventory, receivables, cash and other assets net of liabilities (other than bank debt repaid at closing) of approximately $8.2 million. This transaction is subject to government approvals. The acquisition of Shamrock represents an extension of the Company's South American operating area that was initially established through a series of acquisitions in Argentina during 1995. The oil and gas properties of Shamrock consist of three blocks, totaling approximately 570,000 gross acres, in the Chaco Plains area of southern Bolivia. This region has experienced the greatest amount of exploration and currently accounts for the majority of the country's production. The properties consist of a 100 percent interest in the Chaco and Porvenir blocks, and a 50 percent interest in the Nupuco block. Proved reserves at the time of acquisition, as estimated by Netherland, Sewell, were 57.8 Bcf of gas and 5.0 MMBbls of oil. Current net daily production is approximately 14,500 Mcf of gas and 230 Bbls of condensate. The recent realized price on the properties for natural gas was approximately $1.39 per Mcf. The purchase also included a 29 mile gas pipeline and an interest in a gas processing plant with a capacity of 110 MMcf per day. Liquids are transferred through the pipeline to the processing plant. The current market for the gas is Argentina. The Company believes that the Shamrock properties contain substantial upside potential which may be realized through exploitation and future exploration. There can be no assurance, however, that such potential will be realized. Bolivia occupies the strategic pivotal position in the area known as the "Southern Cone" of South America. The Company expects that gas will be the key energy source for the developing regional economies. The development of the sizable gas reserves in southern Bolivia will play an important role as a source of energy for the net importing countries of this region, the most significant of which is Brazil. Third party plans call for construction of a gas pipeline from Santa Cruz, Bolivia to Sao Paulo, Brazil which is anticipated to be completed by 1999. The Company plans to begin work during 1997 to evaluate the exploration prospects on the Bolivian properties in order to be ready to take advantage of the increased market for Bolivian gas that should occur if the pipeline to Brazil is completed. There can be no assurance, however, that this Brazilian market will be developed. The Company intends to continue its growth strategy emphasizing reserve additions through its acquisition efforts. The Company may utilize any one or a combination of its line of credit with banks, institutional financing, issuance of debt securities or additional equity securities and internally generated cash flow to finance its acquisition efforts. No assurance can be given that sufficient external funds -6- will be available to fund the Company's desired acquisitions. For additional discussion of the Company's liquidity, see pages 29 and 30 of the Company's 1996 Annual Report to Stockholders. The Company does not have a specific acquisition budget since the timing and size of acquisitions are difficult to forecast. The Company is constantly reviewing acquisition possibilities. The Company may expand into new domestic core areas. The Company is also evaluating additional acquisition opportunities in other countries which the Company believes are politically stable. At the present time the Company has no binding agreements with respect to any significant acquisitions other than the agreement with Burlington Resources Inc. (see "--Recent Developments"). EXPLOITATION AND DEVELOPMENT ACTIVITIES The Company concentrates its acquisition efforts on proved producing properties which demonstrate a potential for significant additional development through workovers, behind-pipe recompletions, secondary recovery operations, the drilling of development or infill wells, and other exploitation techniques. The Company has pursued an active workover and recompletion program on the properties it has acquired and intends to continue its workover and recompletion program in the future. The Company's exploitation staff focuses on maximizing the value of the properties within its reserve base. The Company's exploitation engineers, who strive to offset normal production declines and replace the Company's annual production, have replaced more than 125 percent of its production during the last three years. The results of their efforts are reflected in revisions to reserves. Net revisions to reserves for 1996 totaled 29.5 MMBOE, or 171 percent of the Company's production of 17.3 MMBOE. From January 1, 1994, through December 31, 1996, the Company spent approximately $65.8 million on recompletion and workover operations. A measure of the overall success of the Company's recompletion and workover operations during this period (excluding minor equipment repair and replacement) has been that improved production or operating efficiencies have been achieved from approximately 77 percent of such operations. However, there can be no assurance that such results will continue. The Company anticipates spending in excess of $29 million on workover and recompletion operations during 1997. The expenditures required for this program have historically been, and are expected to continue to be, financed by internally generated funds. Development drilling activity is generated both through the Company's exploration efforts and as a result of the Company's obtaining undeveloped acreage in connection with producing property acquisitions. In addition, there are many opportunities for infill drilling on Company leases currently producing oil and gas. The Company intends to continue to pursue development drilling opportunities which offer potentially significant returns to the Company. From January 1, 1994, through December 31, 1996, the Company participated in the drilling of 142 gross (99.15 net) development wells, of which approximately 90 percent gross (90 percent net) were productive. However, there can be no assurance that this past rate of drilling success will continue in the future. The Company is pursuing development drilling in the West Coast, Gulf Coast, Mid- Continent and East Texas areas as well as its Argentina concessions and anticipates continued growth in its drilling activities. Additionally, the Company has numerous infill drilling locations in several East Texas area fields, specifically South Gilmer (Cotton Valley formation), Southern Pine (Travis Peak formation), Bethany Longstreet (Hosston formation) and Rosewood (Cotton Valley formation) fields. During 1996, the Company participated in the drilling of 68 gross (56.61 net) development wells. At December 31, 1996, the Company's proved reserves included approximately 88 development or infill drilling locations on its U.S. acreage and 160 locations on its Argentine acreage. In addition, the -7- Company has an extensive inventory of development and infill drilling locations on its existing properties which are not included in proved reserves. The Company spent approximately $43.3 million on development/infill drilling during 1996 and expects to spend approximately $45 million on its development/infill drilling activities during 1997. In connection with its exploitation focus, the Company actively pursues operating cost reductions on the properties it acquires. The Company believes that its cost structure and operating practices generally result in improved operating economics. Although each situation is unique, the Company generally has achieved reductions in labor and other field level costs from those experienced by the previous operators, particularly in its acquisitions from major oil companies. The following is a brief discussion of significant developments in the Company's recent exploitation and development activities: West Coast Area. The San Miguelito/Rincon field area, acquired from Conoco, Santa Fe Energy and Mobil, continues to be the primary focus of the Company's West Coast exploitation efforts. Consolidation of the three acquisition areas into a single operating unit has significantly reduced operating costs. At the time of the initial acquisition in July 1993, the Company identified 18 exploitation projects; however, since that time, the Company has completed 90 projects. Exploitation efforts including artificial lift enhancements, waterflood optimization, recompletions and sidetracking junked producers have resulted in sustaining the average field production at levels comparable to that of three years prior. As a result, the Company has been able to increase proved reserves each year since the properties were acquired. Also during 1996, the Company initiated pilot waterflooding operations on the Fourth Grubb producing interval. Based on this successful pilot injection test, full scale waterflooding operations will be initiated during 1997. Ongoing reservoir studies continue to identify significant upside to the Company's existing inventory of exploitation projects. Gulf Coast Area. In the Galveston Bay area of Texas, the Company performed 12 workovers in the Red Fish Reef, Trinity Bay and Fishers Reef fields which are 100 percent owned by the Company and which historically have had good exploitation potential. This work consisted of recompletions and repair jobs in the multi-pay Frio zones productive in the area which resulted in a total gross production increase of 250 Bbls of oil per day and 4,200 Mcf of gas per day. During 1996, the Company also performed recompletions and workovers on seven wells in the Tepetate field, a 100 percent owned field acquired from Conoco in January 1996, which resulted in gross production increases of 850 Bbls of oil per day and 400 Mcf of gas per day. The Company also experienced a successful 1996 exploitation program in the South Pass 24 field where three recompletions and one development well resulted in increased gross daily production from the field of 140 Bbls of oil and 4,370 Mcf of gas. Mid-Continent Area. Water injection began in October 1993 in the Shawnee Townsite Unit waterflood project and oil response began in November 1994. Gross unit production has increased from a low of 250 Bbls of oil per day to a current rate of approximately 2,750 Bbls of oil per day. Oil rates are forecasted to peak at approximately 3,500 Bbls of oil per day in 1997. An engineering and geological study performed in 1996 has refined the reservoir characterization and established the viability of drilling several infill development wells within the unit boundary to recover oil that would otherwise be undrained. In addition to the Shawnee waterflood, the Company is actively pursuing four other secondary recovery projects located in the Texas Panhandle. Each of these waterflood projects is targeting the Upper Morrow sand at depths of approximately 8,000 feet. Three of these units have been approved and water injection has been initiated. Installation of the final unit is expected to commence in the first quarter of 1997. Two analogous Upper Morrow fields producing in the immediate area have already responded favorably to waterflood operations. The Company owns working interests ranging from 82 percent to 100 percent in each of the four projects. The Company anticipates additional proved reserves will be added based on the level of success of these secondary recovery projects. -8- East Texas Area. Gas development projects remain the focus of the Company's exploitation efforts in East Texas. In the South Gilmer field, Upshur County, Texas, a Company engineering study performed in 1993 established the potential viability of 10 infill drilling locations along with workover opportunities in eight existing wells. This exploitation work was initiated in 1994 and successful workovers were conducted on five wells. Seven of the infill locations have now been drilled and completed. As a result of this work, gross field production has increased to over 9,000 Mcf per day. The Company's working interests in these wells range from 73 percent to 99 percent. Argentina Concessions. Development and extensional drilling along with development of secondary recovery projects have been the focus of the Company's exploitation efforts in its Argentina properties. During 1996, the Company continued the expansion of the Canadon Minerales Block 123A waterflood by adding additional sands to the flood and completing additional patterns. Water injection began in February 1992 and first oil response was seen approximately 12 months later. Since the initiation of this project, gross production has increased from 150 Bbls of oil per day to 1,300 Bbls of oil per day. During 1996, the Company installed two new waterflood projects in areas immediately adjacent to the Block 123A waterflood. There are two additional areas in Canadon Minerales for which new waterflood projects are planned for 1997. Numerous other areas within the other concessions are being evaluated as future waterflood candidates. Drilling activity commenced during February 1996 and reached its peak with three rigs running during the fourth quarter of 1996. Forty-one wells were drilled in 1996 and an additional 10 were in process at year end 1996. The two main areas where this activity was concentrated were Canadon Minerales with 25 wells drilled and Canadon Seco with 12 wells drilled. Largely due to the results of this drilling activity, gross production during 1996 increased from 3,500 Bbls of oil per day to 6,900 Bbls of oil per day in Canadon Minerales and from 1,300 Bbls of oil per day to 3,200 Bbls of oil per day in Canadon Seco. During 1996, the Company acquired 124 square kilometers (48 square miles) of 3-D seismic to aid in the optimum placement of future drilling locations. This data was acquired in an attempt to aid in the evaluation of the extremely complex stratigraphy that has historically caused problems in geologic interpretation in this basin. The first three wells that were drilled from the evaluation of the 3-D seismic data have proven successful. If future wells verify these initial results, the Company believes that substantial upside potential that has historically been overlooked can be economically exploited. EXPLORATION The Company's exploration program is designed to contribute significantly to its growth. Management divides the strategic objectives of its exploration program into two parts. First, in the U.S. and in Argentina, the Company's exploration focus is in its core areas where its geological and engineering expertise and experience are greatest. State-of-the-art technology, including 3- D seismic, is employed to identify prospects. Exploration in the U.S. and Argentina is designed to generate reserve growth in the Company's core areas in combination with its exploitation activities. The Company's longer-term plans are to increase the magnitude of this program with a goal of achieving production replacement through core area exploration. Such exploration is characterized by numerous individual projects with medium to low risk. Secondly, international exploration targets significant long-term reserve growth and value creation. International exploration projects in Ecuador and Bolivia are characterized by higher potential and higher risk. From January 1, 1994, through December 31, 1996, the Company spent $38.6 million on exploration activities. The Company plans to spend approximately $43 million on exploration activities during 1997, approximately $31 million in the U.S. and Argentina and approximately $12 million in other international areas. The following is a brief discussion of the primary areas of exploration activity for the Company: -9- United States. Gulf Coast Area. In the Galveston Bay area of Texas, the Company --------------- has acquired over 180 square miles of new 3-D seismic data and controls over 30,000 net acres in shallow state waters. The Company uses 3-D seismic data to identify new exploration and extensional opportunities in new reservoirs as well as in existing fields. The Company has identified several new prospects in Galveston Bay. The Texas State Tract-75, an exploratory well which utilized 3-D seismic data, was drilled in the Umbrella Point area and was successfully completed as a producer. One or more offset wells are planned to be drilled at Umbrella Point in 1997. The Texas State Tract No. 2-3A well in the area of Fishers Reef West is scheduled to spud during the second quarter of 1997. A third exploratory prospect, White Heron, is also scheduled to spud during the second quarter of 1997. The Galveston Bay prospects, if successful, may require multiple development wells to drain target reservoirs. Working interests net to the Company range between 33 percent and 100 percent in Galveston Bay. At the Company's Deweyville prospect, a new 10 square mile 3-D seismic survey is being used to aid in the identification of an expanded Yegua Trend on the Texas and Louisiana border. The Company has a 90 percent working interest in this prospect and is in the process of acquiring additional acreage. Mid-Continent Area. The focus of the Company's Mid-Continent ------------------ drilling program continues to be the Anadarko and Ardmore Basins. In the Fort-X prospect, four exploratory wells were drilled in 1996 utilizing 3-D seismic. All four wells found sands targeted to be developed. Two were completed as producers and are producing at 1,250 to 2,500 Mcf of gas per day. A fifth well is currently drilling. With the information obtained from these four wells, the Company has entered into two large 3-D seismic joint ventures in the Anadarko Basin aimed at increasing its inventory of exploratory prospects, drilling activity and reserves in selected multi-pay areas over the next several years. The Wheeler project, in which the Company has a 25 percent working interest, is a 150 square mile 3-D seismic survey in the Texas Panhandle targeting the productive Granite Wash, Morrow, Hunton and Arbuckle formations which are known to exist regionally. An exploratory well is planned for the first half of 1997. The second project is a 500 square mile 3-D seismic joint venture in which the Company has a 31.25 percent working interest. Eight areas of interest have been selected for geologic imaging, targeting the Granite Wash, Red Fork, Morrow, Springer, Hunton and Arbuckle formations. In the Stagecoach evaluation area of southern Oklahoma, the Company has initiated an extensional drilling program utilizing a new frac technology aimed at developing a large 6,000 net acre lease block. Drilling of the first well has begun with evaluation expected in early 1997. If successful, the play could open up additional extensional projects in this gas rich sub-basin. The Company's working interests in these prospects range between 70 percent and 100 percent. West Coast Area. Based on a discovery made by the Company in 1995, --------------- 3-D seismic data is being used to generate additional prospects in the Buttes Slough area of Northern California. Three to five wells are planned in the Grimes area during 1997. In the Zaca field located in Santa Barbara County, an exploratory horizontal well is targeted to be drilled in 1997 to access potential reserves in new fault blocks. The Company owns a 100 percent working interest in this field and has eight additional exploratory prospects. International. South America. The Company is currently pursuing several ------------- international exploratory projects which, if successful, have the potential to increase the growth of the Company. The Company believes that its existing projects in Ecuador and Bolivia have the potential to significantly increase reserves. The exploration play with the largest potential for reserve additions, as estimated by the Company, is Block 19 in the Oriente Basin in Ecuador. The Company has a 30 percent working interest in a project to explore Block 19. Numerous commercially productive fields have been discovered in this basin. Primary targets are the Hollin, Napo "U" and "T" sands which are productive in other significant fields in this basin. Two wells are planned for 1997. In Bolivia, geological studies are underway to -10- confirm a prospect which has been identified on the Company's recently acquired acreage. Pending the results of these studies, the Company plans to drill a well during 1997 that would test independent oil and gas concepts in this area. Additionally, the Company has identified several exploratory leads on the 570,000 acres it controls which, if successfully developed into prospects, could require several years to test. The Company's working interest in the area is 100 percent. In Argentina, in the Cerro Wenceslao concession in the western portion of the San Jorge Basin, an exploratory project is currently underway to test an area structurally high on an anticline feature to a prior well with oil shows. A similar structural feature located in the northeast portion of the same concession produces from numerous sands in the Bajo Barreal formation. This field is currently producing at a rate of 1,520 Bbls of oil per day with a cumulative recovery to date of 17 MMBbls of oil. The Company has a 100 percent working interest in the Cerro Wenceslao concession. OIL AND GAS PROPERTIES At December 31, 1996, the Company owned and operated producing properties in 11 states, with its U.S. proved reserves located primarily in four core areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas. In addition, during 1995 the Company established a new core area in the San Jorge Basin of Argentina. As of December 31, 1996, the Company operated approximately 3,101 productive wells and also owned non-operating interests in 579 productive wells. Oil and gas sales from the Company's producing properties accounted for approximately 83 percent, 82 percent and 76 percent of the Company's revenues for the years ended December 31, 1996, 1995 and 1994, respectively. The Company continuously evaluates the profitability of its oil, gas and related activities and has a policy of divesting itself of unprofitable leases or areas of operations that are not consistent with its operating philosophy. The following table summarizes the Company's proved reserves in its 30 largest fields in the U.S., its five largest concessions in Argentina and its largest concession in Bolivia at December 31, 1996, as estimated by Netherland, Sewell. These fields and concessions represent approximately 76 percent of the Company's proved reserves on such date. -11-
LOCATION NET OIL NET GAS AREA FIELD/CONCESSION NAME (COUNTY, STATE OR PROVINCE) (MBBLS) (MMCF) MBOE - -------------------------- ----------------------------- --------------------------- ------- ------- ------ West Coast San Miguelito Ventura, CA 17,753 4,580 18,516 South Mountain Ventura, CA 6,130 6,308 7,182 Rincon Ventura, CA 4,734 3,823 5,372 Ojai-Silverthread Ventura, CA 2,915 13,567 5,176 Santa Maria Valley/Cat Canyon Santa Barbara, CA 4,089 - 4,089 Buena Vista Hills Kern, CA 2,522 5,264 3,399 Pleito Ranch Kern, CA 2,993 1,212 3,195 North Tejon Kern, CA 1,701 8,440 3,108 Sespe Ventura, CA 2,690 2,433 3,096 Canfield Ranch Kern, CA 2,552 443 2,626 Zaca Santa Barbara, CA 2,101 - 2,101 Lathrop San Joaquin, CA - 11,475 1,913 Wheeler Ridge Kern, CA 1,352 2,029 1,690 North Antelope Hills Kern, CA 1,661 - 1,661 Tejon Kern, CA 1,532 143 1,556 Gulf Coast South Pass 24 Plaquemines, LA 2,500 10,009 4,168 Flomaton Escambia, AL 2,002 7,574 3,264 Tepetate Acadia, LA 2,305 1,017 2,475 Waveland Hancock, MS 249 10,827 2,053 Ville Platte Evangeline, LA 1,147 4,043 1,821 Pachuta Creek Clarke, MS 1,607 317 1,660 Fanny Church Escambia, AL 1,126 2,185 1,490 Trinity Bay Chambers, TX 1,310 1,022 1,481 East Texas South Gilmer Upshur, TX 762 26,147 5,120 Colgrade Winn, LA 3,960 - 3,960 Southern Pine Cherokee, TX - 22,132 3,689 Fruitvale Van Zandt, TX 21 20,308 3,405 Mid-Continent Shawnee Pottawatomie, OK 2,209 61 2,220 Booker Ochiltree, TX 1,775 92 1,791 Strong City Roger Mills, OK 53 10,149 1,745 San Jorge Basin, Argentina Canadon Minerales Santa Cruz Province 25,816 - 25,816 Las Heras/Piedra Clavada Santa Cruz Province 15,489 - 15,489 Canadon Seco Santa Cruz Province 11,547 - 11,547 Cerro Wenceslao Santa Cruz Province 9,205 - 9,205 Meseta Espinosa Santa Cruz Province 8,043 - 8,043 Chaco Plains, Bolivia Nupuco Tarija Department 860 45,236 8,399
West Coast Area. The Company expanded its operations to the West Coast in 1992 through two separate acquisitions of properties located in Kern, Ventura, and Santa Barbara Counties in California. Since 1992, the Company has continued to expand its operations in the West Coast area through additional property acquisitions. As of December 31, 1996, the area comprised 32 percent of the Company's total proved reserves and 53 percent of the Company's U.S. proved reserves. The Company currently operates 1,171 productive wells with current daily gross production of approximately 12,300 Bbls of mid-gravity oil, 2,050 Bbls of heavy oil and 27,100 Mcf of gas. In addition, the Company owns an interest in 71 productive wells operated by others. San Miguelito. The San Miguelito field is located in the west ------------- central portion of the greater Ventura Avenue field just north of the City of Ventura, California. Production is from multiple pay intervals in Pliocene-age sands which span 7,000 vertical feet. Well depths generally range from 7,000 feet to just over 16,000 feet in the deepest wells. Currently, active waterflood operations are -12- underway in three of the producing zones. With the field still producing in excess of 3,300 gross Bbls of oil per day, the Company believes additional waterflood potential exists in lower sands currently producing on primary depletion. The Company operates this single lease property with a 100 percent working and 87.5 percent net revenue interest. For additional information regarding this field, see "--Exploitation and Development Activities--West Coast Area." South Mountain. The South Mountain field, located just south of -------------- Santa Paula, California, has become one of the Company's major producing areas. As a result of the acquisition of the Texaco Properties, which included certain properties in this field, the Company now operates 226 active wells in the South Mountain field. Current gross daily production of 1,100 Bbls of oil and 2,175 Mcf of gas comes from Eocene and Pliocene sand intervals at depths of 3,000 feet to 10,000 feet. The solution gas and gravity drainage producing mechanisms are responsible for low decline rates which result in long-life reserves. In addition to the producing wells, the Company also operates the South Mountain Gas Gathering System which transports approximately 3,500 Mcf per day of Company and third party gas. The Company's working interests in the South Mountain field range from 50 percent to 100 percent with net revenue interests from 42 percent to 100 percent; however, the properties are predominantly owned 100 percent. Rincon. The Rincon field is located on the western updip end of ------ the greater Ventura Avenue field just north of the City of Ventura, California, and adjacent to the Company's San Miguelito field properties. Like the San Miguelito field, production is from multiple pay intervals of Pliocene-age sands. These intervals span several thousand feet with three waterfloods currently in operation. Producing intervals range in depth from approximately 3,500 feet to 14,000 feet. The Company operates this field with a 100 percent working and 80 percent net revenue interest. Current daily gross production from this field is approximately 1,000 Bbls of oil and 900 Mcf of gas. During 1996, the Company was able to increase total field production through development of uphole producing intervals and re-vitalization of existing waterfloods. The Company believes that significant upside reserve potential remains in the development of these shallow producing horizons as well as workover and stimulation activity in the presently producing intervals. For additional information regarding this field, see "--Exploitation and Development Activities--West Coast Area." Ojai-Silverthread and Timber Canyon. The Ojai field, which extends ----------------------------------- to the Silverthread and Timber Canyon areas, is located in the western central portion of Ventura County, California. All production in this area is from the fractured Monterey Shale formation which is encountered at depths ranging from 2,000 feet to 6,000 feet. The Company operates 118 productive wells in this field with a 100 percent working interest and net revenue interests ranging from 83 percent to 100 percent. The properties are mature, characterized by pressure depletion and gravity drainage, with highly predictable production decline rates. Combined current daily gross production exceeds 750 Bbls of oil and 3,200 Mcf of gas. Santa Maria Valley/Cat Canyon. The Company operates these two ----------------------------- heavy (low gravity) oil fields near Santa Maria, California. At the end of 1992, the Company built and commenced operation of two non-conventional fuel facilities. Those facilities are located in the Santa Maria Valley and Cat Canyon fields and now produce oil from tar sands. Since December 1992, the Company has produced over 800 MBbls of tar sand oil through these facilities. In addition, the Company operates one waterflood. Total produced volume from the fields currently is in excess of 1,500 gross Bbls of oil per day. The Company's working interests in the fields are 100 percent with net revenue interests ranging from 74.5 percent to 100 percent. Buena Vista Hills. The Buena Vista Hills field is located ----------------- approximately 25 miles east of Bakersfield, California. Production is from the Upper Channel, Main Massive and Interbed zones at a depth of 5,000 feet to 5,500 feet. The Company operates 24 productive wells in the field with a 100 percent working interest. Daily gross production is 650 Bbls of oil and 400 Mcf of gas. The Company -13- has an ongoing annual workover program in the field. Future projects include continued recompletions, infill drilling and potential waterflooding. Pleito Ranch. The Pleito Ranch field is located on the southern ------------ end of the San Joaquin Basin. Production is from Miocene-age Chanac and Santa Margarita sands below the Wheeler Ridge thrust fault. Well depths range from 11,000 feet to 14,000 feet. All productive wells are operated by the Company with a 100 percent working and net revenue interest. The recovery mechanism is predominantly gravity drainage and is characterized by low decline, long-life reserves with current gross production of approximately 600 Bbls of oil per day. North Tejon. The North Tejon field is located near the southern ----------- end of the San Joaquin Basin. This field is divided into a series of fault blocks with productive reservoirs in the lower Miocene, Oligocene, Zemorrian and Eocene sands. These producing zones range in depth from 5,400 feet to 11,300 feet. All productive wells are operated by the Company with a 100 percent working and net revenue interest. Current gross production rates average in excess of 200 Bbls of oil per day and 2,200 Mcf of gas per day. The Company believes that future projects in this field may increase production and reserves. Gulf Coast Area. The Gulf Coast Area comprised approximately 14 percent of the Company's December 31, 1996, total proved reserves. Production in this area is predominantly from structural accumulations in reservoirs of Miocene Age. The depths of the producing reservoirs in this area range from 1,200 feet to 14,500 feet. The Company currently operates 288 productive wells and owns interests in an additional 166 productive wells in this area. Daily gross production from the operated wells currently averages 7,000 Bbls of oil and 49,800 Mcf of gas. Additional development potential exists in this area from recompletions in existing wellbores particularly in the South Pass 24 (70 percent working interest), Red Fish Reef (100 percent working interest), and Panther Reef (96 percent average working interest) fields. South Pass 24. The South Pass 24 field is located in state waters ------------- of Plaquemines Parish, Louisiana, at shallow water depths averaging 10 feet to 20 feet. The 33 productive oil wells and seven productive gas wells in this field are operated by the Company and one other operator. The South Pass 24 field produces hydrocarbons from various members of the Miocene sand series at an average depth of approximately 7,000 feet. Future value enhancements in this field are expected to come from exploitation opportunities. Flomaton. This field, purchased from Exxon in 1996, is located in -------- Escambia County, Alabama, and produces from the Norphlet sand at 15,000 feet. Company operated gross daily production is 600 Bbls of oil and 10,000 Mcf of gas from nine wells. The Company anticipates significant reduction in operating costs due to planned treating plant efficiency improvements. The Company is also examining the feasibility of accelerating recovery through infill drilling. Tepetate. The Tepetate field is located in Acadia Parish, Louisiana. -------- The major producing sand is the Ortega A. The Company is the operator and owns a 100 percent working interest in the field. Over 20 productive sands are found in the field, primarily in the Frio and Anahuac formations. The depths of the producing sands range from 7,500 feet to 10,000 feet. The field currently produces 1,000 Bbls of oil per day and 12,500 Bbls of water per day from 11 producing wells. The water is reinjected through four injection wells and one disposal well. Several workovers and equipment changes have increased the production from 500 Bbls of oil per day to the current level since acquisition in February 1996. Waveland. The Waveland field is located in Hancock County, -------- Mississippi, and produces from the Washita-Fredricksburg, Paluxy and Mooringsport formations at depths ranging from 11,800 feet to 13,340 feet. The Company currently operates gross daily production of 3,500 Mcf of gas. This -14- field contains a significant amount of reserves that are behind-pipe in existing well bores. The Company intends to further develop this field through a series of workovers and recompletions with two to four such projects scheduled for 1997. Ville Platte. The Ville Platte field is located in east-central ------------ Evangeline Parish, Louisiana. The field has 26 productive sands with six sands currently producing. The Company acquired operating interest in the field in February 1996. The Haas, Tate, and Wilcox 1 through 6 were unitized in 1951 into the Ville Platte Unit. The Company operates the Ville Platte Unit with a 77.8 percent working interest. Other current producing sands are the Middle and Basal Cockfield reservoirs. The Company owns a 100 percent working interest in most of the wells completed in the non-unitized sands. The depths of the producing sands range from 8,000 feet to 12,000 feet. The field currently produces 225 Bbls of oil per day from 15 wells. East Texas Area. The East Texas Area comprised approximately eight percent of the Company's December 31, 1996, total proved reserves. The Cotton Valley, Smackover and Travis Peak formations are the dominant producing reservoirs on the Company's acreage in this area. The Company currently operates daily gross production of 1,250 Bbls of oil and 27,600 Mcf of gas from 673 operated productive wells in this area. The Company owns an interest in an additional 71 productive wells in this area. Significant infill drilling potential exists on the Company's acreage in the South Gilmer, Colgrade, Southern Pine, Rosewood, Bethany Longstreet and Bear Grass fields. The Company plans to continue infill drilling programs in Southern Pine, Colgrade and South Gilmer fields. During 1996, these infill drilling programs have resulted in the addition of five wells, all of which were successful. For additional information regarding these producing operations, see "--Exploitation and Development Activities--East Texas Area." South Gilmer. The South Gilmer field, the Company's largest field ------------ in the East Texas area, is located in Upshur County and produces from the Cotton Valley Lime formation at average depths of 11,300 feet to 11,800 feet. The Company currently operates 18 productive wells and owns interests in three additional productive wells in this field. A workover program implemented in 1994 increased production substantially in five wells. The Company began the drilling of an infill well in December 1994, with two additional wells drilled in 1995 and four wells in 1996. All seven wells resulted in successful completions. Significant behind-pipe reserves are booked for the Company's 6,727 gross acres in the Cotton Valley sand formation. Colgrade. The Colgrade field is located in Winn Parish, Louisiana -------- and currently produces 750 Bbls of oil per day from the Wilcox formation at a depth of 1,400 feet. The Company operates 437 active wells in this field. During 1996, a pilot project was initiated to increase fluid withdrawal rates from these wells using submersible pumps. To date, 38 wells tested using such pumps have indicated increased cumulative oil production of 144 Bbls per day. Projecting this success to an additional 257 candidate wells should result in a peak field rate in 1998 of 1,650 Bbls of oil per day, or an increase in excess of 100 percent over the current rate. These submersible pumps are low cost and replace conventional rod pump installations. Surface facilities are being modified to handle the increased rates. The Company generally has a 100 percent working interest and an 88 percent net revenue interest in this field. Southern Pine. The Southern Pine field is located in Cherokee ------------- County, Texas, and produces from the Travis Peak formation. The Company currently operates 26 productive wells in this field. The Company completed the drilling of eight development wells in 1995. These wells, combined with the ten wells acquired from Herd Producing Company in March 1995, increased gross daily production from 1,200 Mcf of gas to a peak rate of 10,000 Mcf of gas. The installations of plunger lift and central compression during 1996 have helped maintain the current gross daily production of 6,700 Mcf of gas. -15- Mid-Continent Area. The Mid-Continent Area extends from the Arkoma Basin of Eastern Oklahoma to the Texas Panhandle and north to include Kansas. This area comprises six percent of the Company's total proved reserves as of December 31, 1996. The Company currently operates daily gross production of 4,200 Bbls of oil and 28,400 Mcf of gas from 328 operated productive wells in this area. The Company owns an interest in an additional 249 productive wells in this area. The Company's largest field in the Mid-Continent Area is the Shawnee Townsite field, which the Company operates. On March 1, 1993, a unit was formed for secondary recovery operations with water injection initiated in October 1993. For additional information regarding this field, see "--Exploitation and Development Activities--Mid-Continent Area." Argentina Concessions. The Argentina properties consist primarily of 12 mature producing concessions located on the south flank of the San Jorge Basin. These concessions comprised approximately 33 percent of the Company's December 31, 1996, total proved reserves. The Company currently operates 625 productive wells (100 percent working interest) with daily gross production of 16,450 Bbls of oil. In addition, the Company owns an interest in 17 productive wells operated by others. At December 31, 1996, the Company's proved reserves included approximately 160 development or infill drilling locations and 281 workovers on its Argentina acreage. In addition, the Company has an extensive inventory of workovers and development or infill drilling locations on its Argentina properties which are not included in proved reserves. Canadon Minerales. The primary oil producing reservoirs of the ----------------- Canadon Minerales oil concession are the Mina del Carmen and Canadon Seco formations which are both fluvial channel sand bodies at depths ranging from 3,000 feet to 6,000 feet. This concession currently has 184 producing wells and 32 water injection wells with daily gross production of approximately 7,050 Bbls of oil. Approximately 20 percent of the concession's daily production is produced from the Block 123A waterflood, which contains 22 producing wells and 17 water injection wells. The Block 123A waterflood was expanded during 1996 to include additional sands. Also during 1996, two additional waterflood projects were initiated in areas adjacent to Block 123A. At this time there are two additional waterflood projects scheduled for development. Future evelopment plans at Canadon Minerales include numerous workovers and development drilling locations. Many of the workovers are expected to return idle wells back to production by perforating zones not produced by the former owner. Log cross sections reveal many zones which do not appear to have been previously tested. The proved undeveloped locations are generally infill development locations in areas offsetting existing production. Well depths vary from 3,000 feet to 6,000 feet. The first well was drilled in the first quarter of 1996 and 25 wells were drilled on this concession during 1996. See "--Exploitation and Development Activities--Argentina Concessions." Las Heras/Piedra Clavada. The primary oil producing reservoirs of ------------------------ the Las Heras/Piedra Clavada oil concession are the Castillo and Bajo Barreal formations which are both fluvial channel sand bodies with good to moderate sand quality at depths ranging from 3,500 feet to 7,000 feet. Currently, there are 88 producing wells and five water injection wells with daily gross production of approximately 1,200 Bbls of oil. There is one active waterflood in Block 24, which contains 13 producing wells and five water injection wells. In addition to the activities in Block 24, there are three other waterflood projects scheduled for development at Las Heras/Piedra Clavada. Future development plans at Las Heras/Piedra Clavada include numerous workovers and development drilling locations. Many of these workovers are expected to return idle wells back to production by perforating additional zones. Cross sections reveal many zones which do not appear to -16- have been tested. The proved undeveloped locations are generally infill development locations in areas offsetting existing production. Canadon Seco. The primary oil producing reservoirs of the Canadon ------------ Seco oil concession are the Canadon Seco and Mina del Carmen which are fluvial channel sand bodies at depths ranging from 4,000 feet to 7,000 feet. This field currently has 79 producing wells and eight water injection wells with a daily gross production of approximately 3,300 Bbls of oil. There are three active waterfloods at Canadon Seco which contain a total of 10 producing wells and eight water injection wells. The Block VIIIAo waterflood has additional drilling and water injection conversions scheduled for additional development of the concession. Additional development plans at Canadon Seco include numerous workovers and development drilling locations. Many of the workovers are expected to return idle wells back to production by perforating additional zones. See "-- Exploitation and Development Activities--Argentina Concessions." Cerro Wenceslao. The primary oil producing reservoir of the Cerro --------------- Wenceslao oil concession is the Bajo Barreal which contains sands at depths ranging from 1,000 feet to 3,000 feet. Currently, there are 122 producing oil wells and 9 water injection wells with daily gross production of approximately 1,550 Bbls of oil. Future development plans at Cerro Wenceslao include workovers, fracture stimulations, and development drilling on several drilling locations. In addition, the Company plans to further develop the significant waterflood potential in Block 2, Block 5 and the East Flank Block. Meseta Espinosa. The primary oil producing reservoirs of the --------------- Meseta Espinosa oil concession are the Canadon Seco and Mina del Carmen which are fluvial channel sand bodies with good to moderate sand quality at depths ranging from 4,000 feet to 7,000 feet. This concession currently has 103 producing wells and 10 water injection wells with a daily gross production of approximately 2,550 Bbls of oil. There are seven active waterfloods at Meseta Espinosa which contain a total of 17 producing wells and 10 water injection wells. One new proven waterflood project was installed during 1996. It will be followed by the implementation of a second new proven waterflood project. Additional development plans at Meseta Espinosa include several workovers and the drilling of development wells. Bolivia Concessions. The Bolivia properties consist of two producing concessions and one exploration concession located in the Chaco Plains area of southern Bolivia. The Company has a 100 percent working interest in the Chaco exploration concession and the Porvenir producing concession. In the other concession, Nupuco, the Company has a 50 percent working interest. The Company operates all three concessions. These concessions comprise approximately six percent of the Company's total proved reserves and include 6 gross (5.00 net) active producing wells, all of which are operated by the Company. The current daily gross production is approximately 35,000 Mcf of gas and 685 Bbls of condensate. Nupuco. The Nupuco field is located in the southern part of Bolivia ------ approximately 230 miles south of the city of Santa Cruz and approximately 60 miles north of the border with Argentina. The primary gas producing reservoirs are the Triassic age Cangapi and the Carboniferious age San Telmo and Escarpment. This field currently has 2 gross (1.00 net) active producing wells with daily gross production of approximately 30 MMcf of gas and 600 Bbls of condensate. -17- MARKETING The Company's gas production and gathered gas are sold primarily on the spot market or under market-sensitive, long-term agreements with a variety of purchasers, including intrastate and interstate pipelines, their marketing affiliates, independent marketing companies and other purchasers who have the ability to move the gas under firm transportation agreements. Because an insignificant amount of the Company's gas is committed to long-term fixed-price contracts, the Company is positioned to take advantage of rising prices for gas but it is also subject to gas price declines. In order to more efficiently handle spot market transactions, the Company's gas marketing activities are handled by Vintage Gas, Inc., its wholly-owned gas marketing affiliate, which commenced operation on May 1, 1991. This marketing affiliate purchases gas on the spot market from the Company and third parties. Generally, the marketing affiliate purchases this gas on a month-to-month basis at a percentage of resale prices. Gas marketing accounted for approximately 10 percent, 11 percent and 15 percent of the Company's revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Generally, the Company's domestic oil production is sold under short-term contracts at posted prices plus a premium in some cases. The Company's Argentina oil production is currently sold at port to ESSO SAPA and Petrobras at West Texas Intermediate spot prices less a specified differential. The most significant purchaser of the Company's oil during 1996 was Texaco Trading and Transportation, Inc. Such oil purchases amounted to approximately 15 percent of the Company's total revenues for 1996. No other purchaser of the Company's oil or gas during 1996 exceeded 10 percent of the Company's total revenues. The Company has previously engaged in oil and gas hedging activities and intends to continue to consider various hedging arrangements to realize commodity prices which it considers favorable. Three hedges (swap agreements) are currently in place for a total of 7,500 Bbls of oil per day at a weighted average price of $19.26 per Bbl (NYMEX reference price) for the period January 1997 through December 1997. GATHERING SYSTEMS The Company owns 100 percent interests in two oil and gas gathering systems located in Pottawatomie County, Oklahoma and Harris and Chambers Counties, Texas. In addition, the Company owns 100 percent interests in 22 gas gathering systems located in active producing areas of California, Kansas, Texas and Oklahoma. All of these gathering systems are operated by the Company. Together, these systems comprise approximately 300 miles of varying diameter pipe with a combined capacity in excess of 175 MMcf of gas per day. At December 31, 1996, there were 432 wells (most of which are operated by the Company) connected to these systems. Generally, the gathering systems buy gas at the wellhead on the basis of a percentage of the resale price under contracts containing terms of one to 10 years. Oil and gas gathering accounted for approximately 7 percent, 6 percent and 8 percent of the Company's revenues for the years ended December 31, 1996, 1995 and 1994, respectively. -18- RESERVES At December 31, 1996, the Company had proved reserves, as estimated by Netherland, Sewell, of 242.1 MMBOE, comprised of 178.3 MMBbls of oil and 382.8 Bcf of gas. The following table sets forth, at December 31, 1996, the present value of future net revenues (revenues less production and development costs) before income taxes attributable to the Company's proved reserves at such date (in thousands):
Proved Reserves: Future net revenues........................................ $3,140,212 Present value of future net revenues before income taxes, discounted at 10 percent.................................. 1,807,137 Standardized measure of discounted future net cash flows... 1,392,841 Proved Developed Reserves: Future net revenues........................................ 2,309,759 Present value of future net revenues before income taxes, discounted at 10 percent.................................. 1,386,361
In computing this data, assumptions and estimates have been utilized, and the Company cautions against viewing this information as a forecast of future economic conditions. The historical future net revenues are determined by using estimated quantities of proved reserves and the periods in which they are expected to be developed and produced based on December 31, 1996, economic conditions. The estimated future production is priced at prices prevailing at December 31, 1996, except where fixed and determinable price escalations are provided by contract. The resulting estimated future gross revenues are reduced by estimated future costs to develop and produce the proved reserves, based on December 31, 1996, cost levels, but such costs do not include debt service, general and administrative expenses and income taxes. For additional information concerning the historical discounted future net revenues to be derived from these reserves and the disclosure of the Standardized Measure information in accordance with the provisions of Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities," see "Note 10 to Consolidated Financial Statements -Supplementary Financial Information for Oil and Gas Producing Activities" which is incorporated by reference from pages 44 through 48 of the Company's 1996 Annual Report to Stockholders. The following table sets forth estimates of the proved oil and gas reserves of the Company at December 31, 1996, as evaluated by Netherland, Sewell:
OIL (MBbls) GAS(MMcf) ------------------------------- --------------------------------- MBOE DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL TOTAL --------- ----------- ------- --------- ----------- -------- ------- West Coast (a).... 51,240 11,081 62,321 87,952 6,149 94,101 78,005 Gulf Coast........ 16,434 2,022 18,456 86,074 12,833 98,907 34,941 East Texas........ 5,382 424 5,806 72,438 15,743 88,181 20,502 Mid-Continent..... 5,880 1,281 7,161 42,974 899 43,873 14,473 Other U.S......... 314 280 594 26 - 26 598 --------- ---------- ------- -------- --------- -------- ------- Total U.S...... 79,250 15,088 94,338 289,464 35,624 325,088 148,519 Argentina......... 46,582 32,423 79,005 - - - 79,005 Bolivia........... 1,007 3,946 4,953 51,276 6,482 57,758 14,580 --------- ---------- ------- -------- --------- -------- ------- Total Company.. 126,839 51,457 178,296 340,740 42,106 382,846 242,104 ========= ========== ======= ======== ========= ======== =======
- -------------- (a) Total proved oil reserves include 6.8 MMBbls of heavy oil located in the Company's Santa Maria Valley/Cat Canyon, North Antelope Hills and Zaca fields in California. -19- Estimates of the Company's 1996 proved reserves set forth above have not been filed with, or included in reports to, any Federal authority or agency, other than the Securities and Exchange Commission. The Company's non-producing proved reserves are largely behind-pipe in fields which it operates. Undeveloped proved reserves are predominantly infill drilling locations and secondary recovery projects. Approximately 74 percent of the U.S. proved reserves associated with infill drilling locations are located in the Company's 30 largest U.S. fields. The reserve data set forth in this Form 10-K represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates often differ from the quantities of oil and gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based. For further information on reserves, costs relating to oil and gas activities and results of operations from producing activities, see "Note 10 to Consolidated Financial Statements -Supplementary Financial Information for Oil and Gas Producing Activities" which is incorporated by reference from pages 44 through 48 of the Company's 1996 Annual Report to Stockholders. PRODUCTIVE WELLS; DEVELOPED ACREAGE The following table sets forth the Company's domestic and international productive wells and developed acreage assignable to such wells at December 31, 1996:
PRODUCTIVE WELLS -------------------------------------- DEVELOPED ACREAGE OIL GAS TOTAL -------------------- ------------ ---------- ------------ GROSS NET GROSS NET GROSS NET GROSS NET --------- --------- ----- ----- ----- ---- ----- ----- U.S........ 574,163 317,674 2,107 1,631 925 373 3,032 2,004 Argentina.. 1,008,339 844,372 642 629 - - 642 629 Bolivia.... 84,014 72,895 - - 6 5 6 5 --------- --------- ----- ----- ----- ---- ----- ----- Total..... 1,666,516 1,234,941 2,749 2,260 931 378 3,680 2,638 ========= ========= ===== ===== ===== ==== ===== =====
Productive wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. Wells which are completed in more than one producing horizon are counted as one well. Of the gross wells reported above, five had multiple completions. PRODUCTION; UNIT PRICES; COSTS The following table sets forth information with respect to production and average unit prices and costs for the periods indicated: -20-
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 --------- -------- ------ Production: Oil (MBbls) - U.S....................... 7,694 6,647 6,657 Argentina................. 4,245 961 - Total..................... 11,939 7,608 6,657 Gas, all U.S. (MMcf)....... 32,366 30,610 28,884 Average sales prices: Oil (per Bbl) - U.S....................... $ 17.19 (a) $ 15.44 $ 13.53 Argentina................. 15.91 (a) 13.98 - Total..................... 16.73 (a) 15.26 13.53 Gas, all U.S. (per Mcf).... 1.81 1.46 1.78 Production costs (per BOE): U.S........................ 5.42 5.24 5.17 Argentina.................. 4.93 5.42 - Total...................... 5.30 5.25 5.17
- ----------- (a) The impact of oil hedges reduced the Company's 1996 U.S., Argentina and total average oil prices per Bbl by $1.47, $2.96 and $2.00, respectively. The components of production costs may vary substantially among wells depending on the methods of recovery employed and other factors, but generally include production taxes, maintenance and repairs, labor and utilities. UNDEVELOPED ACREAGE At December 31, 1996, the Company held the following undeveloped acres located in the United States, Ecuador and Bolivia. With respect to such United States acreage held under leases, 96,950 gross (34,535 net) acres are held under leases with primary terms that expire at varying dates through December 31, 2000, unless commercial production is commenced. The Ecuador and Bolivia acreage are held under concessions with primary terms that expire at varying dates in 1999. The following table sets forth the location of the Company's undeveloped acreage and the number of gross and net acres in each. Although substantial undeveloped acreage exists in the Company's concessions in Argentina, the concessions in their entirety are held by production. -21-
GROSS NET STATE/COUNTRY ACRES ACRES - ----------------------------------- --------- ------- California.......................... 6,698 6,090 Colorado............................ 2,720 972 Kansas.............................. 1,420 1,420 Louisiana........................... 1,182 430 Mississippi......................... 204 65 Montana............................. 12,382 6,250 New Mexico.......................... 11,469 1,656 Oklahoma............................ 13,978 8,510 Texas............................... 52,506 13,985 --------- ------- Total U.S.......................... 102,559 39,378 Ecuador............................. 494,226 148,268 Bolivia............................. 485,552 485,552 --------- ------- Total Company...................... 1,082,337 673,198 ========= =======
DRILLING ACTIVITY During the periods indicated, the Company drilled or participated in the drilling of the following exploratory and development wells:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ GROSS NET GROSS NET GROSS NET ----- ----- ----- ----- ----- ----- Development: United States - Productive............ 22 12.67 36 19.26 31 18.75 Non-Productive........ 5 2.94 5 3.49 2 1.04 Argentina - Productive............ 39 39.00 - - - - Non-Productive........ 2 2.00 - - - - ----- ----- ----- ----- ----- ----- Total................ 68 56.61 41 22.75 33 19.79 ===== ===== ===== ===== ===== ===== Exploratory: United States - Productive............ 6 3.00 13 9.84 12 2.82 Non-Productive........ 7 3.12 5 2.69 5 4.04 Argentina - Productive............ 2 2.00 - - - - Non-Productive........ 1 1.00 - - - - Other International - Productive............ - - - - - - Non-Productive........ 1 1.00 - - - - ----- ----- ----- ----- ----- ----- Total................ 17 10.12 18 12.53 17 6.86 ===== ===== ===== ===== ===== ===== Total: Productive............. 69 56.67 49 29.10 43 21.58 Non-Productive......... 16 10.06 10 6.18 7 5.07 ----- ----- ----- ----- ----- ----- Total................. 85 66.73 59 35.28 50 26.65 ===== ===== ===== ===== ===== =====
The above well information excludes wells in which the Company has only a royalty interest. -22- At December 31, 1996, the Company was a participant in the drilling or completion of 23 gross (19.63 net) wells. All of the Company's drilling activities are conducted with independent contractors. The Company owns no drilling equipment. SEASONALITY The results of operations of the Company are somewhat seasonal due to seasonal fluctuations in the price for gas. Gas prices have been generally higher in the fourth and first quarters. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results which may be realized on an annual basis. COMPETITION Competition in the oil and gas industry is intense. Both in seeking to obtain and acquire desirable producing properties, new leases and exploration prospects, and in marketing oil and gas, the Company faces competition from both major and independent oil and gas companies, as well as from numerous individuals and drilling programs. Many of these competitors have financial and other resources substantially in excess of those available to the Company. Increases in worldwide energy production capability have brought about substantial surpluses in energy supplies in recent years. This, in turn, has resulted in substantial competition for markets historically served by domestic gas resources from alternative sources of energy, such as residual fuel oil, and among domestic gas suppliers. Changes in government regulations relating to the production, transportation and marketing of gas have also resulted in significant changes in the historical marketing patterns of the industry. Generally, these changes have resulted in the abandonment by many pipelines of long-term contracts for the purchase of gas, the development by gas producers of their own marketing programs to take advantage of new regulations requiring pipelines to transport gas for regulated fees, and the emergence of various types of marketing companies and other aggregators of gas supplies. As a consequence, gas prices, which were once effectively determined by government regulations, are now largely established by competition. Competitors of the Company in this market include other producers, gas pipelines and their affiliated marketing companies, independent marketers, and providers of alternate energy supplies, such as residual fuel oil. Exploration for and production of oil and gas are affected by the availability of pipe, casing and other tubular goods and certain other oil field equipment, including drilling rigs and tools. The Company is dependent upon independent drilling contractors to furnish rigs, equipment and tools to drill the wells it operates. The Company has not experienced and does not anticipate difficulty in obtaining supplies, materials, drilling rigs, equipment or tools. Higher prices for oil and gas production, however, may cause competition for these items to increase and may result in increased costs of operations. RISKS OF INTERNATIONAL OPERATIONS International investments represent approximately 39 percent of the Company's total proved reserves at December 31, 1996, and are expected to represent a significant portion of the Company's total assets in the future. The Company continues to evaluate international investment opportunities but currently has no binding agreements or commitments to make any material international acquisitions. The Company's foreign properties, operations or investments may be adversely affected by local political and economic developments, exchange controls, currency fluctuations, royalty and tax increases, retroactive tax claims, expropriation, import and export regulations and other foreign laws or policies as well as by laws and policies of the United States affecting foreign trade, taxation and investment. In addition, in the event of a dispute arising from foreign operations, the Company may -23- be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts in the United States. The Company may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. REGULATION The oil and gas industry is extensively regulated by federal, state and local authorities. Legislation affecting the oil and gas industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, have issued rules and regulations affecting the oil and gas industry and its individual members, some of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects its profitability. Inasmuch as such laws and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. Exploration and Production. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandoning of wells. The Company's operations are also subject to various conservation regulations, including regulation of the size of drilling and spacing units or proration units, the density of wells which may be drilled and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of lands and leases to facilitate exploration, while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and gas the Company can produce from its wells and the number of wells or the locations at which the Company can drill. In March 1992, Oklahoma enacted legislation which further limits the daily allowable of gas production during periods of low demand for gas. The Oklahoma Corporation Commission sets production levels quarterly. The production of gas from a single well is limited to the greater of a specified Mcf per day or a percentage of the total daily production capacity of the well. Since March 1992, the daily Mcf has been between 750 and 1,000 Mcf and the total daily production has ranged from 25 percent to 50 percent. Effective July 1, 1992, the Texas Railroad Commission, which is the state agency that regulates oil and gas production in Texas (the "TRC"), enacted new regulations that may limit the rate at which oil and gas may be produced from the Company's Texas properties. Under the new Texas rules, the TRC relies upon certain information filed monthly by well operators, in addition to using historical production data for each well during comparable past periods, to arrive at a production allowable. These Texas and Oklahoma regulations and legislation have not had a significant impact on the Company's operations. The Company cannot predict whether other states will adopt similar regulations or legislation. The effect of such future legislation and regulations may be to decrease the allowable daily production and the revenues from gas properties, including properties that produce both oil and gas. It is also possible that such future legislation and regulations may result in a decrease in gas production in such states, which could exert upward pressure on the price of gas. -24- Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect exploration, development and production operations of the Company. For example, the discharge or substantial threat of a discharge of oil by the Company into United States waters or onto an adjoining shoreline may subject the Company to liability under the Oil Pollution Act of 1990 and similar state laws. While liability under the Oil Pollution Act of 1990 is limited under certain circumstances, such limits are so high that the maximum liability would likely have a significant adverse effect on the Company. The Company's operations generally will be covered by insurance which the Company believes is adequate for these purposes. However, there can be no assurance that such insurance coverage will always be in force or that, if in force, it will adequately cover any losses or liability the Company may incur. The Company is also subject to laws and regulations concerning occupational safety and health. It is not anticipated that the Company will be required in the near future to expend amounts that are material in the aggregate to the Company's overall operations by reason of environmental or occupational safety and health laws and regulations, but because such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance. Certain of the Company's oil and gas leases are granted by the federal government and administered by various federal agencies. Such leases require compliance with detailed federal regulations and orders which regulate, among other matters, drilling and operations on these leases and calculation of royalty payments to the federal government. The Mineral Lands Leasing Act of 1920 places limitations on the number of acres under federal leases that may be owned in any one state. While subject to this law, the Company does not have a substantial federal lease acreage position in any state or in the aggregate. The Mineral Lands Leasing Act of 1920 and related regulations also may restrict a corporation from the holding of a federal onshore oil and gas lease if stock of such corporation is owned by citizens of foreign countries which are not deemed reciprocal under such Act. Reciprocity depends, in large part, on whether the laws of the foreign jurisdiction discriminate against a United States person's ownership of rights to minerals in such jurisdiction. The purchase of shares in the Company by citizens of foreign countries who are not deemed to be reciprocal under such Act could have an impact on the Company's ownership of federal leases. Marketing, Gathering and Transportation. Federal legislation and regulatory controls have historically affected the price of the gas produced and sold by the Company and the manner in which such production is marketed. Historically, the transportation and sale for resale of gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the Federal Energy Regulatory Commission ("FERC"). Since 1978, maximum selling prices of certain categories of gas, whether sold in interstate or intrastate commerce, were regulated pursuant to the NGPA. The NGPA established various categories of gas and provided for graduated deregulation of price controls of several categories of gas and the deregulation of sales of certain categories of gas. All price deregulation contemplated under the NGPA has already taken place. On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act") was enacted. The Decontrol Act amended the NGPA to remove, as of July 27, 1989, both price and nonprice controls from gas not subject to a contract in effect on July 26, 1989. Gas under contract on July 26, 1989, was decontrolled on the earlier of the termination of the contract or January 1, 1993. Gas from wells spudded after July 26, 1989, was decontrolled on May 15, 1991, even if those wells were still covered by an existing contract. In December 1992, the FERC issued Order 547, which, effective January 7, 1993, constitutes a blanket certificate of public convenience and necessity pursuant to Section 7 of the NGA authorizing any company which is not an interstate natural gas pipeline or an affiliate thereof to make sales for resale at negotiated rates in interstate commerce of any category of gas that is subject to the FERC's NGA jurisdiction. As a result of such deregulation provisions, virtually all of the Company's gas production is no longer subject to price regulation. Gas which has been removed from price regulation is subject only -25- to that price contractually agreed upon between the producer and purchaser. Under current market conditions, deregulated gas prices under recently negotiated contracts tend to be substantially lower than most regulated price ceilings that were previously prescribed by the NGPA. In February 1988, the FERC issued Order No. 490, which promulgated new abandonment regulations for expired, canceled or modified contracts involving the sale of certain gas committed or dedicated to interstate commerce prior to the enactment of the NGPA. The new rules largely eliminate delays and regulatory burdens associated with securing approval to abandon gas service upon termination or expiration of a contract for the sale of such gas. The new rules also significantly facilitate certain pipelines' ability to discontinue purchasing such gas under terms unfavorable to the pipeline in situations in which the contract has expired or terminated, but abandonment authorization is required to terminate the service. The Company has gas purchase agreements with purchasers that have been abandoned pursuant to Order No. 490. Order No. 490 is currently being challenged in the courts. The Company is unable to predict the outcome of these proceedings, and is also unable to predict the consequences to it of any possible future vacation of Order No. 490. Commencing in 1985, the FERC promulgated a series of orders and regulations adopting changes that significantly affect the transportation and marketing of gas. These changes have been intended to foster competition in the gas industry by, among other things, inducing or mandating that interstate pipeline companies provide nondiscriminatory transportation services to producers, distributors and other shippers (so-called "open access" requirements). The FERC has also sought to expedite the certification process for new services, facilities, and operations of those pipeline companies providing "open access" services. The FERC's actions in these areas have been subject to extensive judicial review and have generated significant industry comment and proposals for modifications to existing regulations. In April 1992 (and clarified in August 1992 and finalized in November 1992), the FERC issued Order 636, a complex regulation which changed gas pipeline operations, services and rates. Among other things, Order 636 required each interstate pipeline company to "unbundle" its traditional wholesale services and create and make available on an open and nondiscriminatory basis numerous constituent services (such as gathering services, storage services, firm and interruptible transportation services, and stand-by sales services) and to adopt a new rate making methodology to determine appropriate rates for those services. To the extent the pipeline company or its sales affiliate makes gas sales as a merchant in the future, it will do so in direct competition with all other sellers pursuant to private contracts; however, pipeline companies are not required to remain "merchants" of gas, and many of the interstate pipeline companies have or will become "transporters only." Each pipeline company had to develop the specific terms of service in individual proceedings. The new rules and various pipeline compliance filings are the subject of appeals and resulting remand proceedings concerning certain issues. The Company cannot predict whether and to what extent further FERC remand proceedings and judicial review will affect these matters. Although the new regulations do not directly regulate gas producers such as the Company, the availability of non- discriminatory transportation services and the ability of pipeline customers to modify or terminate their existing purchase obligations under these regulations have greatly enhanced the ability of producers to market their gas directly to end users and local distribution companies. In this regard, access to markets through interstate gas pipelines is critical to the marketing activities of the Company. Under the NGA, gas gathering facilities are generally exempt from FERC jurisdiction. Interstate transmission facilities are, on the other hand, subject to FERC jurisdiction. The FERC has historically distinguished between these types of activities on a very fact-specific basis which makes it difficult to predict with certainty the status of the Company's gathering facilities. While the FERC has not issued any order or opinion declaring the Company's facilities as gathering rather than transmission facilities, the Company believes that these systems meet the traditional tests that the FERC has used to establish a pipeline status as a gatherer. Further, while some states provide for the rate regulation -26- of pipelines engaged in the intrastate transportation of gas, such regulation has not generally been applied against gatherers of gas. The Company's gathering systems could be adversely affected should they be subjected in the future to the application of such state or federal regulation. As a result of Order 636 a number of interstate pipeline companies have (i) "spun down" their gathering systems from regulated pipeline transportation companies to unregulated affiliates, (ii) "spun-off" gathering systems to non- related entities, and/or (iii) "refunctionalized" portions of their pipeline facilities from transmission to gathering. In May 1994 (and clarified in December 1994) FERC ruled that it generally does not have jurisdiction over gathering facilities absent abuse involving the pipeline-affiliate relationship. However, FERC directed pipelines spinning down or off their gathering systems to include certain Order No. 497 standards of conduct in their tariffs and to enter into continuity of service agreements with existing users or to execute a "default contract" with users with whom they cannot reach agreement, with the default contract to contain a minimum two-year term, use the pipeline gatherer's then current rate (with an appropriate escalator clause) for existing customers for similar service, and contain terms and conditions consistent with those applicable to the pipeline's gathering service. In addition, the interstate pipeline must seek authority under Section 7(b) of the NGA to abandon certified gathering facilities and must file for authority under Section 4 of the NGA to terminate gathering service from both certified and uncertified facilities. On appeal, FERC's decisions were generally upheld, except the court held that FERC did not have the authority to require an unregulated entity to implement "default contracts" and therefore remanded this aspect back to FERC. A consequence of this divestiture of gathering facilities could be separate, and higher, gathering fees. With respect to oil pipeline rates subject to the FERC's jurisdiction, in October 1993 the FERC issued Order 561 to fulfill the requirements of Title XVIII of the Energy Policy Act of 1992. Order 561 established an indexing system, effective January 1, 1995, under which oil pipelines will be able to readily change their rates to track changes in the Producer Price Index for Finished Goods (PPI-FG), minus one percent. This index established ceiling levels for rates. Order 561 also permits cost-of-service proceedings to establish just and reasonable rates. The order does not alter the right of a pipeline to seek FERC authorization to charge market-based rates. However, until the FERC makes the finding that the pipeline does not exercise significant market power, the pipeline's rates cannot exceed the applicable index ceiling level or a level justified by the pipeline's cost of service. EMPLOYEES The Company employs approximately 193 people in its Tulsa office whose functions are associated with management, engineering, geology, land and legal, accounting, financial planning, and administration. In addition, approximately 171 full time employees are responsible for the supervision and operation of its U.S. field activities. The Company also has approximately 136 employees located in South America for the management and operation of its properties in Argentina and Bolivia. The Company believes its relations with its employees are excellent. ITEM 3. LEGAL PROCEEDINGS. On November 5, 1996, the Province of Santa Cruz, Argentina brought suit against Cadipsa in the Corte Suprema de Justicia de la Nacion (the Supreme Court of Justice of the Argentine Republic, Buenos Aires, Argentina), Dossier No. s- 1451, seeking to recover approximately $10.6 million (which sum includes interest) allegedly due as additional royalties on four concessions granted in 1990 in which the Company currently owns a 100 percent working interest. The Company and its predecessors in title have been paying royalties at an eight percent rate; the Province of Santa Cruz claims the rate should be 12 percent. The amount of such claim will increase at the differential of these royalty rates until this claim is resolved. With respect to the 50 percent interest in the two concessions that the Company acquired from British Gas, plc, the Company believes that it is entitled to indemnification by -27- British Gas, plc for any loss sustained by the Company as a result of this claim. Such indemnification equals approximately $4.0 million of the $10.6 million claim. The Company has no indemnification from its predecessors in title with respect to the payment of royalties on the other two concessions. Although the Company cannot predict the outcome of this litigation, based upon the advice of counsel, the Company does not expect this claim to have a material adverse impact on the Company's financial position or results of operations. The Company is also a named defendant in various other lawsuits and is a party in governmental proceedings from time to time arising in the ordinary course of business. While the outcome of such other lawsuits or proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. There were no matters submitted to the Company's stockholders during the fourth quarter of the fiscal year ended December 31, 1996. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth certain information regarding the executive officers of the Company. Officers are elected annually by the Board of Directors and serve at its discretion.
NAME AGE POSITION - --------------------------- --- ----------------------------------------------------- Charles C. Stephenson, Jr.. 60 Director and Chairman of the Board of Directors Jo Bob Hille............... 55 Director, Vice Chairman of the Board of Directors and Chief Executive Officer S. Craig George............ 44 Director, President and Chief Operating Officer William C. Barnes.......... 42 Director, Executive Vice President, Chief Financial Treasurer and Secretary William L. Abernathy....... 45 Senior Vice President--Acquisitions Robert W. Cox.............. 51 Vice President--General Counsel William E. Dozier.......... 44 Vice President--Operations Michael F. Meimerstorf..... 40 Vice President and Controller Robert E. Phaneuf.......... 50 Vice President--Corporate Development Barry D. Quackenbush....... 55 Vice President--Production Larry W. Sheppard.......... 42 Vice President--International
Mr. Stephenson, a co-founder of the Company, has been a Director since June 1983 and Chairman of the Board of Directors of the Company since April 1987. He was also Chief Executive Officer of the Company from April 1987 to March 1994 and President of the Company from June 1983 to May 1990. From October 1974 to March 1983, he was President of Santa Fe-Andover Oil Company (formerly Andover Oil Company), an independent oil and gas company ("Andover"), and from January 1973 to October 1974, he was Vice President of Andover. Mr. Stephenson also serves as a Director of AAON, Inc. Mr. Stephenson has a B.S. Degree in Petroleum Engineering from the University of Oklahoma, and has approximately 37 years of oil and gas experience. Mr. Hille, the other co-founder of the Company, has been a Director of the Company since June 1983, Chief Executive Officer of the Company since March 1994 and Vice Chairman of the Company -28- since September 1995. He was also President of the Company from May 1990 to September 1995, Chief Operating Officer of the Company from April 1987 to March 1994, Executive Vice President of the Company from June 1983 to May 1990 and Treasurer and Secretary of the Company from June 1983 to April 1987. From August 1972 to March 1983, Mr. Hille was employed by Andover where he served at various times primarily as Executive Vice President and Vice President--Operations. Mr. Hille has a B.S. Degree in Petroleum Engineering from the University of Tulsa, and has approximately 31 years of oil and gas experience. Mr. George has been a Director since October 1991, President of the Company since September 1995 and Chief Operating Officer of the Company since March 1994. He was also an Executive Vice President of the Company from March 1994 to September 1995 and a Senior Vice President of the Company from October 1991 to March 1994. From April 1991 to October 1991, Mr. George was Vice President of Operations and International with Santa Fe Minerals, Inc., an independent oil and gas company ("Santa Fe Minerals"). From May 1981 to March 1991, he served in various other management and executive capacities with Santa Fe Minerals and its subsidiary, Andover. From December 1974 to April 1981, Mr. George held various management and engineering positions with Amoco Production Company. He has a B.S. Degree in Mechanical Engineering from the University of Missouri-Rolla. Mr. Barnes, a certified public accountant, has been a Director, Treasurer and Secretary of the Company since April 1987, an Executive Vice President of the Company since March 1994 and Chief Financial Officer of the Company since May 1990. He was also a Senior Vice President of the Company from May 1990 to March 1994 and Vice President--Finance of the Company from January 1984 to May 1990. From November 1982 to December 1983, Mr. Barnes was an audit manager for Arthur Andersen & Co., an independent public accounting firm, where he dealt primarily with clients in the oil and gas industry. He was Assistant Controller- - -Finance of Andover from December 1980 to November 1982. From June 1976 to December 1980, he was an auditor with Arthur Andersen & Co., where he dealt primarily with clients in the oil and gas industry. Mr. Barnes has a B.S. Degree in Business Administration from Oklahoma State University. Mr. Abernathy has been Senior Vice President--Acquisitions of the Company since March 1994. He was Vice President--Acquisitions of the Company from May 1990 to March 1994 and Manager--Acquisitions of the Company from June 1987 to May 1990. From June 1976 to June 1987, Mr. Abernathy was employed by Exxon Company USA, where he served at various times as Senior Staff Engineer, Senior Supervising Engineer and in other engineering capacities, with assignments in drilling, production and reservoir engineering in the Gulf Coast and offshore. He has B.S. and M.S. Degrees in Mechanical Engineering from Auburn University. Mr. Cox has been Vice President--General Counsel of the Company since March 1988. From August 1982 to March 1988, he was employed by Santa Fe Minerals and its subsidiary, Andover, where he served at various times as Vice President--Law and Regional Attorney. From April 1982 to August 1982, he was employed as Corporate Attorney by Andover. Prior to that time, Mr. Cox was employed by Amerada Hess Corporation, a major oil company, served as General Counsel and Secretary of Kissinger Petroleum Corporation, an independent oil and gas company, and served on the legal staff of Champlin Petroleum Company, an independent oil and gas company. He has a B.S. Degree in Business Administration with a major in Petroleum Marketing from the University of Tulsa, and a Juris Doctor from the University of Michigan Law School. Mr. Dozier has been Vice President--Operations of the Company since May 1992. From June 1983 to April 1992, he was employed by Santa Fe Minerals where he held various engineering and management positions serving most recently as Manager of Operations Engineering. From January 1975 to May 1983, he was employed by Amoco Production Company serving in various positions where he worked all phases of production, reservoir evaluations, drilling and completions in the Mid- -29- Continent and Gulf Coast areas. He has a B.S. Degree in Petroleum Engineering from the University of Texas. Mr. Meimerstorf, a certified public accountant, has been Controller of the Company since January 1988 and a Vice President of the Company since May 1990. He was Accounting Manager of the Company from February 1984 to January 1988. From April 1981 to February 1984, he was the Financial Reporting Supervisor for Andover. From June 1979 to April 1981, he was an auditor with Arthur Andersen & Co. He has a B.S. Degree in Accounting from Arkansas Tech University and an M.B.A. Degree from the University of Arkansas. Mr. Phaneuf joined the Company as Vice President--Corporate Development in October 1995. From June 1995 to October 1995, he was employed in the Corporate Finance Group of Arthur Andersen LLP, specializing in energy industry corporate finance activities. From April 1993 to August 1994, he was Senior Vice President and head of the Energy Research Group at Kemper Securities, an investment banking firm. From 1988 until April 1993, he was employed by Rauscher, Pierce Refsnes, Inc., an investment banking firm, as a Senior Vice President, serving as an energy analyst involved in equity research. From 1978 to 1988, Mr. Phaneuf was Vice President of Kidder, Peabody, & Co., an investment banking firm, serving as an energy analyst in the Research Department. From 1976 to 1978, he was employed by Schneider, Bernet, and Hickman, serving as an energy analyst in the Research Department. From 1972 to 1976, he held the position of Investment Advisor for First International Investment Management, a subsidiary of NationsBank. He holds a B.A. Degree in Psychology and an M.B.A. Degree from the University of Texas. Mr. Quackenbush has been Vice President--Production of the Company since May 1990. He was Manager--Production of the Company from November 1989 to May 1990. From May 1970 to July 1989, Mr. Quackenbush was employed by Tenneco Oil Co., an oil and gas company, where he served as Acquisition Manager and in various engineering positions. He has a B.S. Degree in Petroleum Engineering from the Colorado School of Mines. Mr. Sheppard has been Vice President--International of the Company since November 1994. From June 1984 to August 1994, he was employed by Santa Fe Minerals serving as Manager--Acquisitions & Special Projects, Manager-- International Operations, and in various other management and supervisory capacities. From August 1977 to June 1984, he was employed by Amoco Production Company serving in various engineering and supervisory capacities. He has a B.S. Degree in Petroleum Engineering from Texas Tech University. -30- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item is incorporated by reference from the sections on page 51 of the Company's 1996 Annual Report to Stockholders entitled "Stock Price Information," "Dividend Policy" and "Number of Stockholders." ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference from page 25 of the Company's 1996 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference from pages 26 through 30 of the Company's 1996 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is incorporated by reference from pages 31 through 49 of the Company's 1996 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item with respect to the Company's directors is incorporated by reference from the sections of the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders (the "Proxy Statement") entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." The information required by this Item with respect to the Company's executive officers appears at Item 4A of Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference from the section of the Proxy Statement entitled "Principal Stockholders and Security Ownership of Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference from the section of the Proxy Statement entitled "Certain Transactions." -31- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Financial Statements: The financial statements of the Company and its subsidiaries and report of independent public accountants listed below are incorporated by reference from the following pages of the Company's 1996 Annual Report to Stockholders: Annual Report Page ------------- Consolidated Balance Sheets as of December 31, 1996 and 1995..... 31 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994.............................. 32 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994.......... 33 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.............................. 34 Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994.............................. 35 through 48 Report of Independent Public Accountants......................... 49 (2) Financial Statement Schedules: All schedules are omitted as inapplicable or because the required information is contained in the financial statements or included in the footnotes thereto. (3) Exhibits: The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith. 3.1 Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-35289 (the "S-1 Registration Statement")). 3.2 Restated By-laws of the Company (Filed as Exhibit 3.2 to the S-1 Registration Statement). 4.1 Form of stock certificate for Common Stock, par value $.005 per share (Filed as Exhibit 4.1 to the S-1 Registration Statement). 4.2 Indenture dated as of December 20, 1995, between Chemical Bank, as Trustee, and the Company (Filed as Exhibit 99.1 to the Company's report on Form 8-K filed January 16, 1996). 4.3 Indenture dated as February 5, 1997, between The Chase Manhattan Bank, as Trustee, and the Company. -32- 10.1* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Charles C. Stephenson, Jr. (Filed as Exhibit 10.19 to the S-1 Registration Statement). 10.2* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Jo Bob Hille (Filed as Exhibit 10.20 to the S-1 Registration Statement). 10.3* Employment Agreement dated September 19, 1995, between the Company and Robert E. Phaneuf (Filed as Exhibit 10.3 to the Company's report on Form 10-K for the year ended December 31, 1995, filed April 1, 1996). 10.4* Form of Indemnification Agreement between the Company and certain of its officers and directors (Filed as Exhibit 10.23 to the S-1 Registration Statement). 10.5* Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 4(d) to the Company's Registration Statement on Form S-8, Registration No. 33-37505). 10.6* Amendment No. 1 to Vintage Petroleum, Inc. 1990 Stock Plan, effective January 1, 1991 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1991, filed March 30, 1992). 10.7* Amendment No. 2 to Vintage Petroleum, Inc. 1990 Stock Plan dated February 24, 1994 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994). 10.8* Amendment No. 3 to Vintage Petroleum, Inc. 1990 Stock Plan dated March 15, 1996 (Filed as Exhibit A to the Company's Proxy Statement for Annual Meeting of Stockholders dated April 1, 1996). 10.9* Vintage Petroleum, Inc. 401(k) Plan (Filed as Exhibit 4(c) to the Company's Registration Statement on Form S-8, Registration No. 33- 55706). 10.10* Vintage Petroleum, Inc. Non-Management Director Stock Option Plan (Filed as Exhibit 10.18 to the Company's report on Form 10-K for the year ended December 31, 1992, filed March 31, 1993 (the "1992 Form 10-K")). 10.11* Form of Incentive Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the Company's report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991). 10.12* Form of Non-Qualified Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the 1992 Form 10-K). 10.13 Credit Agreement dated August 29, 1996, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent (Filed as Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended September 30, 1996, filed November 7, 1996). 10.14 First Amendment to Credit Agreement (Exhibit No. 10.13 above) dated October 21, 1996, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent (Filed as Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended September 30, 1996, filed November 7, 1996). -33- 10.15 Second Amendment to Credit Agreement (Exhibit No. 10.13 above) dated January 9, 1997, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent (Filed as Exhibit 99 to the Company's Registration Statement on Form S-3, Registration No. 333-19569). 10.16 Assignment Agreement dated November 3, 1995, between Shell Compania Argentina de Petroleo S.A. and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.1 to the Company's Registration Statement on Form S-3, Registration No. 33-97844 (the "S-3 Registration Statement")). 10.17 Assignment Agreement dated November 3, 1995, between Astra Compania Argentina de Petroleo S.A. and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.2 to the S-3 Registration Statement). 10.18 Cadipsa Main Purchase Agreement dated June 2, 1995, between certain shareholders of Cadipsa S.A. listed in Annex 1 thereto and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.1 to the Company's report on Form 8-K filed July 20, 1995). 10.19 Purchase Agreement dated June 2, 1995, between certain shareholders of Cadipsa S.A. listed in Annex 1 thereto and Vintage Petroleum, Argentina Inc. (Filed as Exhibit 2.2 to the Company's report on Form 8-K filed July 20, 1995). 10.20 Amended and Restated Investment Agreement dated April 28, 1994, between Cadipsa S.A. and International Finance Corporation ("IFC") (Filed as Exhibit 99.1 to the S-3 Registration Statement). 10.21 Rescheduling, Amendatory and Temporary Guarantee Agreement dated September 28, 1995, between Cadipsa S.A. and the Company and IFC (Filed as Exhibit 99.2 to the S-3 Registration Statement). 10.22 Purchase Agreement dated September 28, 1995, between IFC and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 99.3 to the S-3 Registration Statement). 10.23 British Gas BGA Purchase Agreement dated September 28, 1995, between British Gas plc and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.1 to the Company's report on Form 8-K filed October 4, 1995). 13. Portions of the Company's 1996 Annual Report to Stockholders. 21. Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Netherland, Sewell & Associates, Inc. 27. Financial Data Schedule. 99.1 Letter of Netherland, Sewell & Associates, Inc. dated March 17, 1997, regarding U.S. oil and gas reserve information. 99.2 Letter of Netherland, Sewell & Associates, Inc. dated March 24, 1997, regarding South American oil and gas reserve information. - ----------------------- -34- * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1996. -35- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VINTAGE PETROLEUM, INC. Date: March 27, 1997 By: /s/ C. C. Stephenson, Jr. -------------------------------- C. C. Stephenson, Jr. Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ C. C. Stephenson, Jr. Director and Chairman of the Board March 27, 1997 - ---------------------------- C. C. Stephenson, Jr. /s/ Jo Bob Hille Director, Vice Chairman of the March 27, 1997 - ---------------------------- Board and Chief Executive Officer Jo Bob Hille (Principal Executive Officer) /s/ S. Craig George Director, President and March 27, 1997 - ---------------------------- Chief Operating Officer S. Craig George /s/ William C. Barnes Director, Executive Vice President, March 27, 1997 - ---------------------------- Chief Financial Officer and William C. Barnes Treasurer (Principal Financial Officer) /s/ Bryan H. Lawrence Director March 27, 1997 - ---------------------------- Bryan H. Lawrence /s/ John T. McNabb, II Director March 27, 1997 - ---------------------------- John T. McNabb, II /s/ Michael F. Meimerstorf Vice President and Controller March 27, 1997 - ---------------------------- (Principal Accounting Officer) Michael F. Meimerstorf
-36- INDEX TO EXHIBITS The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith. EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-35289 (the "S-1 Registration Statement")). 3.2 Restated By-laws of the Company (Filed as Exhibit 3.2 to the S-1 Registration Statement). 4.1 Form of stock certificate for Common Stock, par value $.005 per share (Filed as Exhibit 4.1 to the S-1 Registration Statement). 4.2 Indenture dated as of December 20, 1995, between Chemical Bank, as Trustee, and the Company (Filed as Exhibit 99.1 to the Company's report on Form 8-K filed January 16, 1996). 4.3 Indenture dated as February 5, 1997, between The Chase Manhattan Bank, as Trustee, and the Company. 10.1* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Charles C. Stephenson, Jr. (Filed as Exhibit 10.19 to the S-1 Registration Statement). 10.2* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Jo Bob Hille (Filed as Exhibit 10.20 to the S-1 Registration Statement). 10.3* Employment Agreement dated September 19, 1995, between the Company and Robert E. Phaneuf (Filed as Exhibit 10.3 to the Company's report on Form 10-K for the year ended December 31, 1995, filed April 1, 1996). 10.4* Form of Indemnification Agreement between the Company and certain of its officers and directors (Filed as Exhibit 10.23 to the S-1 Registration Statement). 10.5* Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 4(d) to the Company's Registration Statement on Form S-8, Registration No. 33-37505). 10.6* Amendment No. 1 to Vintage Petroleum, Inc. 1990 Stock Plan, effective January 1, 1991 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1991, filed March 30, 1992). 10.7* Amendment No. 2 to Vintage Petroleum, Inc. 1990 Stock Plan dated February 24, 1994 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994). 10.8* Amendment No. 3 to Vintage Petroleum, Inc. 1990 Stock Plan dated March 15, 1996 (Filed as Exhibit A to the Company's Proxy Statement for Annual Meeting of Stockholders dated April 1, 1996). 10.9* Vintage Petroleum, Inc. 401(k) Plan (Filed as Exhibit 4(c) to the Company's Registration Statement on Form S-8, Registration No. 33-55706). 10.10* Vintage Petroleum, Inc. Non-Management Director Stock Option Plan (Filed as Exhibit 10.18 to the Company's report on Form 10- K for the year ended December 31, 1992, filed March 31, 1993 (the "1992 Form 10-K")). 10.11* Form of Incentive Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the Company's report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991). 10.12* Form of Non-Qualified Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the 1992 Form 10-K). 10.13 Credit Agreement dated August 29, 1996, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent (Filed as Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended September 30, 1996, filed November 7, 1996). 10.14 First Amendment to Credit Agreement (Exhibit No. 10.13 above) dated October 21, 1996, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent (Filed as Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended September 30, 1996, filed November 7, 1996). 10.15 Second Amendment to Credit Agreement (Exhibit No. 10.13 above) dated January 9, 1997, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent (Filed as Exhibit 99 to the Company's Registration Statement on Form S-3, Registration No. 333-19569). 10.16 Assignment Agreement dated November 3, 1995, between Shell Compania Argentina de Petroleo S.A. and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.1 to the Company's Registration Statement on Form S-3, Registration No. 33-97844 (the "S-3 Registration Statement")). 10.17 Assignment Agreement dated November 3, 1995, between Astra Compania Argentina de Petroleo S.A. and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.2 to the S-3 Registration Statement). 10.18 Cadipsa Main Purchase Agreement dated June 2, 1995, between certain shareholders of Cadipsa S.A. listed in Annex 1 thereto and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.1 to the Company's report on Form 8-K filed July 20, 1995). 10.19 Purchase Agreement dated June 2, 1995, between certain shareholders of Cadipsa S.A. listed in Annex 1 thereto and Vintage Petroleum, Argentina Inc. (Filed as Exhibit 2.2 to the Company's report on Form 8-K filed July 20, 1995). 10.20 Amended and Restated Investment Agreement dated April 28, 1994, between Cadipsa S.A. and International Finance Corporation ("IFC") (Filed as Exhibit 99.1 to the S-3 Registration Statement). 10.21 Rescheduling, Amendatory and Temporary Guarantee Agreement dated September 28, 1995, between Cadipsa S.A. and the Company and IFC (Filed as Exhibit 99.2 to the S-3 Registration Statement). 10.22 Purchase Agreement dated September 28, 1995, between IFC and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 99.3 to the S-3 Registration Statement). 10.23 British Gas BGA Purchase Agreement dated September 28, 1995, between British Gas plc and Vintage Petroleum Argentina, Inc. (Filed as Exhibit 2.1 to the Company's report on Form 8-K filed October 4, 1995). 13. Portions of the Company's 1996 Annual Report to Stockholders. 21. Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Netherland, Sewell & Associates, Inc. 27. Financial Data Schedule. 99.1 Letter of Netherland, Sewell & Associates, Inc. dated March 17, 1997, regarding U.S. oil and gas reserve information. 99.2 Letter of Netherland, Sewell & Associates, Inc. dated March 24, 1997, regarding South American oil and gas reserve information. - --------------------------- * Management contract or compensatory plan or arrangement. EX-4.3 2 INDENTURE BETWEEN CHASE MANHATTAN AND THE COMPANY Exhibit 4.3 ================================================================================ VINTAGE PETROLEUM, INC. TO THE CHASE MANHATTAN BANK Trustee INDENTURE Dated as of February 5, 1997 8 5/8% SENIOR SUBORDINATED NOTES DUE 2009 ================================================================================ CERTAIN SECTIONS OF THIS INDENTURE RELATING TO SECTIONS 310 THROUGH 318, INCLUSIVE OF THE TRUST INDENTURE ACT OF 1939:
TRUST INDENTURE ACT SECTION INDENTURE SECTION (S) 310(a)(1) ................................. 609 (a)(2) ................................. 609 (a)(3) ................................. Not Applicable (a)(4) ................................. Not Applicable (b) ................................. 608 610 (S) 311(a) ................................. 613 (b) ................................. 613 (S) 312(a) ................................. 701 702 (b) ................................. 702 (c) ................................. 702 (S) 313(a) ................................. 703 (b) ................................. 703 (c) ................................. 703 (d) ................................. 703 (S) 314(a) ................................. 704 (a)(4) ................................. 101 1004 (b) ................................. Not Applicable (c)(1) ................................. 102 (c)(2) ................................. 102 (c)(3) ................................. Not Applicable (d) ................................. Not Applicable (e) ................................. 102 (S) 315(a) ................................. 601 (b) ................................. 602 (c) ................................. 601 (d) ................................. 601 (e) ................................. 514 (S) 316(a) ................................. 101 (a)(1)(A) ................................. 502 512 (a)(1)(B) ................................. 513 (a)(2) ................................. Not Applicable (b) ................................. 508 (c) ................................. 104 (S) 317(a)(1) ................................. 503 (a)(2) ................................. 504 (b) ................................. 1003 (S) 318(a) ................................. 107
__________________ NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS ________
PAGE ---- ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions........................................................ 1 Act.............................................................. 1 Additional Assets................................................ 2 Adjusted Consolidated Net Tangible Assets........................ 2 Affiliate........................................................ 3 Asset Sale....................................................... 3 Authenticating Agent............................................. 4 Average Life..................................................... 4 Bank Credit Facilities........................................... 4 Board of Directors............................................... 4 Board Resolution................................................. 5 Business Day..................................................... 5 Capital Lease Obligation......................................... 5 Capital Stock.................................................... 5 Change of Control................................................ 5 Change of Control Offer.......................................... 6 Change of Control Payment Date................................... 6 Commission....................................................... 6 Company.......................................................... 6 Company Request or Company Order................................. 6 Consolidated Interest Coverage Ratio............................. 6 Consolidated Interest Expense.................................... 7 Consolidated Net Income.......................................... 7 Consolidated Net Worth........................................... 8 Corporate Trust Office........................................... 8 corporation...................................................... 8 Covenant Defeasance.............................................. 8 CUSIP Number..................................................... 8 Default.......................................................... 8 Defaulted Interest............................................... 8 Defeasance....................................................... 9 Depositary....................................................... 9 Designated Senior Indebtedness................................... 9 Dollar-Denominated Production Payments........................... 9 EBITDA........................................................... 9 Event of Default................................................. 9 Excess Proceeds.................................................. 9 Exchange Act..................................................... 10 Exchanged Properties............................................. 10 Exchange Rate Contract........................................... 10 Expiration Date.................................................. 10 Expiry Date...................................................... 10 Fair Market Value................................................ 10 Foreign Subsidiary............................................... 10 Global Security.................................................. 10 Guarantee........................................................ 10 Hedging Agreements............................................... 11 Holder........................................................... 11 Incur............................................................ 11 Indebtedness..................................................... 11 Indenture........................................................ 12 Interest Payment Date............................................ 12 Interest Rate Protection Agreement............................... 12 Investment....................................................... 12
i
PAGE ---- Issue Date....................................................... 13 Investment Company Act........................................... 13 Legal Holiday.................................................... 13 Lien............................................................. 13 Liquid Securities................................................ 13 Maturity......................................................... 13 Material Change.................................................. 13 Moody's.......................................................... 14 Net Available Cash............................................... 14 Net Working Capital.............................................. 14 9% Indenture..................................................... 15 9% Notes......................................................... 15 Notice of Default................................................ 15 Officers' Certificate............................................ 15 Oil and Gas Business............................................. 15 Oil and Gas Liens................................................ 15 Oil and Gas Purchase and Sale Contract........................... 16 Opinion of Counsel............................................... 16 Outstanding...................................................... 16 paid in full or payment in full.................................. 17 pari passu....................................................... 17 Pari Passu Indebtedness.......................................... 17 Participants..................................................... 17 pay the Securities............................................... 17 Paying Agent..................................................... 17 Payment Blockage Notice.......................................... 17 Payment Blockage Period.......................................... 17 Permitted Business Investments................................... 17 Permitted Designee............................................... 18 Permitted Holders................................................ 18 Permitted Indebtedness........................................... 18 Permitted Investments............................................ 19 Permitted Liens.................................................. 20 Permitted Short-Term Investments................................. 20 Person........................................................... 21 Predecessor Security............................................. 21 Preferred Stock.................................................. 21 Prepayment Offer................................................. 21 Prepayment Offer Notice.......................................... 21 primary obligor.................................................. 23 Production Payments and Reserve Sales............................ 23 Property......................................................... 23 Purchase Amount.................................................. 23 Purchase Date.................................................... 23 Purchase Price................................................... 23 Redeemable Stock................................................. 23 Redemption Date.................................................. 24 Redemption Price................................................. 24 Registrar........................................................ 24 Regular Record Date.............................................. 24 Remaining Excess Proceeds........................................ 24 Representative................................................... 24 Restricted Payment............................................... 24
ii PAGE ---- Restricted Subsidiary................................... 25 Sale and Leaseback Transaction.......................... 25 Securities.............................................. 25 Securities Act.......................................... 25 Security Register and Security Registrar................ 25 Senior Indebtedness..................................... 25 Special Record Date..................................... 25 S&P..................................................... 26 Stated Maturity......................................... 26 Subsidiary.............................................. 26 Surviving Entity........................................ 26 Transaction Date........................................ 26 Trust Indenture Act..................................... 26 Trust Officer........................................... 26 Trustee................................................. 26 Unrestricted Subsidiary................................. 26 U.S. GAAP............................................... 26 U.S. Government Obligation.............................. 27 Vice President.......................................... 27 Volumetric Production Payments.......................... 27 Voting Redeemable Stock................................. 27 Voting Stock............................................ 27 Wholly Owned Subsidiary................................. 27 SECTION 102. Compliance Certificates and Opinions.............................. 27 SECTION 103. Form of Documents Delivered to Trustee............................ 28 SECTION 104. Acts of Holders; Record Dates..................................... 29 SECTION 105. Notices, Etc., to Trustee and Company............................. 31 SECTION 106. Notice to Holders; Waiver......................................... 32 SECTION 107. Conflict with Trust Indenture Act................................. 32 SECTION 108. Effect of Headings, Table of Contents and Cross-Reference Sheet... 32 SECTION 109. Successors and Assigns............................................ 32 SECTION 110. Separability Clause............................................... 33 SECTION 111. Benefits of Indenture............................................. 33 SECTION 112. Governing Law..................................................... 33 SECTION 113. Legal Holidays.................................................... 33 ARTICLE TWO SECURITY FORMS SECTION 201. Form of Securities................................................ 34 SECTION 202. Form of Face of Global Security................................... 34 SECTION 203. Form of Reverse of Global Security................................ 36 SECTION 204. Form of Trustee's Certificate of Authentication................... 39
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PAGE ---- ARTICLE THREE THE SECURITIES SECTION 301. Denominations.................................................... 39 SECTION 302. Execution, Authentication, Delivery and Dating................... 39 SECTION 303. Temporary Securities............................................. 40 SECTION 304. Registration, Registration of Transfer and Exchange.............. 41 SECTION 305. Mutilated, Destroyed, Lost and Stolen Securities................. 43 SECTION 306. Payment of Interest; Interest Rights Preserved................... 44 SECTION 307. Persons Deemed Owners............................................ 45 SECTION 308. Cancellation..................................................... 46 SECTION 309. Computation of Interest.......................................... 46 SECTION 310. CUSIP Numbers.................................................... 46 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture........................... 47 SECTION 402. Application of Trust Money........................................ 48 ARTICLE FIVE REMEDIES SECTION 501. Events of Default................................................. 48 SECTION 502. Acceleration of Maturity; Rescission and Annulment................ 50 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee... 51 SECTION 504. Trustee May File Proofs of Claim.................................. 52 SECTION 505. Trustee May Enforce Claims Without Possession of Securities....... 52 SECTION 506. Application of Money Collected.................................... 53 SECTION 507. Limitation on Suits............................................... 53 SECTION 508. Unconditional Right of Holders To Receive Principal, Premium and Interest.......................................................... 54 SECTION 509. Restoration of Rights and Remedies................................ 54 SECTION 510. Rights and Remedies Cumulative.................................... 54 SECTION 511. Delay or Omission Not Waiver...................................... 55 SECTION 512. Control by Holders................................................ 55 SECTION 513. Waiver of Past Defaults........................................... 55 SECTION 514. Undertaking for Costs............................................. 56 SECTION 515. Waiver of Usury, Stay or Extension Laws........................... 56 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities.............................. 56 SECTION 602. Notice of Defaults............................................... 57 SECTION 603. Certain Rights of Trustee........................................ 57 SECTION 604. Trustee's Disclaimer............................................. 58
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PAGE ---- SECTION 605. May Hold Securities.............................................. 58 SECTION 606. Money Held in Trust.............................................. 58 SECTION 607. Compensation and Reimbursement................................... 59 SECTION 608. Conflicting Interests............................................ 59 SECTION 609. Corporate Trustee Required; Eligibility.......................... 60 SECTION 610. Resignation and Removal; Appointment of Successor................ 60 SECTION 611. Acceptance of Appointment by Successor........................... 61 SECTION 612. Merger, Conversion, Consolidation or Succession to Business...... 62 SECTION 613. Preferential Collection of Claims Against Company................ 62 SECTION 614. Appointment of Authenticating Agent.............................. 62 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE SECTION 701. Company To Furnish Trustee Names and Addresses of Holders......................................................... 64 SECTION 702. Preservation of Information; Communications to Holders........... 65 SECTION 703. Reports by Trustee............................................... 65 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms............. 66 SECTION 802. Successor Substituted............................................ 67 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders................ 67 SECTION 902. Supplemental Indentures with Consent of Holders................... 68 SECTION 903. Execution of Supplemental Indentures.............................. 70 SECTION 904. Effect of Supplemental Indentures................................. 70 SECTION 905. Conformity with Trust Indenture Act............................... 70 SECTION 906. Reference in Securities to Supplemental Indentures................ 70 SECTION 907. Payment for Consent............................................... 70 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest...................... 71 SECTION 1002. Registrar and Paying Agent...................................... 71 SECTION 1003. Money for Securities Payments To Be Held in Trust............... 72 SECTION 1004. Statement by Officers as to Default............................. 73 SECTION 1005. Existence....................................................... 73 SECTION 1006. Maintenance of Properties....................................... 73
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PAGE ---- SECTION 1007. Payment of Taxes and Other Claims............................... 74 SECTION 1008. Limitation on Indebtedness...................................... 74 SECTION 1009. Limitation on Liens............................................. 74 SECTION 1010. Limitation on Restricted Payments............................... 76 SECTION 1011. Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries.................................................... 77 SECTION 1012. Limitation on Asset Sales....................................... 78 SECTION 1013. Incurrence of Layered Indebtedness.............................. 80 SECTION 1014. Transactions with Affiliates.................................... 80 SECTION 1015. Limitation on Restrictions on Distributions from Restricted Subsidiaries.................................................... 81 SECTION 1016. Restricted and Unrestricted Subsidiaries........................ 82 SECTION 1017. Commission Reports.............................................. 83 SECTION 1018. Waiver of Certain Covenants..................................... 83 SECTION 1019. Mandatory Repurchase Upon a Change of Control................... 83 SECTION 1020. Further Instruments and Acts.................................... 85 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Election To Redeem; Notice to Trustee........................... 85 SECTION 1102. Selection by Trustee of Securities To Be Redeemed............... 85 SECTION 1103. Notice of Redemption............................................ 86 SECTION 1104. Deposit of Redemption Price..................................... 87 SECTION 1105. Securities Payable on Redemption Date........................... 87 SECTION 1106. Securities Redeemed in Part..................................... 88 SECTION 1107. Purchase of Securities.......................................... 88 ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Defeasance and Discharge........................................ 88 SECTION 1202. Covenant Defeasance............................................. 89 SECTION 1203. Conditions to Defeasance or Covenant Defeasance................. 89 SECTION 1204. Deposited Money and U.S. Government Obligations To Be Held in Trust; Miscellaneous Provisions.......................... 91 SECTION 1205. Reinstatement................................................... 92
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PAGE ---- ARTICLE THIRTEEN SUBORDINATION OF SECURITIES SECTION 1301. Agreement to Subordinate........................................ 92 SECTION 1302. Liquidation, Dissolution and Bankruptcy......................... 92 SECTION 1303. Default on Senior Indebtedness.................................. 93 SECTION 1304. Acceleration of Payment of Securities........................... 94 SECTION 1305. When Distribution Must Be Paid Over............................. 94 SECTION 1306. Subrogation..................................................... 94 SECTION 1307. Relative Rights................................................. 95 SECTION 1308. Subordination May Not Be Impaired by Company.................... 95 SECTION 1309. Rights of Trustee and Paying Agent.............................. 95 SECTION 1310. Distribution or Notice to Representative........................ 95 SECTION 1311. Trust Moneys Not Subordinated................................... 95 SECTION 1312. Trustee Entitled To Rely........................................ 96 SECTION 1313. Trustee To Effectuate Subordination............................. 96 SECTION 1314. Trustee Not Fiduciary for Holders of Senior Indebtedness........ 97 SECTION 1315. Reliance by Holders of Senior Indebtedness on Subordination Provisions.................................................... 97 SECTION 1316. Proofs of Claim................................................. 97 SECTION 1317. Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights........................................... 97 SECTION 1318. Article Applicable to Paying Agents............................. 98 SECTION 1319. Defeasance of this Article Thirteen............................. 98 ARTICLE FOURTEEN CONCERNING THE HOLDERS SECTION 1401. Identification of Company-Owned Securities...................... 98 SECTION 1402. Revocation of Consents.......................................... 98 ARTICLE FIFTEEN HOLDERS' MEETINGS SECTION 1501. Purposes of Meetings............................................ 99 SECTION 1502. Call of Meetings by Trustee..................................... 99 SECTION 1503. Call of Meetings by Company or Holders.......................... 100 SECTION 1504. Qualifications for Voting....................................... 100 SECTION 1505. Regulations..................................................... 100 SECTION 1506. Voting.......................................................... 102 SECTION 1507. No Delay of Rights by Meeting................................... 102 ARTICLE SIXTEEN MISCELLANEOUS PROVISIONS SECTION 1601. Indenture and Securities Solely Corporate Obligations........... 103 SECTION 1602. Execution in Counterparts....................................... 103
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PAGE ---- TESTIMONIUM.................................................................... 104 SIGNATURE AND SEALS............................................................ 104 ACKNOWLEDGMENT.............................................................105, 106
viii INDENTURE, dated as of February 5, 1997, between VINTAGE PETROLEUM, INC., a Delaware corporation (herein called the "Company"), having its principal office at 4200 One Williams Center, Tulsa, OK 74172, and THE CHASE MANHATTAN BANK, a New York banking corporation, as Trustee (herein called the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 8 5/8% Senior Subordinated Notes Due 2009 (the "Securities"). ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with U.S. GAAP; provided, however, that for the avoidance of any possible doubt, any act or condition in accordance herewith and permitted hereunder when taken, created or occurring shall not become a violation of any provision of this Indenture as a result of a subsequent change in U.S. GAAP; (4) any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Indenture; (5) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (6) all dollar amounts are expressed in United States dollars. "Act", when used with respect to any Holder, has the meaning specified in Section 104. 2 "Additional Assets" means (i) any property (other than cash, cash equivalents or securities) used in any business in which the Company or any Restricted Subsidiary is engaged as of the date of the Indenture or any business ancillary thereto, (ii) Investments in any other Person engaged in the Oil and Gas Business or any business ancillary thereto (including the acquisition from third parties of Capital Stock of such Person) as a result of which such other Person becomes a Restricted Subsidiary in compliance with Section 1016), (iii) the acquisition from third parties of Capital Stock of a Restricted Subsidiary, (iv) the costs of acquiring, exploiting, developing and exploring in respect of oil and gas properties or (v) Permitted Business Investments. "Adjusted Consolidated Net Tangible Assets" means (without duplication), as of the date of determination, (a) the sum of (i) discounted future net revenues from proved oil and gas reserves of the Company and its Restricted Subsidiaries calculated in accordance with Commission guidelines before any state, federal or foreign income taxes, as estimated by a nationally recognized firm of independent petroleum engineers in a reserve report prepared as of the end of the Company's most recently completed fiscal year for which financial statements are available, as increased by, as of the date of determination, the estimated discounted future net revenues from (A) estimated proved oil and gas reserves acquired since the date of such year-end reserve report, and (B) estimated oil and gas reserves attributable to upward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to exploration, development or exploitation activities, in each case calculated in accordance with Commission guidelines (utilizing the prices utilized in such year-end reserve report), and decreased by, as of the date of determination, the estimated discounted future net revenues from (C) estimated proved oil and gas reserves produced or disposed of since the date of such year-end reserve report and (D) estimated oil and gas reserves attributable to downward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to changes in geological conditions or other factors which would, in accordance with standard industry practice, cause such revisions, in each case calculated in accordance with Commission guidelines (utilizing the prices utilized in such year-end reserve report); provided that, in the case of each of the determinations made pursuant to clauses (A) through (D), such increases and decreases shall be as estimated by the Company's petroleum engineers, unless there is a Material Change as a result of such acquisitions, dispositions or revisions, in which event the discounted future net revenues utilized for purposes of this clause (a)(i) shall be confirmed in writing by a nationally recognized firm of independent petroleum engineers, (ii) the capitalized costs that are attributable to oil and gas properties of the Company and its Restricted Subsidiaries to which no proved oil and gas reserves are attributable, based on the Company's books and records as of a date no earlier than the date of the Company's latest annual or quarterly financial statements, (iii) the Net Working Capital on a date no earlier than the date of the Company'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 Company's latest annual or quarterly financial statements or (B) the 3 appraised value, as estimated by independent appraisers, of other tangible assets (including, without duplication, Investments in unconsolidated Restricted Subsidiaries) of the Company and its Restricted Subsidiaries, as of the date no earlier than the date of the Company's latest audited financial statements, minus (b) the sum of (i) minority interests, (ii) any gas balancing liabilities of the Company and its Restricted Subsidiaries reflected in the Company's latest audited financial statements, (iii) to the extent included in (a)(i) above, the discounted future net revenues, calculated in accordance with Commission guidelines (utilizing the prices utilized in the Company's year-end reserve report), attributable to reserves which are required to be delivered to third parties to fully satisfy the obligations of the Company and its Restricted Subsidiaries with respect to Volumetric Production Payments on the schedules specified with respect thereto and (iv) the discounted future net revenues, calculated in accordance with Commission guidelines, attributable to reserves subject to Dollar-Denominated Production Payments which, based on the estimates of production and price assumptions included in determining the discounted future net revenues specified in (a)(i) above, would be necessary to fully satisfy the payment obligations of the Company and its Restricted Subsidiaries with respect to Dollar-Denominated Production Payments on the schedules specified with respect thereto. If the Company 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 the Company were still using the full cost method of accounting. "Affiliate" of any specified Person means any other Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person or (ii) which beneficially owns or holds directly or indirectly 10% or more of any class of the Voting Stock of such specified Person or of any Subsidiary of such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person directly or indirectly, whether through the ownership of Voting Stock, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" means, with respect to any Person, any transfer, conveyance, sale, lease or other disposition (including, without limitation, dispositions pursuant to any consolidation or merger) by such Person or any of its Restricted Subsidiaries in any single transaction or series of transactions of (a) shares of Capital Stock or other ownership interests of another Person (including Capital Stock of Unrestricted Subsidiaries) or (b) any other Property of such Person or any of its Restricted Subsidiaries; provided, however, that the term "Asset Sale" shall not include: (i) the sale or transfer of Permitted Short-Term Investments, inventory, accounts receivable or other Property in the ordinary course of business; (ii) the liquidation of Property received in settlement of debts owing to the Company or any Restricted Subsidiary as a result of foreclosure, perfection or enforcement of any Lien or debt, which debts were owing to the Company or any Restricted Subsidiary in the ordinary 4 course of business of the Company or such Restricted Subsidiary; (iii) when used with respect to the Company, any asset disposition permitted pursuant to Section 801 which constitutes a disposition of all or substantially all of the Company's assets; (iv) the sale or transfer of any Property by the Company or a Restricted Subsidiary to the Company or a Restricted Subsidiary; or (v) the sale or transfer of any asset with a Fair Market Value of less than $1 million. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate the Securities. "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal or liquidation value payment of such Indebtedness or Preferred Stock, respectively, and the amount of such principal or liquidation value payment, by (ii) the sum of all such principal or liquidation value payments, provided, however, that in the case of any Indebtedness in respect of a revolving credit facility, the payment date shall be deemed to be the later of (x) the date of expiration of such facility or, if there is any interim reduction in the availability of credit thereunder, the date of such reduction to the extent of such reduction and (y) the scheduled repayment date in respect of such Indebtedness. "Bank Credit Facilities" means, with respect to any Person, one or more debt facilities or commercial paper facilities with banks or other institutional lenders (including, without limitation, the credit facility pursuant to the Credit Agreement, dated August 29, 1996, as amended, among the Company and certain banks) providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or trade letters of credit. Notwithstanding the foregoing, for purposes of determining whether Indebtedness under Bank Credit Facilities constitutes Permitted Indebtedness and only for such purposes, Indebtedness Incurred in reliance on clause (a) of Section 1008 shall not be deemed to constitute Indebtedness Incurred in reliance on the exception provided by clause (b) or clause (l) of the definition of Permitted Indebtedness. Notwithstanding any of the foregoing, Bank Credit Facilities shall not include (i) the Refinancing Agreement dated May 19, 1995 between Cadipsa S.A. and Banco Medefin S.A., Banco Mercantil Argentino S.A. and ABN AmroBank, or (ii) the Amended and Restated Investment Agreement dated April 28, 1994, as amended, between the International Finance Corporation and Cadipsa S.A. Notwithstanding anything to the contrary herein, the principal amount outstanding on the Issue Date under Bank Credit Facilities, together with accrued and unpaid interest thereon (if any) on the Issue Date, shall be Senior Indebtedness for purposes of this Indenture. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. 5 "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each day that is not a Legal Holiday. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other arrangement conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with U.S. GAAP. For purposes of Section 1009, a Capital Lease Obligation shall be deemed to be secured by a Lien on the property being leased. "Capital Stock" in any Person means any and all shares, interests, participations or other equivalents in the equity interest (however designated) in such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to subscribe for or to acquire an equity interest in such Person; provided, however, that "Capital Stock" shall not include Redeemable Stock. "Change of Control" means the occurrence of any of the following events: (i) any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing, including any group acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of 50% or more of the total voting power of all classes of the Voting Stock of the Company and/or warrants or options to acquire such Voting Stock, calculated on a fully diluted basis; (ii) the sale, lease, conveyance or transfer of all or substantially all of the assets of the Company (other than to any Wholly Owned Subsidiary) shall have occurred; (iii) the stockholders of the Company shall have approved any plan of liquidation or dissolution of the Company; (iv) the Company consolidates with or merges into another Person or any Person consolidates with or merges into the Company in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other property, other than any such transaction where (a) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation that is Capital Stock and (b) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction in substantially the same proportion as before the transaction; or (v) during any period of two consecutive years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election or appointment by such board or whose nomination for election by the 6 stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Company's Board of Directors then in office. "Change of Control Offer" has the meaning specified in Section 1019. "Change of Control Payment Date" has the meaning specified in Section 1019. "Commission" means the Securities and Exchange Commission, from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Interest Coverage Ratio" means, as of the date of the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount of EBITDA of the Company and its consolidated Restricted Subsidiaries for the four full fiscal quarters immediately prior to the Transaction Date for which financial statements are available to (ii) the aggregate Consolidated Interest Expense of the Company and its Restricted Subsidiaries that is anticipated to accrue during a period consisting of the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent thereto (based upon the pro forma amount and maturity of, and interest payments in respect of, Indebtedness of the Company and its Restricted Subsidiaries expected by the Company to be outstanding on the Transaction Date), assuming for the purposes of this measurement the continuation of market interest rates prevailing on the Transaction Date and base interest rates in respect of floating interest rate obligations equal to the base interest rates on such obligations in effect as of the Transaction Date; provided, that if the Company or any of its Restricted Subsidiaries is a party to any Interest Rate Protection Agreement which would have the effect of changing the interest rate on any Indebtedness of the Company or any of its Restricted Subsidiaries for such four quarter period (or a portion thereof), the resulting rate shall be used for such four quarter period or portion thereof; provided further that any 7 Consolidated Interest Expense with respect to Indebtedness Incurred or retired by the Company or any of its Restricted Subsidiaries during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such Indebtedness was so Incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs. In addition, if since the beginning of the four full fiscal quarter period preceding the Transaction Date, (x) the Company or any of its Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale for such period calculated on a pro forma basis as if such Asset Sale and any related retirement of Indebtedness had occurred on the first day of such period or (y) the Company or any of its Restricted Subsidiaries shall have acquired any material assets, EBITDA shall be calculated on a pro forma basis as if such asset acquisitions had occurred on the first day of such four fiscal quarter period. "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication, (i) the sum of (a) the aggregate amount of cash and non-cash interest expense (including capitalized interest) of such Person and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with U.S. GAAP in respect of Indebtedness (including, without limitation, (A) any amortization of debt discount, (B) net costs associated with Interest Rate Protection Agreements (including any amortization of discounts), (C) the interest portion of any deferred payment obligation, (D) all accrued interest, and (E) all commissions, discounts, commitment fees, origination fees and other fees and charges owed with respect to Bank Credit Facilities and other Indebtedness) paid, accrued or scheduled to be paid or accrued during such period; (b) Redeemable Stock dividends of such Person (and of its Restricted Subsidiaries if paid to a Person other than such Person or its Wholly Owned Subsidiaries) declared and payable other than in kind; (c) the portion of any rental obligation of such Person or its Restricted Subsidiaries in respect of any Capital Lease Obligation allocable to interest expense in accordance with U.S. GAAP; (d) the portion of any rental obligation of such Person or its Restricted Subsidiaries in respect of any Sale and Leaseback Transaction allocable to interest expense (determined as if such obligation were treated as a Capital Lease Obligation); and (e) to the extent any Indebtedness of any other Person (other than Restricted Subsidiaries) is Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate amount of interest paid, accrued or scheduled to be paid or accrued by such other Person during such period attributable to any such Indebtedness; less (ii) to the extent included in (i) above, amortization or write-off of deferred financing costs of such Person and its Restricted Subsidiaries during such period; in the case of both (i) and (ii) above, after elimination of intercompany accounts among such Person and its Restricted Subsidiaries and as determined in accordance with U.S. GAAP. "Consolidated Net Income" of any Person means, for any period, the aggregate net income (or net loss, as the case may be) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in 8 accordance with U.S. GAAP; provided that there shall be excluded therefrom, without duplication, (i) items classified as extraordinary (other than the tax benefit of the utilization of net operating loss carry-forwards and alternative minimum tax credits); (ii) any gain or loss, net of taxes, on the sale or other disposition of assets (including the Capital Stock of any other Person) in excess of $5.0 million, from any sale or disposition, or series of related sales or dispositions (but in no event shall this clause (ii) apply to the sale of oil and gas inventories in the ordinary course of business); (iii) the net income of any Subsidiary of such specified Person to the extent the transfer to that Person of that income is restricted by contract or otherwise, except for any cash dividends or cash distributions actually paid by such Subsidiary to such Person during such period; (iv) the net income (or loss) of any other Person in which such specified Person or any of its Restricted Subsidiaries has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of such specified Person in accordance with U.S. GAAP or is an interest in a consolidated Unrestricted Subsidiary), except to the extent of the amount of cash dividends or other cash distributions actually paid to such Person or its Restricted Subsidiaries by such other Person during such period; (v) the net income of any Person acquired by such specified Person or any of its Restricted Subsidiaries in a pooling-of-interests transaction for any period prior to the date of such acquisition; (vi) any gain or loss, net of taxes, realized on the termination of any employee pension benefit plan; (vii) any adjustments of a deferred tax liability or asset pursuant to Statement of Financial Accounting Standards No. 109 which result from changes in enacted tax laws or rates; and (viii) the cumulative effect of a change in accounting principles. "Consolidated Net Worth" of any Person means the stockholders' equity of such Person and its Restricted Subsidiaries, as determined on a consolidated basis in accordance with U.S. GAAP, less (to the extent included in stockholders' equity) amounts attributable to Redeemable Stock of such Person or its Restricted Subsidiaries. "Corporate Trust Office" means the office of the Trustee in The Borough of Manhattan, The City of New York, at which at any particular time its corporate trust business shall be principally administered and which at the date hereof is located at 450 West 33rd Street, New York, NY 10001. "corporation" means a corporation, association, company, joint-stock company or business trust. "Covenant Defeasance" has the meaning specified in Section 1202. "CUSIP Number" means, with respect to the Securities, an identification number assigned to such security pursuant to the procedures of the Committee on Uniform Security Identification Procedures and by the CUSIP Service Bureau. 9 "Default" means any event, act or condition the occurrence of which is, or after notice or the passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 306. "Defeasance" has the meaning specified in Section 1201. "Depositary" means, with respect to Securities issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated by the Company to act as Depositary for such Securities. Initially, the Depositary shall be The Depository Trust Company, its nominees and their respective successors. "Designated Senior Indebtedness" means any Senior Indebtedness which has, at the time of determination, an aggregate principal amount outstanding of at least $10 million (including the amount of all undrawn commitments and matured and contingent reimbursement obligations pursuant to letters of credit thereunder) and is specifically designated in the instrument evidencing such Senior Indebtedness and is designated in a notice delivered by the Company to the holders or a Representative of the holders of such Senior Indebtedness and the Trustee as "Designated Senior Indebtedness" of the Company. "Dollar-Denominated Production Payments" means production payment obligations recorded as liabilities in accordance with U.S. GAAP, together with all undertakings and obligations in connection therewith. "EBITDA" means, with respect to any Person for any period, the Consolidated Net Income of such Person and its consolidated Restricted Subsidiaries for such period, plus (a) the sum of, to the extent reflected in the consolidated income statement of such Person and its Restricted Subsidiaries for such period from which Consolidated Net Income is determined and deducted in the determination of such Consolidated Net Income, without duplication, (i) income tax expense (but excluding income tax expense relating to sales or other dispositions of assets (including the Capital Stock of any other Person) the gains and losses from which are included in the determination of such Consolidated Net Income), (ii) Consolidated Interest Expense, (iii) depreciation and depletion expense, (iv) amortization expense, (v) exploration expense, and (vi) any other non-cash charges including, without limitation, unrealized foreign exchange losses (but excluding losses on sales or other dispositions of assets which are included in the determination of such Consolidated Net Income); less (b) the sum of, to the extent reflected in the consolidated income statement of such Person and its Restricted Subsidiaries for such period from which Consolidated Net Income is determined and added in the determination of such Consolidated Net Income, without duplication (i) income tax recovery (but excluding income tax recovery relating to sales or other dispositions of assets (including the Capital Stock of any other Person) the gains and losses from which are included in the determination of such Consolidated Net Income) and (ii) unrealized foreign exchange gains. 10 "Event of Default" has the meaning specified in Section 501. "Excess Proceeds" shall have the meaning specified in Section 1012. "Exchange Act" means the United States Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time. "Exchanged Properties" means oil and gas properties received by the Company or a Restricted Subsidiary in trade or as a portion of the total consideration for other such properties. "Exchange Rate Contract" means, with respect to any Person, any currency swap agreements, forward exchange rate agreements, foreign currency futures or options, exchange rate collar agreements, exchange rate insurance and other agreements or arrangements, or any combination thereof, designed to provide protection against fluctuations in currency exchange rates. "Expiration Date" has the meaning specified in Section 104. "Expiry Date" has the meaning specified in the definition of "Prepayment Offer Notice" set forth in this Section 101. "Fair Market Value" means, with respect to any assets to be transferred pursuant to any Asset Sale or Sale and Leaseback Transaction or any non-cash consideration or property transferred or received by any Person, the fair market value of such consideration or property as determined in good faith by (i) any officer of the Company if such fair market value is less than $10 million and (ii) the Board of Directors as evidenced by a Board Resolution if such fair market value is equal to or in excess of $10 million; provided that if such resolution indicates that such fair market value is equal to or in excess of $20 million and such transaction involves any Affiliate of the Company (other than a Restricted Subsidiary), such resolution shall be accompanied by the written opinion of an independent, nationally recognized investment banking firm or appraisal firm, in either case specializing or having a specialty in the type and subject matter of the transaction (or series of transactions) at issue, to the effect that such consideration or property is fair, from a financial point of view, to such Person. "Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a jurisdiction other than the United States or a State thereof or the District of Columbia and engages in the Oil and Gas Business exclusively outside the United States of America. "Global Security" means a Security that evidences all or part of the Securities and bears the legend set forth in Section 202. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of 11 guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any Lien on the assets of such Person securing obligations of the primary obligor and any obligation of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase or payment of) any security for the payment of such Indebtedness, (ii) to purchase Property, securities or services for the purpose of assuring the holder of such Indebtedness of the payment of such Indebtedness, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); provided, however, that a Guarantee by any Person shall not include (i) endorsements by such Person for collection or deposit, in either case, in the ordinary course of business or (ii) a contractual commitment by one Person to invest in another Person for so long as such Investment is reasonably expected to constitute a Permitted Investment under clause (b) of the definition of Permitted Investments. "Hedging Agreements" means Interest Rate Protection Agreements, Exchange Rate Contracts and Oil and Gas Purchase and Sale Contracts. "Holder" means a Person in whose name a Security is registered in the Security Register. "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to U.S. GAAP or otherwise, of any such Indebtedness or obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in U.S. GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Indebtedness, becoming Indebtedness shall not be deemed an Incurrence of such Indebtedness. For purposes of this definition, Indebtedness of the Company or a Restricted Subsidiary held by a Wholly Owned Subsidiary shall be deemed to be Incurred by the Company or such Restricted Subsidiary in the event such Wholly Owned Subsidiary ceases to be a Wholly Owned Subsidiary or in the event such Indebtedness is transferred to a Person other than the Company or a Wholly Owned Subsidiary. "Indebtedness" means at any time (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person, and whether or not contingent, (i) any obligation of such Person for borrowed money, (ii) any obligation of such Person evidenced by bonds, debentures, notes, Guarantees or other similar instruments, including, without limitation, any such obligations Incurred in connection with the acquisition of Property, assets or businesses, (iii) any reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar 12 facilities issued for the account of such Person, (iv) any obligation of such Person issued or assumed as the deferred purchase price of Property or services, (v) any Capital Lease Obligation of such Person, (vi) the maximum fixed redemption or repurchase price of Redeemable Stock of such Person at the time of determination, (vii) any payment obligation of such Person under Hedging Agreements at the time of determination, (viii) any obligation to pay rent or other payment amounts of such Person with respect to any Sale and Leaseback Transaction to which such Person is a party, and (ix) any obligation of the type referred to in clauses (i) through (viii) of this paragraph of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed or is responsible or liable, directly or indirectly, as obligor, Guarantor or otherwise; provided that Indebtedness shall not include Production Payments and Reserve Sales. For purposes of this definition, the maximum fixed repurchase price of any Redeemable Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture; provided, however, that if such Redeemable Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability at such date in respect of any contingent obligations described above. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Interest Rate Protection Agreement" means, with respect to any Person, any interest rate swap agreement, forward rate agreement, interest rate cap or collar agreement or other financial agreement or arrangement designed to protect such Person or its Restricted Subsidiaries against fluctuations in interest rates, as in effect from time to time. "Investment" means, with respect to any Person, (i) any amount paid by such Person, directly or indirectly (such amount to be the fair market value of such Capital Stock, securities or Property at the time of transfer), to any other Person for Capital Stock or other Property of, or as a capital contribution to, any other Person or (ii) any direct or indirect loan or advance to any other Person (other than accounts receivable of such Person arising in the ordinary course of business); provided, however, that Investments shall not include extensions of trade credit on commercially reasonable terms in accordance with 13 normal trade practices and any increase in the equity ownership in any Person resulting from retained earnings of such Person. "Issue Date" means the date upon which the Securities first were issued and authenticated hereunder. "Investment Company Act" means the United States Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time. "Legal Holiday" has the meaning specified in Section 113. "Lien" means, with respect to any Property, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien (statutory or other), charge, easement, encumbrance, preference, priority or other security or similar agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). For purposes of Section 1009, a Capital Lease Obligation shall be deemed to be secured by a Lien on the property being leased. "Liquid Securities" means securities (i) of an issuer that is not an Affiliate of the Company, (ii) that are publicly traded on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market and (iii) as to which the Company is not subject to any restrictions on sale or transfer (including any volume restrictions under Rule 144 under the Securities Act or any other restrictions imposed by the Securities Act) or as to which a registration statement under the Securities Act covering the resale thereof is in effect for as long as the securities are held; provided, that securities meeting the requirements of clauses (i), (ii) and (iii) above shall be treated as Liquid Securities from the date of receipt thereof until and only until the earlier of (x) the date on which such securities are sold or exchanged for cash or cash equivalents and (y) 180 days following the date of receipt of such securities. In the event such securities are not sold or exchanged for cash or cash equivalents within 180 days of receipt thereof, for purposes of determining whether the transaction pursuant to which the Company or a Restricted Subsidiary received the securities was in compliance with Section 1012, such securities shall be deemed not to have been Liquid Securities at any time. "Maturity" means the date on which the principal of the Securities or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, pursuant to a Prepayment Offer or Change of Control Offer or otherwise. "Material Change" means an increase or decrease (except to the extent resulting from changes in prices) of more than 30% during a fiscal quarter in the estimated discounted future net revenues from proved oil and gas reserves 14 of the Company and its Restricted Subsidiaries, 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: (i) any acquisitions during the quarter of oil and gas reserves with respect to which the Company's estimate of the discounted future net revenues from proved oil and gas reserves has been confirmed by independent petroleum engineers and (ii) any dispositions of Properties during such quarter that were disposed of in compliance with Section 1012. "Moody's" means Moody's Investors Service Inc., and any successor to its business or operations. "Net Available Cash" from an Asset Sale means cash proceeds received (including any cash proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, and excluding any other consideration received in the form of assumption by the acquiring person of Indebtedness or other obligations relating to such properties or assets) therefrom, in each case net of (i) all legal, title and recording expenses, commissions and other fees and expenses incurred, and all Federal, state, foreign and local taxes required to be paid or accrued as a liability under U.S. GAAP as a consequence of such Asset Sale, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Sale, in accordance with the terms of any Lien upon such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale or by applicable law, be repaid out of the proceeds from such Asset Sale, (iii) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale, and (iv) the deduction of appropriate amounts to be provided by the seller as a reserve, in accordance with U.S. GAAP, against any liabilities associated with the assets disposed of in such Asset Sale and retained by the Company or any Restricted Subsidiary after such Asset Sale; provided, however, that in the event that any consideration for an Asset Sale (which would otherwise constitute Net Available Cash) is required to be held in escrow pending determination of whether a purchase price adjustment will be made, such consideration (or any portion thereof) shall become Net Available Cash only at such time as it is released to such Person or its Restricted Subsidiaries from escrow; and provided, further, however, that any non-cash consideration received in connection with an Asset Sale which is subsequently converted to cash shall be deemed to be Net Available Cash at such time and shall thereafter be applied in accordance with Section 1012. "Net Working Capital" means (i) all current assets of the Company and its Restricted Subsidiaries, less (ii) all current liabilities of the Company and its Restricted Subsidiaries, except current liabilities included in Indebtedness, in each case as set forth in financial statements of the Company prepared in accordance with U.S. GAAP. 15 "9% Indenture" means the indenture dated as of December 20, 1995, between the Company and The Chase Manhattan Bank (formerly known as Chemical Bank), as trustee, relating to the issuance of the 9% Notes. "9% Notes" means the 9% Senior Subordinated Notes Due 2005 of the Company, issued pursuant to the 9% Indenture. "Notice of Default" means a written notice of the kind specified in Section 501. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman of the Board, the President or any Vice President, together with any one of the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company. "Oil and Gas Business" means the business of exploiting, exploring for, developing, acquiring, producing, processing, gathering, marketing, storing and transporting hydrocarbons and other related energy businesses. "Oil and Gas Liens" means (i) Liens on any specific property or any interest therein, construction thereon or improvement thereto to secure all or any part of the costs incurred for surveying, exploration, drilling, extraction, development, operation, production, construction, alteration, repair or improvement of, in, under or on such property and the plugging and abandonment of wells located thereon (it being understood that, in the case of oil and gas producing properties, or any interest therein, costs incurred for "development" shall include costs incurred for all facilities relating to such properties or to projects, ventures or other arrangements of which such properties form a part or which relate to such properties or interests); (ii) Liens on an oil and/or gas producing property to secure obligations Incurred or guarantees of obligations Incurred in connection with or necessarily incidental to commitments for the purchase or sale of, or the transportation or distribution of, the products derived from such property; (iii) Liens arising under partnership agreements, oil and gas leases, overriding royalty agreements, net profits agreements, production payment agreements, royalty trust agreements, master limited partnership agreements, farm-out agreements, division orders, contracts for the sale, purchase, exchange, transportation, gathering or processing of oil, gas or other hydrocarbons, unitizations and pooling designations, declarations, orders and agreements, development agreements, operating agreements, production sales contracts, area of mutual interest agreements, gas balancing or deferred production agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or geophysical permits or agreements, and other agreements which are customary in the Oil and Gas Business, provided in all instances that such Liens are limited to the assets that are the subject of the relevant agreement; (iv) Liens arising in connection with Production Payments 16 and Reserve Sales; and (v) Liens on pipelines or pipeline facilities that arise by operation of law. "Oil and Gas Purchase and Sale Contract" means, with respect to any Person, any oil and gas agreements, and other agreements or arrangements, or any combination thereof, designed to provide protection against oil and gas price fluctuations. "Opinion of Counsel" means a written opinion of counsel, who may be internal legal counsel for the Company, who shall be acceptable to the Trustee and who may rely as to factual matters on Officers' Certificates. "Outstanding" means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (1) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (2) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Paying Agent (other than the Company or its Wholly Owned Subsidiaries) in trust for the Holders of such Securities and the Paying Agent is not prohibited from paying such money to the Holders of Securities on that date pursuant to the terms of this Indenture; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (3) Securities as to which Defeasance has been effected pursuant to Section 1201; and (4) Securities which have been paid pursuant to Section 305 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such 17 Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "paid in full" or "payment in full" has the meaning specified in Section 1302. "pari passu", when used with respect to the ranking of any Indebtedness of any Person in relation to other Indebtedness of such Person, means that each such Indebtedness (a) either (i) is not subordinated in right of payment to any other Indebtedness of such Person or (ii) is subordinate in right of payment to the same Indebtedness of such person as is the other and is so subordinate to the same extent and (b) is not subordinate in right of payment to the other or to any Indebtedness of such Person as to which the other is not so subordinated. "Pari Passu Indebtedness" means any Indebtedness of the Company (including, without limitation, the 9% Notes) that is pari passu in right of payment to the Securities. "Participants" has the meaning specified in Section 304. "pay the Securities" has the meaning specified in Section 1303. "Paying Agent" has the meaning specified in Section 1002. "Payment Blockage Notice" has the meaning specified in Section 1303. "Payment Blockage Period" has the meaning specified in Section 1303. "Permitted Business Investments" means Investments and expenditures made in the ordinary course of, and of a nature that is or shall have become customary in, the Oil and Gas Business as means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of Oil and Gas Business jointly with third parties, including, without limitation, (i) ownership interests in oil and gas properties or gathering, transportation, processing, storage or related systems and (ii) 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 (including Unrestricted Subsidiaries). ''Permitted Designee'' means (i) a spouse or a child of a Permitted Holder, (ii) trusts for the benefit of a Permitted Holder or a spouse or child of 18 a Permitted Holder, (iii) in the event of the death or incompetence of a Permitted Holder, his estate, heirs, executor, administrator, committee or other personal representative or (iv) any Person so long as a Permitted Holder owns at least 51% of the voting power of all classes of the Voting Stock of such Person. "Permitted Holders" means Charles C. Stephenson, Jr., Jo Bob Hille, S. Craig George, William C. Barnes and their Permitted Designees. "Permitted Indebtedness" means any and all of the following: (a) Indebtedness evidenced by the Securities; (b) Indebtedness under Bank Credit Facilities, provided that the aggregate principal amount of all such Indebtedness under Bank Credit Facilities, together with all Indebtedness Incurred pursuant to clause (l) of this paragraph in respect of Indebtedness previously Incurred pursuant to this clause (b), at any one time outstanding does not exceed the greater of (i) $265 million and (ii) an amount equal to the sum of (A) $100 million and (B) 15% of Adjusted Consolidated Net Tangible Assets determined as of the date of the Incurrence of such Indebtedness; provided, however, that the maximum amount available to be outstanding under Bank Credit Facilities shall be permanently reduced by the amount of Net Available Cash from Assets Sales used to permanently repay Indebtedness under Bank Credit Facilities, and not subsequently reinvested in Additional Assets or used to permanently reduce other Indebtedness to the extent permitted pursuant to Section 1012; (c) Indebtedness to the Company or any of its Wholly Owned Subsidiaries by any of its Restricted Subsidiaries or Indebtedness of the Company to any of its Wholly Owned Subsidiaries (but only so long as such Indebtedness is held by the Company or a Wholly Owned Subsidiary); (d) Indebtedness in connection with one or more standby letters of credit, Guarantees, performance bonds or other reimbursement obligations issued in the ordinary course of business and not in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of 19 business and on terms and conditions which are customary in the Oil and Gas Business and other than the extension of credit represented by such letter of credit, Guarantee or performance bond itself); (e) Indebtedness of any Person which shall merge or consolidate with or into the Company in accordance with Section 801, which was outstanding prior to such merger or consolidation; (f) Indebtedness under Interest Rate Protection Agreements entered into for the purpose of limiting interest rate risks, provided that the obligations under such agreements are related to payment obligations on Indebtedness otherwise permitted by the terms of Section 1008; (g) Indebtedness under Exchange Rate Contracts, provided that such Exchange Rate Contracts were entered into for the purpose of limiting exchange rate risks in connection with transactions entered into in the ordinary course of business; (h) Indebtedness under Oil and Gas Purchase and Sale Contracts, provided that such contracts were entered into in the ordinary course of business for the purpose of limiting risks that arise in the ordinary course of business of the Company and its Subsidiaries; (i) in-kind obligations relating to net oil or gas balancing positions arising in the ordinary course of business that are customary in the Oil and Gas Business; (j) Indebtedness outstanding on the Issue Date not otherwise permitted in clauses (a) through (i) above; (k) Indebtedness not otherwise permitted to be Incurred pursuant to this paragraph, provided that the aggregate principal amount of all Indebtedness Incurred pursuant to this clause (k), together with all Indebtedness Incurred pursuant to clause (l) of this paragraph in respect of Indebtedness previously Incurred pursuant to this clause (k), at any one time outstanding does not exceed $25 million; (l) Indebtedness Incurred in exchange for, or the proceeds of which are used to refinance, (i) Indebtedness referred to in clauses (a) through (k) of this paragraph (including Indebtedness previously Incurred pursuant to this clause (l)) and (ii) Indebtedness Incurred pursuant to clause (a) of Section 1008; provided, however, that (i) such Indebtedness is in an aggregate principal amount not in excess of the sum of (A) the aggregate principal amount then outstanding of the Indebtedness being exchanged or refinanced and (B) an amount necessary to pay any fees and expenses, including premiums, related to such exchange or refinancing, (ii) such Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being exchanged or refinanced, (iii) such Indebtedness has an Average Life to Stated Maturity at the time such Indebtedness is Incurred that is equal to or greater than the Average Life to Stated Maturity of the Indebtedness being exchanged or refinanced, and (iv) such Indebtedness is subordinated in right of payment to Senior Indebtedness or the Securities to at least the same extent, if any, as the Indebtedness being exchanged or refinanced; (m) Indebtedness consisting of obligations in respect of purchase price adjustments, indemnities or Guarantees of the same or similar matters in connection with the acquisition or disposition of assets; and (n) accounts payable or other obligations of the Company or any Restricted Subsidiary to trade creditors created or assumed by the Company or such Restricted Subsidiary in the ordinary course of business in connection with the obtaining of goods or services. "Permitted Investments" means any and all of the following: (a) Permitted Short-Term Investments; (b) Investments in property, plant and equipment used in the ordinary course of business and Permitted Business Investments; (c) Investments by the Company or any Restricted Subsidiary in a Restricted Subsidiary and Investments by a Restricted Subsidiary in the Company; (d) Investments in any other Person, including the acquisition from third parties of Capital Stock of a Restricted Subsidiary or any other Person, as a result of which such other Person becomes a Restricted Subsidiary in compliance with Section 1016 or is merged into or consolidated with or transfers or conveys all or substantially all of its assets to the Company or a Restricted Subsidiary; (e) negotiable instruments held for collection; lease, utility and other similar deposits; or stock, obligations or securities received in settlement of debts owing to the Company or any of its Restricted Subsidiaries as a result of foreclosure, perfection or enforcement of any Lien or Indebtedness, in each of the foregoing cases in the ordinary course of business of the Company or such Restricted Subsidiary; (f) Investments in Persons in the Oil and Gas Business (other than Restricted Subsidiaries) intended to promote the Company's strategic business objectives in an amount not to exceed $20 20 million at any one time outstanding; (g) loans made (i) to officers, directors and employees of the Company or any Subsidiary approved by the Board of Directors (or by a duly authorized officer), the proceeds of which are used solely to exercise stock options received pursuant to an employee stock option plan or other incentive plan, in a principal amount not to exceed the exercise price of such stock options, and (ii) to refinance loans, together with accrued interest thereon, made pursuant to this clause (g); (h) advances and loans to officers, directors and employees of the Company or any Subsidiary in the ordinary course of business, provided such loans and advances do not exceed $3.0 million at any one time outstanding; (i) Investments in the form of securities received from Asset Sales, provided that such Asset Sales are made in compliance with Section 1012; and (j) Investments pursuant to any agreement or obligation of the Company or any of its Restricted Subsidiaries as in effect on the Issue Date (other than Investments described in clauses (a) through (i) above). "Permitted Liens" shall have the meaning specified in Section 1009. "Permitted Short-Term Investments" means (a) Investments in U.S. Government Obligations maturing within one year of the date of acquisition thereof, (b) Investments in demand accounts, time deposit accounts, certificates of deposit, bankers acceptances and money market deposits maturing within one year of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America or any State thereof that is a member of the Federal Reserve System having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term indebtedness is rated "A" (or higher) according to Moody's, (c) Investments in demand accounts, time deposit accounts, certificates of deposit, bankers acceptances and money market deposits maturing within one year of the date of acquisition thereof issued by a Canadian bank to which the Bank Act (Canada) applies having capital, surplus and undivided profits aggregating in excess of $500 million, (d) Investments in deposits available for withdrawal on demand with any commercial bank which is organized under the laws of any country in which the Company or any Restricted Subsidiary maintains an office or is engaged in the Oil and Gas Business, provided that (i) all such deposits have been made in such accounts in the ordinary course of business and (ii) such deposits do not at any one time exceed $20 million in the aggregate, (e) repurchase and reverse repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in either clause (b) or (c), (f) Investments in commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any State thereof with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (g) Investments in any money market mutual fund having assets in excess of $250 million substantially all of which consist of other obligations of the types described in clauses (a), (b), (e) and (f) hereof. 21 "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 305 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends and/or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person; provided, however, that "Preferred Stock" shall not include Redeemable Stock. "Prepayment Offer" has the meaning specified in Section 1012(c). "Prepayment Offer Notice" means a written notice of a Prepayment Offer sent by the Company by first-class mail, postage prepaid, to each Holder at his address appearing in the Security Register on the date of the Prepayment Offer offering to purchase up to the principal amount of Securities specified in such Prepayment Offer at the purchase price specified in such Prepayment Offer (as determined pursuant to this Indenture). Unless otherwise required by applicable law, the Prepayment Offer Notice shall specify an expiry date (the "Expiry Date") of the Prepayment Offer which shall be, subject to any contrary requirements of applicable law, and a settlement date (the "Purchase Date") for purchase of the Securities which shall be, subject to any contrary requirements of applicable law, not less than 30 days nor more than 60 days after the date the Prepayment Offer Notice is mailed. The Prepayment Offer Notice shall contain information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will enable such Holders to make an informed decision with respect to the Prepayment Offer, which at a minimum will include (i) the Company's most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (which requirements may be satisfied by delivery of such documents together with the Prepayment Offer), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such financial statements referred to in clause (i), (iii) if applicable, appropriate pro forma financial information concerning the Prepayment Offer, (iv) a description of the events requiring the Company to make the Prepayment Offer, (v) a description of the procedure which Holders must follow and any other information necessary to enable such Holders to tender Securities pursuant to the Prepayment Offer, (vi) a description of the procedure which Holders must follow and any other information necessary to enable such Holders to withdraw an election to tender 22 Securities for payment, and (vi) any other information required by applicable law to be included therein. The Prepayment Offer Notice shall also state: (1) the Expiry Date and the Purchase Date; (2) that any Securities (or any portion thereof) accepted for payment (and duly paid on the Purchase Date) pursuant to the Prepayment Offer shall cease to accrue interest after the Purchase Date; (3) the aggregate principal amount of the Securities offered to be purchased by the Company pursuant to the Prepayment Offer (including, if less than 100%, the manner by which such has been determined pursuant to the Indenture) (the "Purchase Amount"); (4) the purchase price to be paid by the Company for each $1,000 aggregate principal amount of Securities accepted for payment (as specified pursuant to this Indenture) (the "Purchase Price"); (5) that the Holder may tender all or any portion of the Securities registered in the name of such Holder and that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount; (6) the place or places where Securities are to be surrendered for tender pursuant to the Prepayment Offer; (7) that each Holder electing to tender a Security pursuant to the Prepayment Offer will be required to surrender such Security at the place or places specified in the Prepayment Offer Notice prior to the close of business on the Expiry Date (such Security being, if the Company or the Trustee so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing); (8) that Holders will be entitled to withdraw all or any portion of the Securities tendered if the Company (or its Paying Agent) receives, not later than the close of business on the Expiry Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder tendered, the certificate number of the Security the Holder tendered and a statement that such Holder is withdrawing all or a portion of his tender; (9) that if Securities in an aggregate principal amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Prepayment Offer, the Company shall purchase all such Securities; and (10) that in case of any Holder whose Security is purchased only in part, the Company shall execute, and the Trustee shall authenticate and 23 deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Security so tendered. Any Prepayment Offer Notice shall be governed by and effected in accordance with Section 1012. "primary obligor" has the meaning specified in the definition of "Guarantee" set forth in this Section 101. "Production Payments and Reserve Sales" means the grant or transfer to any Person of a royalty, overriding royalty, net profits interest, production payment (whether volumetric or dollar denominated), master limited partnership interest or other interest in oil and gas properties, reserves or the right to receive all or a portion of the production or the proceeds from the sale of production attributable to such properties where the holder of such interest has recourse solely to such production or proceeds of production, subject to the obligation of the grantor or transferor to operate and maintain, or cause the subject interests to be operated and maintained, in a reasonably prudent manner or other customary standard or subject to the obligation of the grantor or transferor to indemnify for environmental matters. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, Capital Stock in any other Person (but excluding Capital Stock or other securities issued by such first mentioned Person). "Purchase Amount" has the meaning specified in the definition of "Prepayment Offer Notice" set forth in this Section 101. "Purchase Date" has the meaning specified in the definition of "Prepayment Offer Notice" set forth in this Section 101. "Purchase Price" has the meaning specified in the definition of "Prepayment Offer Notice" set forth in this Section 101. "Redeemable Stock" of any Person means any equity security of such Person that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or otherwise (including on the happening of an event), is or could become required to be redeemed for cash or other Property or is or could become redeemable for cash or other Property at the option of the holder thereof, in whole or in part, on or prior to the first anniversary of the Stated Maturity of the Securities; or is or could become exchangeable at the option of the holder thereof for Indebtedness at any time, in whole or in part, on or prior to the first anniversary of the Stated Maturity of the Securities; provided, however, that Redeemable Stock shall not include any security by virtue of the fact that it may be exchanged or converted at the 24 option of the holder for Capital Stock of the Company having no preference as to dividends or liquidation over any other Capital Stock of the Company. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registrar" has the meaning specified in Section 1002. "Regular Record Date" for the interest payable on any Interest Payment Date on the Securities means the date specified for that purpose in the Securities. "Remaining Excess Proceeds" shall have the meaning specified in Section 1012. "Representative" means the trustee, agent or representative expressly authorized to act in such capacity, if any, for an issue of Senior Indebtedness. "Restricted Payment" means (i) a dividend or other distribution declared or paid on the Capital Stock or Redeemable Stock of the Company or to the Company's stockholders (other than dividends, distributions or payments made solely in Capital Stock of the Company), or declared and paid to any Person other than the Company or any of its Restricted Subsidiaries on the Capital Stock or Redeemable Stock of any Restricted Subsidiary, (ii) a payment made by the Company or any of its Restricted Subsidiaries (other than to the Company or any Restricted Subsidiary) to purchase, redeem, acquire or retire any Capital Stock or Redeemable Stock of the Company or of a Restricted Subsidiary, (iii) a payment made by the Company or any of its Restricted Subsidiaries to redeem, repurchase, defease or otherwise acquire or retire for value (including pursuant to mandatory repurchase covenants), prior to any scheduled maturity, scheduled sinking fund or scheduled mandatory redemption, Indebtedness of the Company which is subordinate (whether pursuant to its terms or by operation of law) in right of payment to the Securities, (iv) an Investment by the Company or a Restricted Subsidiary in any Person other than the Company or a Restricted Subsidiary, or (v) the sale or issuance of Capital Stock of a Restricted Subsidiary to a Person other than the Company or another Restricted Subsidiary if the result thereof is that such Restricted Subsidiary shall cease to be a Restricted Subsidiary, in which event the amount of such "Restricted Payment" shall be the Fair Market Value of the remaining interest in such former Restricted Subsidiary held by the Company and its other Restricted Subsidiaries. 25 "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated an Unrestricted Subsidiary in the manner provided in Section 1016. "Sale and Leaseback Transaction" means, with respect to any Person, any direct or indirect arrangement (excluding, however, any such arrangement between such Person and a Wholly Owned Subsidiary of such Person or between one or more Wholly Owned Subsidiaries of such Person) pursuant to which Property is sold or transferred by such Person or a Restricted Subsidiary of such Person and is thereafter leased back from the purchaser or transferee thereof by such Person or one of its Restricted Subsidiaries. "Securities" has the meaning stated in the preamble of this Indenture, as amended or supplemented from time to time in accordance with the terms hereof, and more particularly means any Securities authenticated and delivered under this Indenture. "Securities Act" means the United States Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time. "Security Register" and "Security Registrar" have the respective meanings specified in Section 304. "Senior Indebtedness" means (i) all obligations consisting of the principal of and premium, if any, and accrued and unpaid interest in respect of (A) Indebtedness of the Company for borrowed money and (B) Indebtedness evidenced by notes, debentures, bonds or other similar instruments permitted under this Indenture for the payment of which the Company is responsible or liable; (ii) all Capital Lease Obligations of the Company; (iii) all obligations of the Company (A) for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction, (B) under Hedging Agreements or (C) issued or assumed as the deferred purchase price of property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under this Indenture; and (iv) all obligations of other persons of the type referred to in clauses (i) and (ii) for the payment of which the Company is responsible or liable as Guarantor; provided that Senior Indebtedness does not include (i) Pari Passu Indebtedness or Indebtedness of the Company that is by its terms subordinate in right of payment to the Securities; (ii) any Indebtedness Incurred in violation of the provisions of this Indenture; (iii) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services; (iv) in-kind obligations relating to net oil and gas balancing positions; or (v) any liability for Federal, state, local or other taxes owed or owing by the Company. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 306. 26 "S&P" means Standard & Poor's Ratings Group and any successor to its business or operations. "Stated Maturity", when used with respect to any security or any installment of principal thereof or interest thereon, means the date specified in such security as the fixed date on which the principal of such security or such installment of principal or interest is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subsidiary" of a Person means (a) another Person which is a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned or controlled by (i) the first Person, (ii) the first Person and one or more of its Subsidiaries, or (iii) one or more of the first Person's Subsidiaries or (b) another Person which is not a corporation (x) at least 50% of the ownership interest of which and (y) the power to elect or direct the election of a majority of the directors or other governing body of which are controlled by Persons referred to in clauses (i), (ii) or (iii) above. "Surviving Entity" has the meaning specified in Section 801. "Transaction Date" has the meaning specified in the definition of "Consolidated Interest Coverage Ratio" set forth in this Section 101. "Trust Indenture Act" means the United States Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the United States Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the United States Trust Indenture Act of 1939 as so amended. "Trust Officer" means any officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include the successor. "Unrestricted Subsidiary" means (i) each Subsidiary of the Company that the Company has designated pursuant to Section 1016 as an Unrestricted Subsidiary and (ii) any Subsidiary of an Unrestricted Subsidiary. "U.S. GAAP" means United States generally accepted accounting principles as in effect on the date of this Indenture, unless stated otherwise. "U.S. Government Obligation" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the 27 full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Volumetric Production Payments" means production payment obligations recorded as deferred revenue in accordance with U.S. GAAP, together with all undertakings and obligations in connection therewith. "Voting Redeemable Stock" of any Person means Redeemable Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all of the Voting Stock of which (except directors' qualifying shares) is at the time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion 28 of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (except for certificates provided for in Section 1004) shall include, (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) 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; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. 29 Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders; Record Dates. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing or alternatively, may be embodied in and evidenced by the record of Holders voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders duly called and held in accordance with the provisions of Article Fifteen, or a combination of such instruments and any such record; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments or so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The record of any meeting of Holders shall be proved in the manner provided in Section 1506. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. The ownership of Securities shall be proved by the Security Register. Except as provided in Section 1402, any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. 30 The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities; provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take or revoke the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 106. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 502, (iii) any request to institute proceedings referred to in Section 507(2) or (iv) any direction referred to in Section 512, in each case with respect to the Securities. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction or to revoke the same, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 106. 31 With respect to any record date set pursuant to this Section, the party hereto which sets such record date may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 106, on or prior to the existing Expiration Date; provided, further, that the Expiration Date shall be no later than 180 days following the record date relating to such Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date to any earlier day as provided in this paragraph. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to the Securities may do so with regard to all or any part of the principal amount of such Securities or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 105. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trustee Administration, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument, Attention: Chief Financial Officer or at any other address previously furnished in writing to the Trustee by the Company. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification shall constitute a sufficient notification for every purpose hereunder if made, given, furnished or filed in writing by facsimile transmission or otherwise to or with the Company at its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. 32 SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under the Trust Indenture Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 108. Effect of Headings, Table of Contents and Cross-Reference Sheet. The Article and Section headings herein, the Table of Contents and the Cross-Reference Sheet are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. 33 SECTION 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the internal laws of the State of New York without reference to principles of conflicts of laws. SECTION 113. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York. In any case where any Interest Payment Date, Redemption Date, Purchase Date, Change of Control Payment Date or Stated Maturity of any Security shall be a Legal Holiday, then (notwithstanding any other provision of this Indenture or of the Securities other than a provision in the Securities which expressly states that such provision shall apply in lieu of this Section) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding day that is not a Legal Holiday with the same force and effect as if made on the Interest Payment Date, Redemption Date, Purchase Date, Change of Control Payment Date or at the Stated Maturity, provided that no interest shall accrue from and after such Interest Payment Date, Redemption Date, Purchase Date, Change of Control Payment Date or Stated Maturity, as the case may be. If a regular record date is a Legal Holiday, the record date shall not be affected. 34 ARTICLE TWO SECURITY FORMS SECTION 201. Form of Securities. The Securities shall be in substantially the form set forth in this Article with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Securities may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. The Securities shall be issued initially in the form of one or more permanent Global Securities in definitive, fully registered form without interest coupons in substantially the form set forth in Sections 202 and 203 hereof, which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Trustee, at its New York office, as custodian for the Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee in the limited circumstances hereinafter provided. The Securities shall be typed, printed, lithographed or engraved or may be produced in any other manner, all as determined by the officers executing the Securities, as evidenced by their execution of the Securities. SECTION 202. Form of Face of Global Security. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. 35 ..................................... 8 5/8% Senior Subordinated Note Due 2009 ............................................. No. ...... $ ..... CUSIP No. 927460 AB 1 VINTAGE PETROLEUM, INC., a Delaware corporation (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ............................. or registered assigns, the principal sum of ...................... on February 1, 2009, and to pay interest thereon from February 5, 1997, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually in arrears on February 1 and August 1 in each year, commencing August 1, 1997, at the rate of 8.625% per annum, both before and after default, with interest upon overdue interest at the same rate (to the extent legally permitted) until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. 36 Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. VINTAGE PETROLEUM, INC. By.................................. By.................................. SECTION 203. Form of Reverse of Global Security. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued under an Indenture, dated as of February 5, 1997 (herein called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and The Chase Manhattan Bank, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the Securities issued pursuant to the Indenture limited in aggregate principal amount to $100,000,000. The Securities are subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time on or after February 1, 2002, in whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed during the 12- month period beginning February 1 of the years indicated: Redemption Year Price ---- ---------- 2002 104.313% 2003 103.234% 2004 102.156% 2005 101.078% and thereafter, beginning February 1, 2006, at a Redemption Price equal to 100% of the principal amount, together, in the case of any such redemption, 37 with accrued and unpaid interest (if any) to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of the Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. In the event of redemption of this Security in part only, a new Security or Securities of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. Upon a Change of Control, any Holder of Securities will have the right to cause the Company to purchase all or any part of the Securities of such Holder at a purchase price equal to 101% of the principal amount of the Securities to be purchased plus accrued and unpaid interest thereon to the Change of Control Payment Date as provided in, and subject to the terms of, the Indenture. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided, and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture. If an Event of Default with respect to the Securities shall occur and be continuing, the principal of and accrued and unpaid interest on the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture provides that modifications and amendments of the Indenture may be made by the Company and the Trustee without the consent of any Holders of Securities in certain limited circumstances. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities at the time Outstanding, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the 38 Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities, the Holders of not less than 25% in principal amount of the Securities at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of $1,000 or any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Securities are exchangeable for a like aggregate principal amount of Securities of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. 39 No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee and any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 204. Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication shall be in substantially the following form: This is one of the Company's 8 5/8% Senior Subordinated Notes Due 2009 referred to in the within-mentioned Indenture. Dated: The Chase Manhattan Bank, As Trustee By...................................... Authorized Officer ARTICLE THREE THE SECURITIES SECTION 301. Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 or an integral multiple thereof. SECTION 302. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or by any Vice President, together with any one of the Treasurer, any Assistant 40 Treasurer, the Secretary or any Assistant Secretary of the Company. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 308, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. The Trustee shall authenticate and deliver Securities for original issue in an aggregate principal amount of $100,000,000, upon Company Order. Such Company Order shall specify the date on which the original issue of Securities is to be authenticated and shall further provide instructions concerning registration, amounts for each Holder and delivery. The aggregate principal amount of Securities outstanding at any time may not exceed $100,000,000, except as provided in Section 305. SECTION 303. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company maintained for that purpose, without charge to the 41 Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities, of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 304. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office or in any other office or agency of the Company maintained pursuant to Section 1002 being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at the office or agency of the Company maintained for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, of any authorized denominations and of like tenor and aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities, of any authorized denominations and of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 303, 906 or 1106 not involving any transfer. 42 If the Securities are to be redeemed in part, the Company shall not be required (A) to issue, register the transfer of or exchange any Securities during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption under Section 1102 and ending at the close of business on the day of such mailing, or (B) to register the transfer of or exchange any Security so selected for redemption, in whole or in part, except the unredeemed portion of any Security being redeemed in part. With respect to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Security or a nominee thereof and deposited with such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (2) A Global Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary. A Global Security is exchangeable for certificated Securities only if (i) the Depositary notifies the Company that it is unwilling or unable to continue as a Depositary for such Global Security or if at any time the Depositary ceases to be a clearing agency registered under the Exchange Act, (ii) the Company executes and delivers to the Trustee a notice that such Global Security shall be so transferable, registrable, and exchangeable, and such transfers shall be registrable or (iii) there shall have occurred and be continuing an Event of Default or an event which, with the giving of notice or lapse of time or both, would constitute an Event of Default with respect to the Securities represented by such Global Security. Any Global Security that is exchangeable for certificated Securities pursuant to the preceding sentence will be transferred to, and registered and exchanged for, certificated Securities in authorized denominations, without legends applicable to a Global Security, and registered in such names as the Depositary holding such Global Security may direct. Subject to the foregoing, a Global Security is not exchangeable, except for a Global Security of like denomination to be registered in the name of the Depositary or its nominee. In the event that a Global Security becomes exchangeable for certificated Securities, (i) certificated Securities will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof, (ii) payment of principal, any repurchase price, and interest on the certificated Securities will be payable, and the transfer of the certificated Securities will be registerable, at the office or agency of the Company maintained for such purposes, and (iii) no service charge will be made for any registration of transfer or exchange of the certificated Securities, although the Company may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith. 43 (3) Securities issued in exchange for a Global Security or any portion thereof shall have an aggregate principal amount equal to that of such Global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein. Any Global Security to be exchanged in whole shall be surrendered by the Depositary to the Trustee. With respect to any Global Security to be exchanged in part, either such Global Security shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depositary or its nominee with respect to such Global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and deliver the Security issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section, Section 303, 305, 906 or 1106 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof. Members of, or participants in, the Depositary ("Participants") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary or by the Trustee as the custodian of the Depositary or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwith standing the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Participants, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Security. SECTION 305. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange there for a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice 44 to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected there with. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 306. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at 45 the same time the Company 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 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 in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of Securities in the manner set forth in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest on the Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 307. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any premium and (subject to Section 306) any interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. 46 SECTION 308. Cancellation. All Securities surrendered for payment, redemption or registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order; provided, however, that the Trustee shall not be required to destroy such cancelled Securities. SECTION 309. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 310. CUSIP Numbers. The Company in issuing the Securities may use CUSIP numbers, and, if so, the Trustee shall use CUSIP numbers in notices of redemption, any Prepayment Offer Notice or any notice of a Change of Control Offer as a con venience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption, Prepayment Offer Notice or any notice of a Change of Control Offer and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption, prepayment or offer shall not be affected by any defect in or omission of such numbers. 47 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 305 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii)are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be irrevocably deposited with the Trustee, as trust funds in trust for the purpose, money in an amount sufficient to pay and discharge the entire indebtedness on such Securities not there tofore delivered to the Trustee for cancellation (and the Company is not prohibited from depositing such money for such purpose on that date pursuant to the terms of this Indenture) for principal and any premium and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and 48 (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Company to any Authenticating Agent under Section 614, the obligation of the Company under the last paragraph of Section 1003 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 shall survive. SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited with the Trustee. Money held by the Trustee pursuant to this Article shall not be subject to the claims of the holders of Senior Indebtedness. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Thirteen or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security at its Maturity; or (3) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with) and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, 49 to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (4) a default under any Indebtedness for borrowed money by the Company or any Restricted Subsidiary, or under any mortgage, indenture or instrument (including this Indenture) under which there may be issued or by which there may be secured or evidenced any such Indebtedness, which default shall have resulted in an amount greater than $10 million ($40 million in the case of Indebtedness of a Foreign Subsidiary the recourse for which is limited to solely Foreign Subsidiaries) of such Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, or a failure to pay any Indebtedness in an amount greater than $10 million ($40 million in the case of Indebtedness of a Foreign Subsidiary the recourse for which is limited to solely Foreign Subsidiaries) at maturity, in each case without such Indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 10 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such Indebtedness to be dis charged or cause such acceleration to be rescinded or annulled, as the case may be, and stating that such notice is a "Notice of Default" hereunder; or (5) a final judgment or order or final judgments or orders for the payment of money are entered against the Company or any Restricted Subsidiary in an uninsured or unindemnified aggregate amount in excess of $10 million by a court or courts of competent jurisdiction, which judgments or orders are not discharged, waived, stayed, satisfied or bonded within a period (during which execution shall not be effectively stayed) of 60 con secutive days after the right to appeal all such judgments or orders has expired; or (6) the Company or any Restricted Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; 50 or takes any comparable action under any foreign laws relating to insolvency; or (7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Restricted Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any Restricted Subsidiary or for any substantial part of its property; or (C) orders the winding up or liquidation of the Company or any Restricted Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days. The term "Bankruptcy Law" means Title 11, United States Code, or any ------------------ similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(6) or 501(7)) shall occur and be continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of and accrued and unpaid interest on all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount and accrued and unpaid interest shall become immediately due and payable. If an Event of Default specified in Section 501(6) or 501(7) occurs, the principal amount of and interest on all the Securities shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. At any time after such a declaration of acceleration has been made and before a judgment or decree based on acceleration for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, 51 the Holders of a majority in aggregate principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities, (B) to the extent that payment of such interest is lawful and is required hereunder, interest upon overdue interest at the rate borne by such Securities, and (C) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal or interest of the Securities which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereto. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on the Securities when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) the Securities at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of the Securities, the whole amount then due and payable on the Securities for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, 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. 52 If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of the Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding 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 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 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities. 53 SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: to the payment of all amounts due the Trustee under Section 607; and SECOND: subject to Article Thirteen, to the payment of the amounts then due and unpaid for principal of and any premium and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and any premium and interest, respectively; and THIRD: to the Company. SECTION 507. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, 54 any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 508. Unconditional Right of Holders To Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, a Holder of the Securities shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to Section 306) interest on the Securities on the Stated Maturities expressed in the Securities (or, in the case of redemption, prepayment or Change of Control, on the Redemption Date, Purchase Date or Change of Control Payment Date, respectively) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture 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, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall 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. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 305, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 55 SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of the Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities; provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture and would not involve the Trustee in personal liability, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may by Act of such Holders on behalf of the Holders of all the Securities waive any past or existing Default or Event of Default hereunder and its consequences, except a Default (1) in the payment of the principal of or any premium or interest on the Securities, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereto. 56 SECTION 514. 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, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or the Trustee. SECTION 515. Waiver of Usury, Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, 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. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. 57 SECTION 602. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security (including payments pursuant to the mandatory redemption provisions of such Security, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. SECTION 603. Certain Rights of Trustee. Subject to the provisions of Section 601: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel reasonably selected by it and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the 58 Trustee, in its discretion, may make 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 to examine the books, records and premises of the Company, personally or by agent or attorney; and (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 604. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. The Trustee shall not be charged with notice or knowledge of any Default or Event of Default unless (i) a Trust Officer shall have actual knowledge thereof or (ii) the Trustee shall have received notice thereof in accordance with Section 105 from the Company or any Holder. SECTION 605. May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such money shall be paid to the Company from time to time upon receipt by the Trustee of a Company Order except as otherwise provided in this Indenture. 59 SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time such compensation as shall be agreed to in writing by the Company and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify each of the Trustee and any predecessor Trustee for, and to hold it harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. Without limiting any rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(6) or Section 501(7), the expenses (including the reasonable fees and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. To secure the Company's payment obligations under this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee as such, except money or property held in trust to pay the principal of or interest on particular Securities. The provisions of this Section shall survive the termination of this Indenture. SECTION 608. Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent 60 permitted by the Trust Indenture Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being trustee under the 9% Indenture, relating to the 9% Notes. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be one (and only one) Trustee hereunder. The Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. The Trustee may resign at any time by giving written notice thereof to the Company. The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 61 then, in any such case, (A) the Company by a Board Resolution may remove the Trustee, or (B) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after (i) the giving of such notice of resignation or (ii) the removal of the Trustee by the Company pursuant to a Board Resolution, the Trustee who has so resigned or been removed may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, the Company, by a Board Resolution, shall promptly appoint a successor Trustee (it being understood that at any time there shall be only one Trustee) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders of Securities in the manner provided in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. In case of the appointment hereunder of a successor Trustee, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; provided that, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly 62 assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the preceding paragraph. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 614. Appointment of Authenticating Agent. The Trustee, with the prior written consent of the Company and after giving notice of the appointment described in this Section 614 in the manner provided in Section 106 to all Holders of Securities, may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 305, and the Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the 63 authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 106 to all Holders of Securities. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section. 64 If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Company's 8 5/8% Senior Subordinated Notes Due 2009 referred to in the within-mentioned Indenture. The Chase Manhattan Bank, As Trustee By .................... , As Authenticating Agent By .................... , Authorized Officer ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE SECTION 701. Company To Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (1) semiannually, not later than February 1 and August 1 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities as of the preceding January 15 or July 15, as the case may be, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. 65 SECTION 702. Preservation of Information; Communications to Holders. The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act. Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 703. Reports by Trustee. The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Trustee shall, within 60 days after each May 15 following the date of this Indenture, deliver to Holders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a). A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee when the Securities are listed on any stock exchange. 66 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not merge or consolidate with or into any other entity (other than a merger of a Restricted Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of its Property or assets in any one transaction or series of transactions unless: (a) the entity formed by or surviving any such consolidation or merger (if the Company is not the surviving entity) or the Person to which such sale, assignment, transfer, lease or conveyance is made (the ''Surviving Entity'') shall be a corporation organized and existing under the laws of the United States of America or a State thereof or the District of Columbia and such corporation expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, the due and punctual payment of the principal of, premium, if any, and interest on all the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture to be performed by the Company; (b) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all of the Company's Property or assets, such Property or assets shall have been transferred as an entirety or virtually as an entirety to one Person; (c) immediately before and after giving effect to such transaction or series of transactions, no Default or Event of Default shall have occurred and be continuing; (d) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness Incurred or anticipated to be Incurred in connection with such transaction or series of transactions), the Company or the Surviving Entity, as the case may be, would be able to Incur at least $1.00 of additional Indebtedness under clause (a) of Section 1008; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness Incurred or anticipated to be Incurred in connection with such transaction or series of transactions), the Company or the Surviving Entity shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to the transaction or series of transactions; and 67 (f) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, assignment, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any sale, conveyance, transfer, assignment or lease of all or substantially all of the Property or assets of the Company in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such sale, conveyance, assignment, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a sale, conveyance, assignment, transfer or lease of the Property or assets of the Company, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto or otherwise amend this Indenture, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders of the Securities or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default for the benefit of the Holders of the Securities; or 68 (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or (5) to secure the Securities pursuant to the requirements of Section 1009 or otherwise; or (6) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 611; or (7) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (7) shall not adversely affect the interests of the Holders of Securities in any material respect; or (8) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the Trust Indenture Act; or (9) to make any other change that does not adversely affect the interests of any Holder of Securities in any material respect. After an amendment under this Section becomes effective, the Company shall mail to Holders of Securities a notice briefly describing such amendment. The failure to give such notice to all Holders of Securities, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto, amendments to this Indenture or waivers for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of the Securities under this Indenture; provided, however, that no such supplemental indenture, amendment or waiver shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, 69 or reduce the amount of the principal of any Security which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502 or alter the redemption or, except as provided in clause (5) below, repurchase provisions with respect thereto, or change the coin or currency in which any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, prepayment or Change of Control, on or after the Redemption Date, Purchase Date or Change of Control Payment Date, respectively); (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; (3) modify any of the provisions of this Section, Section 513 or Section 1018, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; (4) modify any of the provisions of this Indenture relating to the subordination of the Securities or reduce the relative ranking of any Securities in a manner adverse to Holders; (5) following the mailing of a Prepayment Offer pursuant to Section 1012 or a Change of Control Offer pursuant to Section 1019, modify the provisions of this Indenture with respect to such Prepayment Offer or Change of Control Offer in a manner adverse in any material respect to such Holder; or (6) release any security that may have been granted in respect of the Securities. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed amendment, waiver or supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. After an amendment under this Section becomes effective, the Company shall mail to Holders of Securities a notice briefly describing such amendment. The failure to give such notice to all Holders of Securities, or any defect therein, shall not impair or affect the validity of an amendment under this Section. 70 SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. No such supplemental indenture shall directly or indirectly modify the provisions of Article Thirteen in any manner which might terminate or impair the rights of the holders of Senior Indebtedness pursuant to such subordination provisions without the consent of such holders. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture or amendment executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 907. Payment for Consent. Neither the Company nor any Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this 71 Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of the Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities in accordance with the terms of the Securities and this Indenture. Principal, premium, if any, and interest shall be considered paid on the date due if on such date the Trustee or Paying Agent (other than the Company or its Wholly Owned Subsidiaries) holds in accordance with this Indenture money sufficient to pay all principal, premium, if any, and interest then due and the Trustee or such Paying Agent, as the case may be, is not prohibited from paying such money to the Holders of Securities on that date pursuant to the terms of this Indenture. SECTION 1002. Registrar and Paying Agent. The Company shall maintain in The City of New York an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "paying agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the Trust Indenture Act. Such agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain or act as Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 607. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent. 72 The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. SECTION 1003. Money for Securities Payments To Be Held in Trust. If the Company or any of its Wholly Owned Subsidiaries shall at any time act as Paying Agent, it will, on or before each due date of the principal of or any premium or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Securities, it will, on or prior to each due date of the principal of or any premium or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent for the Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. The Trustee and the Paying Agent shall promptly pay to the Company upon Company Request any money or securities held by them at any time in excess of amounts required to pay principal of, premium, if any, or interest on the Securities. Any money deposited with the Trustee or any other Paying Agent, or then held by the Company, in trust for the payment of the principal of or any premium or interest on any Security and remaining unclaimed for one year after such principal, premium or interest has become due and payable may be paid 73 to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Statement by Officers as to Default. The Company will deliver to the Trustee, within 90 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 1005. Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1006. Maintenance of Properties. The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such 74 properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company 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 proceedings. SECTION 1008. Limitation on Indebtedness. The Company shall not, and it shall not permit any of its Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness unless, after giving pro forma effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving pro forma effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds thereof, the Consolidated Interest Coverage Ratio exceeds 2.5 to 1.0 or (b) such Indebtedness is Permitted Indebtedness. SECTION 1009. Limitation on Liens. The Company shall not, directly or indirectly, Incur any Lien on or with respect to any Property of the Company, whether owned on the Issue Date or acquired after the Issue Date, or any interest therein or any income or profits therefrom, unless the Securities are secured equally and ratably with (or prior to) any and all other obligations secured by such Lien, except that the Company may without restriction Incur Liens securing Senior Indebtedness and the following (each a "Permitted Lien"): (a) Liens existing as of the Issue Date; (b) any Lien existing on any Property of a Person at the time such Person is merged or consolidated with or into the Company (and not Incurred in anticipation of such transaction), provided that such Liens are not extended to other Property of the Company; 75 (c) any Lien existing on any Property at the time of the acquisition thereof (and not Incurred in anticipation of such transaction), provided that such Liens are not extended to other Property of the Company; (d) Liens securing the Securities and other obligations arising under this Indenture; (e) Liens to secure any permitted extension, renewal, refinancing, refunding or exchange (or successive extensions, renewals, refinancings, refundings or exchanges), in whole or in part, of or for any Indebtedness secured by Liens referred to in clauses (a) through (d) of this Section 1009; provided, however, that (i) such new Lien shall be limited to all or part of the same Property that secured the original Lien, plus improvements on such Property and (ii) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness secured by Liens described under clauses (a) through (d) of this Section 1009 at the time the original Lien became a Lien permitted in accordance with the Indenture and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement; (f) any Lien incidental to the normal conduct of the business of the Company, the ownership of its property or the conduct in the ordinary course of its business (including, without limitation, (i) easements, rights of way and similar encumbrances, (ii) rights of lessees under leases, (iii) rights of collecting banks having rights of setoff, revocation, refund or chargeback with respect to money or instruments of the Company or on deposit with or in the possession of such banks, (iv) Liens imposed by law, including, without limitation, Liens under workers' compensation or similar legislation and mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens, (v) Oil and Gas Liens, and (vi) Liens Incurred to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice) in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company and its Restricted Subsidiaries taken as a whole; (g) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, so long as reserves have been established to the extent required by U.S. GAAP as in effect at such time; (h) Liens incurred to secure appeal bonds and judgment and attachment Liens, in each case in connection with litigation or legal proceedings that are being contested in good faith by appropriate proceedings, so long as reserves have been established to the extent required by U.S. GAAP as in effect at such 76 time and so long as such Liens do not encumber assets by an amount in excess of $20 million; (i) Liens securing Hedging Agreements, so long as such Hedging Agreements are permitted under Section 1008; (j) Liens in connection with Sale and Leaseback Transactions permitted pursuant to Section 1008; (k) Liens resulting from a pledge of Capital Stock of a Person that is not a Restricted Subsidiary to secure obligations of such Person and any refinancings thereof; and (l) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of decreasing Indebtedness of the Company or any of its Subsidiaries so long as such deposit of funds is permitted under Section 1010. SECTION 1010. Limitation on Restricted Payments. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment if, at the time of and after giving effect to the proposed Restricted Payment: (a) any Default or Event of Default would have occurred and be continuing; (b) the Company could not Incur at least $1.00 of additional Indebtedness pursuant to clause (a) of Section 1008; or (c) the aggregate amount expended or declared for all Restricted Payments from December 20, 1995 would exceed the sum of (i) $25 million, (ii) 100% of the aggregate net cash proceeds or the Fair Market Value of Property other than cash received by the Company on or subsequent to December 20, 1995, from capital contributions to the Company (other than from a Subsidiary of the Company) and from the issuance or sale (other than to a Subsidiary of the Company) of Capital Stock of the Company, including Capital Stock of the Company issued upon conversion of convertible debt or convertible Redeemable Stock and upon the exercise of options, warrants or rights to purchase Capital Stock of the Company, (iii) 50% of the aggregate Consolidated Net Income of the Company (or, if Consolidated Net Income shall be a deficit, less 100% of such deficit) subsequent to September 30, 1995, and ending on the last day of the fiscal quarter ending on or immediately preceding the date of such Restricted Payment, and (iv) an amount equal to the net reduction in Investments made by the Company and its Restricted Subsidiaries subsequent to December 20, 1995 in any Person resulting from (A) payments of interest on debt, dividends, repayment of loans or advances, or other transfers or distributions of Property (but only to the extent the 77 Company excludes such transfers or distributions from the calculation of Consolidated Net Income for purposes of clause (iii) above), in each case to the Company or any Restricted Subsidiary from any Person, or (B) the redesignation of any Unrestricted Subsidiary as a Restricted Subsidiary, not to exceed, in the case of (A) or (B), the amount of such Investments previously made in such Person or such Unrestricted Subsidiary, as the case may be, which were treated as Restricted Payments. Any payments made pursuant to clauses (a) through (i) of the definition of Permitted Investments shall be excluded for purposes of any calculation of the aggregate amount of Restricted Payments. Any payments made pursuant to clause (j) of the definition of Permitted Investments shall be included for purposes of any calculation of the aggregate amount of Restricted Payments. The foregoing limitations do not prevent the Company or any Restricted Subsidiary from (a) paying a dividend on its Capital Stock within 60 days after declaration thereof if, on the declaration date, such dividend could have been paid in compliance with the Indenture, or (b) making Permitted Investments so long as no Default or Event of Default shall have occurred and be continuing. SECTION 1011. Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries. The Company will not (a) permit any Restricted Subsidiary to issue any Capital Stock other than to the Company or one of its Wholly Owned Subsidiaries or (b) permit any Person other than the Company or a Restricted Subsidiary to own any Capital Stock of any other Restricted Subsidiary (other than directors' qualifying shares), except, in each case, for (i) a sale of the Capital Stock of a Restricted Subsidiary owned by the Company or its Restricted Subsidiaries effected in accordance with Section 1012, (ii) the issuance of Capital Stock by a Restricted Subsidiary to a Person other than the Company or a Restricted Subsidiary and (iii) the Capital Stock of a Restricted Subsidiary owned by a Person at the time such Restricted Subsidiary became a Restricted Subsidiary or acquired by such Person in connection with the formation of the Restricted Subsidiary, or transfers thereof; provided, that any sale or issuance of Capital Stock of a Restricted Subsidiary shall be deemed to be an Asset Sale to the extent the percentage of the total outstanding Voting Stock of such Restricted Subsidiary owned directly and indirectly by the Company is reduced as a result of such sale or issuance; provided, further, that if a Person whose Capital Stock was issued or sold in a transaction described under this Section 1011 is, as a result of such transaction, no longer a Restricted Subsidiary, then the Fair Market Value of Capital Stock of such Person retained by the Company and the other Restricted Subsidiaries shall be treated as an Investment for purposes of Section 1010. 78 SECTION 1012. Limitation on Asset Sales. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, consummate any Asset Sale after the Issue Date, unless (i) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares and assets subject to such Asset Sale and (ii) all of the consideration paid to the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of cash, cash equivalents, Liquid Securities, or the assumption by the purchaser of liabilities of the Company (other than liabilities of the Company that are by their terms subordinated to the Securities) or any Restricted Subsidiary as a result of which the Company and its remaining Restricted Subsidiaries are no longer liable; provided, however, that (x) the Fair Market Value of Exchanged Properties shall be treated as cash for purposes of this clause (ii) and (y) the Company and its Restricted Subsidiaries shall be permitted to receive property and securities other than cash, cash equivalents, Exchanged Properties or Liquid Securities, so long as the aggregate Fair Market Value of all such property and securities received in Asset Sales held by the Company or any Restricted Subsidiary at any one time shall not exceed 10% of Adjusted Consolidated Net Tangible Assets. (b) The Net Available Cash from Asset Sales may be applied by the Company or a Restricted Subsidiary, to the extent the Company or such Restricted Subsidiary elects (or is required by the terms of any Senior Indebtedness), (A) to prepay, repay or purchase Senior Indebtedness or Indebtedness of a Restricted Subsidiary (in each case excluding Indebtedness owed to the Company or an Affiliate of the Company); (B) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary); or (C) if there are no 9% Notes outstanding, to purchase Securities (excluding Securities owned by the Company or an Affiliate of the Company). (c) Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within 365 days from the date of such Asset Sale shall constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10 million, the Company will be required to comply with the applicable provisions of the 9% Indenture to make a prepayment offer to purchase on a pro rata basis, from all holders of the 9% Notes, an aggregate principal amount of 9% Notes equal to the Excess Proceeds, at a price in cash not in excess of 100% of the outstanding principal amount thereof plus accrued interest, if any. To the extent that any portion of the amount of such Excess Proceeds remains after compliance with the preceding sentence, such amount shall constitute "Remaining Excess Proceeds" held for the benefit of the holders of the Securities and any then outstanding Pari Passu Indebtedness (other than the 9% Notes) and the amount of Excess Proceeds will be reset to zero. When the aggregate amount of Remaining Excess Proceeds exceeds $10 million, the Company will be required to make an offer to purchase (the "Prepayment Offer"), on a pro rata basis, the Securities and any then 79 outstanding Pari Passu Indebtedness (other than the 9% Notes), at a purchase price of at least 100% of their principal amount plus accrued and unpaid interest thereon (if any) to the Purchase Date. Such Prepayment Offer with respect to the Securities shall be made in accordance with the procedures (including prorating in the event of oversubscription) set forth herein. If the aggregate principal amount of Securities surrendered for purchase by Holders thereof exceeds the pro rata amount of Remaining Excess Proceeds allocated for the purchase thereof, then the Trustee shall select the Securities to be purchased pro rata according to principal amount with such adjustments as may be deemed appropriate by the Company so that any Securities in denominations of $1,000, or integral multiples thereof, shall be purchased. To the extent that any portion of the amount of Remaining Excess Proceeds remains after compliance with the preceding sentence and provided that all Holders of Securities have been given the opportunity to tender their Securities for purchase as described in the following paragraph in accordance with the Indenture, the Company or such Restricted Subsidiary may use such remaining amount for general corporate purposes and the amount of Remaining Excess Proceeds will be reset to zero. (d) Within five Business Days after the later of (i) 365 days from the date of an Asset Sale and (ii) the completion of any offer for the 9% Notes required by the 9% Indenture, the Company shall, if it is obligated to apply an amount equal to any Remaining Excess Proceeds (or any portion thereof) to fund an offer to purchase the Securities, send a Prepayment Offer Notice to the Holders of Securities. The Company shall notify the Trustee at least 15 Business Days (or such shorter period as is acceptable to the Trustee) prior to the mailing of the Prepayment Offer Notice of the Company's obligation to make a Prepayment Offer, and the Prepayment Offer Notice shall be mailed by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. The Company will comply, to the extent applicable, with the requirements of Rules 13e-4 and 14e-1 under the Exchange Act and any other securities laws or regulations thereunder to the extent such laws and regulations are applicable in connection with the purchase of Securities as described above. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Prepayment Offer, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations described above by virtue thereof. Notwithstanding the foregoing provisions of this clause (d), if any Security (or any portion thereof) accepted for payment shall not be so paid pursuant to the provisions described in the preceding paragraph, then, from the Purchase Date until the date on which the principal of and premium (if any) and interest on such Security is paid, interest shall be paid on the unpaid principal and premium (if any) and, to the extent permitted by law, on any accrued but unpaid interest thereon, in each case, at the rate borne by such Security. 80 SECTION 1013. Incurrence of Layered Indebtedness. The Company shall not Incur any Indebtedness which is subordinate or junior in right of payment to any Senior Indebtedness unless such Indebtedness constitutes Indebtedness which is junior to, or pari passu with, the Securities in right of payment. SECTION 1014. Transactions with Affiliates. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, conduct any business or enter into any transaction or series of transactions (including, but not limited to, the sale, transfer, disposition, purchase, exchange or lease of Property, the making of any Investment, the giving of any Guarantee or the rendering of any service) with or for the benefit of any Affiliate of the Company, unless (a) such transaction or series of transactions is in the best interest of the Company or such Restricted Subsidiary, (b) such transaction or series of transactions is on terms no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company or such Restricted Subsidiary, and (c) with respect to a transaction or series of transactions involving aggregate payments by or to the Company or such Restricted Subsidiary having a Fair Market Value equal to or in excess of (i) $5.0 million but less than $20.0 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such transaction or series of transactions and, in its good faith judgment, believes that such transaction or series of transactions complies with clauses (a) and (b) of this paragraph as evidenced by a Board Resolution or (ii) $20.0 million, (A) the Company receives from an independent, nationally recognized investment banking firm or appraisal firm, in either case specializing or having a specialty in the type and subject matter of the transaction (or series of transactions) at issue, a written opinion that such transaction (or series of transactions) is fair, from a financial point of view, to the Company or such Restricted Subsidiary and (B) the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such transaction or series of transactions and, in its good faith judgment, believes that such transaction or series of transactions complies with clauses (a) and (b) of this paragraph, as evidenced by a Board Resolution. The limitations of the preceding paragraph do not apply to (a) the payment of reasonable and customary regular fees to directors of the Company or any of its Restricted Subsidiaries who are not employees of the Company or any of its Restricted Subsidiaries, (b) indemnities of officers and directors of the Company or any Subsidiary consistent with such Person's bylaws and applicable statutory provisions, (c) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (d) loans made (i) to officers and directors of the 81 Company or any Subsidiary approved by the Board of Directors (or by a duly authorized officer), the proceeds of which are used solely to exercise stock options received pursuant to an employee stock option plan or other incentive plan, in a principal amount not to exceed the exercise price of such stock options or (ii) to refinance loans, together with accrued interest thereon, made pursuant to this clause (d), (e) advances and loans to officers and directors of the Company or any Subsidiary in the ordinary course of business, provided such loans and advances do not exceed $3.0 million at any one time outstanding, or (f) transactions with Restricted Subsidiaries. SECTION 1015. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, assume or otherwise cause or suffer to exist or become effective, or enter into any agreement with any Person that would cause to become effective, any consensual encumbrance or restriction on the legal right of any Restricted Subsidiary (other than a Foreign Subsidiary) to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock or Redeemable Stock held by the Company or a Restricted Subsidiary, (b) pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary, (c) make any loans or advances to the Company or any other Restricted Subsidiary or (d) transfer any of its property or assets to the Company or any other Restricted Subsidiary. Such limitation will not apply (1) with respect to clauses (c) and (d) only, to encumbrances and restrictions (i) in existence under or by reason of any agreements in effect on the Issue Date, (ii) required by Bank Credit Facilities that are not more restrictive than those in effect under the Bank Credit Facility on the Issue Date, (iii) existing at such Restricted Subsidiary at the time it became a Restricted Subsidiary if (A) such encumbrance or restriction was not created in anticipation of such acquisition and (B) immediately following such acquisition, on a pro forma basis, the Company could incur at least $1.00 of additional Indebtedness pursuant to clause (a) of Section 1008 or (iv) which result from the renewal, refinancing, extension or amendment of an agreement referred to in the immediately preceding clauses (i), (ii) and (iii) above, provided, such replacement or encumbrance or restriction is no more restrictive to the Company or Restricted Subsidiary and is not materially less favorable to the Holders of Securities than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced, and (2) with respect to clause (d) only, to (i) any restriction on the sale, transfer or other disposition of assets or Property securing Indebtedness as a result of a Lien permitted under Section 1009, (ii) any encumbrance or restriction in connection with an acquisition of Property, so long as such encumbrance or restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (iii) customary provisions restricting subletting or assignment of leases and customary provisions in other agreements that restrict assignment of such agreements or rights thereunder, 82 (iv) any encumbrance or restriction due to applicable law, (v) customary restrictions contained in asset sale agreements limiting the transfer of such assets pending the closing of such sale and (vi) restrictions contained in purchase money obligations for Property acquired in the ordinary course of business with respect to transfers of such Property. SECTION 1016. Restricted and Unrestricted Subsidiaries. Unless defined or designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries shall be classified as a Restricted Subsidiary subject to the provisions of the next paragraph. The Company may designate a Subsidiary (including a newly formed or newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries as an Unrestricted Subsidiary if (i) such Subsidiary does not own any Capital Stock, Redeemable Stock or Indebtedness of, or own or hold any Lien on any property of, the Company or any other Restricted Subsidiary, (ii) such Subsidiary does not have any Indebtedness or other obligations which, if in Default, would result (with the passage of time or notice or otherwise) in a default on any Indebtedness of the Company or any Restricted Subsidiary and (iii)(A) such designation is effective immediately upon such Subsidiary becoming a Subsidiary of the Company or of a Restricted Subsidiary, (B) the Subsidiary to be so designated has total assets of $1,000 or less or (C) if such Subsidiary has assets greater than $1,000, then such redesignation as an Unrestricted Subsidiary is deemed to constitute a Restricted Payment in an amount equal to the Fair Market Value of the Company's direct and indirect ownership interest in such Subsidiary, and such Restricted Payment would be permitted to be made at the time of such designation under Section 1010. Except as provided in clauses (iii)(B) and (C) of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The designation of an Unrestricted Subsidiary or removal of such designation shall be made by the Board of Directors pursuant to a Board Resolution and shall be effective as of the date specified in the applicable certified resolution, which shall not be prior to the date such certified resolution is delivered to the Trustee. The Company will not, and will not permit any of its Restricted Subsidiaries to, take any action or enter into any transaction or series of transactions that would result in a Person becoming a Restricted Subsidiary (whether through an acquisition or otherwise) unless, after giving effect to such action, transaction or series of transactions, on a pro forma basis, (i) the Company could Incur at least $1.00 of additional Indebtedness pursuant to clause (a) of Section 1008 and (ii) no Default or Event of Default would occur or be continuing. 83 SECTION 1017. Commission Reports. The Company shall file with the Trustee and provide Holders of Securities, within 15 days after it files them with the Commission, copies of its annual report and the information, documents and other reports which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, and, with respect to the annual consolidated financial statements only, a report thereon by the Company's independent auditors. Notwithstanding that the Company may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall continue to file with the Commission and provide the Trustee and Holders of Securities with the annual reports and the information, documents and other reports which are specified in Sections 13 and 15(d) of the Exchange Act, and, with respect to the annual consolidated financial statements only, a report thereon by the Company's independent auditors. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). The Company also shall comply with the other provisions of (S) 314(a) of the Trust Indenture Act. SECTION 1018. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Sections 901(2) for the benefit of the Holders or in any of Sections 1008 through 1017 (second sentence only), inclusive, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders and on behalf of the Holders of all Securities, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 1019. Mandatory Repurchase Upon a Change of Control. (a) Upon the occurrence of a Change of Control, the Company will, in accordance with Section 1019(b), notify each Holder, with a copy of such notice to the Trustee, in writing of the occurrence of a Change of Control and accompanying such notice will be an offer to purchase the Securities (a "Change of Control Offer") at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. 84 (b) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder stating: (1) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this Section and that all Securities (or portions thereof) timely tendered will be accepted for payment; (2) the purchase price and the purchase date, which shall be, subject to any contrary requirements of applicable law, no earlier than 30 days nor later than 60 days from the date such notice is mailed (the ''Change of Control Payment Date''); (3) that any Security (or portion thereof) accepted for payment (and duly paid on the Change of Control Payment Date) pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (4) that any Securities (or portions thereof) not tendered will continue to accrue interest; (5) a description of the transaction or transactions constituting the Change of Control; (6) the procedures that Holders of Securities must follow in order to tender their Securities (or portions thereof) for payment and the procedures that Holders of Securities must follow in order to withdraw an election to tender Securities (or portions thereof) for payment; and (7) that in case of any Holder whose Security is purchased only in part, the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Security so tendered. (c) On or prior to the Change of Control Payment Date, the Company shall irrevocably deposit with the Trustee or with a Paying Agent (or, if the Company or any of its Wholly Owned Subsidiaries is acting as Paying Agent, segregate and hold in trust) in cash an amount equal to the purchase price plus accrued and unpaid interest, if any, payable to the Holders entitled thereto, to be held for payment in accordance with the provisions of this Section. Holders electing to have a Security (or portion thereof) purchased will be required to surrender the Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least five Business Days prior to the Change of Control Payment Date. Holders will be entitled to withdraw their election if the Trustee or the Company receives not later than three Business Days prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security (or portion thereof) purchased. (d) On the Change of Control Payment Date, the Company shall deliver to the Trustee the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company for payment. The Trustee shall, on the Change of Control Payment Date, mail or deliver payment to each tendering Holder of the purchase price. In the event that the aggregate purchase price of the Securities delivered by the Company to the Trustee is less than the amount deposited with the Trustee, the Trustee shall deliver the excess to the Company immediately after the Change of Control Payment Date. 85 (e) The Company will comply, to the extent applicable, with the requirements of Rules 13e-4 and 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 Securities in connection with a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Change of Control Offer, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations described above by virtue thereof. Notwithstanding the foregoing provisions of this Section, if any Security (or any portion thereof) accepted for payment shall not be so paid pursuant to the provisions described in paragraph (d), then, from the Change of Control Payment Date until the date on which the principal of and premium (if any) and interest on such Security is paid, interest shall be paid on the unpaid principal and premium (if any) and, to the extent permitted by law, on any accrued but unpaid interest thereon, in each case, at the rate borne by such Security. SECTION 1020. Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Election To Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of (i) less than all the Securities (including any such redemption affecting only a single Security), the Company shall, at least 60 days prior to the Redemption Date fixed by the Company or (ii) all the Securities, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (in either case, unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed. SECTION 1102. Selection by Trustee of Securities To Be Redeemed. If less than all the Securities are to be redeemed (unless such redemption affects only a single security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, 86 from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security, provided that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed. The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1103. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall identify the Securities to be redeemed (including CUSIP number) and state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities consisting of more than a single Security are to be redeemed, the identification (and, in the case of partial redemption of any such Securities, the principal amounts) of the particular Securities to be redeemed and, if less than all the Outstanding Securities consisting of a single Security are to be redeemed, the principal amount of the particular Security to be redeemed, 87 (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date, and (5) the place or places where each such Security is to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company and shall be irrevocable. SECTION 1104. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company or any of its Wholly Owned Subsidiaries is acting as Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date. Upon Company Order, the Paying Agent shall promptly return to the Company any money so deposited which is not required for such purpose. SECTION 1105. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 306. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. 88 SECTION 1106. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. SECTION 1107. Purchase of Securities. The Company shall have the right at any time and from time to time to purchase Securities in the open market or otherwise at any price. ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Defeasance and Discharge. The Company shall be deemed to have been discharged from its obligations, and the provisions of Article Thirteen shall cease to be effective, with respect to the Securities as provided in this Section on and after the date the conditions set forth in Section 1203 are satisfied (hereinafter called "Defeasance"). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Securities and to have satisfied all its other obligations under the Securities and this Indenture insofar as the Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of the Securities to receive, solely from the trust fund described in Section 1203 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on the Securities when payments are due, (2) the Company's obligations with respect to the Securities under Sections 303, 304, 305, 1002 and 1003, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to any Securities notwithstanding the prior exercise of its option (if any) to have Section 1202 applied to the Securities. 89 SECTION 1202. Covenant Defeasance. (1) The Company shall be released from its obligations under Sections 1007 through 1016, inclusive, and 1019, and Sections 801(d) and 801(e), and any covenants provided pursuant to Section 901(2) for the benefit of the Holders of the Securities, (2) the occurrence of any event specified in Sections 501(3) (with respect to any of Sections 801(d) and 801(e), Sections 1007 through 1016, inclusive, and 1019, and any such covenants provided pursuant to Section 901(2)), 501(4) and 501(5) shall be deemed not to be or result in an Event of Default and (3) the provisions of Article Thirteen shall cease to be effective, in each case with respect to the Securities as provided in this Section on and after the date the conditions set forth in Section 1203 are satisfied (hereinafter called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means that, with respect to the Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section (to the extent so specified in the case of Section 501(3)) or Article Thirteen, whether directly or indirectly by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document, but the remainder of this Indenture and the Securities shall be unaffected thereby. SECTION 1203. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to the application of Section 1201 or Section 1202 to the Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of the Securities, money in an amount, or U.S. Government Obligations, or a combination thereof, which through the payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, in each case sufficient, in the opinion of a United States nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee to pay and discharge, the principal of and any premium and interest on the Securities at Stated Maturity or on earlier redemption in accordance with the terms of this Indenture and the Securities. (2) With respect to Section 1201, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (i) the Company 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 of 90 the Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to the Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, Defeasance and discharge were not to occur. (3) With respect to Section 1202, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to the Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur. (4) The Company shall have delivered to the Trustee an Officers' Certificate to the effect that the Securities, if then listed on any securities exchange, will not be delisted as a result of such deposit. (5) No Default shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 501(6) and 501(7), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day). (6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act). (7) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound. (8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder. (9) At the time of such deposit, (A) no default in the payment of any principal of or premium or interest on any Senior Indebtedness shall have occurred and be continuing, (B) no event of default with respect to any Senior Indebtedness shall have resulted in such Senior Indebtedness becoming, and continuing to be, due and payable prior to the date on which it would otherwise have become due and payable (unless payment of such Senior Indebtedness has been made or duly provided for), (C) no other event of default with respect to any Senior Indebtedness shall have occurred and be continuing permitting (after notice or lapse of time or both) the holders of such Senior Indebtedness (or a trustee on behalf of such 91 holders) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable and (D) the Company is not prohibited from making such deposit for such purpose pursuant to the terms of this Indenture. (10) If the Securities are to be redeemed prior to their Stated Maturity, notice of such redemption shall have been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee shall have been made. (11) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. SECTION 1204. Deposited Money and U.S. Government Obligations To Be Held in Trust; Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 1203 in respect of any Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any such Paying Agent as the Trustee may determine, to the Holders of the Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law. Money and U.S. Government Obligations so held in trust shall not be subject to the provisions of Article Thirteen. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1203 or the principal 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 Securities. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1203 with respect to any Securities which, in the opinion of a United States nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to the Securities. 92 SECTION 1205. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and the Securities from which the Company has been discharged or released pursuant to Section 1201 or 1202 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to the Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 1204 with respect to the Securities in accordance with this Article; provided, however, that if the Company makes any payment of principal of or any premium or interest on any Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of the Securities to receive such payment from the money so held in trust. ARTICLE THIRTEEN SUBORDINATION OF SECURITIES SECTION 1301. Agreement to Subordinate. The Company covenants and agrees, and each Holder by accepting a Security agrees, that the Indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article Thirteen (subject to the provisions of Articles Four and Twelve), to the prior payment of all Senior Indebtedness and that the subordination is for the benefit of and enforceable by the holders of Senior Indebtedness. The Securities shall in all respects rank pari passu with all other existing and future senior subordinated Indebtedness of the Company (including, without limitation, the 9% Notes) and only Indebtedness of the Company which is Senior Indebtedness shall rank senior to the Securities in accordance with the provisions set forth herein. All provisions of this Article Thirteen shall be subject to Section 1312. SECTION 1302. Liquidation, Dissolution and Bankruptcy. Upon any payment or distribution of the assets of the Company to creditors upon a total or partial liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property (each such event, if any, herein sometimes referred to as a "Proceeding"): (1) holders of Senior Indebtedness shall be entitled to receive payment in full in cash of the Senior Indebtedness before Holders shall be entitled to 93 receive any payment of principal of, or premium, if any, or interest on the Securities; and (2) until the Senior Indebtedness is paid in full in cash, any distribution to which Holders would be entitled but for this Article Thirteen shall be made to holders of Senior Indebtedness as their interests may appear, except that Holders may receive and retain shares of stock and any debt securities that are subordinated to Senior Indebtedness to at least the same extent as the Securities. For purposes of this Section "paid in full" or "payment in full", as used with respect to Senior Indebtedness, means the receipt of cash in payment of the principal amount of the Senior Indebtedness and premium, if any, and interest thereon (including any interest thereon accruing after the commencement of any Proceeding) to the date of such payment. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the sale, conveyance, assignment, lease or transfer of all or substantially all of its Property or assets to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a Proceeding for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by sale, conveyance, assignment, lease or transfer such Property or assets, as the case may be, shall, as a part of such consolidation, merger, sale, conveyance, assignment, lease or transfer, comply with the conditions set forth in Article Eight. SECTION 1303. Default on Senior Indebtedness. The Company may not pay the principal of, premium, if any, or interest on, the Securities or make any deposit pursuant to Sections 1203 or 401 and may not repurchase, redeem or otherwise retire any Securities (collectively, "pay the Securities") if (a) any principal, premium or interest in respect of Senior Indebtedness is not paid when due (after giving effect to any applicable grace period), including at maturity, or (b) any other default on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms unless, in either case, the default has been cured or waived and any such acceleration has been rescinded or such Senior Indebtedness has been paid in full; provided, however, that the Company may pay the Securities without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of each issue of Designated Senior Indebtedness. During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration), the Company may not pay the Securities for a period (a "Payment Blockage Period") commencing upon the receipt by the Company 94 and the Trustee of written notice of such default from the Representative of the holders of any Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179 days thereafter (or earlier if such Payment Blockage Period is terminated (i) by written notice to the Trustee and the Company from the Representative which gave such Payment Blockage Notice, (ii) because the default specified in such Payment Blockage Notice is no longer continuing or (iii) because such Designated Senior Indebtedness has been repaid in full). Notwithstanding the provisions described in the immediately preceding sentence, unless the holders of such Designated Senior Indebtedness or the Representative of such holders shall have accelerated the maturity of such Designated Senior Indebtedness and not rescinded such acceleration, the Company may resume payment on the Securities after the end of such Payment Blockage Period (unless otherwise prohibited pursuant to the first sentence of this Section). Not more than one Payment Blockage Notice may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to any number of issues of Designated Senior Indebtedness during such period. SECTION 1304. Acceleration of Payment of Securities. If payment of the Securities is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the Representative of each issue of Designated Senior Indebtedness of the acceleration. The Company may not pay the Securities until five days after such notice is received and, thereafter, may pay the Securities only if this Article Thirteen otherwise permits the payment at that time. SECTION 1305. When Distribution Must Be Paid Over. If a distribution is made to Holders that because of this Article Thirteen should not have been made to them, the Holders who receive the distribution shall hold it in trust for holders of Senior Indebtedness and pay it over to them as their interests may appear. SECTION 1306. Subrogation. After all Senior Indebtedness is paid in full and until the Securities are paid in full, the Holders shall be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness. A distribution made under this Article Thirteen to holders of Senior Indebtedness which otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on Senior Indebtedness. 95 SECTION 1307. Relative Rights. This Article Thirteen defines the relative rights of Holders and holders of Senior Indebtedness. Nothing in this Indenture shall: (1) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of, premium, if any, and interest on the Securities in accordance with their terms; or (2) except as set forth in Section 1304, prevent the Trustee or any Holder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Indebtedness to receive distributions otherwise payable to Holders. SECTION 1308. Subordination May Not Be Impaired by Company. No right of any holder of Senior Indebtedness to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture. SECTION 1309. Rights of Trustee and Paying Agent. Notwithstanding Section 1303 (but subject to Section 1305), the Trustee or Paying Agent may continue to make payments on the Securities and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, a Trust Officer of the Trustee receives notice satisfactory to it that payments may not be made under this Article Thirteen. The Company, the Security Registrar, the Paying Agent, a Representative or a holder of Senior Indebtedness may give the notice; provided, however, that, if an issue of Senior Indebtedness has a Representative, only the Representative may give the notice. SECTION 1310. Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative (if any). SECTION 1311. Trust Moneys Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from money or the proceeds of U.S. Government Obligations held in trust 96 under Article Four or Twelve by the Trustee for the payment of principal of and interest on the Securities shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article Thirteen, and none of the Holders or the Trustee shall be obligated to pay over any such amount to the Company or any holder of Senior Indebtedness of the Company or any other creditor of the Company or any Representative. SECTION 1312. Trustee Entitled To Rely. Upon any payment or distribution pursuant to this Article Thirteen, the Trustee and the Holders shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 1302 are pending, (ii) upon a certificate of the liquidating trustee, receiver, trustee in bankruptcy or agent or other Person making such payment or distribution to the Trustee or to the Holders or (iii) upon the Representatives for the holders of Senior Indebtedness or such holders if there is no Representative with respect to any Senior Indebtedness, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Thirteen. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article Thirteen, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and other facts pertinent to the rights of such Person under this Article Thirteen, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The provisions of Sections 601 and 603 shall be applicable to all actions or omissions of actions by the Trustee pursuant to this Article Thirteen. SECTION 1313. Trustee To Effectuate Subordination. Each Holder by accepting a Security authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Holders and the holders of Senior Indebtedness as provided in this Article Thirteen and appoints the Trustee as attorney-in-fact for any and all such purposes. 97 SECTION 1314. Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Holders or the Company or any other Person, money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Thirteen or otherwise. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants or obligations as are specifically set forth in this Article Thirteen and no implied covenants or obligations with respect to holders of Senior Indebtedness shall be read into this Indenture against the Trustee. SECTION 1315. Reliance by Holders of Senior Indebtedness on Subordination Provisions. Each Holder by accepting a Security acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. SECTION 1316. Proofs of Claim. In the event that the Company is subject to any proceeding under any bankruptcy, insolvency or analogous laws and the Holders and the Trustee fail to file any proof of claim permitted to be filed in such proceeding with respect to the Securities, then any Representative of Senior Indebtedness or any holder thereof if there is no Representative therefor may file such proof of claim no earlier than the later of (i) the expiration of 15 days after such Representative notified the Trustee and the Company of its intention to do so and (ii) 30 days preceding the last day it is permitted to file such claim. SECTION 1317. Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. 98 Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1318. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that neither Section 1309 nor Section 1312 shall apply to the Company or any Wholly Owned Subsidiary if it or such Wholly Owned Subsidiary acts as Paying Agent. SECTION 1319. Defeasance of this Article Thirteen. The subordination of the Securities provided by this Article Thirteen is expressly made subject to the provisions for Defeasance or Covenant Defeasance in Article Twelve hereof and, anything herein to the contrary notwithstanding, upon the effectiveness of any such Defeasance or Covenant Defeasance, the Securities then outstanding shall thereupon cease to be subordinated pursuant to this Article Thirteen. ARTICLE FOURTEEN CONCERNING THE HOLDERS SECTION 1401. Identification of Company-Owned Securities. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Securities, if any, known by the Company to be owned or held by or for the account of the Company or any other obligor on the Securities or by any Affiliate of the Company or any other obligor on the Securities; and, subject to the provisions of Section 601, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 1402. Revocation of Consents. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 104, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities specified in this 99 Indenture in connection with such action, any Holder of a Security, except as provided in Section 104 with respect to record dates, the serial number of which is shown by the evidence to be included in the Securities the Holders of which have consented to or are bound by consents to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 104, revoke such action so far as concerns such Security. ARTICLE FIFTEEN HOLDERS' MEETINGS SECTION 1501. Purposes of Meetings. A meeting of Holders of Securities may be called at any time and from time to time pursuant to the provisions of this Article Fifteen for any of the following purposes: (1) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any Default hereunder and its consequences, or to take any other action authorized to be taken by Holders of Securities pursuant to any of the provisions of Article Five; (2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Six; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 902; or (4) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture or under applicable law. SECTION 1502. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Holders of Securities to take any action specified in Section 1501, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Holders of Securities, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to all Holders of Securities at their addresses as they shall appear on the Security Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to 100 the date fixed for the meeting (or, in the case of a meeting of Holders with respect to the Securities all or part of which are represented by a Global Security, not less than 20 nor more than 40 days). Upon the calling of a meeting of Holders with respect to the Securities all or part of which are represented by a Global Security, a record date shall be established for determining Holders of Outstanding Securities entitled to vote at such meeting, which record date shall be the close of business on the day the Trustee mails the notice of the Meeting of Holders. The Holders on such record date, and their designated proxies, and only such Persons, shall be entitled to vote at such meeting of Holders. SECTION 1503. Call of Meetings by Company or Holders. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the Holders, or their designated proxies, of at least 25% in aggregate principal amount of the Outstanding Securities, shall have requested the Trustee to call a meeting of the Holders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Holders may determine the time and the place in said Borough of Manhattan for such meeting and may call such meeting to take any action authorized in Section 1501, by mailing notice thereof as provided in Section 1502. SECTION 1504. Qualifications for Voting. To be entitled to vote at any meeting of Holders a Person shall (a) be a Holder of one or more Securities or (b) be a Person appointed by an instrument in writing as proxy by a Holder of one or more Securities; provided, however, that in the case of any meeting of Holders with respect to the Securities all or part of which are represented by a Global Security, only Holders, or their designated proxies, of record of Outstanding Securities on the record date established pursuant to Section 1502 hereof shall be entitled to vote at such meeting. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 1505. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of 101 the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. Except as otherwise permitted or required by any such regulation, the holding of Securities shall be proved in the manner specified in Section 104 and the appointment of any proxy shall be proved in the manner specified in said Section 104 or by having the signature of the Person executing the proxy witnessed or guaranteed. The Trustee shall, by an instrument in writing, appoint a temporary chairman and a temporary secretary of the meeting, unless the meeting shall have been called by the Company or by Holders as provided in Section 1503, in which case the Company or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman and a temporary secretary. A permanent chairman and a permanent secretary of the meeting shall be elected by the Persons holding or representing a majority of the Outstanding Securities represented at the meeting. Subject to the provisions of Section 1504, at any meeting each Holder or proxy shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the permanent chairman (or the temporary chairman, if no permanent chairman shall have been elected pursuant to this Section) of the meeting to be not Outstanding. Neither the temporary chairman nor the permanent chairman of the meeting shall have a right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to the provisions of Section 1502 or 1503 may be adjourned from time to time by the Persons holding or representing a majority of the Securities represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. At any meeting of the Holders of Securities a quorum shall consist of Holders present in person or by proxy and representing at least 25% in principal amount of the Outstanding Securities. If a quorum of the Holders of Securities shall not be present within 30 minutes from the time fixed for holding any meeting, the meeting, if summoned by the Holders or pursuant to a request of the Holders, shall be dissolved; but in any other case the meeting shall be adjourned to the same day in the next week (unless such day is a Legal Holiday in which case it shall be adjourned to the next following day thereafter that is not a Legal Holiday) at the same time and place and no notice shall be required to be given in respect of such adjourned meeting. At the adjourned meeting the Holders of Securities present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened notwithstanding that they may not represent 25% of the principal amount of the Outstanding Securities. 102 SECTION 1506. Voting. The vote upon any resolutions submitted to any meeting of Holders shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities or of their representatives by proxy. The permanent chairman (or the temporary chairman, if no permanent chairman shall have been elected pursuant to Section 1505) of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the permanent secretary (or the temporary secretary, if no permanent secretary shall have been elected pursuant to Section 1505) of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the permanent secretary (or the temporary secretary, if no permanent secretary shall have been elected pursuant to Section 1505) of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 1502. The record shall be signed and verified by the affidavits of the permanent chairman and the permanent secretary of the meeting (or if no permanent chairman and/or permanent secretary shall have been elected pursuant to Section 1505, then the temporary chairman and/or the temporary secretary, as the case may be, shall take such action) and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 1507. No Delay of Rights by Meeting. Nothing in this Article Fifteen contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders under any of the provisions of this Indenture or of the Securities. 103 ARTICLE SIXTEEN MISCELLANEOUS PROVISIONS SECTION 1601. Indenture and Securities Solely Corporate Obligations. No recourse under or upon any obligation, covenant or agreement of this Indenture, any supplemental indenture, or of any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any successor corporation or Person, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, shareholders, officers or directors, as such, of the Company or of any successor corporation or Person, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or any of the Securities or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, shareholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Securities. SECTION 1602. Execution in Counterparts. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. ___________________ 104 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and have caused their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. VINTAGE PETROLEUM, INC., By /s/ S. Craig George ----------------------------- By /s/ William C. Barnes ----------------------------- [SEAL] Attest: /s/ William C. Barnes - --------------------------- THE CHASE MANHATTAN BANK, as Trustee, By /s/ Lawrence O'Brien ----------------------------- [SEAL] Attest: /s/ Lawrence O'Brien - -------------------------- 105 [Notarial Seal] STATE OF NEW YORK,) ) SS.: COUNTY OF NEW YORK ) Personally appeared before me, the undersigned authority in and for the said county and state, on this 5th day of February 1997, within my jurisdiction, the within named S. Craig George and William C. Barnes who acknowledged that they are President and Secretary, respectively, of Vintage Petroleum, Inc. and that for and on behalf of the said corporation, and as its act and deed they executed the above and foregoing instrument, after first having been duly authorized by said corporation so to do. /s/ Thomas Gilles ------------------------------ NOTARY PUBLIC 106 [Notarial Seal] STATE OF NEW YORK,) ) SS.: COUNTY OF NEW YORK ) Personally appeared before me, the undersigned authority in and for the said county and state, on this 5th day of February 1997, within my jurisdiction, the within named L. O'Brien who acknowledged that he is a Senior Trust Officer of The Chase Manhattan Bank and that for and on behalf of the said corporation, and as its act and deed he executed the above and foregoing instrument, after first having been duly authorized by said corporation so to do. /s/ Annabelle DeLuca ----------------------------- NOTARY PUBLIC EX-13 3 PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 SUMMARY FINANCIAL AND OPERATING DATA
========================================================================================================================== YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA Financial Data Income Statement Data: Oil and gas sales.......................... $ 258,368 $160,254 $141,357 $113,259 $ 61,194 Gathering revenues......................... 20,508 12,380 14,635 7,861 7,775 Gas marketing revenues..................... 31,920 20,912 27,285 36,175 31,097 Total revenues............................. 311,682 194,797 185,652 160,027 101,450 Operating expenses......................... 138,438 95,121 96,549 85,205 61,771 Depreciation, depletion and amortization............................ 70,057 52,257 45,774 33,335 17,374 Interest................................... 30,109 20,178 12,002 6,943 4,497 Income before cumulative effect of accounting change.................... 41,192 11,361 13,929 16,789 8,653 Net income................................. 41,192 11,361 13,929 18,514 8,653 Earnings per share before effect of accounting change.................... 1.68 .53 .66 .81 .51 Earnings per share......................... 1.68 .53 .66 .89 .51 Dividends declared per share............... .11 .09 .07 .05 .02 ------------- --------------- --------------- --------------- -------------- Balance Sheet Data (end of year): Total assets............................... $ 813,950 $647,539 $407,752 $384,461 $259,887 Long-term debt, less current portion....... 372,390 315,846 186,548 174,164 127,993 Stockholders' equity....................... 265,105 223,960 155,993 143,392 78,696 ------------- --------------- --------------- --------------- -------------- Operating Data Production: Oil (MBbls)................................ 11,939 7,608 6,657 4,785 1,978 Gas (MMcf)................................. 32,366 30,610 28,884 22,504 14,592 ------------- --------------- --------------- --------------- -------------- Average Sales Prices: Oil (per Bbl).............................. $ 16.73 $ 15.26 $ 13.53 $ 14.14 $ 17.88 Gas (per Mcf).............................. 1.81 1.46 1.78 2.03 1.77 ------------- --------------- --------------- --------------- -------------- Proved Reserves (end of year): Oil (MBbls)................................ 178,296 147,871 70,789 63,277 40,209 Gas (MMcf)................................. 382,846 310,762 281,638 273,142 206,582 ------------- --------------- --------------- --------------- -------------- Present value of estimated future net revenues before income taxes discounted at 10 percent (in thousands): Oil and gas properties............... $1,807,137 $894,249 $446,987 $359,978 $335,941 Gathering systems.................... 10,364 10,641 9,215 8,105 4,818 Standardized measure of discounted future net cash flows (in thousands).... 1,392,841 736,546 385,721 339,701 274,443 ------------- --------------- --------------- --------------- --------------
Significant acquisitions of producing oil and gas properties during 1993 and 1995 affect the comparability between the Financial and Operating Data for the years presented above. 1996 ANNUAL REPORT 25 MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations The Company's results of operations have been significantly affected by its success in acquiring oil and gas properties and its ability to maintain or increase production through its exploitation and exploration activities. Fluctuations in oil and gas prices have also significantly affected the Company's results. Principally through acquisitions, the Company has achieved significant increases in its oil and gas production. The following table reflects the Company's oil and gas production and its average oil and gas prices for the periods presented:
=============================================================================== YEARS ENDED DECEMBER 31, 1996 1995 1994 Production: Oil (MBbls)- U.S. ....................................... 7,694 6,647 6,657 Argentina .................................. 4,245 961 -- Total ...................................... 11,939 7,608 6,657 Gas, all U.S. (MMcf) ......................... 32,366 30,610 28,884 Total MBOE ................................... 17,333 12,710 11,471 --------- --------- --------- Average Sales Prices: Oil (per Bbl)- U.S. ....................................... $17.19 $15.44 $13.53 Argentina .................................. 15.91 13.98 -- Total ...................................... 16.73 15.26 13.53 Gas, all U.S. (per Mcf) ...................... 1.81 1.46 1.78 --------- --------- ---------
Average U.S. oil prices received by the Company fluctuate generally with changes in the West Texas Intermediate ("WTI") posted prices for oil. The Company's Argentina oil production is sold at WTI spot prices less a specified differential. The Company experienced a 10 percent increase in its average oil price in 1996 compared to 1995. During 1996, the impact of oil hedges reduced the Company's overall average oil price $2.00 to $16.73 per Bbl. The Company's average U.S. oil price was reduced $1.47 to $17.19 per Bbl while its average Argentina oil price was reduced $2.96 to $15.91 per Bbl. Approximately 67 percent of the Company's Argentina oil production and 38 percent of its U.S. oil production (a combined 5.765 MMBbls) were covered by oil hedges in 1996. The Company experienced a 13 percent increase in its average oil price in 1995 compared to 1994. Higher prices relative to WTI posted prices for the Company's California oil production and the impact of one hedge (swap agreement) which expired December 31, 1995, combined with higher WTI posted prices to account for the increase. The Company's average realized oil price before the impact of oil hedges increased from 87 percent of WTI posted prices in 1994 to 92 percent for 1996. Average gas prices received by the Company fluctuate generally with changes in spot market prices for gas, which may vary significantly by region. The Company's average gas price for 1996, including the impact of hedging, was 24 percent higher than 1995. During 1996, the average gas price was negatively impacted by five cents per Mcf as a result of certain gas hedges that were in place for 40,000 Mcf of gas per day for the period January through March 1996. The Company experienced an 18 percent decline in average gas prices in 1995 compared to 1994. The Company has previously engaged in oil and gas hedging activities and will continue to consider various hedging arrangements to realize commodity prices which it considers favorable. Currently, oil hedges for the calendar year 1997 cover 2.738 MMBbls at an average NYMEX reference price of $19.26 per Bbl. Before the impact of oil hedges, the Company's average realized oil price for 1996 was $18.73 per Bbl, or approximately 85 percent of the average NYMEX reference price. Relatively modest changes in either oil or gas prices significantly impact the Company's results of operations and cash flow. However, the impact of changes in the market prices for oil and gas on the Company's average realized prices may be reduced from time to time based on the level of the Company's hedging activities. Based on 1996 oil production, a change in the average oil price realized by the Company of $1.00 per Bbl would result in 26 VINTAGE PETROLEUM, INC. a change in net income and cash flow before income taxes for the year of approximately $8.7 million and $11.6 million, respectively. A 10 cent per Mcf change in the average price realized by the Company for gas would result in a change in net income and cash flow before income taxes for the year of approximately $1.9 million and $3.1 million, respectively, based on 1996 gas production. Period to Period Comparisons During 1995, the Company made various acquisitions which significantly impacted the period to period comparisons for 1996 and 1995. These acquisitions (the "1995 Acquisitions") include the purchase of certain oil and gas properties from Texaco Exploration and Production, Inc. ("Texaco") in May 1995, the acquisition in July 1995 of a controlling interest in Cadipsa S.A. ("Cadipsa"), an Argentine oil and gas exploration company which was publicly traded in Argentina until December 26, 1996, the acquisition of Vintage Oil Argentina, Inc., formerly BG Argentina, S.A. ("Vintage Argentina"), in September 1995, and the acquisition of certain Argentina oil and gas properties from Astra Compania Argentina de Petroleo S.A. and Shell Compania Argentina de Petroleo S.A. in November 1995 and December 1995, respectively. The Company's consolidated revenues and expenses for 1996 and 1995 include the consolidation of 100 percent of Cadipsa from the date of acquisition under the purchase method of accounting. The minority interest in (income) loss of subsidiary reflects the portion of Cadipsa's (income) loss attributable to the minority ownership during the years ended December 31, 1996 and 1995. At December 31, 1996, the Company owned 96.8 percent of Cadipsa. Year ended December 31, 1996, Compared to Year ended December 31, 1995 Net income was $41.2 million for the year ended December 31, 1996, up 263 percent from $11.4 million in 1995. Increases in the Company's oil and gas production of 36 percent on an equivalent barrel basis, an increase of 24 percent in natural gas prices, and an increase of 10 percent in oil prices are primarily responsible for the increase in net income. The production increases primarily relate to the 1995 Acquisitions. Oil and gas sales increased $98.1 million (61 percent), to $258.4 million for 1996 from $160.3 million for 1995. A 57 percent increase in oil production and a 10 percent increase in average oil prices combined to account for $83.7 million of the increase. A six percent increase in gas production and a 24 percent increase in average gas prices contributed to an additional $14.4 million increase. Oil and gas gathering net margins (revenue less expenses) increased $600,000 (21 percent), to $3.5 million for 1996 from $2.9 million for 1995, due primarily to improved profitability on a gathering system located in Texas, additional net margins from a gathering system located in California acquired from Texaco in May 1995 and increased gas prices. Gas marketing net margins (revenue less expenses) increased $300,000 (14 percent), to $2.4 million for 1996 from $2.1 million for 1995, due primarily to an increase in the reserve for doubtful accounts associated with gas sales in 1995 with no similar increase in 1996 and increased gas prices. Lease operating expenses, including production taxes, increased $25.1 million (38 percent), to $91.9 million for 1996 from $66.8 million for 1995. The increase in lease operating expenses is due primarily to the 1995 Acquisitions. Lease operating expenses per equivalent barrel produced increased one percent to $5.30 in 1996 from $5.25 for 1995. General and administrative expenses increased $4.8 million (41 percent), to $16.4 million for 1996 from $11.6 million for 1995, due primarily to the acquisitions of Cadipsa and Vintage Argentina in the last half of 1995. Depreciation, depletion and amortization increased $17.8 million (34 percent), to $70.1 million for 1996 from $52.3 million for 1995, due primarily to the 36 percent increase in production on an equivalent barrel basis. Amortization per equivalent barrel of the Company's U.S. oil and gas properties declined to $3.78 in 1996 from $3.89 in 1995. Amortization per equivalent barrel of the Company's Argentina oil and gas properties for 1996 was $4.12 as compared to $4.28 for 1995. Interest expense increased $9.9 million (49 percent), to $30.1 million for 1996 from $20.2 million for 1995, due primarily to a 24 percent increase in the Company's total average outstanding debt related primarily to the 1995 Acquisitions. Year ended December 31, 1995, Compared to Year ended December 31, 1994 Net income was $11.4 million for the year ended December 31, 1995, down 18 percent from $13.9 million in 1994. A decrease of 18 percent in natural gas prices and a 68 percent increase in interest expense offset a 13 percent increase in average oil prices and an 11 percent increase in production on an equivalent barrel basis. In addition, certain oil and gas properties were shut- in for a portion of the first six months of 1995 due to storm damage caused by heavy rains in California and the resulting mudslides, reducing the Company's overall production in the first half by approximately 70,000 Bbls of oil and 350,000 Mcf of gas. 1996 ANNUAL REPORT 27 Oil and gas sales increased $18.9 million (13 percent), to $160.3 million for 1995 from $141.4 million for 1994, due primarily to a 13 percent increase in average oil prices and an 11 percent increase in production on an equivalent barrel basis, partially offset by an 18 percent decline in average natural gas prices. The production increases primarily relate to the 1995 Acquisitions. How- ever, these production increases were partially offset by lower production from the Company's properties affected by the California storms. In addition, oil and gas sales for 1995 were reduced by $0.5 million reflecting the total settlement of a class action lawsuit filed on June 8, 1990, on behalf of certain royalty and mineral interest owners. Oil and gas gathering net margins (revenues less expenses) increased $600,000 (26 percent), to $2.9 million in 1995 from $2.3 million in 1994, due primarily to net margins from a gathering system located in California acquired from Texaco in May 1995 and additional third party volumes transported through an existing system located in Texas. Gas marketing net margins (revenues less expenses) decreased $200,000 (9 percent), to $2.1 million in 1995 from $2.3 million in 1994, due primarily to an increase in the reserve for doubtful accounts associated with gas sales and the decline in average natural gas prices. Other income decreased $1.1 million (46 percent) to $1.3 million in 1995 from $2.4 million in 1994, due primarily to the recognition of a $0.9 million loss from 1996 natural gas price hedges (swap agreements) which no longer qualified as hedges. Lease operating expenses, including production taxes, increased $7.5 million (13 percent), to $66.8 million in 1995 from $59.3 million in 1994. The increase in lease operating expenses is due primarily to the 1995 Acquisitions. Lease operating expenses per equivalent barrel produced increased two percent to $5.25 in 1995 from $5.17 in 1994, due to the impact of the California storms on production and costs incurred. General and administrative expenses increased $2.7 million (30 percent), to $11.6 million in 1995 from $8.9 million in 1994, due primarily to the acquisition of Cadipsa and the addition of new personnel throughout 1994 and 1995 as a result of acquisitions made in 1994 and an increase in the Company's exploitation efforts. Depreciation, depletion and amortization increased $6.5 million (14 percent), to $52.3 million in 1995 from $45.8 million in 1994, due primarily to the 11 percent increase in production on an equivalent barrel basis. Amortization per equivalent barrel of the Company's U.S. oil and gas properties increased two percent to $3.89 in 1995 from $3.82 in 1994. Amortization per equivalent barrel of the Company's Argentina oil and gas properties for 1995 was $4.28. The Company had no Argentina operations prior to 1995. Interest expense increased $8.2 million (68 percent), to $20.2 million in 1995 from $12.0 million in 1994, due primarily to a 28 percent increase in the average interest rate on the Company's floating-rate debt with banks to 7.4 percent per annum in 1995 from 5.8 percent per annum in 1994, an increase in average outstanding advances under the Company's bank revolving credit facility and bank term loan, and interest expense on third-party debt of the Company's foreign subsidiaries. Capital Expenditures During 1996, the Company's domestic capital expenditures totaled $113.7 million of which $50.5 million were for acquisitions of producing oil and gas properties. The largest of these acquisitions was approximately $28.5 million for producing oil and gas properties located in south Alabama acquired from Exxon Company, U.S.A. Funds for these acquisitions were provided by advances under the Company's revolving credit facility. The Company's 1996 international capital expenditures of $90.3 million included approximately $49.4 million in Argentina, primarily for exploitation activities, and $37.0 million in Bolivia related to the acquisition of 100 percent of the outstanding common stock of Shamrock Ventures Boliviana Ltd. from affiliates of Ultramar Diamond Shamrock Corporation. Funds for the purchase of the stock were provided by advances under the Company's revolving credit facility. In February 1997, the Company reached an agreement with subsidiaries of Burlington Resources Inc. to purchase certain producing oil and gas properties and facilities located in the Gulf Coast of Texas and Louisiana for $114.1 million in cash, subject to closing adjustments. The effective date of the transaction is January 1, 1997, with closing scheduled for April 1, 1997, subject to board approvals by the Company and Burlington Resources Inc. and satisfaction of other normal conditions to closing. Funds for this acquisition will be provided by advances under the Company's revolving credit facility. The timing of most of the Company's capital expenditures is discretionary with no material long-term capital expenditure commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The Company primarily uses internally generated cash flow to fund capital expenditures other than significant acquisitions and anticipates that its cash flow, net of debt service 28 VINTAGE PETROLEUM, INC. obligations, will be sufficient to fund its planned 1997 non-acquisition capital expenditures of approximately $58 million in the U.S. and approximately $59 million in South America. The Company does not have a specific acquisition budget since the timing and size of acquisitions are difficult to forecast. The Company is actively pursuing additional acquisitions of oil and gas properties. In addition to internally generated cash flow and advances under the Company's revolving credit facility, the Company may seek additional sources of capital to fund any future significant acquisitions (see "-Liquidity"). The Company's recent capital expenditure history is a follows:
===================================================================================== YEARS ENDED DECEMBER 31, 1996 1995 1994 IN THOUSANDS Acquisition of oil and gas reserves ................. $ 91,282 $207,658 $36,544 Drilling ............................................ 51,175 21,343 9,593 Workovers and recompletions ......................... 33,482 18,313 13,984 Acquisition of undeveloped acreage and seismic ...... 14,847 7,684 1,869 Acquisition and construction of gathering systems ... 724 234 632 Other ............................................... 12,546 5,367 3,146 -------- -------- -------- Total ............................................. $204,056 $260,599 $65,768 -------- -------- --------
Liquidity Internally generated cash flow and the borrowing capacity under its revolving credit facility are the Company's major sources of liquidity. In addition, the Company may use other sources of capital, including the issuance of additional debt securities or equity securities, to fund any major acquisitions it might secure in the future and to maintain its financial flexibility. The Company funds its capital expenditures (excluding acquisitions) and debt service requirements primarily through internally generated cash flows from operations. Any excess cash flow is used to reduce outstanding advances under the Company's revolving credit facility. In the past, the Company has accessed the public markets to finance significant acquisitions and provide liquidity for its future activities. In conjunction with the purchase of substantial oil and gas assets in 1990, 1992 and 1995, the Company completed three public equity offerings, as well as a public debt offering in 1995, which provided the Company with aggregate net proceeds of approximately $272 million. On February 5, 1997, the Company completed a public offering of 1,500,000 shares of common stock, all of which were sold by the Company. Net proceeds to the Company of approximately $47.1 million were used to repay a portion of existing indebtedness under the Company's revolving credit facility. Also on February 5, 1997, the Company issued $100 million of its 8 5/8% Senior Subordinated Notes Due 2009 (the "8 5/8% Notes"). Net proceeds to the Company of approximately $96.4 million were used to repay a portion of existing indebtedness under the Company's revolving credit facility. The 8 5/8% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002. Upon a change in control (as defined) of the Company, holders of the 8 5/8% Notes may require the Company to repurchase all or a portion of the 8 5/8% Notes at a purchase price equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest. The 8 5/8% Notes mature on February 1, 2009, with interest payable semiannually on February 1 and August 1 of each year. The 8 5/8% Notes are unsecured senior subordinated obligations of the Company, rank subordinate in right of payment to all senior indebtedness (as defined) and rank pari passu with the Company's 9% Senior Subordinated Notes Due 2005. The indenture for the 8 5/8% Notes contains limitations on, among other things, additional indebtedness and liens, the payment of dividends and other distributions, certain investments and transfers or sales of assets. Under its Credit Agreement dated August 29, 1996, as amended (the "Credit Agreement"), certain banks have provided to the Company an unsecured revolving credit facility. The Credit Agreement establishes a borrowing base (currently $270 million) determined by the banks' evaluation of the Company's U.S. and certain Argentina oil and gas reserves. 1996 ANNUAL REPORT 29 Outstanding advances under the revolving credit facility bear interest payable quarterly at a floating rate based on Bank of Montreal's alternate base rate (as defined) or, at the Company's option, at a fixed rate for up to six months based on the eurodollar market rate ("LIBOR"). The Company's interest rate increments above the alternate base rate and LIBOR vary based on the level of outstanding senior debt and the portion of the borrowing base attributable to the U.S. reserves at the time. As of February 19, 1997, the Company had elected a fixed rate based on LIBOR for a substantial portion of its outstanding advances which resulted in an average interest rate of approximately 6.2 percent per annum. In addition, the Company must pay a commitment fee ranging from 0.25 to 0.375 percent per annum on the unused portion of the banks' commitment. On a semiannual basis, the Company's borrowing base is redetermined by the banks based upon their review of the Company's U.S. and certain Argentina oil and gas reserves. If the sum of outstanding senior debt (excluding debt of the Company's foreign subsidiaries) exceeds the borrowing base, as redetermined, the Company must repay such excess. Any principal advances outstanding at October 1, 1999, will be payable in 12 equal consecutive quarterly installments commencing January 1, 2000, with maturity at October 1, 2002. The unused portion of the revolving credit facility was approximately $157 million at February 19, 1997. The unused portion of the revolving loan facility and the Company's internally generated cash flow provide liquidity which may be used to finance future capital expenditures, including acquisitions. As additional U.S. and Argentina acquisitions are made and properties are added to the borrowing base, the banks' determination of the borrowing base and their commitment may be increased. Inflation In recent years inflation has not had a significant impact on the Company's operations or financial condition. Income Taxes The total provision for U.S. income taxes is based on the Federal corporate statutory income tax rate plus an estimated average rate for state income taxes. The Company incurred a current provision for U.S. income taxes of approximately $2.6 million in 1996 and a current benefit of approximately $1.0 million in 1995. The Company has a $5.4 million U.S. alternative minimum tax credit carryforward which does not expire and is available to offset U.S. regular income taxes in future years, but only to the extent that U.S. regular income taxes exceed the U.S. alternative minimum tax in such years. An analysis of income taxes is presented in Note 6 to the Company's December 31, 1996, consolidated financial statements. Earnings of the Company's foreign subsidiaries, Cadipsa and Vintage Argentina, are subject to Argentina income taxes. Due to significant Argentina net operating loss carryforwards for both companies, the Company does not expect to pay any foreign income taxes related to these subsidiaries in 1997. No U.S. deferred tax liability will be recognized related to the unremitted earnings of these foreign subsidiaries, as it is the Company's intention, generally, to reinvest such earnings permanently. Foreign Operations A majority of the Company's foreign operations are located in Argentina. The Company believes Argentina offers a politically stable environment and does not anticipate any significant change in the near future. The current democratic form of government has been in place since 1983 and, since 1989, has pursued a steady process of privatization, deregulation and economic stabilization and reforms involving the reduction of inflation and public spending. Argentina's 12-month trailing inflation rate measured by the Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to 0.1 percent as of December 1996. The Company believes that its Argentine operations present minimal currency risk. All of the Company's Argentine revenues are U.S. dollar based, while a large portion of its costs are Argentine peso denominated. The Argentina Central Bank is obligated by law to sell dollars at a rate of one Argentine peso to one U.S. dollar and has sought to prevent appreciation of the peso by buying dollars at rates of not less than 0.998 peso to one U.S. dollar. As a result, the Company believes that should any devaluation of the Argentine peso occur, its revenues would be unaffected and its operating costs would not be significantly increased. At the present time, there are no foreign exchange controls preventing or restricting the conversion of pesos into dollars. 30 VINTAGE PETROLEUM, INC. CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 1995 IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS Assets Current Assets: Cash and cash equivalents............................................................... $ 2,774 $ 2,545 Accounts receivable - Oil and gas sales.................................................................... 68,219 40,256 Joint operations..................................................................... 4,445 4,616 Prepaids and other current assets....................................................... 9,252 11,665 ------------- ------------- Total current assets............................................................... 84,690 59,082 ------------- ------------- Property, Plant And Equipment, at cost: Oil and gas properties, full cost method................................................ 964,623 762,582 Oil and gas gathering systems........................................................... 13,489 12,765 Other ................................................................................. 8,439 7,733 ------------- ------------- 986,551 783,080 Less accumulated depreciation, depletion and amortization............................... 275,392 205,334 ------------- ------------- 711,159 577,746 ------------- ------------- Other Assets, net....................................................................... 18,101 10,711 ------------- ------------- $813,950 $647,539 ------------- ------------- Liabilities And Stockholders' Equity Current Liabilities: Revenue payable......................................................................... $ 24,746 $ 16,855 Accounts payable - trade................................................................ 20,355 15,514 Other payables and accrued liabilities.................................................. 26,595 18,697 Current portion of long-term debt....................................................... 6,629 7,930 Acquisition costs payable............................................................... 35,051 -- ------------- ------------- Total current liabilities............................................................ 113,376 58,996 ------------- ------------- Long-Term Debt, less current portion above.............................................. 372,390 315,846 ------------- ------------- Deferred Income Taxes................................................................... 57,610 37,753 ------------- ------------- Other Long-Term Liabilities............................................................. 3,641 3,922 ------------- ------------- Minority Interest In Subsidiary......................................................... 1,828 7,062 ------------- ------------- Commitments And Contingencies (Note 4) Stockholders' Equity, per accompanying statements: Preferred stock, $.01 par, 5,000,000 shares authorized, zero shares issued and outstanding............................................................................ -- -- Common stock, $.005 par, 40,000,000 shares authorized, 24,069,112 and 23,661,162 shares issued and outstanding.............................. 120 118 Capital in excess of par value.......................................................... 152,321 149,725 Retained earnings....................................................................... 112,664 74,117 ------------- ------------- 265,105 223,960 ------------- ------------- $813,950 $647,539 ------------- -------------
The accompanying notes are an integral part of these statements. 1996 ANNUAL REPORT 31 CONSOLIDATED STATEMENTS OF INCOME ================================================================================
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Revenues: Oil and gas sales......................................................... $258,368 $160,254 $141,357 Oil and gas gathering..................................................... 20,508 12,380 14,635 Gas marketing............................................................. 31,920 20,912 27,285 Other income.............................................................. 886 1,251 2,375 -------- -------- -------- 311,682 194,797 185,652 -------- -------- -------- Costs And Expenses: Lease operating, including production taxes............................... 91,916 66,771 59,292 Oil and gas gathering..................................................... 16,985 9,511 12,294 Gas marketing............................................................. 29,537 18,839 24,963 General and administrative................................................ 16,441 11,601 8,889 Depreciation, depletion and amortization.................................. 70,057 52,257 45,774 Interest.................................................................. 30,109 20,178 12,002 -------- -------- -------- 255,045 179,157 163,214 -------- -------- -------- Income before income taxes and minority interest.......................... 56,637 15,640 22,438 Provision For Income Taxes: Current................................................................... 2,610 (955) 1,576 Deferred.................................................................. 12,328 6,034 6,933 Minority Interest In (Income) Loss Of Subsidiary.......................... (507) 800 - -------- -------- -------- Net Income................................................................ $ 41,192 $ 11,361 $ 13,929 -------- -------- -------- Earnings Per Share........................................................ $ 1.68 $ .53 $ .66 -------- -------- -------- Weighted average common shares and common equivalent shares outstanding.......................................... 24,537 21,276 21,174 -------- -------- --------
The accompanying notes are an integral part of these statements. 32 VINTAGE PETROLEUM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================
Common Stock ------------------ Capital Retained Total Shares Amount In Earnings Excess of Par Value IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Balance at December 31, 1993........................... 20,153 $101 $ 91,118 $ 52,173 $143,392 Net income........................................ -- -- -- 13,929 13,929 Exercise of stock options and resulting tax effects...................... 10 -- 83 -- 83 Cash dividends declared ($.07 per share).......... -- -- -- (1,411) (1,411) ------- ---------- ------------ ----------- ----------- Balance at December 31, 1994........................... 20,163 101 91,201 64,691 155,993 Net income........................................ -- -- -- 11,361 11,361 Issuance of common stock.......................... 2,803 14 55,190 -- 55,204 Exercise of warrants.............................. 294 1 1,467 -- 1,468 Exercise of stock options and resulting tax effects...................... 401 2 1,867 -- 1,869 Cash dividends declared ($.09 per share).......... -- -- -- (1,935) (1,935) ------- ---------- ------------ ----------- ----------- Balance at December 31, 1995........................... 23,661 118 149,725 74,117 223,960 Net income........................................ -- -- -- 41,192 41,192 Exercise of warrants.............................. 306 2 1,530 -- 1,532 Exercise of stock options and resulting tax effects...................... 102 -- 1,066 -- 1,066 Cash dividends declared ($.11 per share).......... -- -- -- (2,645) (2,645) ------- ---------- ------------ ----------- ----------- Balance at December 31, 1996........................... 24,069 $120 $152,321 $112,664 $265,105 ======= ========== ============ =========== ===========
The accompanying notes are an integral part of these statements. 1996 ANNUAL REPORT 33 CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================================================================ FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 IN THOUSANDS Cash Flows From Operating Activities: Net income.................................................................... $ 41,192 $ 11,361 $ 13,929 Adjustments to reconcile net income to cash provided by operating activities - Depreciation, depletion and amortization................................... 70,057 52,257 45,774 Minority interest in income (loss) of subsidiary........................... 507 (800) - Provision for deferred income taxes........................................ 12,328 6,034 6,933 ----------- ----------- ------------ 124,084 68,852 66,636 Decrease (increase) in receivables............................................ (24,614) (11,836) 3,005 Increase (decrease) in payables and accrued liabilities....................... 14,619 (1,012) (9,487) Other......................................................................... 2,493 (1,805) (1,484) ----------- ----------- ------------ Cash provided by operating activities...................................... 116,582 54,199 58,670 ----------- ----------- ------------ Cash Flows From Investing Activities: Additions to property, plant and equipment - Oil and gas properties..................................................... (162,129) (141,490) (65,136) Gathering systems and other................................................ (1,430) (3,256) (1,832) Proceeds from sales of oil and gas properties................................. 1,291 604 711 Purchase of companies, net of cash acquired................................... (9,160) (45,886) - Other......................................................................... (3,233) 2,777 (4,411) ----------- ----------- ------------ Cash used by investing activities.......................................... (174,661) (187,251) (70,668) ----------- ----------- ------------ Cash Flows From Financing Activities: Sale of common stock.......................................................... 2,528 51,191 - Sale of 9% Senior Subordinated Notes Due 2005................................. - 145,137 - Advances on revolving credit facility and other borrowings.................... 149,014 178,264 51,134 Payments on revolving credit facility and other borrowings.................... (90,720) (237,679) (37,959) Dividends paid................................................................ (2,514) (1,747) (1,308) ----------- ----------- ------------ Cash provided by financing activities...................................... 58,308 135,166 11,867 ----------- ----------- ------------ Net Increase (Decrease) In Cash............................................... 229 2,114 (131) Cash And Cash Equivalents, beginning of year.................................. 2,545 431 562 ----------- ----------- ------------ Cash And Cash Equivalents, end of year........................................ $ 2,774 $ 2,545 $ 431 ----------- ----------- ------------
The accompanying notes are an integral part of these statements. 34 VINTAGE PETROLEUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 [1] Business and Significant Accounting Policies Consolidation Vintage Petroleum, Inc. is an independent energy company with operations primarily in the exploration and production, gas marketing and gathering segments of the oil and gas industry. Approximately 95 percent of the Company's operations are within the exploration and production segment based on 1996 operating income. Its core areas of exploration and production operations include California, the Gulf Coast, East Texas and Mid-Continent areas of the United States, and the San Jorge Basin of Argentina. Argentina exploration and production operations commenced in 1995 as a result of the acquisitions discussed in Note 7. The consolidated financial statements include the accounts of Vintage Petroleum, Inc. and its wholly- and majority-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Oil and Gas Properties Oil and gas properties are accounted for using the full cost method which provides for the capitalization of all acquisition, exploration and development costs incurred for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. The Company capitalized $5.5 million, $4.4 million and $2.3 million of internal costs in 1996, 1995 and 1994, respectively. The unamortized capitalized costs of oil and gas properties, including estimated future development and abandonment costs, are amortized using the units-of-production method based on proved reserves on a country-by-country basis. The Company's unamortized costs of oil and gas properties are limited, on a country-by-country basis, to the sum of the future net revenues attributable to proved oil and gas reserves discounted at 10 percent plus the cost of any unproved properties. If the Company's unamortized costs in oil and gas properties exceed this ceiling amount, a provision for additional depreciation, depletion and amortization is required. At December 31, 1996, 1995 and 1994, the Company's cost of oil and gas properties by country did not exceed such ceiling amounts. Amortization per equivalent barrel of the Company's U.S. oil and gas properties was $3.78, $3.89 and $3.82 for the years ended December 31, 1996, 1995 and 1994, respectively. Amortization per equivalent barrel of the Company's Argentina oil and gas properties for the years ended December 31, 1996 and 1995, was $4.12 and $4.28, respectively. The Company had no Argentina operations prior to 1995. Revenue Recognition Natural gas revenues are recorded using the sales method. Under this method, the Company recognizes revenues based on actual volumes of gas sold to purchasers. The Company and other joint interest owners may sell more or less than their entitlement share of the natural gas volumes produced. A liability is recorded and revenue is deferred if the Company's excess sales of natural gas volumes exceed its estimated remaining recoverable reserves. Hedging Policy The Company periodically uses hedges (swap agreements) to reduce the impact of oil and natural gas price fluctuations. Gains or losses on swap agreements are recognized as an adjustment to sales revenue when the related transactions being hedged are finalized. Gains or losses from swap agreements that do not qualify for accounting treatment as hedges are recognized currently as other income or expense. The cash flows from such agreements are included in operating activities in the consolidated statements of cash flows. Depreciation Depreciation of property, plant and equipment (other than oil and gas properties) is provided using both straight-line and accelerated methods based on estimated useful lives ranging from three to ten years. Income Taxes Deferred income taxes are provided on transactions which are recognized in different periods for financial and tax 1996 ANNUAL REPORT 35 reporting purposes. Such temporary differences arise primarily from the deduction of certain oil and gas exploration and development costs which are capitalized for financial reporting purposes and differences in the methods of depreciation. Statements of Cash Flows Cash equivalents consist of highly liquid money-market mutual funds and bank deposits with initial maturities of three months or less. During the years ended December 31, 1996, 1995 and 1994, the Company made cash payments for interest totaling $29.6 million, $21.6 million and $11.3 million, respectively, and cash payments for U.S. income taxes of $1.3 million, $0.5 million and $3.1 million, respectively. Cash payments of $0.1 million were made during 1996 for foreign tax withholdings. No cash payments were made during 1995 for foreign income taxes and the Company had no foreign operations prior to 1995. During 1995, the Company purchased a majority interest in Cadipsa (see Note 7). The value of the non-cash consideration is not reflected in the Company's 1995 Consolidated Statement of Cash Flows. Such non-cash consideration consisted of $5.7 million of the Company's common stock, $3.2 million cash payable in 1996, and approximately $58.1 million of net liabilities and a $7.9 million minority interest added through consolidation of Cadipsa. In December 1995, the Company purchased certain oil and gas properties from Shell (see Note 7). Deferred payments valued at $5.1 million represent non-cash consideration and are not reflected in the Company's 1995 Consolidated Statement of Cash Flows. In November 1996, the Company agreed to acquire 100 percent of the outstanding common stock of Shamrock Ventures Boliviana Ltd. Acquisition costs of $35.1 million remained unpaid at December 31, 1996, and are reflected in the accompanying balance sheet as acquisition costs payable, a current liability. These unpaid acquisition costs are not reflected in the Company's 1996 Consolidated Statement of Cash Flows. Earnings Per Share Earnings per share are based on the weighted average common shares and common share equivalents outstanding, computed using the treasury stock method assuming the exercise of all common stock options and warrants (except where the effect is anti-dilutive). General and Administrative Expense The Company receives fees for operation of jointly-owned oil and gas properties and records such reimbursements as reductions of general and administrative expense. Such fees totaled approximately $2.3 million, $2.9 million and $2.3 million in 1996, 1995 and 1994, respectively. Revenue Payable Amounts payable to royalty and working interest owners resulting from sales of oil and gas from jointly-owned properties and from purchases of oil and gas by the Company's marketing and gathering segments are classified as revenue payable in the accompanying financial statements. Accounts Receivable The Company's oil and gas, gas marketing and gathering sales are to a variety of purchasers, including intrastate and interstate pipelines or their marketing affiliates, independent marketing companies and major oil companies. The Company's joint operations accounts receivable are from a large number of major and independent oil companies, partnerships, individuals and others who own interests in the properties operated by the Company. [2] Long-Term Debt Long-term debt at December 31, 1996 and 1995, consists of the following: ================================================================================
1996 1995 IN THOUSANDS Revolving credit facility.......................... $200,800 $ 74,300 9% Senior Subordinated Notes Due 2005, less unamortized discount........................ 149,633 149,592 Bank term loan..................................... - 36,736 5.92% Senior note.................................. - 9,948 Subsidiary debt - International Finance Corporation notes.............................. 25,986 28,000 Other subsidiary debt.............................. 2,600 5,200 Bank of Boston senior note......................... - 20,000 --------- --------- 379,019 323,776 Less - Current portion of long-term debt................................... 6,629 7,930 --------- --------- $372,390 $315,846 --------- ---------
36 VINTAGE PETROLEUM, INC. Subsidiary debt relates to borrowings of the Company's foreign subsidiaries, the recourse of which is solely to such subsidiaries, except for $8.4 million advanced by the International Finance Corporation which is guaranteed by the Company. Aggregate maturities of long-term debt for each of the years ending December 31, 1997, through December 31, 2001, are $6.6 million, $4.0 million, $4.0 million, $71.0 million and $69.7 million, with $223.7 million thereafter. Revolving Credit Facility The Company has available an unsecured revolving credit facility under the Credit Agreement dated August 29, 1996, as amended (the "Credit Agreement"), between the Company and certain banks. The Credit Agreement establishes a borrowing base (currently $270 million) based on the banks' evaluation of the Company's U.S. and certain Argentina oil and gas reserves. Outstanding advances under the Company's revolving credit facility bear interest payable quarterly at a floating rate based on Bank of Montreal's alternate base rate (as defined) or, at the Company's option, at a fixed rate for up to six months based on the eurodollar market rate ("LIBOR"). The Company's interest rate increments above the alternate base rate and LIBOR vary based on the level of outstanding senior debt and the portion of the borrowing base attributable to the U.S. reserves at the time. In addition, the Company must pay a commitment fee ranging from 0.25 to 0.375 percent per annum on the unused portion of the banks' commitment. Total outstanding advances at December 31, 1996, were $200.8 million at an average interest rate of approximately 6.7 percent. On a semiannual basis, the Company's borrowing base is redetermined by the banks based upon their review of the Company's U.S. and certain Argentina oil and gas reserves. If the sum of outstanding senior debt (excluding debt of the Company's foreign subsidiaries) exceeds the borrowing base, as redetermined, the Company must repay such excess. Any principal advances outstanding at October 1, 1999, will be payable in 12 equal consecutive quarterly installments commencing January 1, 2000, with maturity at October 1, 2002. The terms of the Credit Agreement impose certain restrictions on the Company regarding the pledging of assets and limitations on, among other things, additional indebtedness and the payment of dividends and other distributions. In addition, the Credit Agreement requires the maintenance of a minimum current ratio (as defined) and tangible net worth (as defined) of $200 million plus 75 percent of the net proceeds of any future equity offerings. 9% Senior Subordinated Notes On December 20, 1995, the Company issued $150 million of its 9% Senior Subordinated Notes Due 2005 (the "9% Notes"). The 9% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 15, 2000. Upon a change in control (as defined) of the Company, holders of the 9% Notes may require the Company to repurchase all or a portion of the 9% Notes at a purchase price equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest. The 9% Notes mature on December 15, 2005, with interest payable semiannually on June 15 and December 15 of each year. The 9% Notes are unsecured senior subordinated obligations of the Company, rank subordinate in right of payment to all senior indebtedness (as defined) and rank pari passu with the new 8 5/8% Notes (see below). The indenture for the 9% Notes contains limitations on, among other things, additional indebtedness and liens, the payment of dividends and other distributions, certain investments and transfers or sales of assets. 8 5/8% Senior Subordinated Notes On February 5, 1997, the Company issued $100 million of its 8 5/8% Senior Subordinated Notes Due 2009 (the "8 5/8% Notes"). The 8 5/8% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002. Upon a change in control (as defined) of the Company, holders of the 8 5/8% Notes may require the Company to repurchase all or a portion of the 8 5/8% Notes at a purchase price equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest. The 8 5/8% Notes mature on February 1, 2009, with interest payable semiannually on February 1 and August 1 of each year. The 8 5/8% Notes are unsecured senior subordinated obligations of the Company, rank subordinate in right of payment to all senior indebtedness (as defined) and rank pari passu with the 9% Notes. The indenture for the 8 5/8% Notes contains limitations similar to those contained in the indenture for the 9% Notes. The net proceeds 1996 ANNUAL REPORT 37 to the Company from the sale of the 8 5/8% Notes (approximately $96.4 million) and the concurrent sale of common stock (approximately $47.1 million--see Note 3) were used to repay approximately $143.5 million of the existing indebtedness under the Company's revolving credit facility. [3] Capital Stock Public Offerings and Other Issuances On July 5, 1995, the Company issued 302,808 shares of common stock valued at $5.7 million as partial consideration to acquire a controlling interest in Cadipsa (see Note 7). On December 20, 1995, the Company completed a public offering of 2,793,700 shares of common stock, of which 2,500,000 shares were sold by the Company and 293,700 shares were sold by a stockholder. Net proceeds to the Company were approximately $49.5 million. The net proceeds were used to repay advances made under the revolving credit facility to fund the acquisition of a portion of the Astra/Shell Properties (see Note 7) and to finance a substantial portion of the acquisition of the remaining portion of the Astra/Shell Properties. A portion of a stock subscription warrant was exercised on December 20, 1995, for the purchase of 293,700 shares of the Company's common stock at an exercise price of $5.00 per share yielding net proceeds to the Company of approximately $1.5 million. The remaining portion of the stock subscription warrant was exercised on January 4, 1996, for the purchase of 306,300 shares of the Company's common stock at an exercise price of $5.00 per share yielding net proceeds to the Company of approximately $1.5 million. The Company had no stock subscription warrants outstanding as of December 31, 1996. On February 5, 1997, the Company completed a public offering of 1,500,000 shares of common stock, all of which were sold by the Company. Net proceeds to the Company of approximately $47.1 million were used to repay a portion of existing indebtedness under the Company's revolving credit facility. Stock Plans The Company has three fixed plans which reserve shares of common stock for issuance to key employees and non-management directors. The Company accounts for these plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). Accordingly, no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: ================================================================================
1996 1995 IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Net income - as reported......................... $41,192 $11,361 Net income - pro forma........................... 40,781 11,320 Earnings per share - as reported................. 1.68 .53 Earnings per share - pro forma................... 1.66 .53
The pro forma effect on net income for 1996 and 1995 may not be representative of the pro forma effect on net income in future years because SFAS No. 123 has not been applied to options granted prior to January 1, 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for options granted in 1996 include a dividend yield of 0.4 percent, expected volatility of approximately 29.5 percent, a risk-free interest rate of approximately 6.2 percent, and expected lives of 4.2 years. The weighted average assumptions used for options granted in 1995 include a dividend yield of 0.4 percent, expected volatility of approximately 31.3 percent, a risk-free interest rate of approximately 5.9 percent, and expected lives of 4.2 years. Under the 1983 Stock Option Plan, as amended (the "1983 Plan"), incentive stock options were granted to key employees of the Company. Generally, options granted under the 1983 Plan are exercisable for a two to seven year period beginning three years from the date granted. As of December 31, 1996, all available options have been granted under the 1983 Plan. Under the 1990 Stock Plan, as amended (the "1990 Plan"), a total of up to 2,250,000 shares of common stock are available for issuance to key employees of the Company. The 1990 Plan permits the granting of any or all of the following types of awards: (a) stock options, (b) stock appreciation rights, and (c) restricted stock. As of December 31, 1996, awards for a total of 778,000 shares of common stock remain available for grant under the 1990 Plan. The 1990 Plan is administered by the Compensation Committee appointed by the Board of Directors of the Company (the "Committee"). Subject to the terms of the 38 VINTAGE PETROLEUM, INC. 1990 Plan, the Committee has the authority to determine plan participants, the types and amounts of awards to be granted and the terms, conditions and provisions of awards. Options granted pursuant to the 1990 Plan may, at the discretion of the Committee, be either incentive stock options or non-qualified stock options. The exercise price of incentive stock options may not be less than the fair market value of the common stock on the date of grant and the term of the option may not exceed 10 years. In the case of non-qualified stock options, the exercise price may not be less than 85 percent of the fair market value of the common stock on the date of grant. Any stock appreciation rights granted under the 1990 Plan will give the holder the right to receive cash in an amount equal to the difference between the fair market value of the share of common stock on the date of exercise and the exercise price. Restricted stock under the 1990 Plan will generally consist of shares which may not be disposed of by participants until certain restrictions established by the Committee lapse. Under the Non-Management Director Stock Option Plan (the "Director Plan"), 30,000 shares of common stock are available for issuance to the outside directors of the Company. Each outside director receives an initial option to purchase 5,000 shares of common stock during the director's first year of service to the Company. Annually thereafter, options to purchase 1,000 shares of common stock are to be granted to each outside director. Options granted pursuant to the Director Plan are non-qualified stock options with terms not to exceed 10 years and the option exercise price must equal the fair market value of the common stock on the date of grant. As of December 31, 1996, options for a total of 14,000 shares of common stock remain available for grant under the Director Plan. The following is an analysis of all option activity under the 1983 Plan, the 1990 Plan and the Director Plan for 1996, 1995 and 1994: ================================================================================
1996 1995 1994 ----------------------- ----------------------- ---------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------------- ----------------------- ---------------------- Beginning stock options outstanding............. 1,133,102 $14.81 1,457,000 $11.64 1,193,000 $10.34 Stock options granted........................... 315,000 19.41 98,000 20.23 274,000 17.04 Stock options cancelled......................... (2,000) 19.38 (20,000) 18.13 - - Stock options exercised......................... (101,650) 9.88 (401,898) 4.47 (10,000) 4.89 Ending stock options outstanding................ 1,344,452 $16.25 1,133,102 $14.81 1,457,000 $11.64 ----------------------- ----------------------- ---------------------- Ending stock options exercisable................ 599,387 $13.86 341,796 $11.16 338,014 $ 4.74 ----------------------- ----------------------- ---------------------- Weighted average fair value of options granted.. $ 6.33 $ 6.75 ------ ------
Of the 1,344,452 options outstanding at December 31, 1996: (a) 343,102 options have exercise prices between $3.39 and $11.88, with a weighted average exercise price of $9.58 and a weighted average contractual life of 5.4 years (319,406 of these options are exercisable at a weighted average price of $9.82); (b) 1,001,350 options have exercise prices between $16.75 and $25.56, with a weighted average exercise price of $18.54 and a weighted average contractual life of 8.1 years (279,981 of these options are exercisable at a weighted average price of $18.48). All of the outstanding options are exercisable at various times in years 1997 through 2006. All incentive stock options and non-qualified options were granted at fair market value on the date of grant. As of December 31, 1996, no awards other than incentive and non-qualified stock options have been granted under the 1990 Plan. Generally, options granted under the 1990 Plan have a 10-year term and provide for vesting after three years. At December 31, 1996, a total of 2,136,452 shares of the Company's common stock are reserved for issuance pursuant to the 1983 Plan, the 1990 Plan and the Director Plan. 1996 ANNUAL REPORT 39 Preferred Stock Preferred stock at December 31, 1996, consists of 5,000,000 authorized but unissued shares. Preferred stock may be issued from time to time in one or more series, and the Board of Directors, without further approval of the stockholders, is authorized to fix the dividend rates and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock. [4] Commitments and Contingencies Rent expense was $1.0 million, $0.8 million and $0.5 million for 1996, 1995 and 1994, respectively. The future minimum commitments under long-term noncancellable leases for office space are $0.8 million and $0.3 million for 1997 and 1998, respectively. The Company has $7.8 million in letters of credit outstanding at December 31, 1996. These letters of credit relate primarily to bonding requirements of various state regulatory agencies for oil and gas operations and various obligations for acquisition and exploration activities in South America. During 1995, the Company entered into an exploration contract on Block 19 in Ecuador for a term of four years. Under the terms of the contract, the Company is required to participate in the drilling of a minimum of two wells. The Company estimates its share of the costs to drill these wells to be approximately $4.5 million. The Company assumed a commitment related to an exploration program within the Chaco Block in Bolivia. The exploration program requires performance of 1,400 work units, which could include reprocessing of existing seismic, acquisition of new seismic and the drilling of exploratory wells. The entire obligation, however, can be fulfilled by the drilling of a 15,000 foot well. The Company estimates the cost of this well to be approximately $4.5 million and expects to fulfill the obligation by drilling such a well in the second half of 1997. On November 5, 1996, the Province of Santa Cruz, Argentina brought suit against Cadipsa in the Corte Suprema de Justicia de la Nacion (the Supreme Court of Justice of the Argentine Republic, Buenos Aires, Argentina), Dossier No. s-1451, seeking to recover approximately $10.6 million (which sum includes interest) allegedly due as additional royalties on four concessions granted in 1990 in which the Company currently owns a 100 percent working interest. The Company and its predecessors in title have been paying royalties at an eight percent rate; the Province of Santa Cruz claims the rate should be 12 percent. The amount of such claim will increase at the differential of these royalty rates until this claim is resolved. With respect to the 50 percent interest in the two concessions that the Company acquired from British Gas, plc, the Company believes that it is entitled to indemnification by British Gas, plc for any loss sustained by the Company as a result of this claim. Such indemnification equals approximately $4.0 million of the $10.6 million claim. The Company has no indemnification from its predecessors in title with respect to the payment of royalties on the other two concessions. Although the Company cannot predict the outcome of this litigation, based upon the advice of counsel, the Company does not expect this claim to have a material adverse impact on the Company's financial position or results of operations. The Company is a defendant in various other lawsuits and is a party in governmental proceedings from time to time arising in the ordinary course of business. In the opinion of management, none of the various other pending lawsuits and proceedings should have a material adverse impact on the Company's financial position or results of operations. [5] Financial Instruments Price Risk Management The Company periodically uses hedges (swap agreements) to reduce the impact of oil and natural gas price fluctuations on its operating results and cash flows. These swap agreements typically entitle the Company to receive payments from (or require it to make payments to) the counterparties based upon the differential between a fixed price and a floating price based on a published index. The Company's hedging activities are conducted with major investment and commercial banks which the Company believes are minimal credit risks. At December 31, 1996, the Company was a party to oil price swap agreements for calendar 1997 covering 2.738 MMBbls at an average NYMEX reference price of $19.26 40 VINTAGE PETROLEUM, INC. per Bbl. At December 31, 1995, the Company was a party to natural gas price swap agreements for the period January through March 1996 covering 3.64 Bcf at an average NYMEX reference price of $2.05 per Mcf. Fair Value of Financial Instruments The Company values financial instruments as required by Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. The Company estimates the value of the 9% Notes based on quoted market prices. The Company estimates the value of its other long-term debt based on the estimated borrowing rates currently available to the Company for long- term loans with similar terms and remaining maturities. The estimated fair value of the Company's long-term debt at December 31, 1996 and 1995, was $383.9 million and $323.2 million, respectively, compared with a carrying value of $379.0 million and $323.8 million, respectively. The fair value of commodity swap agreements is the amount at which they could be settled, based on quoted market prices. At December 31, 1996 and 1995, the Company would have been required to pay approximately $9.2 million and $2.2 million, respectively, to terminate its swap agreements. The carrying value of other financial instruments approximates fair value because of the short maturity of those instruments. [6] Income Taxes Income before income taxes and minority interest is composed of the following: ================================================================================
1996 1995 1994 IN THOUSANDS Domestic..................................... $38,016 $15,536 $22,438 Foreign...................................... 18,621 104 - --------- --------- --------- $56,637 $15,640 $22,438 --------- --------- ---------
The total provision for income taxes consists of the following: ================================================================================
1996 1995 1994 IN THOUSANDS Current: Federal.................................. $ 2,360 $ (955) $1,119 State.................................... 250 - 457 Foreign.................................. - - - --------- -------- -------- 2,610 (955) 1,576 Deferred................................... 12,328 6,034 6,933 --------- -------- -------- $14,938 $5,079 $8,509 --------- -------- --------
A reconciliation of the federal statutory income tax rate to the effective rate is as follows: ================================================================================
1996 1995 1994 Statutory income tax rate.................................... 35.0% 35.0% 35.0% State income tax, less federal benefit............................. 3.9 3.9 3.9 Federal income tax credits................................. (3.1) (7.4) - Tax impact of foreign operations.................................. (8.2) 1.3 - Other......................................... (1.2) (0.3) (1.0) ------- ------- ------- 26.4% 32.5% 37.9% ------- ------- -------
The components of the Company's net deferred tax liability as of December 31, 1996 and 1995, are as follows: ================================================================================
1996 1995 IN THOUSANDS Deferred Tax Liabilities: Differences between book and tax basis of property.................... $ 62,735 $ 41,699 Other.......................................... 778 - --------- --------- 63,513 41,699 --------- --------- Deferred Tax Assets: Argentina net operating loss carryforwards................................ 14,472 20,467 Alternative minimum tax credit carryforward.......................... 5,403 3,538 Other.......................................... 500 408 --------- --------- 20,375 24,413 Valuation allowance.............................. (14,472) (20,467) --------- --------- 5,903 3,946 --------- --------- Net deferred tax liability....................... $ 57,610 $ 37,753 --------- ---------
1996 ANNUAL REPORT 41 Earnings of the Company's foreign subsidiaries, Cadipsa and Vintage Oil Argentina, Inc. (see Note 7), are subject to Argentina income taxes. Due to significant Argentina net operating loss carryforwards for both companies, the Company does not expect to pay any foreign income taxes related to these subsidiaries in 1997. No U.S. deferred tax liability will be recognized related to the unremitted earnings of these foreign subsidiaries, as it is the Company's intention, generally, to reinvest such earnings permanently. As of December 31, 1996, the Company has an alternative minimum tax ("AMT") credit carryforward of approximately $5.4 million. The AMT credit carryforward does not expire and is available to offset regular income taxes in future years, but only to the extent that regular income taxes exceed the AMT in such years. As of December 31, 1996, the Company has net operating loss carryforwards for Argentina income tax reporting purposes of approximately $44 million which can be used to offset taxable income in Argentina. These carryforwards expire beginning 1997 through 2001. [7] Significant Acquisitions In May 1995, the Company acquired certain U.S. oil and gas properties from Texaco Exploration and Production, Inc. for approximately $26.7 million cash (the "Texaco Acquisition"). Through a series of transactions during the last six months of 1995, the Company purchased approximately 71.6 percent of the outstanding common stock of Cadipsa S.A. ("Cadipsa"), a publicly-traded Argentine oil and gas exploration and production company, for 302,808 shares of the Company's common stock (valued at $5.7 million) and $12.4 million cash (the "Cadipsa Acquisition"). Approximately $58.1 million of net liabilities and a $7.9 million minority interest result from the consolidation of Cadipsa as of the acquisition date. As of December 31, 1996, the Company owned 96.8 percent of the outstanding common stock of Cadipsa. Effective December 26, 1996, Cadipsa was delisted with the Argentina Stock Exchange and is no longer a publicly-traded company. On September 29, 1995, the Company purchased 100 percent of the outstanding common stock of BG Argentina, S.A. ("BG Argentina") from British Gas, plc for $37 million cash (the "BG Acquisition"). BG Argentina was subsequently renamed Vintage Oil Argentina, Inc. On November 3, 1995, the Company purchased a 35 percent interest in certain Argentina oil and gas properties (the "Astra/Shell Properties") from Astra Compania Argentina de Petroleo S.A. for $17.9 million cash. On December 28, 1995, the Company purchased the remaining 65 percent interest in the Astra/Shell Properties from Shell Compania Argentina de Petroleo S.A. for $32.8 million cash and deferred payments valued at $5.1 million. The Company accounted for the Cadipsa Acquisition and the BG Acquisition under the purchase method. The consolidated statements of income include the operating results of the above acquisitions since their acquisition date. The Company completed on December 20, 1995, a public offering of 2,793,700 shares of the Company's common stock (the "Common Stock Offering"), of which 2,500,000 shares were sold by the Company and 293,700 shares were sold by a certain stockholder (see Note 3). The net proceeds to the Company of approximately $49.5 million were used to fund a substantial portion of the purchase of the Astra/Shell Properties. The Company's unaudited pro forma revenues, net income and earnings per share for the years ended December 31, 1995 and 1994, presented below have been prepared assuming the Common Stock Offering, the Texaco Acquisition, the Cadipsa Acquisition, the BG Acquisition and the acquisition of the Astra/Shell Properties had been consummated as of January 1, 1994. However, such pro forma information is not necessarily indicative of what actually would have occurred had the transactions occurred on such date. ================================================================================
1995 1994 Revenues (in thousands)............................. $244,921 $255,489 Net income (in thousands)........................... 18,712 9,059 Earnings per share.................................. .78 .37
[8] Segment Information The Company operates in the oil and gas exploration and production industry in the United States and South America. Operations in the gathering and gas marketing industries are in the United States. 42 VINTAGE PETROLEUM, INC. The following is industry segment data for the years ended December 31, 1996, 1995 and 1994: ================================================================================
1996 1995 1994 IN THOUSANDS Revenues: Exploration and production - U.S............................................................................ $190,839 $146,819 $141,357 Argentina...................................................................... 67,529 13,435 - Gas marketing..................................................................... 62,851 49,775 61,480 Gathering......................................................................... 34,917 22,289 17,630 Other income...................................................................... 886 1,251 2,375 Elimination of intersegment sales................................................. (45,340) (38,772) (37,190) ------------ ---------- ---------- $311,682 $194,797 $185,652 ------------ ---------- ---------- Income Before Income Taxes And Minority Interest: Exploration and production - U.S............................................................................ $ 70,382 $ 39,524 $ 38,234 Argentina...................................................................... 29,110 4,114 - Other international............................................................ (841) - - Gas marketing..................................................................... 2,383 2,073 2,322 Gathering......................................................................... 2,186 1,568 1,058 Other income...................................................................... 886 1,251 2,375 ------------ ---------- ---------- Operating income.................................................................. 104,106 48,530 43,989 Corporate expenses................................................................ (17,360) (12,712) (9,549) Interest expense.................................................................. (30,109) (20,178) (12,002) ------------ ---------- ---------- $ 56,637 $ 15,640 $ 22,438 ------------ ---------- ---------- Identifiable Assets: Exploration and production - U.S............................................................................ $499,439 $431,391 $386,824 Argentina...................................................................... 228,002 180,488 - Other international............................................................ 44,473 1,269 - Gas marketing..................................................................... 8,422 5,431 5,850 Gathering......................................................................... 10,249 11,084 8,918 Corporate......................................................................... 23,365 17,876 6,160 ------------ ----------- ---------- $813,950 $647,539 $407,752 ------------ ----------- ---------- Depreciation, Depletion And Amortization: Exploration and production - U.S............................................................................ $ 49,466 $ 45,730 $ 43,831 Argentina...................................................................... 17,494 4,115 - Other international............................................................ 841 - - Gathering......................................................................... 1,337 1,301 1,283 Corporate......................................................................... 919 1,111 660 ------------ ----------- ---------- $ 70,057 $ 52,257 $ 45,774 ------------ ----------- ---------- Capital Additions: Exploration and production - U.S............................................................................ $113,037 $ 88,149 $ 65,136 Argentina...................................................................... 49,429 170,947 - Other international............................................................ 40,866 1,269 - Gathering ........................................................................ 724 234 632 Corporate......................................................................... 706 3,023 1,200 ------------ ----------- ---------- $204,762 $263,622 $ 66,968 ------------ ----------- ----------
During 1996, 1995 and 1994, sales to one crude oil purchaser represented approximately 15 percent, 17 percent and 14 percent, respectively, of the Company's total revenues (exclusive of eliminations of intersegment sales and the impact of hedges). 1996 ANNUAL REPORT 43 [9] Quarterly Results (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995: ================================================================================
QUARTER ENDED March 31 June 30 Sept. 30 Dec. 31 IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 Revenues............................................................... $71,340 $76,043 $75,952 $88,347 Operating income....................................................... 21,619 26,714 23,979 31,794 Net income............................................................. 7,174 9,796 9,827 14,395 Earnings per share..................................................... .30 .40 .40 .58 1995 Revenues............................................................... $41,042 $45,230 $50,101 $58,424 Operating income....................................................... 8,999 11,778 13,041 14,713 Net income............................................................. 1,608 3,244 2,724 3,786 Earnings per share..................................................... .08 .15 .13 .17
[10] Supplementary Financial Information for Oil and Gas Producing Activities Results of Operations from Oil and Gas Producing Activities The following sets forth certain information with respect to the Company's results of operations from oil and gas producing activities for the years ended December 31, 1996, 1995 and 1994. The Company began operations in Argentina through various acquisitions in the last two quarters of 1995 (see Note 7). Prior to 1995, all of the Company's oil and gas producing activities were located in the United States. ================================================================================
1996 ----------------------------------------------------- Other U.S. Argentina International Total ----------------------------------------------------- IN THOUSANDS Revenues............................................................... $190,839 $67,529 $ - $258,368 Production (lifting) costs............................................. 70,991 20,925 - 91,916 Depreciation, depletion and amortization............................... 49,466 17,494 841 67,801 ----------------------------------------------------- Results of operations before income taxes.............................. 70,382 29,110 (841) 98,651 Income tax expense..................................................... 25,197 - (327) 24,870 ----------------------------------------------------- Results of operations (excluding corporate overhead and interest costs) $ 45,185 $29,110 $ (514) $ 73,781 ----------------------------------------------------- 1995 1994 ----------------------------------------------------- U.S. Argentina Total Total ----------------------------------------------------- IN THOUSANDS Revenues............................................................... $146,819 $13,435 $160,254 $141,357 Production (lifting) costs............................................. 61,565 5,206 66,771 59,292 Depreciation, depletion and amortization............................... 45,730 4,115 49,845 43,831 ----------------------------------------------------- Results of operations before income taxes.............................. 39,524 4,114 43,638 38,234 Income tax expense..................................................... 12,332 - 12,332 14,529 ----------------------------------------------------- Results of operations (excluding corporate overhead and interest costs) $ 27,192 $ 4,114 $ 31,306 $ 23,705 -----------------------------------------------------
44 VINTAGE PETROLEUM, INC. Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing Activities The Company's net investment in oil and gas properties at December 31, 1996 and 1995, was as follows: ================================================================================
1996 ----------------------------------------------------------- Other U.S. Argentina Bolivia International Total ----------------------------------------------------------- IN THOUSANDS Unproved properties not being amortized............................ $ 16,420 $ - $ - $5,087 $ 21,507 Proved properties being amortized.................................. 685,692 220,376 37,048 - 943,116 ----------------------------------------------------------- Total capitalized costs............................................ 702,112 220,376 37,048 5,087 964,623 Less accumulated depreciation, depletion and amortization.......... 240,059 21,609 - 841 262,509 ----------------------------------------------------------- Net capitalized costs........................................... $462,053 $198,767 $37,048 $4,246 $702,114 1995 ----------------------------------------------- Other U.S. Argentina International Total ----------------------------------------------- IN THOUSANDS Unproved properties not being amortized........................................ $ 8,505 $ - $ 1,269 $ 9,774 Proved properties being amortized.............................................. 581,861 170,947 - 752,808 ----------------------------------------------- Total capitalized costs........................................................ 590,366 170,947 1,269 762,582 Less accumulated depreciation, depletion and amortization...................... 190,593 4,115 - 194,708 ----------------------------------------------- Net capitalized costs....................................................... $399,773 $166,832 $ 1,269 $567,874 -----------------------------------------------
The following sets forth certain information with respect to costs incurred (exclusive of general support facilities) in the Company's oil and gas activities during 1996, 1995 and 1994: ================================================================================
1996 ----------------------------------------------------------- Other U.S. Argentina Bolivia International Total ----------------------------------------------------------- IN THOUSANDS Acquisition: Undeveloped properties.......................................... $ 9,868 $ 2,080 $ - $3,818 $ 15,766 Producing properties............................................ 50,480 3,754 37,048 - 91,282 Costs incurred: Exploratory..................................................... 6,502 1,383 - - 7,885 Development..................................................... 46,187 42,212 - - 88,399 ----------------------------------------------------------- Total costs incurred.......................................... $113,037 $ 49,429 $37,048 $3,818 $203,332 ----------------------------------------------------------- 1995 1994 ----------------------------------------------------------- Other U.S. Argentina International Total Total ----------------------------------------------------------- IN THOUSANDS Acquisition: Undeveloped properties.......................................... $ 6,415 $ - $ 1,269 $ 7,684 $ 1,869 Producing properties............................................ 38,896 168,762 - 207,658 36,544 Costs incurred: Exploratory..................................................... 2,037 - - 2,037 3,349 Development..................................................... 40,801 2,185 - 42,986 23,374 ----------------------------------------------------------- Total costs incurred.......................................... $ 88,149 $170,947 $ 1,269 $260,365 $ 65,136 -----------------------------------------------------------
1996 ANNUAL REPORT 45 Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. The following is an analysis of the Company's proved oil and gas reserves which are located in the United States. Argentina and Bolivia (including its proportionate share of reserves of its limited partnerships and joint venture) as estimated by the Company's independent petroleum consultants, Netherland, Sewell & Associates, Inc.: ================================================================================
U.S. Argentina Bolivia Total -------------------------------------------------------------------------------- Oil Gas Oil Oil Gas Oil Gas (MBbls) (MMcf) (MBbls) (MBbls) (MMcf) (MBbls) (MMcf) -------------------------------------------------------------------------------- Proved reserves at December 31, 1993................ 63,277 273,142 - - - 63,277 273,142 Revisions of previous estimates..... 8,577 4,131 - - - 8,577 4,131 Extensions, discoveries and other additions.................. 6 4,139 - - - 6 4,139 Production.......................... (6,657) (28,884) - - - (6,657) (28,884) Purchase of reserves-in-place....... 5,645 29,655 - - - 5,645 29,655 Sales of reserves-in-place.......... (59) (545) - - - (59) (545) -------------------------------------------------------------------------------- Proved reserves at December 31, 1994................ 70,789 281,638 - - - 70,789 281,638 Revisions of previous estimates..... 7,160 18,405 2,952 - - 10,112 18,405 Extensions, discoveries and other additions.............. 338 2,015 - - - 338 2,015 Production.......................... (6,647) (30,610) (961) - - (7,608) (30,610) Purchase of reserves-in-place....... 8,840 39,486 65,653 - - 74,493 39,486 Sales of reserves-in-place.......... (253) (172) - - - (253) (172) -------------------------------------------------------------------------------- Proved reserves at December 31, 1995................ 80,227 310,762 67,644 - - 147,871 310,762 Revisions of previous estimates..... 13,382 21,834 12,449 - - 25,831 21,834 Extensions, discoveries and other additions.............. 458 5,445 308 - - 766 5,445 Production.......................... (7,694) (32,366) (4,245) - - (11,939) (32,366) Purchase of reserves-in-place....... 8,095 20,787 2,849 4,953 57,758 15,897 78,545 Sales of reserves-in-place.......... (130) (1,374) - - - (130) (1,374) -------------------------------------------------------------------------------- Proved reserves at December 31, 1996................ 94,338 325,088 79,005 4,953 57,758 178,296 382,846 -------------------------------------------------------------------------------- Proved developed reserves at: December 31, 1994................... 55,037 220,112 - - - 55,037 220,112 -------------------------------------------------------------------------------- December 31, 1995................... 63,791 270,427 36,928 - - 100,719 270,427 -------------------------------------------------------------------------------- December 31, 1996................... 79,250 289,464 46,582 1,007 51,276 126,839 340,740 --------------------------------------------------------------------------------
46 VINTAGE PETROLEUM, INC. Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Unaudited) The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under SFAS No. 69. The Standardized Measure does not purport to present the fair market value of proved oil and gas reserves. This would require consideration of expected future economic and operating conditions which are not taken into account in calculating the Standardized Measure. Under the Standardized Measure, future cash inflows were estimated by applying year-end prices, adjusted for fixed and determinable escalations, to the estimated future production of year-end proved reserves. Future cash inflows were reduced by estimated future production, development and abandonment costs based on year-end costs to determine pre-tax cash inflows. Future income taxes were computed by applying the statutory tax rate to the excess of pre-tax cash inflows over the Company's tax basis in the associated proved oil and gas properties. Tax credits and permanent differences were also considered in the future income tax calculation. Future net cash inflows after income taxes were discounted using a 10 percent annual discount rate to arrive at the Standardized Measure. Set forth below is the Standardized Measure relating to proved oil and gas reserves at December 31, 1996 and 1995: ================================================================================
1996 ---------------------------------------------- U.S. Argentina Bolivia Total ---------------------------------------------- IN THOUSANDS Future cash inflows.................................................... $3,110,810 $1,743,483 $188,211 $5,042,504 Future production costs................................................ 1,063,823 575,101 51,578 1,690,502 Future development and abandonment costs............................... 133,243 134,219 14,804 282,266 ---------------------------------------------- Future net cash inflows before income tax expense...................... 1,913,744 1,034,163 121,829 3,069,736 Future income tax expense.............................................. 611,554 229,649 38,268 879,471 ---------------------------------------------- Future net cash flows.................................................. 1,302,190 804,514 83,561 2,190,265 10 percent annual discount for estimated timing of cash flows.......... 484,288 285,896 27,240 797,424 ---------------------------------------------- Standardized Measure of discounted future net cash flows............... $ 817,902 $ 518,618 $ 56,321 $1,392,841 ---------------------------------------------- 1995 ------------------------------------ U.S. Argentina Total ------------------------------------ IN THOUSANDS Future cash inflows............................................................. $1,786,545 $1,083,551 $2,870,096 Future production costs......................................................... 751,312 409,734 1,161,046 Future development and abandonment costs........................................ 118,784 119,916 238,700 ------------------------------------ Future net cash inflows before income tax expense............................... 916,449 553,901 1,470,350 Future income tax expense....................................................... 232,036 86,162 318,198 ------------------------------------ Future net cash flows........................................................... 684,413 467,739 1,152,152 10 percent annual discount for estimated timing of cash flows................... 224,078 191,528 415,606 ------------------------------------ Standardized Measure of discounted future net cash flows........................ $ 460,335 $ 276,211 $ 736,546 ------------------------------------
1996 ANNUAL REPORT 47 Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Unaudited) The following is an analysis of the changes in the Standardized Measure during 1996, 1995 and 1994: ================================================================================
1996 1995 1994 IN THOUSANDS Standardized Measure - Beginning of year...................... $ 736,546 $385,721 $339,701 Increases (decreases) - Sales, net of production costs............................. (166,452) (93,483) (82,065) Net change in sales price, net of production costs......... 644,367 131,697 54,864 Discoveries and extensions, net of related future development and production costs......................... 20,085 4,585 4,724 Changes in estimated future development costs.............. (69,433) (31,210) (17,276) Development costs incurred................................. 77,174 37,600 20,228 Revisions of previous quantity estimates................... 251,736 59,319 34,428 Accretion of discount...................................... 88,411 44,699 35,078 Net change in income taxes................................. (248,427) (86,296) (50,189) Purchase of reserves-in-place.............................. 149,900 311,449 47,718 Sales of reserves-in-place................................. (1,859) (661) (694) Timing of production of reserves and other................. (89,207) (26,874) (796) ----------- ---------- ---------- Standardized Measure - End of year............................ $1,392,841 $736,546 $385,721 ----------- ---------- ----------
[11] Subsequent Events In February 1997, the Company reached an agreement with subsidiaries of Burlington Resources Inc. to purchase certain producing oil and gas properties and facilities located in the Gulf Coast of Texas and Louisiana for $114.1 million in cash, subject to closing adjustments. The effective date of the transaction is January 1, 1997, with closing scheduled for April 1, 1997, subject to board approvals by the Company and Burlington Resources Inc. and satisfaction of other normal conditions to closing. On February 5, 1997, the Company issued $100 million of its 8 5/8% Senior Subordinated Notes Due 2009 (see Note 2) and completed a public offering of 1,500,000 shares of common stock (see Note 3). The net proceeds to the Company from the sale of the 8 5/8% Notes (approximately $96.4 million) and the concurrent sale of common stock (approximately $47.1 million) were used to repay approximately $143.5 million of existing indebtedness under the Company's revolving credit facility. 48 VINTAGE PETROLEUM, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Vintage Petroleum, Inc.: We have audited the accompanying consolidated balance sheets of Vintage Petroleum, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vintage Petroleum, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Tulsa, Oklahoma ARTHUR ANDERSEN LLP February 19, 1997 1996 ANNUAL REPORT 49 STOCKHOLDER INFORMATION Stock Price Information The Company's common stock trades on the New York Stock Exchange. The table below reflects the high and low sales prices and dividends paid per share during each quarter of 1995 and 1996.
- -------------------------------------------------------------------------------- Quarter Ended High Low Dividends Paid March 31, 1995............... $20 $16 $.02 June 30, 1995................ 21-5/8 18-1/4 .02 September 30, 1995........... 21-3/4 17 .02 December 31, 1995............ 22-1/2 19-1/8 .025 March 31, 1996............... 22-1/2 19-1/8 .025 June 30, 1996................ 26-3/4 19 .025 September 30, 1996........... 29-7/8 22-3/8 .025 December 31, 1996............ 34-3/4 28-3/4 .03
Dividend Policy The Company began paying a quarterly dividend in the fourth quarter of 1992 and expects to continue paying a regular quarterly cash dividend. Number of Stockholders Substantially all of the Company's stockholders maintain their shares in "street name" accounts and are not, individually, stockholders of record. There were 82 stockholders of record at December 31, 1996. 1996 ANNUAL REPORT 51 EX-21 4 SUBSIDIARIES OF THE COMPANY Exhibit 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------
State or Jurisdiction Ownership Name of Incorporation Percentage ---- --------------------- ---------- Vintage Gas, Inc. Oklahoma 100 Vintage Marketing, Inc. Oklahoma 100 Vintage Pipeline, Inc. Oklahoma 100 Vintage Petroleum International, Inc. Oklahoma 100 Vintage Oil Argentina, Inc. (formerly BG Argentina, S.A.) Cayman Islands 100 Cadipsa S.A. Republic of Argentina 96.8 Vintage Petroleum Argentina, Inc. Cayman Islands 100 Vintage Petroleum Ecuador, Inc. Cayman Islands 100 VPI Exploration & Production Ltd. Alberta, Canada 100 Vintage Petroleum Bolivia, Ltd. (formerly Shamrock Ventures (Boliviana) Ltd.) Bermuda 100
EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 19, 1997, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-37505 and 333-09205). /s/ ARTHUR ANDERSEN LLP Tulsa, Oklahoma March 27, 1997 EX-23.2 6 CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC. EXHIBIT 23.2 [LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC. APPEARS HERE] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS --------------------------------------------------------- As Petroleum Engineers, we hereby consent to the inclusion of the information included in this Form 10-K and incorporated by reference in this Form 10-K from the 1996 Annual Report of Stockholders of Vintage Petroleum, Inc. with respect to the oil and gas reserves of Vintage Petroleum, Inc., the future net revenues from such reserves and the present value thereof, which information has been included in this Form 10-K in reliance upon the report of this firm and upon the authority of this firm as experts in petroleum engineering. We hereby further consent to all references to our firm included in this Form 10-K and to the incorporation by reference in the Registration Statements on Form S-8, No. 33-37505 and 333-09205, of Vintage Petroleum, Inc. of such information with respect to the oil and gas reserves of Vintage Petroleum, Inc., the future net revenues from such reserves and the present value thereof. NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ FREDERIC D. SEWELL _______________________ Frederic D. Sewell President Dallas, Texas March 27, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2,774 0 72,664 0 0 9,252 986,551 275,392 813,950 113,376 372,390 0 0 120 264,985 813,950 310,796 311,682 138,438 138,438 86,498 0 30,109 56,637 14,938 41,192 0 0 0 41,192 1.68 1.68
EX-99.1 8 LETTER REGARDING U.S. OIL AND GAS RESERVE EXHIBIT 99.1 [LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC. APPEARS HERE] March 17, 1997 Mr. S. Craig George Vintage Petroleum, Inc. 4200 One Williams Center Tulsa, Oklahoma 74172 Dear Mr. George: In accordance with your request, we have estimated the proved reserves and future revenue, as of January 1, 1997, to the Vintage Petroleum, Inc. (Vintage) interest in certain oil and gas properties located in the United States as listed in the accompanying tabulations. This report has been prepared using constant prices and costs and conforms to the guidelines of the Securities and Exchange Commission (SEC). As presented in the accompanying summary projections, Tables I through V, we estimate the net reserves and future net revenue to the Vintage interest, as of January 1, 1997, to be:
Net Reserves Future Net Revenue (M$) ------------------------ -------------------------- Oil Gas Present Worth Category (Barrels) (MCF) Total at 10% - ------------------- ------------------------ -------------------------- Proved Developed Producing 67,917,766 221,461,021 1,283,335.9 791,679.8 Non-Producing 11,324,486 68,003,199 366,588.8 190,921.8 Proved Undeveloped 15,087,464 35,623,354 308,279.8 148,367.8 Pipeline Revenue/(1)/ Proved Developed 0 0 17,001.8 10,363.5 ---------- ----------- ----------- ----------- Total Proved 94,329,716 325,087,574 1,975,206.3 1,141,332.9
/(1)/ Revenue is from the operations of Vintage Pipeline, Inc. and Vintage Marketing, Inc. The oil reserves shown include crude oil, condensate, and gas plant liquids. Oil volumes are expressed in barrels which are equivalent to 42 United States gallons. Gas volumes are expressed in thousands of standard cubic feet (MCF) at the contract temperature and pressure bases. The estimates shown in the previous table do not include the effect of the Section 29 non-conventional fuel federal income tax credit. However, at the request of Vintage, we have prepared estimates of net reserves and future revenue including the effect of the tax credit for certain oil wells [LOGO APPEARS HERE] located in the Cat Canyon and Santa Maria Valley Fields, Santa Barbara County, California, which Vintage believes qualify for the tax credit. The basis used to identify wells which qualify for the Section 29 tax credit and the methods used to calculate the effect of this credit were provided by Vintage and have not been independently verified. As presented in the accompanying summary projections, Tables VI through X, we estimate the net reserves and future net revenue to the Vintage interest, including the effect of the Section 29 tax credit, as of January 1, 1997, to be:
Net Reserves Future Net Revenue (M$) ------------------------ -------------------------- Oil Gas Present Worth Category (Barrels) (MCF) Total at 10% - --------------------- ---------- ----------- ----------- ----------- Proved Developed Producing 67,925,635 221,461,021 1,289,981.7 796,877.4 Non-Producing 11,324,440 68,003,199 367,442.0 191,578.4 Proved Undeveloped 15,087,464 35,623,354 311,110.4 150,456.4 Pipeline Revenue/(1)/ Proved Developed 0 0 17,001.8 10,363.5 ---------- ----------- ----------- ----------- Total Proved 94,337,539 325,087,574 1,985,535.9 1,149,275.7
/(1)/ Revenue is from the operations of Vintage Pipeline, Inc. and Vintage Marketing, Inc. The effect of the Section 29 tax credit on estimated reserves and future revenue is presented in the table following this letter, along with estimated reserves and future revenue to the Vintage interest in certain oil and gas properties, as of January 1, 1997, both excluding and including the effect of the tax credit. As shown in the Table of Contents, this report includes summary projections of reserves and revenue for each reserve category along with one-line summaries of reserves, economics, and basic data by lease, excluding the effect of the Section 29 tax credit. Also included are summary projections of reserves and revenue for each reserve category along with one-line summaries of reserves, economics, and basic data by lease, including the effect of the Section 29 tax credit, for the Cat Canyon and Santa Maria Valley Fields. For the purposes of this report, the term "lease" refers to a single economic projection. The estimated reserves and future revenue shown in this report are for proved developed producing, proved developed non-producing, and proved undeveloped reserves. In accordance with SEC guidelines, our estimates do not include any value for probable or possible reserves which may exist for these properties. This report does not include any value which could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. Future gross revenue to the Vintage interest is prior to deducting state production taxes and ad valorem taxes. Future net revenue is after deducting these taxes, future capital costs, and [LOGO APPEARS HERE] operating expenses, but before consideration of federal income taxes. Estimates are presented which include the effect of the Section 29 tax credit. In accordance with SEC guidelines, the future net revenue has been discounted at an annual rate of 10 percent to determine its "present worth." The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties. For the purposes of this report, a field inspection of the properties has not been performed nor has the mechanical operation or condition of the wells and their related facilities been examined. We have not investigated possible environmental liability related to the properties; therefore, our estimates do not include any costs which may be incurred due to such possible liability. Also, our estimates do not include any salvage value for the lease and well equipment nor the cost of abandoning the properties. Oil prices used in this report are based on a December 31, 1996 West Texas Intermediate posted price of $24.25 per barrel, adjusted by lease for gravity, transportation fees, premiums, and regional posted price differentials. As requested, additional oil premiums have been included for certain fields when Vintage is receiving premiums through purchaser contracts over and above those at the lease level. Oil prices are held constant in accordance with SEC guidelines. Gas prices used in this report are based on either the most current price available for each lease, adjusted to a December 1996 regional spot market price, or the contract price. At the expiration of existing contracts, gas prices are adjusted to the December 1996 regional spot market price and held constant thereafter. All other gas prices are held constant in accordance with SEC guidelines. Lease and well operating costs are based on operating expense records of Vintage. For recently acquired properties for which there are not adequate historical operating expense records, the operating expense estimates of Vintage have been used. For non-operated properties, these costs include the per-well overhead expenses allowed under joint operating agreements along with costs estimated to be incurred at and below the district and field levels. As requested, lease and well operating costs for the operated properties include only direct lease and field level costs. Headquarters general and administrative overhead expenses of Vintage are not included. Lease and well operating costs are held constant in accordance with SEC guidelines. Capital costs are included as required for workovers, new development wells, and production equipment. We have made no investigation of potential gas volume and value imbalances which may have resulted from overdelivery or underdelivery to the Vintage interest. Therefore, our estimates of reserves and future revenue do not include adjustments for the settlement of any such imbalances; our projections are based on Vintage receiving its net revenue interest share of estimated future gross gas production. The reserves included in this report are estimates only and should not be construed as exact quantities. They may or may not be recovered; if recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. The sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions [LOGO APPEARS HERE] included in this report due to governmental policies and uncertainties of supply and demand. Also, estimates of reserves may increase or decrease as a result of future operations. In evaluating the information at our disposal concerning this report, we have excluded from our consideration all matters as to which legal or accounting, rather than engineering and geological, interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geological data; therefore, our conclusions necessarily represent only informed professional judgments. The titles to the properties have not been examined by Netherland, Sewell & Associates, Inc., nor has the actual degree or type of interest owned been independently confirmed. The data used in our estimates were obtained from Vintage Petroleum, Inc.; other interest owners; various operators of the properties; and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted as accurate. We are independent petroleum engineers, geologists, and geophysicists; we do not own an interest in these properties and are not employed on a contingent basis. Basic geologic and field performance data together with our engineering work sheets are maintained on file in our office. Very truly yours, /s/ FREDERIC D. SEWELL TJT:LJH EX-99.2 9 LETTER REGARDING SOUTH AMERICA OIL AND GAS RESERVE EXHIBIT 99.2 [LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC. APPEARS HERE] March 24, 1997 Mr. S. Craig George Vintage Petroleum, Inc. 4200 One Williams Center Tulsa, Oklahoma 74172 Dear Mr. George: In accordance with your request, we have estimated the proved reserves and future revenue, as of January 1, 1997, to the combined interests of Cadipsa S.A., Vintage Oil Argentina, Inc., and Shamrock Ventures (Boliviana) Ltd. (collectively referred to herein as "Total South America") in certain oil and gas properties located in the South American countries of Argentina and Bolivia as listed in the accompanying tabulations. This report has been prepared using constant prices and costs and conforms to the guidelines of the United States Securities and Exchange Commission (SEC). All prices, costs, and revenue estimates are expressed in United States dollars ($). As presented in the accompanying summary projections, Tables I through IV, we estimate the net reserves and future net revenue to the Total South America interest, as of January 1, 1997, to be:
Net Reserves Future Net Revenue (M$) ----------------------- -------------------------- Oil Gas Present Worth Category (Barrels) (MCF) Total at 10% - ------------------ ---------- ---------- ----------- ------------- Proved Developed Producing 34,963,303 46,238,051 438,660.2 303,863.1 Non-Producing 12,625,237 5,037,491 213,675.1 114,584.9 Proved Undeveloped 36,369,617 6,482,517 519,343.0 270,319.6 ---------- ---------- --------- --------- Total Proved 83,958,157 57,758,059 1,171,678.3 688,767.6
The oil reserves shown include crude oil and condensate. Oil volumes are expressed in barrels which are equivalent to 42 United States gallons. Gas volumes are expressed in thousands of standard cubic feet (MCF) at the contract temperature and pressure bases. As shown in the Table of Contents, this report includes summary projections of reserves and revenue for each country by reserve category. Summary projections of reserves and revenue for each company by reserve category along with one-line summaries of reserves, economics, and basic data by lease are also included behind the appropriate tabs. For the purposes of this report, the term "lease" refers to a single economic projection. The estimated reserves and future revenue shown in this report are for proved developed producing, proved developed non-producing, and proved undeveloped reserves. In accordance with [LOGO APPEARS HERE] SEC guidelines, our estimates do not include any value for probable or possible reserves which may exist for these properties. This report does not include any value which could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. Future gross revenue to the Total South America interest is prior to deducting provincial production taxes. Future net revenue is after deducting these taxes, future capital costs, and operating expenses, but before consideration of Argentine, Bolivian, or United States federal income taxes. In accordance with SEC guidelines, the future net revenue has been discounted at an annual rate of 10 percent to determine its "present worth." The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties. For the purposes of this report, a field inspection of the properties has not been performed nor has the mechanical operation or condition of the wells and their related facilities been examined. We have not investigated possible environmental liability related to the properties; therefore, our estimates do not include any costs which may be incurred due to such possible liability. Also, our estimates do not include any salvage value for the lease and well equipment nor the cost of abandoning the properties. Oil prices used in this report are based on a December 31, 1996 New York Mercantile Exchange spot price of $25.78 per barrel, adjusted by field for gravity, transportation fees, marketing fees, and regional price differentials. Oil prices are held constant in accordance with SEC guidelines. Gas prices used in this report are based on contract prices, adjusted for transportation fees and BTU content. These prices are adjusted according to the provisions of existing gas contracts which remain in effect throughout the life of the properties. Lease and well operating costs are based on operating expense records of Vintage Petroleum, Inc. (Vintage). For recently acquired properties for which there are not adequate historical operating expense records, the operating expense estimates of Vintage have been used. For non-operated properties, these costs include the per-well overhead expenses allowed under joint operating agreements along with costs estimated to be incurred at and below the district and field levels. As requested, lease and well operating costs for the operated properties in Argentina include only direct lease and field level costs, while these costs for the operated properties in Bolivia also include the overhead cost of maintaining an office in Santa Cruz, Bolivia. Headquarters general and administrative overhead expenses of Vintage are not included. For certain recently acquired properties, lease and well operating costs are adjusted to reflect Vintage's intention to modify procedures upon obtaining operational control of the properties. In accordance with SEC guidelines, lease and well operating costs are held constant throughout the life of the properties with the exception of the adjustments described herein. Capital costs are included as required for workovers, new development wells, and production equipment. The reserves included in this report are estimates only and should not be construed as exact quantities. They may or may not be recovered; if recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. The sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions included in this report due to governmental policies and uncertainties of supply and demand. Also, estimates of reserves may increase or decrease as a result of future operations. [LOGO APPEARS HERE] In evaluating the information at our disposal concerning this report, we have excluded from our consideration all matters as to which political, socioeconomic, legal, or accounting, rather than engineering and geological, interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geological data; therefore, our conclusions necessarily represent only informed professional judgments. The titles to the properties have not been examined by Netherland, Sewell & Associates, Inc., nor has the actual degree or type of interest owned been independently confirmed. The data used in our estimates were obtained from Vintage Petroleum, Inc. and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted as accurate. We are independent petroleum engineers, geologists, and geophysicists; we do not own an interest in these properties and are not employed on a contingent basis. Basic geologic and field performance data together with our engineering work sheets are maintained on file in our office. Very truly yours, /s/ Frederic D. Sewell TJT:LJH -----END PRIVACY-ENHANCED MESSAGE-----